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House View – December 2016

H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 1

HOUSE VIEW

December 2016

H IN D UJ A B ANK

S W IT Z E RL A ND

The impact of Trump’s

economic plan

Direct consequences of

demonetisation in India

Is the 7-year bull market

in Treasuries over?

Future of

EM currencies vs. USD

Time to build

bridges or walls?



Key Themes ........................................................3

Economic overview ............................................5

Switzerland ......................................................5

Eurozone ..........................................................5

USA..................................................................5

Asia ..................................................................5

India .................................................................6

Iran ...................................................................6

Asset class overview .........................................7

Equities ............................................................7

Fixed income ....................................................9

Currencies ...................................................... 10

Commodities .................................................. 11

Opportunities .................................................. 12

Summary on future trends ............................... 13

Asset allocation ................................................ 14

Preferred investment views ............................ 14

Recommended asset allocation ..................... 15

Contacts ............................................................ 16

Disclaimer ......................................................... 17

Dear Reader,

After the election of Donald Trump, the prospect of fiscal stimulus

means that analysts are raising their forecasts for real GDP

growth, inflation and interest rates. There is still considerable

uncertainty surrounding exactly what fiscal, trade and regulatory

policies President-elect Donald Trump will pursue in office next

year, but analysts now expect GDP growth to be around 2.7% in

2017, compared with a pre-election forecast of 2.0%. This being

said, we cannot stress enough, that the uncertainty surrounding

these forecasts remains unusually elevated.

As a result of demonetisation in India, cash owners have until the

end of the year to exchange newly developed banknotes worth

500 or 2’000 rupees. According to estimates, the Indian shadow

economy has a volume of at least 20% of GDP. The

macroeconomic impact of the measure cannot yet be foreseen

at the moment. Economists expect a decline in growth of 0.5% -

1.0% for the next two quarters. At the same time, the tax

revenues of the government will rise, as a result of one-off

payments and the formalization of previously unrecognized

economic areas.

After the oil-price collapse, oil price is normalising and

consequently the inflation rates are normalising. A more

aggressive fiscal policy in the US, like that desired by Donald

Trump, will highly probably be a synonym of an increasing debt

to GDP ratio. Theoretically, this may be credit negative for the

Treasury and may result in higher yields. As visibility for next year

is relatively low, we maintain our defensive bias on credit and

recommend unconstrained strategies, preferred securities or

floating rate notes.

Emerging markets currencies continue to underperform against

the USD following President Elect Trump’s victory. All 24

emerging-market currencies have weakened against the dollar,

led by a 12% slump in the Mexican peso and an 8.4% drop in

Turkey’s lira. Looking forward this trend is set to continue as

levels of uncertainty remain elevated regarding future US foreign

and Trade policy.

Sincerely,

Michel Menoud

Chief Investment Officer

Table of contents



Key Themes

US election

On 8th November 2016, Donald Trump was elected President

of the United States. At the same time, since the Democrats

have not won the majority in the Senate, the Republicans

retained control over the Senate and the House of

Representatives. Consequently, a certain "balance of power"

between the two parties no longer exists.

1. Healthcare reform

Donald Trump would like to change Obamacare. Trump

advocates more competition in the health care system, so that

more cost-effective medicines are launched. Apart from this,

he believes that health care costs would drop as a result of a

restrictive immigration reform, due to lower expenditures

linked to support of illegal immigrants. Concrete proposals for

further reforming and improving health care were not part of

the election campaign of Donald Trump. Therefore, the

outcome of the health care reform remains a question mark.

2. Improving infrastructure

At the beginning of his presidency, Donald Trump plans to

implement an investment package of more than USD 300

billion. However, investments must be approved separately

from the Congress every year. The long-term planning of

major infrastructure projects is therefore made considerably

more difficult. The tactics in the political daily business is

simple. If the investment does not flow into the projects or

regions favoured by the politicians, the parliamentarians are

blocking the process. As long as this remains the case, the

continuation and maintenance of large projects depend on the

moods of the Congress.

3. Taxation

The new resident wants a comprehensive tax reform - aiming

at reducing top tax rate from almost 40% to 25%. Corporate

tax is also to be reduced - from 35% to 15%. In addition, single

citizens, who earn less than 25’000 dollars per year, should

not pay taxes as well. Whether the United States can afford

these tax cuts in the face of immense debt remains nebulous.

4. Foreign policy USA - China

The Western world is doing well to integrate China into the

economy and to see it as a partner. Greater China is still the

better constellation as a counterpart in comparison to a china-

divided China or a military opponent.

Overall, we remain optimistic that the relationship between the

US and China remains constructive despite the choice of

Donald Trumps. The mutual economic interests are too great.

Recommendations for investors 2017

Bonds and currencies

The US GDP forecast for 2017 is +2.5%, whereas the inflation

rate is expected to be +1.5%, below the target of 2% of the US

Fed. After the election of Donald Trump, a rate hike from the

Fed will probably occur in December. The yield curve has

steepened faster than expected. The US dollar might weaken

in the short term, but then it will be able to pick up again. The

problems in other countries with liquid foreign exchange

markets (such as Eurozone, Japan) are even more serious

than in the US.

Sectors USA

The following sectors could benefit from Donald Trump’s

choice:

a. Consumer goods for the middle class

(thanks to tax relief);

b. Health care (low-cost providers in their markets);

c. Infrastructure (in particular, enterprises active in building

materials, civil engineering, etc.);

d. Defence.

Equities USA

We would consider the following equities due to the new US

presidency or consider them as an admixture in a portfolio:

a. Consumer goods: Costco, Mondelez, Pepsico;

b. Health care: Sector biotech or individual stocks such as

Celgene. Shares in medical technology such as Intuitive

Surgical, Edwards Life Sciences, or Johnson & Johnson;

c. Construction/Infrastructure: Jacobs Engineering,

Caterpillar, US Steel (for risk-sensitive investors);

d. Defence: Northrop Grumman, Lockheed Martin, L3

Communications, Huntington Ingalls.

Recent financial markets movements post US election

1. Equities:

Strong upward move (approx. +10%) of the securities from the health care/biotech, financial and defence

sector, also the Russell 2’000 Index, including small

and middle capitalization stocks. Weak performance (approx. –5%) of

technology/consumer staples/consumer cyclicals stocks.

2. Fixed Income: 10-year US Government yield raised

from 1.80% to 2.40%.

3. US-Dollar: The USD gained strength across most of

the major currencies (approx. +5%).

4. Gold: The gold price dropped from USD 1’300/oz. to

USD 1’200/oz. due to the USD strength and the yield increases.



Key Themes

India – Cash Reform

According to estimates, the Indian shadow economy has a

volume of at least 20% of GDP, as some earlier investigations

suggest. The government has not yet made public the results

of several recent studies, but experts in India have estimated

a volume of around 500 billion dollars as a realistic figure for

the illegal parallel universe.

On 8th November, as part of a campaign against black money,

counterfeiting, corruption and terror financing, Prime Minister

Narendra Modi announced demonetisation of 500 and 1’000

Rupees currency notes. Later, on 24th November, Finance

Minister Arun Jaitley introduced a bill to amend the Income

Tax law, providing an opportunity for people to invest declared

money in bonds or equities with a 50% penalty.

Until 30th December 2016, cash owners now have time to

bring their money to their banks or to exchange newly

developed banknotes worth 500 or 2’000 Rupees, which the

Indian bank RBI has promised. Cash is also to be kept short

afterwards: Just 4’000 Rupees (54 Euro) may be used for cash

transactions, the rest must be paid into an Indian account.

Afterwards withdrawals on ATMs will be limited to 4’000

Rupees a day, and those who go directly to the branch may

not raise more than 20’000 Rupees per week.

The macroeconomic impact of the measure cannot yet be

foreseen at the moment. Economists expect a decline in

growth of 0.5% - 1.0% for the next two quarters. At the same

time, the tax revenues of the government will rise, as a result

of one-off payments and the formalisation of previously

unrecognised economic areas. The inflation effect is

contentious.

The amount of money will probably decrease, since no one

expects that all 22 billion notes, whose nominal value

correspond to 10.5% of the Indian GDP, will be exchanged.

Already, reports of physically destroyed bribes are circulating.

If, however, the money was not circulating in the informal

economy before, but simply harboured - which was quite a

practice - its destruction also has only a limited deflationary

effect.

Following the demonetisation drive, various banks have cut

deposit rates by 15-25 basis points. A fall in deposit rates

would bring down relative attractiveness of bank fixed

deposits. As a result, Investors are likely to shift some of their

savings to the stock and bond markets.

Is the 7-year bull market in Treasuries

over?

Now that the oil price is normalising, inflation rates are

normalising. As a result, while oil prices were deflationary until

now, they will be inflationary for the next quarters. A more

aggressive fiscal policy in the US, like that desired by Donald

Trump, will highly probably be a synonym of an increasing

debt to GDP ratio and intense ceiling debt discussions in

December. This may be credit negative for the Treasury and

may result in higher yields. However, such impact should be

limited. We have to bear in mind that the target of the Fed is

to quietly normalise the Fed fund rates and the fixed income

market and not to generate a financial crisis.

As visibility for next year is relatively low, we maintain our

defensive bias on credit and recommend unconstrained

strategies, preferred securities or floating rate notes.

Future of EM currencies vs. USD

Emerging markets continue to underperform against the USD

following President Elect Trump’s victory. US Treasury yields

are poised to keep rising and that will mean more pain for

emerging markets. The yield on the 10-year has climbed

about half a percentage point since the election, and reached

2.41% on 23rd November 2016, the highest level since July

2015. All 24 emerging-market currencies have weakened

against the dollar in the same period, led by a 12% slump in

the Mexican peso and an 8.4% drop in Turkey’s lira. Mexico,

was the hardest hit EM currencies against the USD due to its

dependence on the US economy. India’s rupee and Turkey’s

lira dropped to record lows. Emerging market assets continue

to fall as traders increase bets on Federal Reserve interest-

rate hikes, curbing demand for higher-yielding investments.

Looking forward this trend is set to continue as levels of

uncertainty remain elevated regarding future US foreign and

Trade policy.



Economic overview

Economic growth was restrained in the industrialised countries during the first half of the year. The

widely anticipated growth acceleration in the USA hasn’t yet materialised. The reluctance to invest

can mostly be traced back to the pre-existing weak global demand.

We remain optimistic. Our main argument for this continues to be the economic stimulus

programmes should provide a renewed boost for company investments and private consumption.

Switzerland

The economy in Switzerland has a modest but resistant

growth although the Swiss export industries have to struggle

with the strong Swiss Franc and the Swiss banking sector is

changing rapidly due to “industrialisation” and its “off-/onshore

business”. This modest growth is carried from the strong

international competiveness of the Swiss firms and the steady

Swiss consumption growth.

Eurozone

The Eurozone economy has seen relatively positive

developments thanks to falling oil prices and the devaluation

of the euro. The output gap (the difference between actual

GDP and potential GDP) will fall to an estimated 0.6

percentage points this year. The Purchasing Managers’

Indices are pointing towards an upturn in industrial activity for

the next months.

USA

A rise in GDP forecasts to 2.7% in 2017 is based on the

assumption that Trump and the Republican-controlled

Congress agree on a fiscal package worth around USD4trn

over the next decade, equivalent to 2.4% of GDP per year.

Most of that stimulus will come in the form of tax cuts for high

income earners and lower corporate tax rates. Assuming that

the stimulus is not passed until next April, some of the boost

will spill over into the first half of 2018. The net impact on GDP

growth will be even smaller because, with the economy

already close to full employment, the fiscal stimulus will boost

inflation too. The latter will require the Fed to raise interest

rates slightly more aggressively than previously expected.

Indeed, we have already seen a modest tightening of financial

conditions, with the dollar and long-term interest rates rising.

That will offset some of the boost on economic growth from

the stimulus. Both headline and core CPI inflation are

expected to climb above 2.5% by end-2017, but there is some

uncertainty surrounding how the repeal of the Affordable Care

Act will affect the wider measure of medical care prices.

Asia

Japan

Since 2014, Japan’s economy has been facing multiple

challenges and many investors continue to await the

economic stimulus programme, which is to be performed in

combination with renewed fiscal measures by the central

bank. In light of the ever rising debt (230% of annual GDP),

we are doubtful whether the stated measures will take effect

in any way over the medium term.

Impact investing - a financial and social opportunity for conscious investors

The very first India’s Impact Investment Conclave “Prabhav 2016” organised by Impact Investors Council (IIC), was held on 15 – 17 November 2016 in Delhi, Mumbai and Bengaluru.

The Vice-chairperson of Hinduja Bank (Switzerland) Ltd, Ms Shanu SP Hinduja, participated in the event dedicated to the development of the impact investing sector in India with a focus on impact measurement and standardisation, research and police support and self-regulation.

What is impact investing?

Impact investing is an innovative and a relatively new type of investing, which attracts investors from around the world every year (nearly 24% growth to USD 15.2bn volume of investments over the past 4 years1). The two equally important criteria such as creation of specific tangible/measurable impact and positive financial return, by solving a social/environmental issue and

creating a compelling business opportunity, differ it from social & responsible investing when investors mainly screen out certain “harmful” sectors (weapons, tobacco, alcohol, etc.) and philanthropy.

Growing investor’s consciousness and global demand in addressing social and environmental challenges make impact investing effective in both developed and developing countries.

A global analysis of portfolios of 157 impact investors indicated that they collectively managed USD 77.4bn in impact investing assets. At least 60 respondents are active in each of food & agriculture, healthcare, housing, energy, education, microfinance, and other financial services. The most prominent instruments are private debt (35%), real assets (25%) and private equity (17%)1. Trying to forecast the development of impact investment market, Monitor Institute and GIIN projected an immense growth up to USD 500bn by 2020.

Impact investing in India

According to McKinsey & Company research report released at Prabhav 2016 in Delhi, with a cumulative investment of USD 4.1bn over the past six years, India has emerged as one of the largest impact investment destinations in the world. Today investors in India are largely focused on cleantech (77%) and financial infusion (14%). Overall, at least 60-80 million lives were touched last year across socially relevant sectors such as financial inclusion, agriculture, healthcare and education. By 2025, impact investing in India has a potential to grow from USD 1bn to USD 6-8bn.

1Source: Annual Impact Investor Survey conducted by

J.P. Morgan and Global Impact Investing Network (GIIN) in 2016



Economic overview

India

Indian equities have fallen 10.1% in USD terms

so far in November, underperforming Asian

and Global equity markets. This is primarily

due to concerns that the Indian government’s

bold decision to demonetise of higher

denomination currency notes will adversely

impact domestic consumption and slow down

the economy.

The US dollar appreciation after Donald Trump’s victory in US

Presidential elections also hurt the performance of Indian

equities in dollar terms. While the Indian rupee depreciated

versus the dollar, it has outperformed most other Asian

currencies over this period.

Potential benefits of demonetisation:

Curb illegally accumulated wealth – India’s shadow

economy was 23% of GDP according to World Bank

estimates. According to market researches, only about

4% Indians pay taxes and direct tax collections amount

to 5.5% of GDP.

Expectations of a fall in interest rates – Banks have

received net new deposits of around US$60bn in the first

ten days, which is 2.7% of GDP and almost half of the

deposit creation that happens in a year. This sharp rise

in deposits is expected to lead to a fall in interest rates

by up to 50bps.

Potential shift towards banking and digital money

transactions – A large part of the adult population is still

unbanked. The move is expected to boost the

government’s financial inclusion and Digital India plans

and encourage people to move towards online payment

systems. It must be noted that about 35% of the

demonetised currency in circulation has already come

into the banking system.

Potential adverse impact of demonetisation:

Near term contractionary impact on consumption and

economic growth – 500 and 1’000 rupee notes account

for about 86% of currency in circulation. Their sudden

withdrawal will adversely impact liquidity, hurt

consumption and GDP growth over the next two to three

quarters. It could also delay the sowing of the winter crop

as farmers find it hard to buy inputs.

Squeeze on the cash economy - Not all cash is black

money and not all black money is in cash (a majority of

it is held in real estate and gold). Note that India’s

informal sector generates around 45% of GDP and 80%

of employment. The potential impact on this segment on

the total GDP is hard to quantify at this stage.

Iran

According to the Central Bank of Iran, the

budget deficit has more than doubled in the

same period last year mainly due to a decline

in income from sales of crude oil and gas, and

a surge in government spending.

The Central Bank of Iran (CBI) has released its latest report

on the government’s budget, covering the first half of the

Iranian fiscal year up to September 21. According to the CBI,

the budget deficit has more than doubled to USD 8.4 billion,

compared with a USD 4 billion deficit in the same period last

year. Despite the rise in income from taxes it could not

compensate the higher government spending. Moreover,

income from sales of crude oil, gas and other condensates

declined as well. Income from taxes rose 26.8% to USD 18.7

billion. Current government spending has seen similar growth,

reaching USD 30 billion, 14% lower than the initial target of

the budget plan. Income from sales of crude oil, gas and other

condensates was reported at USD 7.8 billion, a 12% decline

from the same year-ago period, with the items targeted to

produce income of USD 25 billion over the whole budget year.

Despite the lower than forecast incomes, government

spending on construction surged by 53.5% to USD 4.2 billion.

The government budget deficit in the first half of the current

year, was covered by selling USD 8.7 billion of debt securities.

The CBI also reported that money supply had grown by 10.4%

in the first half, reaching USD 357 billion. It should be noted

that the official US Dollar rate was applied in reporting the

figures above.

.



Asset class overview

Equities

The key issue within the markets was the hardening of interest rates at the long end of the yield curve.

In absolute terms, the relatively minor interest rate hike produced a clear rotation within the stock

market sectors. This meant that defensive sectors – such as, in our view, the highly rated consumer

staples sector –, but also telecommunications, utilities and property were given a considerably lower

rating by investors within a very short period of time. Shares in these sectors were previously bought

by investors more as a relatively secure ‘replacement for bonds’.

Buy Hold Sell

Switzerland

The Swiss stock market continues to be vulnerable to

corrections. The shares of many companies have reached fair

value. The stock selection is and remains an important factor

in our view.

UK

The FTSE 100 Index had a strong performance since the Brexit (approx. +12% as of 9th November 2016) because of the associated weakness of GBP currency rate.

USA

After the US elections, equity markets dropped initially about

4% - 5%, but made up most of their losses thereafter. Since

the closing price of 2140 on 8th November 2016, the S&P 500

is roughly 3% higher as of 9th November 2016.

Japan

Sectors such as chemicals, the automotive industry and

construction should benefit as a result, and partially fulfil their

recovery potential. The US rate hike cycle, which is being

positively correlated with the aforementioned sectors, is

further indication of this. This strategy of stock and sector

selection is therefore recommended.

Recommended global equities to buy - Switzerland

Stock Currency Price Target Price

Geberit CHF 405 460

Givaudan CHF 1810 2150

Nestlé CHF 68 82

Novartis CHF 70 85

Roche CHF 224 280

Recommended global equities to buy - UK


Smith & Nephew

GBP 11.2 14.5

Recommended global equities to buy - USA


Alphabet C USD 758 900

Berkshire Hathaway

USD 157 180

Celgene USD 118 130

Cognizant Technology

USD 55 60

Disney USD 99 110

Salesforce USD 72 105

Recommended global equities to buy - Japan


Toyota JPY 6700 7800

Murata JPY 15615 18000

Nintendo JPY 27940 30000

Furukawa Electric

JPY 3530 4000




Equities

Eurozone

It seems that stock markets are already anticipating to some degree the scenario of an improving global economy in 2017. We believe, however, that the current asset allocation in equities should not been changed for the time being.

Emerging Markets

Post US election, the Asian Markets did not show any

remarkable reaction in contrary to the Brazilian and the

Mexican indexes (approx. – 8%).

Recommended global equities to buy - Eurozone

Stock Country Currency Price Target Price

Axa FR EUR 22 26

Hermes FR EUR 389 430

L’Oréal FR EUR 159 200

Vinci FR EUR 61 72

Fresenius DE EUR 67 75

BMW DE EUR 80 90

Recommended global equities to buy – Emerging Markets

Stock Country Currency Price Target Price

Singapore Airlines

SG SGD 10 14

Tencent Holdings

HK HKD 195 230

Want China HK HKD 5.0 5.7

Advantech TW TWD 256 290

Taiwan Semi-conductor

TW TWD 183 220




Fixed income

The rise in the inflation rate is due to the fact that commodity prices have stabilised in recent months.

In our view, market participants seem therefore to be expecting only a temporary increase in the rate

of inflation. The expected rise in prices for 2017 is still below the targets set by the Fed. After years

of ultra-expansive monetary policy, by which the European Central Bank and the Federal Reserve

were aiming to prevent a slide into deflation, things are anything but normal.

Swiss Government Bonds

The 10-year Swiss Government bond yield is approx. -0.15%

and therefore, we still do not recommend having any exposure

to Swiss Government Bonds.

Emerging Market Bonds

For Emerging Markets bonds, the credit risk premium looks

attractive after the US election and it should compensate for

the higher US interest rates (duration risk). We recommend to

hedge the Emerging Market currencies against the reference

currency or the USD.

US Government Bonds

After the US election, the 10-year government bond yield

jumped from 1.80% to 2.20%. We forecast the upward trend

will continue in 2017 up to 2.70%. Therefore, it is not advisable

to hold long-term US government bonds.

High-yield bonds in EUR

The risk premium for high yield bonds in EUR has expanded

slightly after the US election. We look this situation a good

opportunity to have a certain exposure in this asset class due

to the still accommodative stance of the ECB, tough a tapering

is possible in 2017, and a better economic outlook for the

Eurozone.

Outlook of bonds

Sector Currency Outlook

(1 month)

Expected % change*

(1 month)

Outlook (3+ months)

Expected % change

(3+ months)

Bonds CHF (Corporate & Gvt. Bonds) CHF within +/-0.10% within +/-0.10%

Bonds EUR (Corporate & Gvt. Bonds) EUR within +/-0.15% within +/-0.25%

Bonds GBP (Corporate & Gvt. Bonds) GBP within +/-0.25% within +/-0.50%

Bonds USD (Corporate & Gvt. Bonds) USD within +/-0.25% within +/-0.50%

Global EM (Sovereign Bonds) USD within +/-0.50% within +/-1.00%

Global HY Bonds (High Yield Bonds) USD within +/-0.50 % within +/-1.00%

Recommendations

After 30 years of worldwide sinking yields and rising bond

prices, it is advisable to invest in Fixed Income

investments like corporate bonds denominated in USD,

insurance-linked bonds, funds following unconstrained

strategies or aimed at generating an absolute return, and

high-yielding bonds denominated in EUR for example as

alternatives of traditional government and corporate

bonds.




Currencies

We continue to recommend the US dollar despite the weak US economic data for the first half of the

year. There are also hardly any alternatives. The balance-sheet total of the Swiss National Bank (SNB)

has reached a worrying level. The continuation of foreign exchange market interventions to weaken

the Swiss franc has reached its limit in our view. The SNB could let the EUR/CHF exchange rate drop

to parity.

EUR

The ECB’s wait-and-see approach is seen by financial

markets as an admission of the limited effect of security

purchases on the real economy. However, the delayed effect

of fiscal measures justifies the behaviour of monetary

authorities. According to economic indicators, the moderate

recovery in the Eurozone is continuing. This is being driven by

consumption in particular, which is benefitting from the

improved situation in the labour market. The latest indicators,

especially from Germany, point to somewhat stronger

economic activity. The current environment will have little

influence on the exchange rate. The value of the euro should

approach parity with the US dollar in the coming months due

to the rising interest rate spread and changing economic

momentum.

CHF

EUR/CHF has recently been driven lower by Euro weakness,

however a floor above 1.0700 supports prices in the near term.

Over time we remain bullish for this cross seeing it eventually

trade back through the 1.0800 resistance area towards 1.0950

again. Focus for USD/CHF remains at 1.0140, above which

can see further scope for a test of the January 2016 peak at

1.0257. USD/CHF is consolidating in a high level range with

the spotlight on the 2015/2016 sell-off at 1.0140. Fresh selling

is expected to show at 1.0250 area, however, a direct break

higher can target a tougher level at 1.0330 – the 2015 high.

Near-term support shows at 1.0068/40, followed by .9995/80

where buying is expected to show.

GBP

We see the GBP maintaining its near-term out-performance

as the UK’s government under PM May tries reconnecting to

corporate UK. Yesterday’s speech at the CBI conference saw

a reconnecting to business approach allowing GBP to recover,

reducing its risk premium. GBP/USD has potential to 1.30 in

the near-term.

JPY

JPY positioning is moving towards short territory but remains

neutral. Macro funds added to short positioning and sentiment

turned further bearish. Long USD/JPY remains one of the

favourite trades and the team expect long positioning to

continue to build.

INR

Rupee rebounds from record low, but is still set for third

consecutive weekly loss amid outflows from local assets.

Foreign funds sold net 7.6b rupees ($110.7m) of rupee debt

in November, ninth straight day of outflows that’s longest

stretch since May. Indian government’s scrapping of high-

value notes will severely hit 4Q GDP and will push 2016 GDP

growth below 7%. Softer growth and inflation may prompt RBI

to cut more aggressively in coming months, though this is

contingent on INR stability; at this stage, still sees above 7%

growth for 2017. India’s currency may decline further even

with strong fundamentals

Anticipated trend of major currencies

Sector Spot Outlook

(1 month) Expected % change*

(1 month) Outlook

(3+ months)

Expected % change

(3+ months)

EUR/CHF 1.08 1.09 1.09

EUR/JPY 121 125 130

EUR/USD 1.06 1.10 1.10

GBP/CHF 1.27 1.22 1.24

USD/CHF 1.01 1.01 1.02

USD/JPY 114 115 120

INR/USD 68 68 68.5




Commodities

Gold could benefit if negative interest rates continue to escalate in some countries. We would

currently advise against exposure to oil or shares of oil companies. Despite “reaching” agreements

within OPEC, the oversupply is likely to last until spring 2017.

Gold

After the US election, the US 10-years government bond yield

went up from 1.80% to 2.40% due to higher inflation

expectations as a result of Trumps’ spending plans. In

addition, the USD exchange rate moved up to most other

currencies. Because of that, the Gold price dropped from USD

1’300/oz. to USD 1’200/oz. It is advisable to hold a share of

gold as a “safe haven”, considering possible negative

economic effects as a result of a potential US-American

protectionist attitude.

Industrial Metals

After a weaker phase, industrial metals have recently profited

from increased risk appetite of investors as well as from the

positive signals coming from the global economy.

Since the end of October the Bloomberg industrial metals

index increased to its highest level since July 2015. The

reaction to the election of Donald Trump as the future US-

President was in total even positive. Since the beginning of

the year, the index has increased by about 30%. Interestingly,

industrial metals were able to decouple themselves from oil

during the last couple of weeks. Aside from positive global

economic signals, the strongly increased energy prices

appear to trickle through to aluminium prices. Zinc climbed

even above its highs from back in 2015 and 2014 and is

currently trading at 2011 levels. Structurally the price remains

supported by a supply-side deficit.

Oil

OPEC has agreed to cut supplies for the first time since the

global financial crisis, sending prices above USD 50. - a barrel.

The cartel reached the deal to cut 1.2m barrels a day for six

months from the start of January. Other major non-Opec

producers including Russia, agreed to participate in the cut.

In our opinion, while crude prices have risen on the deal,

OPEC will need to convince a sceptical oil market it can

actually deliver. Since increasing volumes from

unconventional shale production are also becoming

economically viable, an upturn among operating production

sites can be observed in the USA. This, coupled with a low

interest rate climate and, in effect, very easy access to

financing solutions, is creating an increased risk of a

production peak. For us, the USA remains the leading

marginal oil producer.

The International Energy Agency (IEA) had predicted in its

World Energy Outlook that further oil price fluctuations will

continue. "We are at the beginning of a period of high

volatility," said the IEA.




Opportunities

Japan has reached a historical turning point in terms of corporate governance. The Japanese

government, pension funds, banks, and institutional investors are acting to make corporate

managers more accountable to shareholders and responsive to their concerns. We view the new

Corporate Governance Code and Stewardship Code as game-changers in the way Japanese

companies are managed. Japanese companies are ready to buy back more shares.

Japan

Healthy companies:

As a result of the reforms carried out by business managers,

Japanese companies have significantly increased their return

on equity in recent months. The return of free cash flow is also

sitting above its historical average at almost 5%.

Negative mood:

The mood within the private sector, however, is in total

contrast to this. Both certain sentiment indices and the scale

of ‘short selling’ among investors remain on a similar level to

the period during the financial crisis. One sure reason for this

is the development of the yen against the US dollar.

Evaluation:

On the one hand, there are low expectations for cyclical

sectors. As the expectations for the fourth quarter of the

reporting season are modest, the pace of earnings is also

expected to pick up again. The MSCI Japan Index is quoting

a price/earnings ratio almost 30% below the historical ten-year

average. There is a similar picture comparing with the MSCI

World Index.

Sectors:

Sectors such as chemicals, the automotive industry and

construction should benefit as a result, and partially fulfil their

recovery potential. We believe the investors should focus on

these sectors and select each single stock carefully. In our

view, the quality of earnings and the level of transparency

differ among the companies to a vast extent.

Conclusion:

For investors wishing to invest in Japanese stocks, we would

recommend cyclical stocks along with a currency hedging.

Recommendations

Japanese stocks such as Toyota, Murata Manufacturing,

Nintendo and Furukawa Electric are attractive for the

medium term in our opinion.

Alternatively, one can consider hedged share classes of

the funds Goldman Sachs Japan equity Portfolio, Invesco

Japanese Equity Core Fund, or Uni-Global Equities

Japan.

Japanese Abenomics

The Bans of Japan’s monetary easing and the JPY 6

trillion ETF purchase programme are likely to support

Japanese equities in the coming months, and reduce

headwinds for corporate earnings next year.

A probable corporate earnings rebound in the coming

months could be offset by a loss of confidence in

Abenomics, which may renew selling pressure.

Within Japan, investors should focus on low P/B stocks

of cash-rich, strong balance sheet companies which can

increase their dividends or buy back their shares.



Summary on future trends

As of 01 December 2016

Overweight Neutral Recent downgrades

Asset class Outlook Benchmark Value m/m perf1

in % Ytd Perf.

Equities

USA S&P 500 2'199 4.4% 9.8%

Eurozone Euro Stoxx 50 3'031 0.4% -3.5%

UK FTSE 100 6'738 -2.1% 12.3%

Japan Nikkei 225 18'513 6.1% -1.0%

Switzerland SMI 7'802 0.5% -8.3%

Emerging Markets MSCI EM 863 -4.3% 11.2%

Bonds

US Government bonds 10-year yield 2.41% -1.7% 1.1%

US corporate bonds Spread (vs 10yr US Gvt) 120 bps -3.2% 5.5%

US high yield bonds Spread (vs 10yr US Gvt) 418 bps 0.5% 13.2%

EM sovereign Spread (vs 10yr US Gvt) 388 bps -4.4% 8.4%

Swiss Government bonds 10-year yield -0.11% -0.5% -0.3%

Germany Government bonds 10-year yield 0.30% 0.0% 1.7%

Alternative investments

Commodities Dow Jones Commodity 557 4.3% 22.8%

Listed Real Estate FTSE EPRA/NAREIT

Developed 4'007 -1.6% 1.1%

Currencies

USD - N/A N/A N/A

EUR EUR/USD 1.06 -3.8% -2.1%

CHF USD/CHF 1.01 -3.7% -1.1%

GBP GBP/USD 1.25 2.4% -14.9%

JPY USD/JPY 114.15 -8.8% 5.3%

INR USD/INR 68.36 -2.4% -3.2%

Source: HBS, Bloomberg

1Month-on-month performance



Asset allocation

Preferred investment views

Asset Class Most preferred Least preferred

Equities

United States

Emerging Markets

Japan

-

Bonds

Preferred shares

Unconstrained strategies

Euro high yield

Government bonds

Foreign Exchange USD

EUR

GBP

JPY

Alternative investments REITs

Equity market neutral -

Cash - -



Asset allocation

Recommended asset allocation

The Conservative Investor

Asset Class Range of

SAA1

TAA2 Portfolio

Deviation (from prev. allocation)

Cash 0% - 50% 20% 0%

Fixed Income 20% - 80% 40% 0%

Equity 0% - 30% 25% 0%

Alternative Investments 0% - 20% 15% 0%

Total 100% 100% 0%

The Balanced Investor


SAA1

TAA2 Portfolio


Cash 0% - 30% 5% 0%

Fixed Income 10% - 70% 20% 0%

Equity 20% - 60% 55% 0%


Total 100% 100% 0%

The Dynamic Investor


SAA1

TAA2 Portfolio


Cash 0% - 20% 5% 0%

Fixed Income 0% - 60% 10% 0%

Equity 50% - 90% 70% 0%


Total 100% 100% 0%

The Strategic Equity Investor


SAA1

TAA2 Portfolio


Cash 0 - 20% 5% 0%

Fixed Income 0 - 20% 0% 0%

Equity 70 -100% 95% 0%

Alternative Investments 0 - 20% 0% 0%

Total 100% 100% 0%

1 SAA – Strategic Asset Allocation, 2 TAA – Tactical Asset Allocation

Cash20%

Fixed Income

40%

Equity25%

Alt. Inv.15%

Cash5%

Fixed Income

20%

Equity55%

Alt. Inv.20%

Cash5%

Fixed Income

10%

Equity70%

Alt. Inv.15%

Cash5%

Equity95%



Contacts

Geneva – Headquarters

Hinduja Bank (Switzerland) Ltd

Place de la Fusterie 3bis

1204 Geneva, Switzerland

Tel. +41 58 906 08 08

Fax +41 58 906 08 00

Branches

Zurich

Florastrasse 7

8008 Zurich, Switzerland

Tel. +41 44 388 45 45

Fax +41 44 380 05 91

Lugano

Viale Serafino Balestra 5

6900 Lugano, Switzerland

Tel. +41 91 910 43 43

Fax +41 91 923 55 73

Representative Offices

London

New Zealand House, 80 Haymarket

London, SW1Y 4TE, United Kingdom

Tel. +44 20 7839 2366

Fax +44 20 7839 4959

Paris

33, rue Galilée

75116 Paris, France

Tel. +33 1 44 43 52 36

Fax +33 1 40 70 03 79

Subsidiaries

Switzerland

Berafina AG

Münchensteinerstrasse 43

4001 Basle, Switzerland

Tel. +41 61 225 45 45

Fax +41 61 225 45 25

Rowena AG

Grenzstrasse 24

9430 St Margrethen, Switzerland

Tel. +41 71 747 49 59

Fax +41 71 747 49 51

Dubai

Hinduja Bank (Middle East) Ltd

Dubai International Financial Centre

Building GV 10, 2nd Floor, Unit 5

Dubai, UAE

Tel. +97 14 436 65 88

Mauritius

Hinduja India Mauritius Holdings (Mauritius) Ltd

HBS India Investments (Mauritius) Ltd

HBS Trust Services (Mauritius) Ltd

1st Floor, Manor House Cr. St. James

Chazal Street Port Louis, Mauritius

Tel. +230 208 75 75

Fax +230 208 75 74

USA

Hinduja Capital Advisors Inc

537 Madison Ave., 12th Floor

New York, 10022, USA

Tel. +1 212 375 07 55

Fax +1 212 752 73 12

UK

Amas Investment & Project Services Ltd

New Zealand House

80 Haymarket

London, SW1Y 4TE, United Kingdom

Tel. +44 20 7839 4661

Fax +44 20 7839 5992

India

Paterson Securities P Ltd

#48 Vanguard House,

Second Line Beach, Parrys,

Chennai – 600 001

India

Cayman Island

BCL Private Bank & Trust (Cayman) Ltd

c/o P.O. Box 2407GT

Grand Cayman

Cayman Islands


H i n d u j a B a n k ( S w i t z e r l a n d ) L t d

Publisher

Hinduja Bank (Switzerland) Ltd

Place de la Fusterie 3 bis

1204 Geneva, Switzerland

Tel. +41 22 906 08 08

Fax +41 22 906 08 00

www.hindujabank.com

[email protected]

Disclaimer

The information in this publication was developed using data which Hinduja Bank (Switzerland) Ltd assumes to be accurate;

nevertheless, Hinduja Bank (Switzerland) Ltd accepts no liability and offers no guarantee. The availability of such information does

neither constitute a recommendation nor a solicitation to buy or sell any of the products and services discussed herein. Statements

made in this publication can be changed without prior notice. The Bank or its subsidiaries or affiliates cannot be engaged in any legal

action, claim or dispute for any result, performance, losses or any other reason linked to any information provided in this document.

Moreover, the content is not intended for individuals (or entities) who (which), by reason of their nationality or domicile or for any

other reason, are subject to foreign regulations prohibiting access to banking services or investment instruments via one or several

distribution channels, or prohibiting or restricting the use of any information provided in this document.

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