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ANDBANK RESEARCH Global Economics & Markets

Alex FustĂŠ Chief Economist alex.fuste@andbank.com +376 881 248

2014 Strategic Outlook For the Global Economy & Financial Markets December, 2013


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

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Executive Summary

Corporate Review

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Economy & Markets USA – The US remains within that group of economies that always ends up surprising positively. After this tremendous cut in deficit (the equivalent to 2.9% of GDP), the economy has managed to keep GDP growth at around 2%. Admittedly, the quantity & quality of jobs being created in the US does not help. This has prompted structural changes in the median income level and this could lead one to think that demand factors will remain subdued. Additionally, there is still a long way left to go in terms of deleveraging (total debt remains at 350% of GDP). On the positive side, low inflation will keep the long end of the yield curve well contained, helping the real estate sector to continue its gradual recovery. We expect GDP to accelerate to a rate of 2.5% in 2014. Eurozone – The streams of thought pointing to the infeasibility of the euro will persist. We think they are wrong. In Germany, the SPD’s participation in the German government and not facing any fiscal drag for years to come may fuel certain reflation in Germany that will benefit the rest of euro area members. The Euro will continue offering the expected benefits for which it was designed. (1) Joining one of the biggest and healthiest domestic markets, and (2) by embracing the concept of fiscal and monetary “orthodoxy”, which in turn involves a presumption of stability, it will continue fueling foreign flows into regional assets. We expect the Eurozone GDP growth to accelerate in 2014 to a rate of 1% -1.25% (from the 0.8% seen in 2013). Asia – The region accounts for more than 30% of global GDP, which is indicative of a greater autonomy. Despite the slowdown, the region still shows a healthy pace of growth (6.8% y/y in 3Q). For 2014 we expect growth to remain stable at a healthy pace of around 6%. From a solvency point of view, it is undeniable that there has been a significant reduction in its debt (from 53% of GDP in 2002 to 40% in 2013). Latin America – Over the next years, external conditions are likely to prove more challenging. The slowing demand from Asia in general, and China in particular, is not an overly worrisome factor, but instead we are concerned about less abundant global liquidity that has so far helped commodity prices. Another reason of concern is the Domestic vulnerabilities that are also building, specifically the current state of under investment. GDP growth for the region could settle down to a rate of just 2.6% or so in 2014. By blocs, the best positioned is the one known as the “Pacific Alliance".

Equities – S&P: We expect corporate margins to remain stable, among the highest in the world at 9.6%, allowing the EPS to grow at the same pace as sales (+6.2%) in 2014. Knowing that EPS in the S&P was US$109.5 in 2013, this means that 2014 EPS could be around US$116.27 in 2014. Regarding the LTM PE, we would place our fundamental level near the region of 16 at Dec 2014. According to these figures, the fundamental value for the S&P could be set at 1.849, representing a +2.4% potential appreciation from current levels. Stoxx 600 Europe: Sales will expand only marginally (+3.9%), but margins will expand from 5.5% to 6.5%, allowing the EPS to grow 22.7%. We are betting on the PE staying around 14.5 in December, fixing the fundamental value for this index at 370 (from today’s 322), which means a potential appreciation of +14.8%. In Asian Pacific ex Japan: we expect corporate sales to grow at 9%, margins to pick up to 7.75% and EPS to grow 15.3%. With PE around 13.7, these markets offer a potential appreciation of +20.7%. Mexbol, our Dec 2014 target, is at 47,500 (+14% potential) and Bovespa at 52,000 (a fair value). Core Fixed Income – Bund: Start Buying at 2% yield, sell at 1.5%. Treasury: Start buying at 3%, sell at 2.5% Sovereign Risk (European Periphery): We project a 75-100 bp additional cut in yields for the long maturity bonds of these issuers. Double digit potential performance in Italy, Spain, Portugal and Greece. Corporate Credit: We prefer HY bonds (+4.5% expected potential), vs. a mild 1.5% in the itrax and CDX. Buy EUR credit at +100bp spread. CDX at +90bp and increase exposure in HY with spreads above 400bp. EM Bonds Asia (local currency): The Tapering issue will probably continue damaging these bonds. Despite this, we see a lot of value in these assets, especially in local currency. Volatility guaranteed. Preferred: Malaysia, Indonesia & India. EM Bonds Latin America (local currency): Same reading as in Asian bonds. Volatility guaranteed. Most preferred: Chile, Mexico and Peru Commodities: Our target price for Oil (WTI) remains stable around the $85. Buy in the $70s and sell above $95. Commodities in general at fair value. Preferred: Gas, wheat, cotton, and some minerals. Avoid metals. Fx: Fundamental target for the USD/EUR at 1.40. Asian currencies are attractive. Avoid JPY (vs. EUR and USD). Underweight GBP vs. EUR. Neutral MXN (target at 12.75). Short BRL (2.6).


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

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Corporate Review

Key Forecasts Table 1: GDP & Consumer Prices (% Y/Y)

2013f

GDP 2014f

2015f

1.7

1.5 1.5 -0.5 0.8 0.9

2.5 1.2 1.0 1.5 1.8

3.0 1.0 1.5 2.0 2.2

1.4 0.3 1.2 2.5 1.2

1.7 2.0 0.8 1.7 1.5

2.0 1.0 1.0 1.8 1.5

14.9 0.4

10.1 3.9

7.5 2.8

7.0 3.5

6.5 4.0

2.5 4.0

3.5 3.0

3.5 3.0

1.9 0.4 1.1

5.5 6.2 4.9

2.5 3.5 2.5

3.5 3.0 3.0

4.0 3.5 4.0

1.5 2.4 1.3

2.5 3.0 1.5

3.0 3.5 1.5

5.6 1.5 0.6 0.5 0.8 0.4 28.1

6.3 4.7 6.0 3.6 4.7 7.3 5.7

4.7 6.0 4.5 7.3 3.5 5.2 6.0

5.0 5.5 5.0 6.5 3.5 5.5 5.8

5.5 6.0 5.0 6.5 4.5 5.5 5.8

6.2 6.5 2.1 2.5 2.1 7.0 3.4

6.5 5.0 3.0 3.0 2.5 8.0 4.0

6.0 5.0 2.5 3.5 3.0 7.0 4.0

Australia New Zealand Austral-Asia

1.2 0.2 1.4

3.2 2.5 2.9

2.4 2.5 2.4

2.3 3.0 2.4

2.5 3.0 2.6

2.2 1.0 2.0

1.8 2.0 1.8

2.5 2.5 2.5

Brazil Mexic o Argentina Colombia Venezuela Peru Chile Ec uador Latam

2.94 2.09 0.85 0.58 0.47 0.37 0.35 0.15 7.8

2.0 2.5 2.0 3.5 -1.0 5.5 4.3 3.5 2.4

2.2 4.0 -1.0 4.0 -0.5 5.5 4.3 3.0 2.6

2.8 4.3 1.5 3.8 1.5 5.5 4.0 2.5 3.2

6.0 3.7 24.0 2.3 36.0 2.5 2.0 3.5 8.5

5.0 3.0 30.0 3.0 33.0 2.3 2.5 4.0 8.5

4.8 3.5 25.0 3.0 30.0 2.0 2.5 3.5 7.8

Global

100

2.7

3.2

3.4

2.6

2.9

2.9

Share of World

1991-2010 average growth

US Japan Euro-zone Uk Developed

24.2 8.5 14.3 3.5 50.5

2.4 1.0 1.6

Mainland China Hong Kong South Korea Singapore Taiwan India Indonesia Malaysia Philippines Thailand Vietnam EM Asia

Consumer Prices 2013f 2014f 2015f

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Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

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Corporate Review

Asia Pacific ex Japan The subjects to be considered in 2014 1.

Their share in Global GDP (as a factor that will determine economic autonomy)

2.

Debt metrics. Is it a solvency problem? Discipline in the budget balance

3.

Labor market dynamics & development of domestic standards of living

4.

Fx currency reserves as a proxy for their capacity to fund themselves domestically

5.

The Current Account as “The big problem�

6.

Financing requirements in 2014

7.

The dependence or autonomy of their external sectors

8.

Inflation as a recurrent argument for a local currency sell-off

9.

The importance of competitiveness in a dismal global environment

10. International recognition of all these aspects

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1st. Their share in Global GDP (as a factor that will determine economic autonomy) Why do we have to monitor this part of the world closely? Simply, because not spending a good part of your time analyzing this part of the world would be like playing baseball with your eyes closed. You could get hit on the nose!

SHARE OF WORLD GDP

Thomsom Datastream, IMF, Capital Economics

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‌ and despite the slowdown, the region still shows a healthy rate of growth, which suggest that their share of global GDP will continue to increase

Asi a Eme rg i ng The 3Q report shows an aggregate pace in growth of 6.8% y/y at regional level.

7.8% 4.2% 2.4%

In terms of q/q dynamics, the region has experienced an acceleration in this 3Q, reporting a q/q growth of 3.2% (13.3 annualized).

1.6%

6% 2.6%

7.5% 5%

The best q/q dynamics have taken place in Indonesia (2.6% and 3% n.a. growth in 2Q and 3Q respectively), Malaysia (3.3% and 3.9%).

5.6%

1.6

2.6

3.7

4.7

5.7

6.8

7.8

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Corporate Review

2nd. Debt metrics. Is it a solvency problem? Discipline in the budget balance It is undeniable that there has been a significant reduction in their debt (from 53% of GDP in 2002, to 41% in 2012 and 40% in 2013)

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‌ and all this has been due to a disciplined budget balance (that apparently still follows a countercyclical pattern)

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3rd. Labor market dynamics & development of domestic standards of living The domestic labor market is increasingly active despite the global financial crisis. The unemployment rate has dropped from 4.7% in 2005 to 4.2% in 2012, and 4% today.

Today it is at 4.2%

Before the crisis, the unemployment rate was at 4.7%

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Concerning the development of standards of living, the best way to look at this is by analyzing the performance of domestic consumption ‌

 Indeed, the mercantilist approach reduces the dependence on capital inflows, but these economies remain largely leveraged to the Western cycle, so they will have a subpar growth for many years.  On the other hand, we think that it is a better option to invest in those countries that are less synchronized with the developed economies. Those with stronger domestic dynamics, at the expense of a negative current account balance. A deficit that, on the other hand, they do have the ability to finance domestically (due to their strong position in Fx reserves, or their low level of debt).

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‌ and assess whether these dynamics in standards of living are sustainable This can be seen by detecting whether the country maintains a balanced production structure. In that regard we can see how the favorable development in the tertiary sector has not been to the detriment of the secondary sector.

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4th. The Fx currency reserves as a proxy for their capacity to fund themselves domestically And a permanently healthy net position in Foreign Exchange Reserves (>40% of GDP), meaning that they can fund their deficits (in case they decide to incur one)

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5th. The Current Account as “The big problem� The Current Account position is the main driver that investors have taken as a trigger point to sell these assets, those with the weakest position in the Current Account balance being the hardest hit. Be careful with them in 2014, while we recommend that you take advantage of them at stressed levels (excessive punishment).

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Falling current account surpluses are not to be feared

 The trend over the past few years in most of Asia has been towards smaller current account surpluses.  The deficits in India and Indonesia have rightly caused some concern, but there is no balance of payments crisis on the cards in either country.

 The trend towards smaller current account surpluses is largely a healthy development since we strongly believe that smaller surpluses reflect a rebalancing within these economies.  Asia’s policymakers have largely been seeking to focus on a more autonomous domestic demand-led growth rather than a growth model mostly based on exports to the developed world.  The “mercantilist” approach is losing prominence and shifting towards a more sustainable global “status quo”. Definitely a respite for the West.  Smaller current account surpluses are a sign that this is taking effect.

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6th. Financing requirements in 2014 The EM Asian countries (we are interested in) have extremely low financing requirements for the next 18 months (equivalent to just 8% of GDP on average).

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7th. The dependence or autonomy of their external sectors Commercial links with developed economies are not as large as in the past. This points to a certain degree of economic autonomy

Asian Exports (2012, % of GDP)

Commercial links with the US barely represent 4% of GDP

Capital Economics, ThomsonDatastream

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8th. Inflation as a recurrent argument for a local currency sell-off In the countries under our scrutiny, inflation remains historically low and under control at around 2.9%. More importantly. We forecast that once Indonesia’s base effect (of removing subsidies on gasoline) disappears, inflation in this country will return to 5%, and with it, inflation in the region will fall to around 2.75%.

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Despite what many believe, inflation is definitely not a threat for these currencies

Consumer Prices (% y/y)

Representative of the region

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9th. The importance of competitiveness in a dismal global environment Asian economies have actually gained in competitiveness compared with rivals in Latin America and Europe. This means that, if western economies (and the global activity) continue their gradual pace of recovery, Asian economies should not experience any significant decline in the pace of expansion. US import prices by region (index)

Capital Economics, Thomson Datastream

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10th. International recognition of all these aspects

There is an explicit recognition of all the aforementioned aspects (A - average rating for the region)

Region Ratings

AA-

AAA A-

BBB-

BBBBB+

Chi n a

Ind i a

Ind on e sia

Ma l aysia

Phi l i pp i ne s

T ai wan

T ha i la n d

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Corporate Review

Our conclusions for the Asian economies “Good prospects in the medium to long term�  Despite the slowdown, the region still shows a healthy rate of growth (6.8% y/y in 3Q2013 with positive dynamics in the q/q readings).  It is undeniable that there has been a significant reduction in their debt (from 53% of GDP in 2002, to 41% in 2012 and 40% in 2013).  Thanks to a disciplined budget balance (that apparently still follows a countercyclical pattern).  With an increasingly active domestic labor market, despite the global financial crisis. The unemployment rate has lowered from 4.7% in 2005 to 4.2% in 2012, and 4% today.  And a permanently healthy net position in Foreign Exchange Reserves (>40% of GDP).  Strong domestic dynamics that are reflected in the strong performance of domestic consumption.  An improvement in the Service sector that does not detract from the manufacturing sector (+7.2% y/y growth in industrial production in the 3Q13).  Inflation is not a risk. In the countries we are interested in (in the South East region) inflation remains historically low and under control at around 2.9%. And more importantly, we forecast that once Indonesia’s base effect (through removing subsidies on gasoline) disappear, inflation in this country will return to 4.5%, and with it, inflation in the region will fall to around 2.5%.  Indeed, the mercantilist approach reduces dependence on capital inflows, but these economies remain largely leveraged to the Western cycle, so they will have a subpar growth for many years. If true, the perspectives for these countries must be lowered automatically.  On the other hand, we think that it is a better option to invest in those countries that are less synchronized with the developed economies. Those with stronger domestic dynamics, at the expense of a negative current account balance. A deficit that, on the other hand, they have the ability to finance domestically (due to their strong position in Fx reserves, or their low level of debt).

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China – The reforms proposed in the Third Plenum

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A summary of what the Xi Reform represents 1.

The document released after the 3rd Plenum actually represents the “Master Plan” that president Xi promised. The Reform is clear, wide ranging and does not shy away from areas of contention. “Aimed at a broad reform of Chinese governance. Not just narrow economic changes”

2.

The market-friendly approach is about-face from the previous government’s stance: The central emphasis is on granting markets a decisive role in resource allocation. Prices of water, oil, natural gas, electricity, transport and telecommunications will be more market determined. An approach will be adopted to open up more of the economy to private and foreign firms.

3.

Policy-makers will step back from micro-level intervention. Xi is a strong leader who is centralizing power to overcome the limits that Hu and Wen (and the rest of the reformers) faced.

4.

Interest rate and capital account liberalization will continue. Private banks will be allowed for the first time. These steps should significantly improve the ability of private firms to compete with State Owned Enterprises (SOE). The expansion of VAT to cover more service sectors is also an incremental step.

5.

Fiscal reform is another key area. The reform represents the beginning of a strategy to clean up local government debt and finances. The objective is to increase the transparency of the budget by shifting responsibility for spending from local to central government. Both local and central government debt will be monitored more closely. These moves should help rein in risks that have certainly been growing.

6.

Social welfare & residential reforms are also important: Hukou requirements for access to social welfare and affordable housing will be abolished in small cities and eased in medium-sized cities. They will remain in place for large cities). This should help to support more sustained development. (Under the Hukou system people who worked outside their authorized home or geographical area would not qualify for grain rations, employer-provided housing, or health care). Restrictions on the sale of rural land will be lifted. This will help poor rural households by allowing them to capitalize on the value of land, also giving a leg up to urbanization.

7.

Tougher times for the SOEs. The plan aims to reduce the privileges of the SOEs. Although the state clearly wishes to see a continued strong role for SOEs.

8.

Mr Xi’s statement includes a comment that “growth is unbalanced, uncoordinated and unsustainable”. Whether or not the Plenum ends up as a turning point in China’s development will depend on how well the reform is implemented. The first step, which is a correct assessment of the situation and the definition of the necessary reforms…, has been taken.

9.

In the words of a respected analyst firm, “we cannot help feeling more upbeat about the prospects for China's long term economic future than we have ever been”.

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Sceptics may think that this is just a bundle of good ideas…

1.

Indeed, there are many who think that Xi may not have the power to push the plan through and overcome the fierce resistance from SOE tycoons and local official governments.

2.

According to some sources familiar with this issue, this pessimism will soon be proved wrong. Xi has already shown his power: i.

By a robust anti-corruption campaign over the last year, neutralizing many political rivals (all of them beneficiaries of the old system)

ii.

Jailing the head of the SOE administrative agency.

iii. Jailing senior executives at the most powerful SOE, The Chinese National Petroleum Company (CNPC) iv. Taking action against a big-city mayor who was a poster boy … v.

3.

… or directly sentencing to death the Deputy Mayor of two districts in Shanghai (the economic capital of China), for accepting bribes from companies.

The Reform Plan establishes two new Centralized Party Bodies (State Security Committee and Leading Group on Reforms), both tightly under XI’s control. The purpose of these agencies is to solve the two big problems reformers faced under the previous government. (1) The ability of bureaucrats to block reforms, and (2) the inability of top leaders to overcome bureaucratic battles. How?: i.

By changing China’s top priority from Security concerns to Economic growth (as the new Reform Plan makes clear)

ii.

In this way, Xi has positioned himself to be the final arbiter of all disputes, having the ability to decree when security concerns should take a back seat to economic growth.

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In summary, a Third Plenum reform package that exceeds everybody’s expectations and represents: 1.

2.

A new organization of China’s economy: The reform plan unveiled by Xi Jinping (November 15) represents a decisive shift towards a far more market oriented organization of China’s economy. i.

Market forces should be given a decisive role in resource allocation (as opposed to the “basic” and political criteria prevailing in the past 20 years).

ii.

“This change may seem minor but it is momentous” (Arthur Kroeber).

iii.

Aimed at overcoming one of the “well-known” problems with China: The wasteful investment spending that results from the ability of authorities at all levels to interfere with markets: Availability & control of key inputs such as land or energy, manipulation of prices, restricting market access for private firms by onerous licensing and approval requirements. All in all, a network of protectionist barriers to benefit politically connected firms…

iv.

How? Forcing the different levels of government to retreat from all these interferences in the market and focusing on the provision of basic social services and centralizing the bureaucratic machinery.

A substantial shift in the aggressiveness aimed at reducing the privileges of the SOE sector (the largest consumer of resources). Most analysts in the West thought Xi would avoid a head-on confrontation with the powerful SOEs, and instead try to indirectly reduce their influence. However, under Xi’s plan: i.

The major SOEs will be organized in a manner similar to Singapore’s Temasek (investment company owned by central government. With a multinational team, the holding company manages a portfolio that covers a broad spectrum of sectors including financial services, TMT, transportation, industrials, real estate, energy and resources. One of the few global firms assigned with the highest credit ratings of AAA by S&P, attaining perfect quarterly scores on the Linaburg-Maduell Transparency Index. A holding company that will have its own Board of Directors and management team. Pays taxes to tax authorities and distributes dividends to its shareholder (the Ministry of Finance).

ii.

The first measure already approved has been to force the SOEs to remit more of their profits to the State via an increase in the pay-out ratio, that will rise from 10% today to 30%.

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A wide ranging reform

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Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

30


Corporate Review

USA – The six subjects that will dominate

1.

The quality of jobs created & the structural changes in the median income level

2.

The state of deleveraging and the distance left to go

3.

The risks of a “trigger point” or “transition phases”

4.

The need to stop QE. A good reason to fear a rise in yields.

5.

Low inflation will help to keep the yield curve well contained (helping the real estate sector to continue its gradual recovery)

6.

The US remains within that group of economies that always ends up surprising (positively)

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1st. The quantity & quality of jobs being created in the US does not help Charles Gave defines this perfectly as one of the biggest worries concerning the medium term outlook for the US economy: “The perfect symmetry between full time jobs lost and part time jobs created�.

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... This poor process of job creation in the US has prompted structural changes in the median income level that will keep demand factors subdued  Some analysts demonstrate this by measuring first the 7 year difference between total jobs and part time jobs (red line).  As this gap widens in favor of part time employment, it is legitimate to think that a greater share of the US labor force now earns lower wages.  This can be clearly seen in the sharp decline in the real median income in the last 7 years (black line). Put simply (in the words of these same analysts), “The median income has slumped”.  And we, at Andbank, strongly believe that this process will require a long time to be reversed…  … causing demand factors to exceed supply factors …  … leaving us with our long held central scenario of disinflationary pressures.

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2nd. The state of deleveraging, and the distance left to go In general terms, the entire economy has deleveraged from 371% to 350% of GDP in the 2008-2013 period. Just a mere 5.6%. There is still a long way left to go. 90,000 80,000 70,000 60,000

Net Worth - Bal sheet Households & Nonprof corps (bll $)

Although household net wealth has apparently recovered 2007 levels, much of this wealth recovered has been in speculative & Real Estate assets.

50,000 40,000 30,000

90,000

11,000

80,000

10,000

15,000

81%14,000

9,000

70,000

8,000

60,000

7,000

50,000

6,000

40,000

5,000

30,000

4,000

13,000 12,000

3,000

20,000

20,000

Total Liabilities - Bal sheet Households & Nonprof corps (bll $)

11,000

2,000

10,000

1,000

10,000 0 '04

'05

'06

'07

'08

'09

'10

'11

10,000

0

'12

-1,000

Net Wealth Financial Assets

Total Assets Debt

'05

'06

Total Liab (Right) Home Mortages (Left)

Federal Reserve System

30,000

9,000 '04

Tangible Assets

©FactSet Research Systems

TANGIBLE ASSETS - HOUSEHOLDS (bll $)

'07

'08

'09

'10

Consumer Credit (Left) Muni sec (Left)

Federal Res erve Sy s tem

30,000 140

25,000

25,000 120

20,000

20,000

15,000

15,000

10,000

10,000

100

'11

'12

'13

Bank Loans (Left) Comm mortg (Left) ©FactSet Res earch Sys tems

DEBT OUTSTANDING - CORPORATIONS & FINANCIALS (% of GDP)

Corps keep the level of debt and the Government offsets the deleveraging seen in the financial sector

140 120

101% 100 84%

80

80

78%

60 40

5,000

5,000

0

0

'04

'05

'06

'07

Total Tangible Assets

Federal Reserve System

'08

'09

Real Estate

'10

'11

'12

20 0

60

In total, public & private debt in the US still represents 350% of GDP '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Corporate

Consumer Dur Goods Federal Reserve System

©FactSet Research Systems

Financial corps

40 20 0

Federal Debt ©FactSet Research Systems


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3rd. About the risk of a “Trigger Point” •

What is a “Trigger point”? As a renowned analyst said to me “It is simply that fleeting moment in which we move from a market environment dictated by a set of rules to a new one dictated by a different set of rules in just one second”.

Why is it important to know when or where this “trigger point” could occur? The old guys at this place called a financial market assert that when this happens we enter a “transition phase” in the economic cycle, where neither the analytical endeavors nor the econometric models are useful to answer the short term & more “real” questions. Thus, in these “transition phases”, the analyst must rely on psychology-related aspects or acquire new tricks. Some even say that it is necessary to “unlearn what has been learned”. Certainly, a very painful exercise. In such an environment, prices are made at the margin (the price agreed upon by the marginal seller & buyer).

Can we detect when a trigger point may happen? No. We can not know when it could happen. But we do know what could be a trigger point.

Can we determine what could be a “Trigger Point” to be feared in the US? Yes. Here is the identification process: 1. We have mentioned many times that when assessing whether market rates are harmful or beneficial for the economy, what matters is not the quantum of the interest rate (i.e. the level of the 10yr UST yield). It is ridiculous to hear (as I have heard) that rates are too low because they are historically low. 2. What matters is the adaptation of rates to the corresponding level of economic growth. In other words. The spread between the magnitudes of (1) market rate versus (2) activity rate. When the former far exceeds the latter, we are facing a “trigger point”. Then, it is better to start praying. 3. Why? As Mr Knut Wicksell (founder of the Stockholm school) once said, interest rates define the cost OF capital, and the activity rate defines the return ON capital. When cost OF capital grows at a significantly faster pace than the return ON capital, the following violent adjustments occur: 

The spread between corporate bonds and government bonds widens explosively



The broad stock market dives



Financial stocks crater



Money velocity declines precipitously.

These adjustments comprise what could be called a “transition phase”. The trigger point is when the condition is given.


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What is the Trigger Point we all must fear? “The Baa bond rates leapt ahead of the US growth rate by 250bp”. 

For this discussion, I will refer to the Baa bond rates (as the cost of borrowing of an average company in the US), and compare it with the real GDP pace (as a proxy for the average return on capital). The following conclusion could be drawn:



Since 1929, every time real Baa bond rates leapt ahead of the US growth rate by 250bp or more, the economy was knocked flat on its back and the violent adjustments mentioned unfolded.



Today we are not at this level (250bp) but we are near (200bp)



Nor do we have, in the time period examined, any example of a recession occurring when Baa rates were in an acceptable range relative to growth.



What are the instruments to prevent the feared “Transition Phase” being triggered? (reaching the 250bp spread) 1. Keep the 10 Yr Treasury yields low (so that the Baa bond yields –the cost of capitalremain well anchored) 2. How? By temporarily keeping QE (which means, avoiding the Tapering mechanism that could result in a jump in yields). 3. Finally, seek at all costs an increase in GDP growth (and thus, in the Return on Capital), that reduces the spread between Cost of & Return on capital.

10

COST OF CAPITAL Vs RETURN ON CAPITAL

8 6

8 6

4 2 0 -2 -4 -6 SPREAD, COST OF CAPITAL Vs RETURN ON CAPITAL 10

8 6

10

4 2 0 -2 -4 -6 10

8

Trigger point

6

4

4

2

2

0

0 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Ba a C orp Real B ond Yield - defla ted by 3yr a vg C PI (Proxy for the Co st of C apital) Re al GDP Growth (P roxy for the Return on C apital) Re cession Pe riods - Unite d States Baa Corp Bond Yield less Real GDP growth

Andbank, Federa l Reserve System, B EA

©FactSet Research System s


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Conclusions about a potential Trigger Point:  Are we near a “Trigger Point”? Yes.  Could this Trigger point activate a “Transition Phase”? Yes  What could we expect if this happens? It is impossible to predict but, when a “Transition phase” in the economic cycle takes place, neither the analytical endeavors nor the econometric models are useful to provide the answers to this sort of question. Put simply, prices are made at the margin (by the marginal seller & buyer). Volatility explodes.  In terms of financial markets, how does this transition phase translate? History suggests that when a “Trigger Point” leads to a “Transition phase”, severe discontinuities takes place, impacting the economy and resulting in the following violent adjustments: •

The spread between corporate bonds and government bonds widens explosively

The broad stock market dives

Financial stocks crater

Money velocity declines precipitously.

 Can this be avoided? Yes. Admittedly, we are already near what we have identified as a “Trigger Point” but we have not reached it yet. Additionally, we were in a very similar environment in 2011 but the US authorities were able to stabilize the situation.  What distance separates us from that “Trigger Point”? Currently, the real cost of capital for an average company in the US remains around 200 bp above its return on capital. Certainly a very dangerous stage. However, the red line is 250 bp. Why? Is that an arbitrary level? Whenever that line has been crossed, the above adjustments have always been unleashed. Thus, it is not an arbitrary level.  Do we have significant leeway? Definitely NOT. Just a 50 bp movement in yields.  What is our current position in this regard? •

As we are so close to our “Trigger Point” (just a 50 bp shift in yields) , I would assign a zero percent probability to a Tapering before year end. Why? If the Fed starts the tapering immediately, the UST and the Baa bond yields will probably rise by more than 50 bp, leading us to cross that “red line” (Trigger Point => Transition phase => violent adjustments)

I would also assign a zero percent probability to the Tapering while the real GDP growth remains below 3%. A good point to start tapering would be when the spread between the cost of and the return on capital is between 0 and 50 bp. This will happen when GDP growth is fixed in the 3%-3.5% area.

Finally, I strongly believe that Mr Bernanke and Ms Yellen know this perfectly after having spent the last years reducing the entire yield curve trying to follow the principles of the Stockholm school (founder of the thesis that I have explained). I strongly believe that the Fed will not allow yields to rise because they are already at a dangerously high level (although there are many that still think that yields are low). If I am right, then the famous “DO NOT FIGHT THE FED” applies. If I am wrong, be prepared for a transition phase.


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4th. But things are not so simple. There is a good reason to fear a rise in yield. “The end of QE” Why? Simply because it is necessary to stop doing QE!

It is not that the M2 has fallen (in fact, it has increased by US$2.3 trillion, or 100% of the amount by which the Money base has increased). The key point is that, while in normal conditions the US$2.4trn increase in the money base should have helped to create US$21.7trn of M2 (if the ratio was to keep stable at 9), this shift has only given place to an increase of US$2.3trn (the same as the Money base). Where has all the theoretical money gone? 1. First of all, many of this Money Base has gone directly to the markets (MBS, Equity, etc) and has not been injected into the real economy. Seen in perspective, discontinuing this activity is not a bad thing, since keeping it means that a “bubble mentality” is being created. 2. The Money base used to purchase Treasuries has been theoretically transferred to the real economy (I do not think the Treasury department has decided to keep this money stashed in the drawer). It has spent that money but the velocity of money has been zero (or almost zero).


Corporate Review

5th. Low inflation will keep the long end of the yield curve well contained, helping the real estate sector to continue its gradual recovery Swap spread in the US remains at historical lows and this should normalize towards 40-50 bps. Meaning that, with no inflationary pressures in sight that could bring the swap curve upwards ‌, this can only be materialized through a decline in UST yields. A very favorable scenario for key sectors of the real economy such as Real Estate.

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6th. But the US remains within that group of economies that always ends up surprising (positively) 12 MONTHS CUMULATIVE DEFICIT - USA

400 200 0 -200 -400 -600 -800 -1000 -1200 -1400 -1600 '47 '51 '55 '59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11

Wow!! Wow!!

400 200 0 -200 -400 -600 -800 -1000 -1200 -1400 -1600

Government Surplus Or Deficit (AR Bil. $) - United States US Department of Treasury

 In a normal Western economy, a development in the government fiscal balance such as the one seen in 2013 in the US (USD 500bn cut in deficit, see the upper chart) would simply disintegrate its GDP.  However, in the US, despite this tremendous cut in deficit equivalent to 2.9% of GDP, the economy has managed to keep GDP growth at around 2% (see chart below)

US - DEFICIT & GDP

©FactSet Research400 Systems

10 8

0  My question is a simple one: What will happen in 2015? Especially if the US economy manages to reduce the deficit by another USD 500 bn in 2014, leaving the government budget almost balanced?  The answer should be something like: “if when cutting public spending by US$500bn the economy is able to record +2% …, without such a fiscal drag, the economy could easily expand above 4%”.

6

-400

4

-800

2

-1,200

0 -2

-1,600 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

-4

Government Surplus Or Deficit (AR Bil. $) (Left) (MOV 1Y) Real GDP (Quarterly SAAR) (Right) (MOV 10Y) Real GDP (Quarterly SAAR) (Right) Andbank, US Dept. of the Treasury, BEA

©FactSet Research Systems


Corporate Review

Summary table. How is the US economy positioned on each of the 2014 subjects? 2014 subjects for the US

How is the US economy positioned

1

Jobs & Income

Poorly positioned

2

The state of deleveraging & the distance left to go

Poorly positioned

3

About the risk of a “Trigger Point”

Neutral

4

The need to stop doing QE

Poorly positioned

5

Disinflation will help

Well positioned

6

The US: Still a surprising economy

Well positioned

The economy still shows the need to stick to the existing structural adjustments (deleveraging & fiscal deficit) but the economy, as in 2013, could manage to grow above the 2% rate in 2014.

Final Assessment

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Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

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Euro zone The six subjects that will dominate in 2014

1.

The persistent streams of thought pointing to the infeasibility of the Euro

2.

Potential reflation in Germany

3.

The EUR and its strength

4.

The new level of competitiveness in southern economies

5.

The ability to overcome obstacles in the European periphery

6.

The banking system

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1st. The streams of thought pointing to the infeasibility of the euro will persist. This line also bets on the inevitable bankruptcy of some euro area members. We think they are wrong!  Anglo Saxons rebuke Germany for relying excessively on their exports and not wasting capital, arguing that the German export industry is destroying the Italian or Spanish ones. If you look at the chart, this is apparently true, however, it is not.  When the US Treasury, the IMF and now the European Commission bash the Germans for being productive, we do not really believe that they are asking the Germans to be less productive. This would be ridiculous and certainly a cause for panic. Obviously, what they are actually requesting is a higher level of capital domestic spending so that the current account could become more balanced.  Is this actually a solution? This is definitely rubbish. One consumes and spends what one can or what one’s conscience dictates. Here are cultural, historical, religious or even genetic reasons. Altering the order of this would eventually lead to anything but equilibrium. SO, WE CAN NOT ASK GERMANS TO SPEND MORE.

160

INDUSTRIAL PRODUCTION - ITALY VS GERMANY

160

150

150

140

140

130

130

120

120

Is the German Industry actually destroying the industry of the rest?

110 100 90

80 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11

110 100 90 80

(INDEX) Industrial Production Italy / Industrial Production Germany Andbank, Conference board

ŠFactSet Research Systems


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All this noise comes after the all-time high trade surplus in Germany, giving way to fierce international criticism of Germany for relying excessively on foreign trade 350

German Exports (billion EUR Quarterly)

 “When Keynesian policies are failing, as they always do, proponents never fail to look for a scapegoat. This is usually Germany” (Charles Gave)

350

300

300

250

250

200

200

150

150

100

100

50

 Well, this is exactly what we are witnessing now. The US Treasury is once again going after the Germans, immediately seconded by the IMF and even the European Commission. All in unison rebuking Germany for earning and saving money. In short, for being productive.

50

0

0 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Total Exports German Federal Statistic Office

Goods

Services ©FactSet Research Systems

 Merkel’s CDU could finally give in to the SPDs postulates and could opt to balance this external imbalance through a reflation of the domestic economy. If only to stop listening to the criticism.  If true, this will be good news for everyone (except for the German Ordoliberals -a minority elite?-)

68 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 0

GERM ANY - EXPORTS BREAKDOWN (bn€ m onthly)

'04

'05

'06

'07

All European China Deutsche Bundesbank

68 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 0 '08

'09

Euro Zone USA

'10

EU Asia

'11

'12

'13

UK Brazil ©FactSet Research Systems


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According to the line of thinking contrary to the euro, the sequence of events that will lead to the death of the euro, and cause its members to default, is as follows:  Le us go back to the Wicksellian world where there is a “natural rate” of money, and in equilibrium, the “market rate” of money should match the “natural rate” of money. Both guided by the economic growth rate.  In this world, a better managed economy that expands faster has a higher natural (required) rate of money. Accordingly, authorities should raise market rates. Let us consider that this economy is Germany.  In this same world, a badly managed economy that expands slowly has a lower natural rate. Accordingly, authorities should cut rates towards that natural rate. Let us consider Italy as an example of this. Here is the result:

German “natural” rate of borrowing money (3%)

Italian “natural” rate of borrowing money (0%)

German “market” rate of borrowing money (1%)

Italian “market” rate of borrowing money (1%)

Rates in Germany are too low (cheap cost of capital)

Rates in Italy are too high (expensive cost of capital)

Germans can keep doing what they do best: investing in their export oriented industry

Italians are forced to stop investing *

Productivity improves

Productivity deteriorates

Continued Divergence

* Mr. Knut Wicksell (the great Swedish economist) helped to strengthen the idea that “corporate profits tend to expand at the rate of GDP, so that as long as interest rates are below the growth rate, it pays to borrow and to take risk (economic growth)”. In the same way, as soon as interest rates are above the growth rate, the most intelligent action is to deleverage as fast as possible (economic crisis)”

46


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47

So, they defend the fact that the ECB perpetuates divergences, and thus kills the Euro zone. In other words: “As long as the Euro is around, the euro area economies will keep diverging from each other and will collapse” … Do not worry!!!!!!! That is just the Anglo Saxon view. Neither the ECB nor the EUR is killing the euro area members. 1. In 1979 the European Exchange Rate Mechanism (ERM) was introduced, being the first semi-pegged currency system in the region. Before the introduction of the Euro (1 Jan 99), exchange rates were based on the European Currency Unit (ECU). So, it is legitimate to assert that, in some way, the EUR already existed before 1999. Well, in that period, the industries of some of these countries performed quite well and the EUR did not seem to kill those industries!! 2. Maybe you think that the problem is not with the EUR but with the ECB leading to the aforementioned differential in the cost of capital. If true, how could we explain that Industrial activity in Portugal is gaining traction and ground when compared to German Industry, and is doing so with the ECB staying alive and kicking? It’s a question of being more competitive. If you can not do so through the cost of capital, it must be through other production costs (I’m aware of the harshness of this, but there is no social contract that gives legitimacy to any government to hold on to industries whatever the cost). To all those that have seen their salaries reduced, I would say: Once these sacrifices yield their benefit (more exports, employment, fiscal balance…) the cost of capital converges (the third benefit), being then when you have to invest. If you do not do so, it will not be the ECB or the EUR that will kill your industry. The fault is yours (as usual). 3. In the meantime, the ECB can also help to make the cost of capital converge. It is already doing this. Rates at 0.25% just when Germany is not going to face any fiscal drag in the years to come. I just hope that we can see how the transmission of monetary policy continues to improve. 110

INDUSTRIAL PRODUCTION - PERIPHERY Vs GERMANY

INDUSTRIAL PRODUCTION - PERIPHERY Vs GERMANY

100 99 98 97

100 90 80

96 95 94 93

70 60 50

101

92

'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 S pain v s Germany

Andbank, INE, NSSG , PNSI

Gre ece vs Ge rm any

Portugal vs Ge rmany

©Fa ctSet Rese arch Syste ms

1/12

4/12

7/12

S pain v s Germ any A ndbank, INE, NSSG, PNSI

10/12

1/13

4/13

Gre ece vs Ge rm any

7/13

10/13

Portug al vs Ge rm any

©Fa ctSet Rese arch Syste ms


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2nd. The SPD’s participation in the German government coalition fuels the possibility of a limited economic reflation in Germany SPD’s demands for German coalition agreement

Andbank’s assessment about the relevance and influence on the economy (depending on the likelihood of implementation)

1

Rise in Minimum wage to €8.5/h

Relevance: High / Influence: High

2

Rise in investment in infrastructure and education

Relevance: High / Influence: High

3

A common strategy for sustainable growth in the Eurozone

Relevance: High / Influence: High

4

Fight against youth unemployment across Europe

Relevance: High / Influence: High

5

A financial transaction tax (FTT) to fund this new public spending

Relevance: High / Influence: High

6

Flexible retirement conditions

Relevance: Low / Influence: Low

7

Curbing the increase in rents in big cities

Relevance: Low / Influence: Low

7

Prevention of poverty

Relevance: Low / Influence: Low

8

Will not accept social cuts

Relevance: Low / Influence: Low

More than 50% of issues have been discussed and apparently agreed, although there are still a lot of discussions to be held. The SPD’s demands will probably have a POSITIVE INFLUENCE IN THE HYPOTHETHICAL REFLATION OF THE ECONOMY IN 2014


Corporate Review

... and some other factors also point to an economic reflation Having achieved its legally required deficit target, Germany should not face any fiscal drag for years to come! 1

STRUCTURAL FISCAL BALANCE - GERMANY

1

0

0

-1

-1

-2

-2

-3

-3

… and if you still think a lack of fiscal drag is not a powerful argument, take a look at this chart 6

GERMANY - REAL GDP GROWTH

3,0

4

2,0

2

1,0

0

0,0

-2

-1,0 -2,0

-4

-3,0

-6 -4

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

-4

-8

W e o Fo re ca s t, Ge ne ra l Go ve rnm ent Structura l Ba la nce , % O f P o te ntia l Gdp IMF WEO - World Economic Outlook

'03

'04

'05

'06

In fact, the economy could already be reflating! GERMANY - TAX REVENUES

620

600

600

580

580

560

560

540

540

520

520

500

500

480

480

460

10

11

12

13

460

T o ta l T a x Re ve nue s, Ge ne ra l Gove rnm e nt, Ex cluding Lo ca l T a x e s, M il EU R - Ge rm a ny / 1000 Minis try of Finance

©FactSet Res earch Sys tems

'08

'09

% Cha nge q/q No n-annualize d (Right)

©FactSet Res earch Sys tems

German Federal Statistic Office

620

'07

'10

'11

'12

'13

-4,0 -5,0

% Cha nge y/y (Le ft) ©FactSet Research Systems

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50

3rd. About the EUR (and its stability) as an umbrella for the most vulnerable members  There are many who defend the thesis that the improvement in risk premiums seen in the “peripheral world” has been primarily due to the implementation of the fiscal adjustment processes imposed. Well, that would be like simplifying things too much.  In our humble opinion, this dramatic improvement has more to do with the Euro and its reaffirmation as “the single currency”

35

10Yr YIELDS - PERIPHERAL BONDS

35

30

30

25

25

20

20

15

15

10

10

5 0

5 '12 Italy Spain

Andbank, JPM Chase

'13 Greece Portugal

0

Ireland ©FactSet Research Systems


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… (3rd) The EUR represents much more than a monetary mechanism Why countries want to join the Euro even when knowing that it means (1) handing over their economic & monetary sovereignty (2) painful austerity or even (3) the removal of democratically elected governments and the imposition of technocratic administrations (Italy & Greece)? 1.

Because membership represents entering one of the biggest and healthiest domestic markets where, (1) on average, the rest of the members are richer than you, and (2) with no barriers in such a giant market, members see the opportunity to boost trade relations.

2.

Reasons may also be rooted in the difficult recent histories of many of the EUR members.

3.

i.

Whether the trouble is common history …

ii.

… or because some members have spent a large part of their past in thrall to other bigger and more powerful partners. In these cases, membership symbolizes their democratic credentials and the opportunity to provide a place (if little influence) at the top political table. “In a way, it completes the move away from the former Soviet Union” (answer of the Latvia PM to an interview two months before joining the euro)

iii.

… or simply because of the deep-seated fear of a repeat of the totalitarian alternatives seen in the 70’s (the military regime of the colonels in Greece (74), or the Salarazista Novo State in Portugal (74) heavily influenced by the Leon XIII encyclicals, or (75) the Franco regime in Spain). All these periods in the past are not so far back in time.

Integration is perceived as going beyond the monetary, fiscal or financial aspects, but there is also much room for integration in sectors such as energy (theoretical origin of the Eurozone), transportation, military, etc. All of them factors that can actually entail some substantial advantages.


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…(3rd) Yes, but What real advantages are actually offered by the EUR to its members? 1.

As well as joining one of the biggest and healthiest domestic markets …

2.

… the EUR also embodies the concept of fiscal and monetary “orthodoxy”. This concept involves a presumption of stability, or even an international appreciation, of the currency in a world where monetary and fiscal orthodoxy has simply ceased to exist.

3.

In a Global financial market that is heavily involved in a currency war in the Forex market, the investor’s focus is being moved from the assets’ stability to the stability of the currency in which these assets are denominated. This may explain the significant inflows seen in peripheral countries

4.

Do not forget that financial problems of countries are not caused by the currency (whether it is the EUR or the Lira). It is all about the economic policies implemented by the country in question.

450

MONEY BASE - INDEX (base v alue = 100)

450

400

400

350

350

300

300

250

250

200

200

150

150

100

100

50

'09

'10

'11

FED Money Base BoE T.Liabilities (mov 3m) Andbank, National Central Banks

'12

'13

50

BoJ Money Base ECB Money Base ©FactSet Research Systems


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4th. The new position of competitiveness in southern economies, derived from the tremendous internal adjustments  Someone told me not long ago that this crisis is here to stay and that it is better that we prepare for a partisan lifestyle (thankfully they did not say a Spartan lifestyle). Well, it is typical in times of crises to see disbelief growing. It is human.  What I would say to all these people is that, when a sacrifice gives rise to compensation, the sacrifice automatically ceases to be a sterile waste and becomes an asset, and it may be the case that this asset yields more than the initial sacrifice. Therefore, take into account that we are not talking about sterile sacrifices in the south of the Eurozone (see the results of the hard adjustments in the labor market).

200

FOREIGN TRADE, TOTAL EXPORTS (Mov 6m of the Index base value =100)

200

180

180

160

160

140

140

120

120

100

100

80

'04

'05

'06 Gre ece

'07 Spain

Andbank, National Statistical Services

'08

'09

Po rtuga l

'10 Ita ly

'11

'12

'13

80

Ire land ŠFactSet Research Systems


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5th. Are the peripheral economies overcoming the obstacles Andbank Peripheral Risk Indicator (APRI) APRI 9.13 Reading  The APRI Composite for the European peripherals shows an aggregate score of 50.7 in September (slightly above the 50.6 level seen in the previous month). A positive (though very slight) reading for the second month in a row means that (1) On aggregate, these economies are no longer deteriorating and (2) They continue showing positive dynamics in certain aspects of the economy. Admittedly, the two months upward trend may not be sufficient, but it is necessary if these economies are intended to show broader progress. In short, all things considered, our APRI September-13 helps us to strengthen our thesis that these economies would be consolidating.

 This month, the two major advances have been experienced by Portugal (again) and Ireland. The APRI Composite for the Portuguese economy has been

51.5 in September, while Ireland has advanced by 51.7. Within the Portuguese economy, the best performing areas have been in Activity (54.3) and Confidence (52.1). We should also highlight the improvement seen in the labor market component although, admittedly, progress has been less intense in this regard (50.2). In the fiscal arena, it seems that the recent political turmoil has had its toll and that the authorities of peripherals have managed to soften the pace required in fiscal adjustments, as reflected in the deterioration of fiscal dynamics in Portugal (49.2). The second economy recording the best dynamics is Ireland, with GDP growth at near 2% a year in the last quarter, although admittedly, last month’s improvement seen in the APRI composite for Ireland has been largely influenced by the big jump in confidence, which is a priori less relevant data.

 APRI Activity component at regional level (51.7). Current record consolidates the upward trend reflected already in last month’s score (50.2).

Aggregate figures in the Activity component points to a stabilization of this group of economies in this regard. Again, Portugal and Greece are the countries showing clearest positive dynamics in activity for a second month in a row. (54.3 and 52.0 respectively). Spain & Italy show the same reading of 50.7 in the activity component, further improving last month’s figures of 50 and 49.7 respectively. Slowly these economies are heading northward and maybe on the verge of delivering broader positive readings in the next months.

 APRI Surveys component at regional level (51.5). Although slightly lower than last month’s figure (51.9), the current level still shows that confidence

continues to improve in the area, although now at a slightly lower pace. The important point here is to emphasize the two positive readings in a row, something that helps us to strengthen the idea that the upward trend would also be consolidating in the confidence arena. The best monthly readings are in Ireland (54.5), Italy and Portugal (both at 52.1). Then comes Spain (51.7) and Greece (47.2). Obviously in the latter case, we need continuity first in the incipient progress of activity to see gains in confidence.

 APRI Labor component at regional level (49.7). This month’s figures adds to the negative reading of last month (49.6). At a first glance, one could

conclude that labor conditions are still deteriorating at a regional level, nevertheless, we note that the aggregate figure has been entirely dominated by the sharp drop in Greek’s data, whose labor market is reflecting the effects of compliance with the targets set by the Troika of putting 25,000 public employees in a mobility scheme, from where they are relocated or dismissed. On the positive side, Spain, Portugal and Ireland show stable to positive records in this component.

 APRI Fiscal component at regional level (49.5). After the positive readings seen in recent months (suggesting that fiscal efforts undertaken by this

group of economies were substantial), the last update points to a relaxation in the speed of fiscal adjustments to meet the targets set by creditors. Maybe the recent turmoil seen in Portugal and Greece (and lately in Italy) has helped lenders to soften the rate imposed in fiscal adjustments. Only Spain has recorded some advances in this regard, with a budget balance execution failing to meet targets but only by a reduced amount, and with apparently good performance in the primary budget figures. Greece would be the second best performer in this area, with data for the first seven months of 2013 supporting the projection that the country will finally reach the seminal target of a primary surplus.


Corporate Review

Andbank Peripheral Risk Indicator APRI 9.13 Composite

APRI - ACTIVITY COMPONENT

APRI - SURVEYS COMPONENT

APRI - LABOR COMPONENT

APRI - FISCAL COMPONENT

APRI - COMPOSITE

Italy

50.7

52.1

49.8

48.8

50.3

Spain

50.7

51.7

50.2

50.2

50.7

Portugal

54.3

Ireland

50.7

54.5

50.1

Greece

52.0

47.2

48.4

49.9

49.4

Aggregate

51.7

51.5

49.7

49.5

50.7

+

52.1

+

50.2

+

49.2

=

51.5 51.7

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56

Andbank Peripheral Risk Indicator APRI 9.13 Activity Component

Avg last 3m (excl last observ)

sm en t

Volume Idx Prod, Manuf Last Month

As

se s

sm en t se s

Consensus (for the Year) as of July 2013

As

se s

(2)

As

GDP - QoQ (saar) GDP - QoQ (saar) Last Previous

sm en t

NEAR TERM ACTIVITY FIGURES

PERIPHERAL RISK INDICATOR APRI - ACTIVITY COMPONENT

Italy

-1.2%

-2.4%

51.1

-1.80%

50.5

91.60

91.00

50.3

50.7

Spain

-0.4%

-2.0%

51.4

-1.60%

51.0

91.31

91.91

49.7

50.7

Portugal

4.4%

-4.2%

57.5

-2.65%

56.1

95.97

97.09

49.4

54.3

Ireland

1.8%

-2.1%

53.4

0.80%

50.9

95.48

99.84

47.8

50.7

Greece

1.2%

-1.8%

52.6

-4.20%

54.7

85.57

87.52

48.9

52.0

(1)

51.7

(1) For Greece we use the most frequently updated GDP series provided by the National Statistical Service of Greece. The time series' name is "National Accounts, Gross Domestic Products at constant prices, million EUR". This time series is quarterly. We use the 12m moving average of the QoQ annualized growth rate due to its volatile nature. (2) In the second assessment, we compare the annualized GDP growth rate recorded in the most recent observation with the consensus estimate for the full year. If current pace falls below full year consensus estimate, the index will yield a negative reading (below 50). By contrast, when current rate is higher than full year estimate, the index reading will be above 50.


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57

Andbank Peripheral Risk Indicator APRI 9.13 Surveys Component

me nt ss

(2)

EC - INTENTION TO Avg last 3m BUY A CAR (12 fw) (exc l last observ)

As se

Avg last 3m (exc l last observ)

sm en t

EC - GENERAL ECON SITUATION (12fw)

As se s

ss As se

(1)

EC - COSUMER Avg last 3m CONF INDICATOR (exc l last observ)

me nt

SURVEYS OF ECONOMIC CONDITIONS & SENTIMENT

PERIPHERAL RISK INDICATOR APRI - SURVEYS COMPONENT

Italy

-16.4

-23.6

53.6

-4.3

-14.7

55.2

-89.8

-84.8

47.5

52.1

Spain

-21.3

-28.4

53.6

-18.3

-26.8

54.2

-91.8

-86.2

47.2

51.7

Portugal

-47.0

-52.4

52.7

-56.3

-62.2

53.0

-91.4

-92.6

50.6

52.1

Ireland

-9.9

-26.2

58.1

-19.9

-29.1

54.6

-75.6

-76.9

50.6

54.5

Greece

-72.0

-65.5

46.7

-69.5

-61.4

45.9

-95.2

-93.0

48.9

47.2

51.5

(1) Monthly frequenc y data. (2) Quarterly frequenc y data.


58

Corporate Review

Andbank Peripheral Risk Indicator APRI 9.13 Labor Component

sm en t

Avg last 3m (exc l last observ)

se s

Unemployment Rate

As

As

sm en t

Avg last 3m (excl last observ)

se s

se s

Weekly Hours of Work

As

Workers affiliated to Avg last 3m Soc Sec System (exc l last observ) (Index T-5y = 100)

sm en t

LABOR MARKET DYNAMICS

PERIPHERAL RISK INDICATOR APRI - SURVEYS COMPONENT

Italy

96.53

96.75

49.8

36.05

36.35

49.6

12.1

12.1

50.0

49.8

Spain

86.45

86.40

50.0

36.95

37.02

49.9

26.3

26.4

50.5

50.2

Portugal

84.19

84.41

49.8

37.75

37.83

49.9

17.4

17.6

51.0

50.2

Ireland

87.53

87.15

50.4

34.75

34.93

49.7

13.5

13.5

50.2

50.1

Greece

79.31

79.51

49.8

40.45

40.97

49.4

27.6

26.8

46.0

48.4

49.7


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Corporate Review

Andbank Peripheral Risk Indicator APRI 9.13 Fiscal Component

Data as of

31-jul

Italy

-4.44

Spain

-3.47

Portugal

(1)

(2)

-3.46

(1)

-3.00

48.7

-4.44

-2.90

-3.01

49.6

-5.96

-5.20

-2.41

49.1

-5.95

-7.90

51.8

-9.98

48.6

-1.48

49.3

-0.53

-5.50

49.6

-1.36

-4.60

45.3

1.32

(3)

(1)

(1)

sm en t

Primary Balance YTD Cumulative (1y ago)

se s

Primary Balance YTD Cumulative

As

sm en t

Budg. Balance Target Year (2013)

se s

Budg. Balance YTD Cumulative (saar)

As

se s

Budg. Balance YTD Cumulative (1y ago)

As

Budg. Balance YTD Cumulative

sm en t

FISCAL PROGRESS

PERIPHERAL RISK INDICATOR APRI - FISCAL COMPONENT

-0.37

49.0

48.8

-2.28

51.5

50.2

-0.02

48.8

49.2

-1.59

52.5

49.9

(4)

Ireland (1)

Greece

-5.81

(1)

49.5

(1) We use the cumulative 12months budget balance, and compare it with the cumulative 12months on the same period of last year since we lack the YTD figures. (2) Central Government. (3) EC's 2013 deficit target for Spain is 6,5%. If c entral gov applies an average of 1,3% target for Autonomous Communities, the target for the central government could be fixed at 5,2%. (4) We have not got homogeneous fisc al data for Ireland yet.


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60

6th. The banking system in the euro area continues its adjustment process towards a balance of the systemic risks 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

T.Assets of MFIs - Euroarea

35,000

33,000

• •

32,000

Loans to private sector (€-1.4trn or 40% of total) and Non strategic Assets* (€-2trn or 55% of total).

31,000

* External Assets (-0.5trn) plus Remaining Assets (-1.5 trn)

30,000

'10

'11

T.Ass ets (Right) Lo a ns (Le ft) Securitie s (e x-sha re s) (Le ft) Ex terna l Asse ts (Le ft)

'12

'13

Re m a ining As se ts (Le ft) Equity (Le ft) Fix e d Asse ts (Left) MM Funds (Le ft) ©FactSet Research Sys tems

7,000

Within the reduction observed in the “Loans” category (€-1.4trn), the adjustment has taken place primarily in two categories:

6,000

Loans to MFIs (€-0.9trn or 64% of total) Loans to Non-financial enterprises (€-0.33trn or 25% of total)

4,000

In summary, it is normal that the pace of activity has slowed in the euro area in 2013 given the tremendous adjustment seen in the aggregated balance sheet of the banking system.

2,000

• •

By type of assets, the most significant adjustment has been in the following categories:

34,000

'09

Andbank, ECB

The total size of the aggregated banking balance sheet in the Euro area has been reduced by almost €3.5trn in the 20122013 period. (from €34.86trn to €31.38trn)

36,000

If this pace of adjustment in the aggregated balance sheet continues, it will take just 3 years for the banking sector to have cut one third of its original size. If true, the sector would be in conditions to put the business cycle in full swing towards more sustainable growth.

TOTAL LOANS MFIs - Euroarea

5,000 3,000 1,000 0

'04

'05

'06

'07

Total Loans (right) MFIs (left) Andbank, European Central BanK

'08

'09

Households Non-fin corps

'10

'11

'12

'13

18,800 18,600 18,400 18,200 18,000 17,800 17,600 17,400 17,200 17,000

Government Insurance firms ©FactSet Research Sys tems


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

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Corporate Review

Latin America Some brief considerations before commencing the analysis

1.

It would be a misjudgment to consider Latin America as an homogeneous region in the economic, social and political areas by the very fact that countries are closely linked by language and culture.

2.

The region is now a real hotbed of great contradictions, strategic movements and interest groupings that forces us to deploy a much more selective analysis, resulting in a polyhedral outlook.

3.

As an example of this, you only have to consider and understand the basics of the blocs prevailing today in the region. 

Pacific Alliance (AdP): Chile, Mexico, Peru, Colombia



Boliviarian Alliance – Trade Agreement (ALBA-TCP): Cuba, Venezuela, Nicaragua, Ecuador, Bolivia



Mercosur: Brazil, Argentina, Uruguay, Paraguay, Bolivia, Venezuela, and other associates



Unasur: 12 states

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Corporate Review

Latin America The subjects that will dominate in 2014

1.

Lower demand from Asia

2.

Global monetary conditions

3.

Domestic vulnerabilities

4.

Low regional competitiveness in a global & competitive backdrop

5.

Concerns about a rapid build-up of private debt

6.

Significant divergences in GDP figures

7.

The threat of uncontrolled inflation hurting real income in some countries.

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1st. About the growing acceptance that Chinese demand for raw materials can’t keep growing at the pace seen in the last decade. This is seen in the market as a significant headwind but … for us, this might not be so important 

Indeed, over the past decade, the external conditions faced by Latin America have been more supportive than at any time since the 1970s.



Latin America has been the beneficiary of favorable “tailwinds” such as: (1) rising commodity prices, (2) capital inflows and (3) brisk global GDP growth. All of them factors that have gone hand in hand with the unprecedented growth in the region (excluding 2009, the average annual growth in the region in the 2000-2011 period has been 5%).



Admittedly, as we have argued on many occasions when determining our cautious stance in commodities, the primary driver for the commodities super-cycle (which was the heavy industrial boom) has now slowed and we suspect that this slowdown is clearly structural (not just cyclical).



However we are not overly concerned about this issue, mainly for two reasons: 1.

2.

“Fading vs. normalizing”: We prefer to use the term “normalizing” to refer to the dynamics seen in the general level of activity in Asia (the big driver for commodities). Indeed a “normalization” in the pace of activity in Asia necessarily involves a lower structural pace, however, it is precisely this structural nature that makes the new pace more sustainable. Additionally, we do not expect a substantial deceleration in Asian growth in 2014, not to mention that the rates of expansion in Asia will continue being healthy (near the 5.8% for Asia Pacific ex Japan in 2014 and 2015). “Relative dependence”: Despite the significant shift seen in regional exports towards Asia in the last decade, this is not so high as many people might imagine. Latin America exports to China barely represent 2% of GDP (see the chart).

LATIN AMERICA EXPORTS TO CHINA (% GDP) 8 7 6 5 4 3 2 1 0

2000 2012

Thomson Datastream


Corporate Review

2nd. Global monetary conditions are likely to tighten gradually as the US Fed scales back its program of asset purchases. We consider this a true headwind …  … at least while deterioration in the Current Account balance lasts.  Deficit in the Current Account has deteriorated in the region for 4 years in a row, partly because of a deterioration in the Terms of Trade, but only in part, as demonstrated by the fact that the CA worsened in 2010 and 2011, when Terms of Trade improved.  If we add the loss of fiscal discipline in countries such as Argentina, Brazil and now Mexico, the region could find itself with a higher than anticipated “twin deficit” that needs to be financed in a new environment where financial conditions will be tighter.  Twin deficit (CA balance + Budget bal YTD) of the different countries: Brazil (-2%, -2% = -4%), Chile (-3.5%, +0.2% = -3.3%), Mexico (-1%,-1.7% = -2.7%), Peru (-3.5%,+1.9% = -1.6%), Col (-2.5%,+1.3% = -1.2%), Arg (+1, +0.4% = +1.4%)

40

LATIN AMERICA - TERMS OF TRADE & CURRENT ACCOUNT (big six)

30 20 10 0 -10 -20 -30 -40

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Current account (% of GDP) (Right)

Andbank, WEO IMF, Citi

6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00 -5.00 -6.00

Terms of Trade (Left) ©FactSet Research Systems

Although they show the worst figures in the CA balance, Chile & Peru offset this with the best figures in the Budget Balance (0% and +1.3% respectively)

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Corporate Review

3rd. Domestic vulnerabilities are also building, specifically the current state of under investment. For us, this poses a serious threat. FIXED CAPITAL INVESTMENT (% of GDP)  The boom in domestic demand over the past decade contrasts with a sluggish pace in investment (that has clearly lagged well behind).  Latin America has invested less than the EM average for more than 10 years.  In per capita terms, these economies also show very poor figures. (see the table below). Investment x capita x year CHILE URUGUAY ARGENTINA MEXICO BRAZIL PERU

3,676 2,788 2,700 2,522 2,040 1,629

Trading Ec onomic s

 If you compare per capita investment in Latin America’s countries with one of the developed economies showing the lowest figures in fixed capital investment (Spain), you will realize this. (Spain currently has a gross fixed capital formation of €184 bn per year, which represents 18.4% of GDP, but nearly US$5,314 in per capita terms).  Germany is recording €464bn in fixed capital formation. 18.1% of GDP but in per capita terms it amounts to US$7,450. A figure that is 40.2% higher than in Spain.

Capital Economics, IMF

INVESTMENT (% of GDP) 30 25 20 15 10 5 0 Peru

Chile

Andbank, IMF-WEO

Mexico Argentina Uruguay

Brazil

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Corporate Review

4th. These domestic vulnerabilities result in an insufficient level of competitiveness that will weigh heavily in a dismal global environment (where we only expect “decent” data to come from the developed economies) Competitiveness in EM economies can be assessed by looking at the prices that the US is paying for its imports from various regions. As the chart shows, Asian economies have kept their competitiveness stable in the last decade, and compare very well with rivals in Latin America (that have lost ground vs. the rest of the EM competitors). This means that if Western economies and global activity continue their “very gradual” pace of recovery (as we expect), Asian economies could cope well in this new environment of subpar growth, while Latin American economies will be left behind.

Low rates of investment during a prolonged period of time has increasingly lead to bottlenecks on the supply side in some countries of Latin America (Brazil & Argentina), which in turn results in higher prices and inflationary pressures even though growth has fallen. This drawback translates into a situation that perpetuates the problems of competitiveness; actually a disadvantage in a world where survival increasingly depends on competitiveness.

US import prices by region (index)

COST OF EXPORTING A SHIPPING CONTAINER (US$)

Capital Economics, Thomson Datastream

Capital Economics, Thomson Datastream

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... This simply gives us an idea of “who is who” in this world!

INDUSTRIAL ACTIVITY – ASIA vs. LATIN AMERICA

Capital Economics, Thomson Datastream

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69

5th. An additional and generally accepted concern is the rapid build-up of private sector debt. We do not share this concern. LEVEL OF PRIVATE SECTOR DEBT 3Q2013 (% OF GDP)

A common mistake is to look at the private debt level as a % of GDP in one specific economy and compare it with other countries

Capital Economics, Thomson Datastream

CHANGE IN PRIVATE SECTOR DEBT 2006-2012 (% PTS OF GDP)

We think that a more reasonable exercise is to measure the intensity and speed at which this boom in credit has developed. In that regard, Brazil has shown a worrying rate of credit growth in the last 6 years.

Capital Economics, Thomson Datastream

Without considering all the information, one could easily conclude that a moderation in credit growth will take place as banks tighten conditions.

+21% +75%

Admittedly, this should happen in countries such as Brazil, being a compelling reason to see poor growth in the coming years in this country. However, we see no reason to think that other economies should see a shrinkage process in credit growth.

Capital Economics, Thomson Datastream


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70

Summary Table of Economic Subjects in Latin America Subject Demand from Asia

Andbank’s opinion •

• •

How is the region positioned?

Instead of “fading” we prefer to use the term “normalizing” towards a lower but healthier structural (and thus, more sustainable) pace in China & Asia. Not to mention that the rates of expansion in Asia will continue being around a healthy 5%-6% rate. Despite the significant shift seen in regional exports towards Asia in the last decade, this is not so high as many people might imagine.

Despite the slower structural pace in Asia, this will still be healthy and more sustainable. Additionally we expect a mild acceleration in activity in EM Asia (4.5% in 2013, 4.6% in 2014, 5% in 2015)

Global monetary conditions

• •

We consider this a true headwind. Deficit in the Current Account has deteriorated in the region for 4 years in a row. If we add the loss of fiscal discipline in countries such as Argentina, Brazil and now Mexico, the region can find itself with a higher “twin deficit” that needs to be financed in a new environment where financial conditions will be tighter.

Dynamics in the global monetary conditions will put further pressure on regional economies. Especially those with higher twin deficits.

Domestic vulnerabilities & low competitiveness

Latin America has invested less than the EM average for more than 10 years These domestic vulnerabilities result in an insufficient level of competitiveness that will weigh heavily in a dismal global environment

If global activity continues at its “very gradual” pace of recovery (as we expect), Latin American economies will be left behind due to their worse position in terms of competitiveness.

Rapid build-up of private sector debt

Admittedly, this should happen in countries such as Brazil, where private credit has grown quicker than in any other economy in the region. However, we see no reason to think that other economies should see a shrinkage process in credit growth.

We do not see this factor as a risk at regional level.


Corporate Review

How is each country positioned on each of the 2014 subjects?

Subject

Worst Positioned

Best Positioned

1

Demand from Asia

Colombia, Mexico, Argentina

Chile, Peru

2

Global monetary conditions (twin deficit)

Brazil, Chile, Mexico

Colombia, Argentina

3

Domestic vulnerabilities (Investment)

Brazil

Chile

4

Global Competitiveness

Brazil, Argentina

Chile, Peru

5

Rapid build-up of private sector debt

Brazil

Mexico, Argentina

6

2014 growth

Argentina, Brazil

Peru, Chile, Mexico

7

Inflation & Real income deterioration

Argentina

Peru, Chile

Brazil (bad position in 5 out of 7 subjects) Argentina (bad position in 4 out of 7 subjects)

• •

Chile (in 5 out of 7) Peru (in 4 out of 7)

Final Assessment

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Conclusions for the region “Slower growth the new norm”  Over the next 5-10 years, external conditions are likely to prove more challenging.  The slowing demand from Asia in general, and China in particular, is not an overly worrisome factor, but instead we are concerned about the less abundant global liquidity (that has so far helped commodity prices).  Another reason of concern is the Domestic vulnerabilities that are also building, specifically the current state of under investment. For us, this poses a serious threat.  Factoring our forecasts for global economic conditions: Activity (Global growth in the 3.3% area), Monetary conditions (tighter) and Capital inflows (should ease significantly) … IT would be legitimate to estimate a GDP growth for the region that could settle down at a rate of just 2.6% or so over the next year.  By blocs, the best positioned is the Pacific Alliance (Chile, Peru, Colombia and Mexico).  The bloc represents 40% of GDP in the region. Commerce within the bloc accounts for 50% of total commerce in the region, with exports amounting to USD 500bn. A population of 200 million. Under a hypothetical consideration, it would be the 8th economy in the world.  Formed by countries with political systems that tend to converge on values and principles, it is a bloc that pursues the configuration of stable markets, economic development, competitiveness and free trade of goods, services and capital. It has tried to overcome the preconceptions and the rooted anti-imperialist discourse and incorporates a long list of observer countries (France, Canada, Australia, Japan, etc.).  Its strength lies in the countries comprising the bloc, but also in the name itself of the group. The allusion to the Pacific reiterates that they direct their gaze to Asia (where we have the best prospects). This could make the group win global centrality.  The Worst positioned bloc, “ALBA-TCP”: Cuban & Venezuelan 2004 initiative. In the words of the late H.Chavez: “The bloc’s objective is independence, the way is revolution, and the flag is socialism”. Thus, it is a political bloc, not an economic one. Very much opposed to the AdP (Ecuador’s PM, R.Correa, said: “I will join the AdP when Alaska and Siberia have a treaty”

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Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

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Corporate Review

Financial Markets Performance Performance by Asset Class (1 month)

Performance by Asset Class (YTD)

(Performanc e in %)

(Performance in %)

Equity

-20

-15

-10

-5

0

5

10

15

20

Equity

S&P Index

2,8

S&P Index

Stoxx 600

2,2

Stoxx 600

Nikkei 225

30

50

14,4 39,4 0,4

MSCI Em Latam

0,8

Fixed Income

-9,1

Fixed Income

German Government Bonds 10 Yr

German Government Bonds 10 Yr

0,8

US Generic Govt 10 Year Yield

-4,5

GBI EM Broad Asia

2,1 0,8

LATAM EMGILB 3- 5yrs Inc ome

-2,5

US Generic Govt 10 Year Yield

1,5

CS Asian Bond Total Total Rtn

GBI EM Broad Latam

Alternative Investments

-0,5 -14,6

Alternative Investments

FTSE NAREIT Equ Reits

FTSE NAREIT Equ Reits

6,3

1,5

HFRI Fund of Funds Composite I

5,2

1,0

Credit Suisse Blue Chip Hedge

4,9

HFRI Fund of Funds Composite I Credit Suisse Blue Chip Hedge -1,5

Reut/Jeff Commodity Index

0,8

Markit iBoxx TIPS Inflation- Li

4,0 -4,8

Reut/Jeff Commodity Index 1,8

GOLD SPOT $/OZ

Figures as of:

10

22,7

MSCI Em Asia

1,6

MSCI Em Latam

-10

Nikkei 225

-1,7

MSCI Em Asia

-30

1,0

GOLD SPOT $/OZ Markit iBoxx TIPS Inflation-Li

-19,6 -7,5 4,0

24/10/2013

Returns are expressed inc luding dividends and / or c oupons. Indic es are not manipulated or composed by other indic es and are shown as a proxy to ilustrate performanc e in the different sec tors of financial markets, not representing returns in any spec ific investment strategy. Sourc e: Bloomberg


Corporate Review

Global Financial Markets - Equity Performance – YTD. “It has definitely been a good year”

160 150 140 130 120 110 100 90 80

GLOBAL EQUTY INDICES (base 100) 17%

13% 22% 15% 9.9%

Jan

Feb Mar

Apr

May Jun

S&P 500 Euro STO XX 50 STOXX 600 Stoxx, S&P, MSCI

Jul

Aug Sep

Oct

Nov

160 150 140 130 120 110 100 90 80

MSCI AC Asia P acific e x JP MSCI Japan MSCI EM Latin America ©FactSet Research Systems

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Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

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Equity – Short-term Outlook Positioning & Flows ST Assessment: Slightly overbought  Our flow indicators provide an aggregate assessment that can range from -10 (strong sell) to +10 (strong buy).  Today, our indicators show an aggregate score of -2.5 (better that the -3.2 seen last month), showing that there would not be a significant stress level in the equity market.

Aggregate Result in our Flow & Sentiment Indicators

Buy signal Positive Bias Neutral Negative Bias Sell signal FINAL VALUATION

Market is Overbought

Current

Month

Month

1 1 7 9 4 -3.2

0 3 9 6 4 -2.5

0

-5

-10

Previous

+5

Area of Neutrality Sell bias

Buy bias

+10 Market is Oversold

Nature of Index 1 2 3 Positioning 4 5 6 7 8 9 Flow 10 11 Mkt vs Data 12 13 14 15 16 17 Sentiment 18 19 20 21 22

Index

Put Call Ratio Positioning - Speculators Positioning - Hedge Funds Positioning - Strategists Option Skew Monitor Asset Allocators - Equity Asset Allocators - Cash Flows - Global Asset Class, weekly Directors Buying vs Selling Driver for markets (Profits or PE expansion) BofA ML Global Financial Stress Index (GFSI Index) Citi Economic Surprise Index Citi Macro Risk Index (MRI CITI Index) Companies over their 200 ma level Investor Intellgence Bull/Bear Ratio (newsletter) AAII Bull & Bears Survey of Management Sentiment (NAAIM Active Managers) Market Vane Index (CTA's advisors) NDR Crowd Composite Sentiment Complacency in Market (volatility) Andbank's Equity Composite FGA's Composite Sentiment

Andbank's Assessment -1 0 0 -0.5 0 0.5 0.5 -0.5 -0.5 -1 0 0.5 0 -0.5 -0.5 -1 0 0 0 -1 0 -0.5


Corporate Review

Equity – Mid to Long-term Outlook Fundamental Approach

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Corporate Review

P

S&P

= EPS2014 x PEmultiple 2014

• EPS2014 = EPS2013 (1+ gEPS) • gEPS = f(gsales, Profit margin, Fxvar) • PEmultiple2014 = f(Money impulse, profit cycle, historical value)

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Corporate Review

S&P – Estimating 2014 growth in EPS

Usd/Eur

S&P

Usa Europe Rest of the world Total world

2013 profit margin % (Factset) 2014 est profit margin % (3) *

Today

Avg 2013

1,35

1,38

% sales

2014 real GDP estimated

2014 inflation rate estimated

53,4 9,2 37,4 99,99

2,50 1,00 4,00 3,30

1,70 1,10 4,10

9,6 9,6

Sales base 2013 Sales exp 2014

100 106,18

Profit base 2013 Profit exp 2014

9,6 10,2

2014 expected profit growth %*

6,18

2,22%

Expected * Currency effect on 2014 nominal sales growth international Sales GDP estimated % 2014 in (%) USD 4,20 2,10 8,10

-1,63 1,50

4,20 3,73 9,60 6,18

EUR/USD average level 2014 USD change vs EUR USD change vs Rest of Fx % of Companies hedging Fx Risks

1,38 -2,17% -2,00% 25%

Effect of USD change vs EUR Effect of Int Fx changen vs USD

1,63% 1,50%

* Consensus estimates: Sales growth at 4.44%, Profit margin in 2014 expanding, EPS growth +10%

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Corporate Review

S&P – Estimating the 2014 PE multiple 1st criteria: The money impulse

 Why? In 2013, the S&P performance has been a mere question of multiples‌  which have expanded at the same pace as the monetary base.  At this point, everybody realizes that the million dollar question is:  What will the medium-term Money Impulse be?

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Our Central scenario in 2014: The Fed starts Tapering at the end of 3rd quarter, and then follows a very mild reduction in the pace of money expansion Report date:

25-nov-2013

Legend

Excess Reserves As a proxy for Monetary base Dates 19-dic-2014 19-nov-2014 20-oct-2014 20-sep-2014 21-ago-2014 22-jul-2014 22-jun-2014 23-may-2014 23-abr-2014 24-mar-2014 22-feb-2014 23-ene-2014 24-dic-2013 24-nov-2013 25-oct-2013 27-sep-2013 30-ago-2013 26-jul-2013 28-jun-2013 31-may-2013 26-abr-2013 29-mar-2013 22-feb-2013 25-ene-2013 28-dic-2012

Monthly Pace in QE USBC0065051Excess Reserves (bn $) 3.020 3.020 3.015 3.000 2.975 2.940 2.895 2.840 2.775 2.710 2.635 2.560 2.475 2.390 2305000,00 2.305 2221949,00 2.222 2173670,00 2.174 2031072,00 2.031 1922551,00 1.923 1897053,00 1.897 1751983,00 1.752 1726553,00 1.727 1615439,00 1.615 1521890,00 1.522 1452682,00 1.453

1m Change 5 15 25 35 45 55 65 65 75 75 85 85 85 85 83 48 143 109 25 145 25 111 94 69

Monthly pace of money expansion. The tapering starts at end of Q3

-10 (2H14)

3m Change 20 45 75 105 135 165 185 205 215 235 245 255 253 216 274 299 277 279 196 282 230 274 1.615 1.522 1.453

Money Impulse - 3m Change in 3m Change -85 -90 -90 -80 -70 -50 -50 -40 -40 -18 29 -19 -46 -60 -5 103 -5 49 -78

Money Impulse

82


01-dic-2014

01-nov-2014

01-oct-2014

01-sep-2014

01-ago-2014

01-jul-2014

-300

01-jun-2014

-200

01-may-2014

01-abr-2014

01-mar-2014

01-feb-2014

01-ene-2014

01-dic-2013

01-nov-2013

01-oct-2013

01-sep-2013

01-ago-2013

01-jul-2013

01-jun-2013

01-may-2013

01-abr-2013

01-mar-2013

01-feb-2013

01-ene-2013

01-dic-2012

Corporate Review

The money impulse, graphically

400 Money Impulse - 3m Change in 3m Change

300

200

100

0

-100

The Money impulse under our Central Scenario of Tapering starting at the end of Q3 enters a contraction

-400

mode

83


Corporate Review

84

Now let’s plot the monetary impulse under our central scenario

Money impulse follows a marginal decreasing trend


Corporate Review

85

And now, the final step. Once we know what the money impulse will be, we can draw a picture for the % change in PE, and thus project the 2014 PE ratio (ltm) at December 2014 Central Scenario: 10bn monthly slowdown in QE

February March April May June July August September October November December January February March April May June July August September October November December

Money Impulse

PE ratio (3m% change)

PE 2013 Projected

45 -78 49 -5 103 -5 -60 -46 -19 29 -18 -40 -40 -50 -50 -70 -80 -90 -90 -100

2,3% -3,9% 2,4% -0,2% 5,2% -0,3% -3,0% -2,3% -0,9% 1,4% -0,9% -2,0% -2,0% -2,5% -2,5% -3,5% -4,0% -4,5% -4,5% -5,0%

15,58 15,95 16,37 15,22 15,80 16,60 15,08 15,48 16,27 14,70 15,10 15,70 14,12 14,42 15,00 13,41


86

Corporate Review

S&P – Estimating the 2014 PE multiple 2nd criteria: PE multiples never contract until the EPS cycle ends

 Indeed, it seems that the EPS cycle has not ended, and is apparently continuing in full swing (we forecast an EPS growth of 6% in 2014).  According to this hypothesis, the PE multiple could continue stable at current levels (16.37) or even expand.  This approach suggest that the PE ltm could easily be between 16.37 and 18. Let us assume a mid point of 17.4.

80

S&P - EPS growth (% y/y) & PE expansion

20

60

18

40

16

20

14

0

12

-20

10

-40

'05

'06

'07

'08

'09

'10

'11

'12

'13

8

(% 1YR) S&P 500 - Earnings per Share (Left) S&P 500 - Price to Earnings Ratio (Right) Andbank, S&P Corp

ŠFactSet Research Systems


Corporate Review

S&P – Estimating the 2014 PE multiple 3rd criteria: PE multiples as a mean reverting factor

28 26 24 22 20 18 16 14 12 10 8

S&P - PE multiple (ltm)

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

28 26 24 22 20 18 16 14 12 10 8

S&P 500 - P rice to Ea rnings Ra tio Tre ndline: Average S&P Corporation

ŠFactSet Res earch Systems

 Current PE ltm is at 16.37, still slightly below its 10 year average of 16.92).  According to our central scenario for the economy and earnings, we consider it feasible that the PE multiple will reach its long term average level of 16.92

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Corporate Review

Our fundamental value and the expected performance for the S&P 500

P = EPS2014 x PEmultiple

2013 Projected 2013 Projected 2013 EPS Growth EPS (%) EPS (US$)

2013 PE Andbank's ltm projections for 2014 PE ltm

Target Price

Current Price 27-nov-13

Expected Change (%) 2014

1,849

1,803

2.5%

(1)

S&P

109.51

6.2

116.27

16.37

15.9

(1) Our projection for the 2014 PE (ltm) in the S&P results from the values recorded in the three approaches we have used: The monetary impulse (13.4), the profit cycle (17.4) and the historical value (16.9). The average value is 15.9, and we consider this measure conservative.

88


89

Corporate Review

Stoxx 600 Europe – Estimating 2014 growth in EPS

Today

Avg 2013

1.35

1.38

2.22%

% sales

2014 real GDP estimated

2014 inflation rate estimated

2014 nominal GDP estimated

Currency effect on international Sales (%)

Expected sales growth % 2014 in EUR

10.8 60.2 29.1 100.00

2.50 1.00 4.00 3.30

1.70 1.10 4.10

4.20 2.10 8.10

-1.63 -0.00

2.57 2.10 8.10 3.89

USD/EUR

Stoxx 600

Usa Europe Rest of the world Total world

2013 profit margin % (Factset) 2014 est profit margin % (3) *

5.5 6.5

Sales base 2013 Sales exp 2014

100 103.89

Profit base 2013 Profit exp 2014

5.5 6.8

2014 expected profit growth %*

22.78

* Consensus estimates: Sales growth at 2%, Profit margin in 2014 at 6.3%, EPS growth +16%

*

EUR/USD average level 2014 USD change vs EUR EUR change vs Rest of Fx % of Companies hedging Fx Risks

1.38 -2.17% 0.00% 25%

Effect of USD change vs EUR Effect of Int Fx changen vs EUR

-1.63% 0.00%


Corporate Review

Our fundamental value and the expected performance for the Stoxx 600 Europe

P = EPS2014 x PEmultiple

2013 Projected 2013 Projected 2013 EPS Growth EPS (%) EPS (US$)

2013 PE Andbank's ltm projections for 2014 PE ltm

Target Price

Current Price 27-nov-13

Expected Change (%) 2014

370

322

14.8%

(1)

Stoxx 600

20.77

22.8

25.50

15.55

14.5

(1) In the case of the PE for Europe, despite the fact that we see an acceleration in profits, the current level of PE ltm (15.55) is well above its long term average (13.3). For this reason, we believe that PE could go towards 13.3 although we are aware that risks are on the upside for the PE actually being higher at year end. We feel comfortable with a PE at 14.5

90


Corporate Review

Asia Pacific x Japan – Estimating EPS

Usd/Eur

MSCI Asia EM

Usa Europe Region Asia Pcific x Japan Total world

2013 profit margin % (Factset) 2014 est profit margin % (3)

Avg 2013

1.35

1.38

2.22%

% sales

2014 real GDP estimated

2014 inflation rate estimated

2014 nominal GDP estimated

Currency effect on international Sales (%)

Expected sales growth % 2014 in USD

5.0 5.0 90.0 100.00

2.50 1.00 5.80 3.30

1.70 1.10 4.00

4.20 2.10 9.80

-1.63 ---

2.57 2.10 9.80 9.05

7.33 7.75

Sales base 2013 Sales exp 2014

100 109.05

Profit base 2013 Profit exp 2014

7.33 8.5

2014 expected profit growth %

Today

15.30

EUR/USD average level 2014 USD change vs EM currencies EUR change vs EM currencies % of Companies hedging Fx Risks

1.38 -2.17% 0.00% 25%

Effect of USD change vs EUR Effect of Int Fx changen vs EUR

-1.63% 0.00%

91


92

Corporate Review

Asia Pacific x Japan – Estimating PE multiples  We are going to use the same three criteria: 65 60 55 50 45 40 35 30 25 20 15

1. Tapering: A lower pace in monetary expansion means a negative money impulse that could justify a contraction in the PE ltm for the region (let us say from 13.18 to 12.75) 2. Profit Cycle. It seems that the profit cycle has not ended (we expect EPS to grow 15% in 2014), this could justify a PE multiple stable or even expanded at year end. We can expand multiples in the same proportion as in the US, and this will place the PE in the 14 area) 3. Historically, the PE ltm has an average value of 14.4. Today, the PE is below that level, which could justify a mean reverting movement. 14.4

ASIA PACIFIC x JAPAN - PE ltm

20

20

10

18

18

16

16

14

14

12 10 '04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'05

'06

'08

'09

'10

'11

'12

'13

©FactSet Res earch Systems

ASIA PACIFIC x JAPAN - NET MARGIN

11 10

9

9

8

8

12

7

7

10

6

6

8

5

'04

'05

'06

FDSAGG Asia Pa cific x Ja pa n - Price to Ea rnings Ra tio Trendline : Ave ra ge Factset Research Systems

'07

65 60 55 50 45 40 35 30 25 20 15

FDSAGG Asia P a cific x Ja pan - Ea rnings pe r Sha re

11

8

'04

Factset Res earch Sys tems

22

22

ASIA PACIFIC x JAPAN - EPS (usd)

©FactSet Research Systems

'07

'08

'09

'10

'11

'12

'13

5

FDSAGG Asia P a cific x J apa n - Ne t Ma rgin T rendline : Ave ra ge Factset Res earch Sys tems

©FactSet Research Systems


Corporate Review

Our fundamental value and the expected performance for the Asia Pacific x Japan index is:

P = EPS2014 x PEmultiple

2013 Projected 2013 Projected 2013 EPS Growth EPS (%) EPS (US$)

FDSAG Asia Pac x Japan

58.48

15.3

67.43

2013 PE Andbank's ltm projections for 2014 PE ltm 13.18

13.7

Target Price

Current Price 27-nov-13

Expected Change (%) 2014

925

768

20.4%

93


Corporate Review

Global Equity Ranking – Fundamental Outlook Long-term view P to Book

Price to Earnings

Price to dividend

EV to EBITDA

Real yield ratio

VALUATION composite

Avg grade

Hierarchy

Avg grade

Hierarchy

Avg grade

Hierarchy

Avg grade

Hierarchy

Avg grade

Hierarchy

Avg grade

Hierarchy

Russia

-2.46

1

-1.78

1

0.98

28

-2.05

1

1.86

1

6.4

1

Hong Kong

-1.40

3

-0.69

6

0.12

18

-0.61

3

1.29

2

6.4

1

Turkey

-0.93

5

-0.93

2

-0.07

16

-0.53

5

0.43

4

6.4

1

South Korea

-1.80

2

-0.60

7

-0.88

1

-0.14

9

-0.91

16

7

4

Japan

-0.37

12

-0.24

8

-0.84

2

-0.48

6

-0.16

8

7.2

5

Indonesia

0.88

20

-0.77

4

0.03

17

-0.62

2

0.50

3

9.2

6

India

-0.49

10

-0.75

5

0.39

21

-0.59

4

0.10

7

9.4

7

China

-0.91

6

-0.87

3

0.70

25

-0.21

8

0.37

5

9.4

7

Israel

-0.43

11

0.53

16

-0.49

8

0.12

11

0.20

6

10.4

9

Germany

0.92

21

-0.23

9

-0.53

7

0.41

15

-0.42

11

12.6

10

Taiwan

-0.01

14

1.11

20

-0.47

10

0.66

18

-0.26

9

14.2

11

Canada

-0.61

7

-0.09

10

0.81

27

0.14

12

-1.09

20

15.2

12

Brazil

-1.13

4

0.00

11

0.76

26

0.74

19

-1.05

19

15.8

13

Chile

-0.52

8

1.13

21

-0.14

14

0.30

14

-1.14

22

15.8

13

United States

2.52

27

0.42

15

-0.58

5

1.02

23

-0.70

12

16.4

15

Italy

-0.51

9

2.37

27

-0.40

11

0.03

10

-1.27

25

16.4

15

Malaysia

0.67

18

0.38

13

0.51

22

0.51

16

-0.71

14

16.6

17

Poland

-0.31

13

0.37

12

0.63

24

-0.42

7

-1.66

27

16.6

17

Mexico

1.92

25

0.75

18

-0.28

13

0.26

13

-0.90

15

16.8

19

World

France

0.35

17

2.22

24

-0.62

4

0.81

21

-1.00

18

16.8

19

Australia

0.30

16

0.74

17

0.53

23

1.42

25

-0.37

10

18.2

21

Eurozone

0.79

19

2.02

23

-0.81

3

0.92

22

-1.29

26

18.6

22

Thailand

1.48

23

0.40

14

-0.10

15

0.79

20

-1.11

21

18.6

22

Spain

0.17

15

2.84

28

-0.55

6

0.59

17

-1.72

28

18.8

24

South Africa

2.21

26

0.76

19

0.22

19

1.71

26

-0.71

13

20.6

25

United Kingdom

1.60

24

2.36

26

-0.31

12

2.06

28

-0.93

17

21.4

26

Sweden

1.44

22

1.50

22

0.34

20

1.02

24

-1.26

24

22.4

27

Switzerland

2.71

28

2.34

25

-0.47

9

2.04

27

-1.16

23

22.4

27

94


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

95


Corporate Review

96

Interest rates Swaps & Govies (The underlying messages) 1.

Still a disinflationary world: Swap rates & Treasury yields have increased during the last months primarily due to the threat of Tapering. Despite this, it cannot be said yet that strong implicit inflation is expected in the long term (2.79% in the US and 1.97% in the Eurozone).

2.

A positive “swap spread” (in both currencies) means that Treasury and Bund now reflect not only inflation expectations, but something more. The higher spread in the EUR curve points to the existence of a relatively higher demand for bunds as a result of higher market fears. Maybe a sign that global macro risks & financial fears have not disappeared. Nevertheless, it can be said that these fears are now lower.

3.

EUR swap spread is now slightly below the historical average level. In order for this spread to normalize towards 40-45 bps, with no inflationary pressures in sight, this can only materialize through a 20 bp decline in bund yield.

4.

However, the swap spread in the US remains more clearly at historical lows (15 bps) and this should normalize towards the 4050 bps average. With no inflationary pressures in sight, this can only materialize through a structurally low yield in the UST.

USD: SWAP10 – Govie10

EUR: SWAP10 – Govie10


Corporate Review

Core Fixed Income – US Dollar Performance & Perspectives

• Strategic range for the T10 Yield: 2.5%-3% • Fundamental outlook:  Short end of the curve: Our fundamental view for economic growth and inflation in the US is consistent with a relatively dovish stance in the Fed policy rate. We project short maturities (0-2 years) to remain wellanchored at historical lows (around 0.25%).  Long end of the yield curve (10 years): Our fundamental range for the 10 yr Treasury yield remains in the 2.5% - 3% range.

Recommended Strategy:  According to our target range, we feel structurally comfortable with gradually buying Treasuries at 3.0%, and gradually selling at 2.5%  We estimate that the 10yr yields will trade within our fundamental range in the medium term. Obviously, nobody can say where the “market dynamics” will bring the 10yr yield, due to factors such as the Fed’s Tapering. If the 10Y T breaks the upper band of our range up to 3.25% or even the 3.5% level, we consider those levels as a “buy” opportunity.

97


Corporate Review

Core Fixed Income – Euro Performance & Perspectives

• Strategic range for the 10Yr Bund Yield: 1.5%-2% • Fundamental outlook:  Short end of the curve: Our fundamental view for economic growth and inflation in the EZ is consistent with a relatively dovish stance in the ECB policy rate. We project short maturities (02 years) to remain well-anchored at historical lows (around 0.25% or below).  Long end of the yield curve (10 years): Our fundamental range for the 10 yr bund yield remains in the 1.5% - 2% range.

Recommended Strategy:  According to our target range, we feel structurally comfortable with gradually buying Bunds at 2.0%, and gradually selling at 1.5%  We estimate that the 10yr yields will trade within our fundamental range in the medium term. Obviously, nobody can say where the “market dynamics” will bring the 10yr yield, due to factors such as the Fed’s Tapering. If the 10Y bund breaks the upper band of our range up to 2.25% or even the 2.5% level, we consider those levels as a “buy” opportunity.

98


Corporate Review

Core Fixed Income – EUR Gov bond & USD Treasury Expected Performance

Figures as of:

USD

EUR

25/11/2013

ST Performance (2m) Change Short until Term Fundament Fundamental change al Target Target (in bp) (bp)

MT Performance (12m)

Expected Pric e Coupon Pric e Coupon Performance Performance Performance Performanc e Performanc e Short Term

Expected Performance (Fundamental)

25-Nov-2013

Short Term Target

2yr

0,13

0,00

0,00

-13

-13

1,96

0,26%

0,02%

0,26%

0,13%

0,28%

0,39%

3yr

0,21

0,10

0,10

-11

-11

2,86

0,32%

0,03%

0,32%

0,21%

0,35%

0,52%

4yr

0,41

0,32

0,32

-9

-9

3,83

0,35%

0,07%

0,35%

0,41%

0,42%

0,75%

5yr

0,67

0,60

0,60

-7

-7

4,68

0,33%

0,11%

0,33%

0,67%

0,44%

1,00%

6yr

0,78

0,72

0,72

-5

-5

5,31

0,27%

0,13%

0,27%

0,78%

0,40%

1,05%

7yr

1,05

1,02

1,02

-3

-3

6,09

0,19%

0,18%

0,19%

1,05%

0,37%

1,25%

8yr

1,30

1,28

1,28

-1

-1

6,83

0,08%

0,22%

0,08%

1,30%

0,30%

1,38%

9yr

1,54

1,54

1,54

1

1

7,62

-0,06%

0,26%

-0,06%

1,54%

0,20%

1,48%

Duration

10yr

1,72

1,75

1,75

3

3

8,45

-0,23%

0,29%

-0,23%

1,72%

0,06%

1,49%

2yr

0,28

0,25

0,25

-3

-3

1,92

0,05%

0,05%

0,05%

0,28%

0,10%

0,33%

3yr

0,55

0,53

0,53

-2

-2

2,92

0,06%

0,09%

0,06%

0,55%

0,16%

0,62%

4yr

1,00

0,99

0,99

-2

-2

3,81

0,06%

0,17%

0,06%

1,00%

0,23%

1,06%

5yr

1,34

1,33

1,33

-1

-1

4,68

0,05%

0,22%

0,05%

1,34%

0,27%

1,38%

6yr

1,70

1,69

1,69

0

0

5,52

0,02%

0,28%

0,02%

1,70%

0,30%

1,71%

7yr

2,05

2,06

2,06

0

0

6,29

-0,02%

0,34%

-0,02%

2,05%

0,32%

2,04%

8yr

2,35

2,36

2,36

1

1

6,95

-0,06%

0,39%

-0,06%

2,35%

0,33%

2,28%

9yr

2,58

2,59

2,59

2

2

7,89

-0,12%

0,43%

-0,12%

2,58%

0,31%

2,46%

10yr

2,73

2,75

2,75

2

2

8,37

-0,18%

0,45%

-0,18%

2,73%

0,27%

2,55%

99


Corporate Review

100

Asian Government Bonds: In our humble opinion, the overreaction of the market results in investment opportunities. 1.

2.

10 9 8 7 6 5 4 3 2 1 0

Market failure: The majority of the Industrialized economies in Asia have been hit because of the threat of Tapering. However the drop has had different intensities depending on the country. i.

The group of economies that has withstood the “crisis” better has been the one comprising the countries that “buy protection” via a mercantilist approach (that ensures current account surpluses): South Korea, Taiwan, etc…

ii.

And the countries hardest hit have been those experiencing current account deficits (in most cases due to the development of their domestic currencies).

The opportunity: i.

Indeed, the mercantilist approach reduces the dependence on capital inflows, but … Is it not true that these economies are the most leveraged to the Western cycle? What would happen if I told you that the Western economies will have a subpar growth for many years? Yes, the perspectives for these countries worsen automatically.

ii.

On the other hand, we are inclined to think that the best options to invest are in those countries that are less synchronized with the developed economies. Those with stronger domestic dynamics, at the expense of a negative current account balance. A deficit that, on the other hand, they have the ability to finance domestically.

ASIAN 10 Y r GOVERNMENT YIELDS

Jan

Feb Mar Ko rea Ta iwan

WM Reuters

Apr

May Jun Thailand Mala ysia

Jul

Aug Sep

Singapore Indo nesia

Oct

Nov

10 9 8 7 6 5 4 3 2 1 0

Philippines

110

ASIAN CURRENCIES vs USD (Index 1/x, Base 100)

105

105

100

100

95

95

90

90

85

85

80

Jan Feb Mar Apr IDR

©FactSet Research Systems

110

WM Reuters

THB

May Jun PHP

MYR

Jul

Aug Sep Oct Nov

CNY

KRW

80

TWD

©FactSet Research Systems


Corporate Review

101

Our conclusions for regional bonds “Panic is not indicated” •

Indeed, these markets will “dance” the Tapering song in 2014 and the dance will be rock instead of a “Waltz”. Each time the Tapering sounds hard, these markets will fall (equities, bonds and currencies).

How much worse can these markets get? Considerably, but we see value in these assets. We propose back and forth movements, perhaps with a structural tendency to worsen at first (1H2014), but it should not last long.

As we have seen, this is not a balance sheet problem, and thus, it is not a solvency problem.

Ok, but what could be a good entry point?  This will have something to do with Tapering and thus, with the 10 year Treasury Yield.  Historically, a good entry level in Treasuries is when the real yield achieves the 1.5%-2% level (since we are, and will remain, at structurally low yield levels, we prefer to use 1.5% in real yield as a rule of thumb)  Thus, assuming that our projection for the long term inflation rate in the US is for 1.5% on average, the entry point in Treasuries would be when nominal yields reach the 3% level.  The rule of thumb for the EM bond markets has been “buy” whenever the spread in real yields is at 200 bp vs. the real yield in Treasury.  This means that we recommend buying EM bonds when Real Yield is near 3.5% (1.5% in T10 plus 200 bp).

S.Korea Thailand Singapore Phillipines Taiwan Malaysia Indonesia China

CPI (y/y) Nominal CPI (y/y) Andbank's 10yr Yiled Last reading Estimate 3.60% 0.70% 0.70% 4.01% 1.50% 1.50% 2.28% 1.80% 1.80% 3.33% 2.90% 2.90% 1.72% 0.50% 0.50% 3.91% 2.60% 2.60% 8.31% 8.30% 4.50% 4.50% 3.00% 3.00%

Real Yield (10yr bond) 2.90% 2.51% 0.48% 0.43% 1.22% 1.31% 3.81% 1.50%


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

102


Corporate Review

European Sovereign Risk Trends Periphery (CDS 5yr)

Rally Time in the 4Q2013! 1400 PERIPHERAL

1200 1000 800 600 400 200

Portugal

Spain

Ireland

Italy

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

0

103


Corporate Review

European Sovereign Risk Trends Core Countries (CDS 5yr)

175

‌ also for T2 countries such as France or Belgium! CORE COUNTRIES

150 125 100 75 50 25

Belgium

France

Germany

Austria

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

0

104


Corporate Review

Sovereign Risk Recommended Strategy – Consistent with our APRI

CURRENT LEVELS FOR SOVEREIGNS

Yield 10Y Spread 10Y CDS 5Y (cash bond) (cash bond, bp) (usd, bp)

Peripheric

25/11/2013

Recommendation Overweight

Greece

8,79

706

2

Neutral

Portugal

5,93

421

351

Overweight

Ireland

4,40

268

127

Neutral

Spain

4,15

243

154

Overweight

Italy

4,09

236

187

Overweight

105


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

106


Corporate Review

107

Corporate credit Recent Performance & Recommendation Corporate Credit - EUR

Corporate Credit - USD

Itrax Main

CDX Main

115

150

110

140

105 130

100

120

95

110

90 85

100

80

90

75

80

70

Figures as of:





25-11-13

EUR Corporates (itraxx): At 80bp of spread, we consider euro denominated corporates as “expensive”. Nevertheless we believe that the positive mood in the market will persist during the year. We recommend maintaining positions if you are long but not to build new exposures. Entry point above 100bp. 

Best names: (1) Fin Subs and Tier 1 of core countries’ banks. (2) Fin Sen of “troublesome” countries. (3) Leader corps in peripheral countries. (4) Small operators in the TMT sector.



Avoid: (1) Financial corps of countries that have not undertaken reforms in the financial sector (Fra & Germ). (2) Autos of Germ & Fra (not expensive but bad dynamics)

USD Corporates (CDX): The same reading as in EUR. Entry point above 90s


Corporate Review

Financials EUR - Credit Performance & Recommendations FINANCIAL SPREADS - EUR 700 600

SNRFIN CDSI GEN 5Y Curncy SUBFIN CDSI GENERIC 5Y Corp

500 400 300 200 100 0



Specific “banking” risk premiums are disappearing. French, German and many northern bank bonds are extremely expensive.



The two investment categories we recommend to stay long within this universe are: 

1st category – “Long Seniors & Subordinated”: Santander, BBVA, Intesa Sanpaolo, Unicredit



2nd category – “Long Senior only”: Popular, Sabadell, Bankinter, Caixa

108


Corporate Review

Credit – HY EUR Recent Performance & Recommendation Markit iTraxx Europe Crossover 1000 900 800 700 600 500 400 300 200 100 0



HY Crossover: At 328bp of spread, we consider EUR-HY as “expensive”. Nevertheless, we believe that the positive mood in the market will persist during the year.



The price of this asset will move to the rhythm of tapering. Start buying again above 400bp. Strong buy above 450.

109


Corporate Review

110

Corporate Credit – EUR, USD & HY Expected Performance CDX USD - SHORT TERM OUTLOOK 3M (ex-interest rate risk)

ITRAX MAIN EUR - SHORT TERM OUTLOOK 3M (ex-interest rate risk)

Spread effect

Change (bp)

Price effect

From

To

Change

20,4

- 0,71%

79,6

100

20,4

Spread effec t

0,26%

Eur3m+

0,80%

0,26%

Coupon effec t

Coupon effect Total Effect Yield effec t (5yr bond)

0,26%

0,67%

0,60%

-0,07%

ITRAX MAIN EUR - MID TERM OUTLOOK 12M (ex-interest rate risk)

Spread effect

Yield effec t

Price effect

From

To

Change

0,34%

79,6

70

-9,6

Spread effec t

1,29%

Eur3m+

0,80%

1,29%

Coupon effec t

1,63% -7

0,26%

To

68,6

90

21,4

0,23%

USLib3m+

0,69%

0,23%

1,34%

1,33%

-0,01%

-0,52% -1

0,60%

Price effect

From

To

-3,6

0,13%

68,6

65

-3,6

1,26%

USLib12m+

0,69%

1,26%

-0,07%

1,34%

1,33%

-0,01%

Yield effect

-1

Change (bp)

Price effect

From

To

71,3

-2,49%

328,7

400

71,3

0,88%

USLib3m+

3,29%

0,88%

0,67%

0,60%

-0,07%

Coupon effec t Total Effect Yield effec t (5yr bond)

Change

-1,61% -7

0,25%

HY / CROSS OVER EUR - SHORT TERM OUTLOOK 12M (ex-interest rate risk)

Spread effect

Change (bp)

Price effect

From

To

-28,7

1,01%

328,7

300

-28,7

3,86%

USLib12m+

3,29%

3,86%

0,67%

0,60%

-0,07%

Coupon effec t Total Effect Yield effec t

Change

4,87% -7

0,25%

Change

1,38%

HY / CROSS OVER EUR - SHORT TERM OUTLOOK 3M (ex-interest rate risk)

Spread effect

0,03%

Change (bp)

Total Effect 0,67%

Change

CDX USD - SHORT TERM OUTLOOK 12M (ex-interest rate risk)

-9,6

Total Effect

From

-0,75%

Yield effect (5yr bond)

Change (bp) Coupon effect

Price effect

21,4

Total Effect

-0,46% -7

Change (bp)

0,03%


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global – The World Economy. A bird’s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

111


Corporate Review

Industrial commodities. The super-cycle ended in 2013 and we do not expect a big upward movement in prices.

112


113

Corporate Review

1st. The primary driver of the commodities super-cycle has now slowed down and we suspect that this slowdown is clearly structural (not just cyclical)  We have argued on many occasions that, despite our positive outlook for Asia (and China in particular), the latter must “sacrifice” growth if it wants to ensure the necessary credibility of its currency and bond market.  As a result of this, we suspect the structural growth for the next decade will be lower than that seen during the past decade. In other words, the big industrial boom (and growth) has slowed down in a way that is structural and not just cyclical.

50

CHINA HEA VY INDUSTRIA L BOOM & COMMODITY PRICES

25

25

20

0

15

-25

10

-50

5

-75

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

0

(% 1 Y R , I N D E X) C RB S pot I ndex , 1 9 6 7 =1 0 0 - U nit ed S tat es (Le ft) (M O V 3 M ) % 1 Y R C hina he a vy indus t ria l v alue added (Right) Andbank, CRB,Chines e N at Bureau of Stat is t ics

©Fact Set Res earch Sys tems

THE IMPLICATIONS: 1. THIS NEW NORM WILL NOT NECESSARILY IMPLY BIG ADDITIONAL FALLS IN COMMODITY PRICES. 2. … BUT MEANS THAT THE PROSPECTS FOR A NEW STRUCTURAL BULL MARKET ARE DIM 3. CHINESE HEAVY INDUSTRIAL OUTPUT IS LIKELY TO STABILIZE AT AROUND A LEVEL WHICH HAS BEEN ASSOCIATED WITH A ZERO Y/Y GROWTH IN COMMODITY PRICES


Corporate Review

2nd. Despite the recent spike seen in manufacturing activity, it can by no means be anticipated that India will pick up China’s baton as a leader in commodity consumption

20

GDP GROWTH & INDUSTRIAL ACTIVITY - INDIA

20

16

16

12

12

8

8

4

4

0

0

-4

-4

-8

-8 '09

'10

'11

'12

'13

(% 1Y R) N IA , GDP , C ons tant 2 004 -2 00 5 P ric es , GDP at market pric es , T ens of M il I N R - India (MO V 3 M , % 1Y R) Indus trial P roduc tion, M anufac turing (MO V 3 M , % 1Y R) Indus trial P roduc tion, T otal (MO V 3 M , % 1Y R) Indus trial P roduc tion, M ining & Q uarrying Andbank, India Minis try of Statis tics

ŠFactSet Res earch Sys tems

India is definitely losing steam, presence, influence and growth!

114


Corporate Review

3rd. Metal producers and miners have been clearly caught off guard with a gargantuan excess capacity  The pace at which some producers have expanded their production capacity for certain industrial products has led the world into a clear excess of capacity.  As those players adapt themselves to the outlook of a more “reasonable” structural growth in Asia, many projects will be cancelled, which will eventually help to tighten the markets, although it WILL NOT PREVENT THE OVERSUPPLY IN METALS, and to a lesser extent MINERALS, during a long period of time (years), and this should keep prices subdued.

240

WORLD PRODUCTION OF INDUSTRIAL & ENERGY COMMODITIES (Index)

220 200 180 160 140 120 100 80

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 C rude Steel P rimary A luminium C opper

Energy (O il, Gas , C oal) C oal P roduc tion C rude O il

Andbank, World Steel As s oc, I nt Alum Ins t, EIA

N atural Gas C oal ©FactSet Res earch Systems

115


Corporate Review

4th Real vs. speculative demand still points south for prices  We saw a rise recently in the price of transporting dry commodities (a sign that global activity is recovering), but, as we suggested, it was too early to suggest a rise in commodity prices coming before a strong recovery in real demand. We still think this.  Real vs. Speculative demand continues to be different, with the latter being the main driver for prices over the last 4 years

800

Baltic Dry Inde x Vs Commodity Prices (daily)

14,000

12,000

700

10,000 600 8,000 500 6,000 400 4,000 300

2,000

200

0 '04

'05

'06

'07

'08

'09

'10

'11

Baltic Dry Index - Price (Right) CRB Continuous Commodity Index - Price (Lef t) CRB Spot Commodity Index - Price (Lef t)

'12

'13

116


Corporate Review

Precious metals. We consider that the gold price remains expensive. In the long term, we feel comfortable setting the target price for gold at US$ 900.

117


Corporate Review

118

Precious Metals Gold – All our approaches lead us to conclude that Gold is still expensive. HISTORICAL GOLD PRICE DEFLATED

GOLD PRICE IN TERMS OF OIL

2,500

30

2,000

2,000

25

25

1,500

1,500

20

20

1,000

1,000

15

15

10

10

2,500

500

500

0 0 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12

5

Gold, De flated by US infla tion Trendline: Ave ra ge Trendline: 35 Year Moving Avera ge Andbank custom series, Dow Jones Company

50 45 40 35 30 25 20 15 10 5 0

GOLD PRICE IN TERMS OF EQUITY

'94

'96

'98

'00

'02

30

'04

'06

'08

'10

'12

5

Gold S pot price / WTI o il price Trendline: A ve ra ge from 22-Feb-98 to 25-Fe b-13

©FactSet Research Systems

50 45 40 35 30 25 20 15 10 5 0

A ndb ank, London B ullion Market Associatio n

©FactSet Rese arch System s

GOLD – NOMINAL vs. REAL PRICE: The gold price continues experiencing a significant adjustment but it is still expensive from a historical perspective in real terms. The gold price in real terms should approach US$700 (LT average), which means that, given a CPI deflator of 116.4, the nominal price of gold should stay near US$814. GOLD PRICE / OIL PRICE: The value of this ratio stands at 13.32 (slightly above the historical average value of 12.85). Given that our 5yr target price for oil remains at US$85, the nominal gold price should approach the US$1,092 level for this ratio to be near its LT average level.

EQUITY PRICE / GOLD: The 15yr average value for this ratio is 20.04. Currently this ratio is fixed at 12.9. If the DJI remains stable at current '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 levels in 2014 (16.080), the gold price should decline towards DJ Industria l Average - Inde x P rice Lev el / London Gold (AM Fix ing $/ozt) - Price US$800 in order for this ratio to be near its LT average level. Trendline: Ave ra ge

Andbank, Dow Jones & Compa ny

©FactSet Rese arch Systems


Corporate Review

Central bank actions explain much of the gold price behavior… and they do not seem to be feeding the chances of a new rally

100 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50

GOLD STOCK IN CENTRAL BANK RESERVES

We already have 4 out of the 8 biggest “mercantilist” Central Banks destocking their large piles of Gold

'10 (MOV 6M , % 1YR)India (MOV 6M , % 1YR) Thailand (MOV 6M , % 1YR)Sing

Andbank, National Reserv Banks

'11

'12

(MOV 6M , % 1YR) Philipp (MOV 6M , % 1YR)Japan (MOV 6M , % 1YR)UK

'13 (MOV 6M , % 1YR)Chile (MOV 6M , % 1YR)China ©FactSet Research Systems

119


Corporate Review

120

Do not expect India to provide support for Gold: Even India, with the wedding season in full swing, has been forced to significantly reduce the amount of imported gold (after the restrictions that ban imports of non-core goods in order to repair its current account deficit)

100 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50

GOLD STOCK IN CENTRAL BANK RESERVES (q/q change)

'10 (% 1Q)India (% 1Q) Thailand

Andbank, National Reserv Banks

'11 (% 1Q)Sing (% 1Q) Philipp

'12 (% 1Q)Japan (% 1Q)UK

'13

100 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50

(% 1Q)Chile (% 1Q)China ŠFactSet Research Systems


Corporate Review

121

Until after the Current Account in India has completely reversed this trend


Corporate Review

122

Precious Metals Gold: New target price of US$ 900 Criteria

Recent Developments

Andbank’s Assessment

India's government is restricting gold imports

India accounts for up to 25% of physical gold demand with imports of roughly 1,000 tons a year (15% of India's total imports), which explains a big share of the current account (CA) deficit in the country. Due precisely to the recent deterioration of the CA balance, which has triggered capital outflows by foreign investors, the government has been forced to impose restrictions on gold imports. As a result, gold imports (which were running at a pace of 125 tons a month) have now dropped off to almost zero (despite the fact that the Indian wedding season is approaching). This will continue in 2014.

Expensive

Financial Liberalization in China

With more than half of global physical gold demand coming from China and India, we consider that what happens in Asia is more likely to be a driver for gold than what happens at the Fed. The Chinese government continues with its economic reforms pointing to a financial liberalization that could widen the investment alternatives for Chinese investors (capital account opening). This could reduce the demand for gold.

Expensive

Gold in Real Terms

The gold price continues experiencing a significant adjustment but it is still expensive from a historical perspective in real terms. The gold price in real terms should approach US$700 (LT average), which means that, given a CPI deflator of 116.4, the nominal price of gold should stay near US$814.

Expensive

Gold in terms of Oil (Gold / Oil)

The value of this ratio stands at 13.32 (slightly above the historical average value of 12.85). Given that our 5yr target price for oil remains at US$85, the nominal gold price should approach the US$1,092 level for this ratio to be near its LT average level.

Slightly expensive

The 15yr average value for this ratio is 20.04. Currently this ratio is fixed at 12.9. If the DJI remains stable at Gold in Terms of Equity (Dow current levels in 2014 (16.080), the gold price should decline towards US$800 in order for this ratio to be Expensive / Gold) near its LT average level.

Gold & Money Impulse

We have revised this approach to incorporate the money impulse coming from the central banks expanding their monetary base (MB). In total, the four main central banks have expanded money by US$3.75trn (2.2 times). The gold price has increased 1.75 times. This shows a 0.80 correlation, which is extremely high, considering that much of this money goes into other assets.

Expensive

Debt crisis in Europe.

The satisfactory political resolution of the debt crisis in Europe should help ease systemic concerns

Expensive

We consider that the gold price remains expensive. In the long term, we feel comfortable setting the target price for gold at US$ 900.

Expensive

Final Assessment


Corporate Review

General Commodities Under a historical perspective. Considering historic prices, it could be said that only precious metals are expensive. Other Commodities would be at a fair value.

123


124

Corporate Review

Commodities (by groups) Viewed in Perspective 600

x 1.81 in 10Y (6.1% annual)

ENERGY

x 1.82 in 10Y (6.2% annual)

CROPS

600

700

500

500

600

600

400

400

500

500

300

300

400

400

300

300

200

200

200

200

100

100

100

100

0

'04

'05

'06

'07

(INDEX) W TI

'08

'09

(INDEX) C o a l

'10

'05

0

'06

'07

'08

'09

P la tin um

0

'04

'05

'10 Go ld

'11

'12

'06 Co rn

x 2.92 in 10Y (11.3% annual) 1,000

P a lla dium Andbank, NYMEX

'13

©FactSet Research Systems

PRECIOUS METALS

'04

'12

(INDEX) Na tura l Ga s

Andbank, DJ Com pany

1,000 900 800 700 600 500 400 300 200 100 0

'11

'13

900 800 700 600 500 400 300 200 100 0

Silve r ©FactSet Res earch Sys tems

'07

'08

W he a t

'09

So yb e a n

'10 Suga r

Andbank, CRB

600

'11

'12

700

0

'13

Cotton ©FactSet Research Sys tems

MINERALS & METALS

x 2.23 in 10Y (8.4% annual)

600

500

500

400

400

300

300

200

200

100

100

0

'04

'05

'06

C op pe r

'07 Nick e l

Andbank, London Metal Exchange

'08 Zinc

'09

'10

Alum inum

'11

'12

'13

0

Iro n O re ©FactSet Res earch Sys tems


Corporate Review

125

Commodities Under a historical perspective, it could be said that only Precious metals are expensive. Other Commodities would be at a fair value CURRENT

10 YEAR

ANNUALIZED

ANDBANK'S

Index100 (T-10Y)

PERFORMANCE

GROWTH

ASSESSMENT

Oil Coal Gas

181.0 308.0 150.0 86.0

81% 208% 50% -14%

6.1% 11.9% 4.1% -1.5%

FAIR VALUE EXPENSIVE CHEAP VERY CHEAP

Corn Wheat Soybean Sugar Cotton

182.0 172.0 167.0 191.0 254.0 120.0

82% 72% 67% 91% 154% 20%

6.2% 5.6% 5.3% 6.7% 9.8% 1.8%

FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE CHEAP

Palladium Platinum Gold Silver

292.0 379.0 178.0 319.0 379.0

192% 279% 78% 219% 279%

11.3% 14.3% 5.9% 12.3% 14.3%

EXPENSIVE EXPENSIVE FAIR VALUE EXPENSIVE EXPENSIVE

Copper Nickel

223.0 353.0 112.0

123% 253% 12%

8.4% 13.4% 1.1%

FAIR VALUE EXPENSIVE CHEAP

Zinc

206.0

106%

7.5%

FAIR VALUE

Energy

Crops

Precious

Minerals

Annualized growth last 10 Yr < 0% 0% - 5% 5% - 10% 10% -15% > 15%

Andbank's Criteria VERY CHEAP CHEAP FAIR VALUE EXPENSIVE BUBBLE


Corporate Review

126

Commodities - Conclusions 1. Industrial commodities: The super-cycle ended in 2013 and we do not expect a big upward movement in prices. •

The primary driver of the commodities super-cycle has now slowed down and we suspect that this slowdown is clearly structural (not just cyclical).

It can by no means be anticipated that India will pick up China’s baton as a leader in commodity consumption

Metal producers and miners have been clearly caught off guard with a gargantuan excess capacity.

Real vs. speculative demand still points south for prices

2. Precious metals. We consider that the gold price remains expensive. With a long term perspective, we feel comfortable setting the target price for gold at US$ 900. 3. General Commodities Under a historical perspective. Considering historic prices, it could be said that only precious metals are expensive. Other Commodities would be at a fair value. This is in line with our more fundamental approach that concludes that “we do not expect a big upward movement in prices”. 4. Most preferred commodities: •

Within minerals: Zinc & Nickel are at heavy discounts vs. other minerals, nevertheless there are no apparent reasons to think in a more limited presence of these commodities in the different industrial processes (i.e, the nickel is used in the manufacture of super alloys with copper (highly resistant to oxidation), is used in rechargeable batteries, coinage (for what it will take a lot of it if central banks continue expanding monetary base, is also used in foundries, metal coatings and to make white gold (although its use in jewelry is limited by being a toxic product).

Within Crops: Wheat & Cotton.

Within Energy: Natural Gas

5. Commodities that should be avoided: •

Energy: Oil WTI (up to US$85)

Precious metals: Silver, Gold, Palladium

Metals & Minerals: Aluminium, Steel and Copper


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global â&#x20AC;&#x201C; The World Economy. A birdâ&#x20AC;&#x2122;s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

127


Corporate Review

128

USD Global Monetary Policies point to a lower USD  As of October, two out of the six central banks most actively holding currency reserves decided to increase exposure to the USD. China strongly increased the stock of its foreign currency reserve from the 21.5 equivalent months of imports to the 22.4 area, and Indonesia did it for the second consecutive month (from 5.7 to 6)  The other countries decided to normalize their high levels of holdings in currency reserves (Japan from 17.9 to 17.6, S.Korea from 7.8 to 7.7, and Brazil from 17.9 to 17.7)  In general terms, the â&#x20AC;&#x153;big brothersâ&#x20AC;? still retain an abnormally high proportion of foreign currency reserves (much higher than that implied by the pace of their current account balance), meaning that they probably accumulated Currency Reserves and Gold on the back of systemic fears, that are gradually disappearing.  We still expect this normalization process to continue, putting pressure on the USD.

35

Foreign Currency Reserves (as months of imports, 3m MA)

35

30

30

25

25

20

20

15

15

10

10

5 0

5 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 India C hina

A ndbank, Centra l Ba nks

Japan S.Ko rea

0

Brazil Indonesia ŠFa ctSet Re search Systems


Corporate Review

129

USD Geopolitical developments also point to a lower USD  The flow of USD with respect to the global volume of commercial trade has reached a 15 year low (at 1998 levels). Although this may sound like a shortage of USD (apparently supportive for that currency), from a geopolitical perspective it is not. We consider this factor as a trigger point that could give rise to new and dramatic developments.  With a long-term view, we see some interesting aspects, such as the internationalization of the RMB, and the progress seen in the RMB denominated debt market, that could result in strategic movements of a specific group of countries in order to overcome the relatively low level of the USD currency (compared to the nominal level of commercial transactions that are looking for a currency to be settled). If true, the USD could stop being the settlement currency of a major part of global transactions.  Why? Simply because, as many times in the past, the prevailing currency reserves can not keep pace with growth of global trade, being dwarfed by the growing size of international commerce. At such a point, the countries involved in that commerce create solutions that lead to more than one currency cohabiting as currency reserves. This means that other currencies will be present in the Foreign reserves of these central banks. In other words, the USD could be forced to make room for the new tenant, which translates in lower demand for the USD.

7,00 6,00

U SD FLO W TO TH E W O RLD 1 2

0 -100 -200

5,00

4 -300

4,00

-400

3,00

-500 -600

3

2,00 1,00

-700

0,00

-800

-1,00

'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

-900

Quarterly US Current Account deficit as a % of Quarterly Global Trade (Left) BOP Current Account balance (12m Mov Sum, US$bn) Recess ion P eriods - United States

US Bureau of Economic Analysis

ŠF actSet Research System s

(1) In 1989, with a US$ 100bn CA deficit (cumulative 12m), the quarterly flow of USD thrown to the world coming from this CA represented 3% of the quarterly international commerce. (2) In 1995, with the same amount of CA deficit, this USD flow represented just 2% of international commerce. (3) In 2000, with a larger CA deficit of US$416bn (cumulative 12 months), the quarterly flow of dollars represented 4.5% of international transactions. Which means that for each US$100bn in CA deficit, the world received US$ equivalent to 1% of international commerce. (3) Now, in 2013, with a similar CA deficit of $412bn, quarterly flows of dollars represent just 2.3% of the level of international transactions. Meaning that for each US$ 100bn of CA deficit, the world is receiving the equivalent of 0.5% of international trade.


Corporate Review

130

USD/EUR Andbank’s Assessment Recent Developments

Criteria

Tensions in Europe

The APRI Composite for the European peripherals shows an aggregate score of 50.7 in September (slightly above the 50.6 level seen in the previous quarter). A positive reading for the second quarter in a row means that (1) on aggregate, these economies are no longer deteriorating and (2) they continue showing positive dynamics in certain aspects of the economy

In general terms, the “big brothers” still retain an abnormally high Global accumulation proportion of foreign currency reserve (much higher than that implied of the Reserve by the pace of their current account balance). We still expect this Currency normalization process to continue, putting pressure on the USD.

USD flow to the world

The flow of USD with respect to the global volume of commercial trade has reached a 15 year low. In 1989, with a US$100bn deficit in CA, the quarterly flow of USD to the world was equivalent to 3% of total commercial transactions. Today, with the same level of CA deficit, the flow of USD barely represents 0.5% of total trade. The USD is simply dying as the only currency reserve.

Short positioning in Non commercial Long contracts in EUR are 81k, vs. 72k in short € (CFTC. Options & contracts. The net position is +8k long EUR. Much lower than the +65k Futures, ECA cur) net long position seen in the last month. We see this positioning as fairly neutral in the short term

QE

Despite the fact that the market has begun to incorporate a sort of tapering in the Fed’s QE, it is not clear when this will take place. Meanwhile, the ECB has started to move, shrinking the monetary base in 2013. We consider this divergence in monetary policy to be supportive for the euro (negative for the USD).

Final Assessment

Effect on the USD (Short-Term view)

Effect on the USD (Long-Term view)

NEUTRAL

NEGATIVE

NEUTRAL

NEGATIVE

NEUTRAL

NEGATIVE

NEUTRAL

NEUTRAL

NEUTRAL

NEGATIVE

NEUTRAL (1.35-1.40)

NEGATIVE (1.40)


Corporate Review

131

Asian Fx 1.

The majority of Asian currencies have been hit because of the threat of Tapering. However the drop has had different intensities depending on the country.

2.

The group of economies that has withstood the “crisis” better has been the one comprising the countries that “buy protection” via a mercantilist approach (that ensures current account surpluses): South Korea, Taiwan, etc…, while the countries hardest hit have been those experiencing current account deficits (in most cases due to the development of their domestic currencies).

3.

Indeed, the mercantilist approach reduces the dependence on capital inflows, but … Is it not true that these economies are the most leveraged to the Western cycle? What would happen if I told you that the Western economies will have a subpar growth for many years? Yes, the perspectives for these countries worsen automatically.

4.

On the other hand, we are inclined to think that the best options to invest are in those countries that are less synchronized with the developed economies. Those with stronger domestic dynamics, at the expense of a negative current account balance. A deficit that, on the other hand, they have the ability to finance domestically.

110

ASIAN CURRENCIES vs USD (Index 1/x, Base 100)

110

105

105

100

100

95

95

90

90

85

85

80

Jan Feb Mar Apr IDR

WM Reuters

THB

May Jun PHP

MYR

Jul

Aug Sep Oct Nov

CNY

KRW

80

TWD

©FactSet Research Systems


132

Corporate Review

Asian Fx The RMB’s satellites are a “buy” POSITIVE OUTLOOK

Asian Currency Diffusion Index

Asian currencies are still cheap relative to the USD.

Asian curr Index (rhs)

1,300 STRONG BUY

We recommend being long in the THB, IDR, PHP and MYR. Avoid those more closely related to JPY (KRW, TWD).

Diffusion Index 3mth smoothed (lhs)

0,40

1,250

0,30

1,200

0,20

1,150 BUY

0,10

1,100

0,00

1,050 -0,10 SELL

1,000 -0,20

0,950

Jul-13

Oct-13

Apr-13

Jan-13

Jul-12

Oct-12

Apr-12

Jan-12

Jul-11

Oct-11

Apr-11

Jan-11

Jul-10

Oct-10

Apr-10

-0,50 Jan-10

0,800 Jul-09

-0,40 Oct-09

0,850 Apr-09

-0,30

Jan-09

0,900

Jul-08

STRONG SELL

Oct-08

Indeed, these markets will “dance” the Tapering song in 2014. Each time the Tapering sounds hard, these markets could fall considerably (equities, bonds and currencies).

1.

S&P Volatility. Asian assets are the first to be sold when managers need to liquidate portfolios. A rise in the volatility of the S&P has a negative reading for the attractiveness of Asian currencies. A VIX above 25 makes this factor negative.

2.

Kospi volatility. This factor helps to reflect the risks specific to the region. A reading above 23 makes this factor contribute negatively.

3.

Overall velocity of money. As velocity increases, the “animal spirits” grow in financial markets. We take the variation rate at M1 in the Eurozone, USA and Japan as representative of this. Asia’s natural response to an upswing in the overall level of prices is to allow their currencies to appreciate, thus keeping purchasing power levels up. An increase in the overall M1 is therefore synonymous with currency appreciation in emerging countries.

4.

OECD LEI. When global growth slows, Asian countries’ exchange rate policies are used as a tool to counter short-term dynamics and manage the domestic economy. The commercial mindset of many central bankers makes them limit the appreciation of their currencies in such episodes. This factor computes negatively when the LEI of the Asian big five falls.

5.

Performance of the RMB.

6.

Performance of the JPY. Traditionally a currency “anchor” for the rest. Korea and Taiwan have a product overlap with Japan, competing in many fields with Japanese products. A weak yen therefore “invites” competitive devaluations from the rest. With The JPY down by over 300 bps (from 80 to 83), this component is negative for the rest.


Corporate Review

Real Yield differentials Are NOT a good proxy for currency performance History demonstrates that when it comes to currencies, things are not always that simple

2,50 2,00 1,50 1,00 0,50 0,00 -0,50 -1,00 -1,50 -2,00 -2,50 -3,00 -3,50

USD should have appreciated vs JPY. However, the USD depreciated significantly

Real y ield differential & Fx - USDJPY

136 128 120 112 104 96 88 80 '04

'05

'06

'07

'08

'09

'10

'11

'12

72 '13

Real Yield Differential 10yr bond (US vs Japan) (Left) JPYUSD (Right) Andbank, T.Prebon, Min int affairs of Japan, IMF

ŠFactSet Research Systems

133


Corporate Review

Thus, be careful when using Real Yield Differentials. We do not recommend being long in JPY or USD, despite these two currencies being the ones with the highest Real Yields

6,00

REAL Y IELDS CORE COUNTRIES (1 0 year bonds)

6,00

5,00

5,00

4,00

4,00

3,00

3,00

2,00

2,00

1,00

1,00

0,00

0,00

-1,00

- 1,00

-2,00

- 2,00

-3,00

- 3,00

-4,00

'04

'05

'06 Ja pa n

'07 US

'08

'09

Euro zo ne

Andbank, T.Prebon, Min int affairs of Japan, IMF, Euros tat

'10

'11

'12

- 4,00 '13

Unite d Kingdom ŠFactSet Res earch Systems

134


135

Corporate Review

We still recommend staying short JPY/Long EUR. How far and how fast can the JPY depreciate? EUR/JPY (EURJPY-FX1)





HOW FAR? Viewing the second graph, we can make a guess. Considering the global aspects affecting mostly developed economies, and particularly Japan, our guess is above 140, with the possibility of reaching the 170 level again. HOW FAST? We believe that a rapid & disorderly depreciation of the JPY will inflict severe pain on various business segments and on households in the form of much higher import prices. Steel producers (with a high energy dependence) and the chemicals sector (net importers) will suffer if the pace of depreciation continues with the intensity of recent weeks. We expect the momentum to ease, with the BoJ seeking a more managed decline. This could well be a 3-5 year process before the aforementioned targets are reached.

1 3 8.6 1 1 .2 4 0 .9 0 % 0 8 :4 0:5 4 P M J P Y

D e c - 12 - N o v- 13

135 130 125 120 115 Ja n Feb Ma r Ap r Ma y Ju n

Ju l Au g Se p O ct No v

EUR/JPY (EURJPY-FX1)

1 3 8.6 0 1 .2 3 0 .9 0 % 0 8 :4 1:0 9 P M J P Y

N o v- 93 - N o v- 13

170 160 150 140 130 120 110 100 90 '9 4

'9 6

'9 8

'0 0

'0 2

'0 4

'0 6

'0 8

'1 0

'1 2


136

Corporate Review

Why Short JPY vs. EUR (and not vs. USD) 1.

Japan has Europe’s export champions in its sights.

2.

Germany is a major trade competitor.

3.

Japan has recently announced that it would use some of its foreign exchange reserves to buy eurodenominated bonds in an explicit move to weaken the yen.

4.

In a currency war, Japan has more ammunition!

5.

Why? It’s simply a question of “money supply power”. The ECB is straitjacketed with far more restrictions than the BoJ.

6.

7.

8.

9.

Looking at the dynamics in Japanese exports once these measures have been adopted (see the charts) is like the JPY depreciation would be paying off (although not enough to improve the CA balance. We consider it likely that the BoJ will implement more of these radical measures to boost exports even more. In the meantime, in the Euro zone, financial conditions are improving … spreading the perception that a systemic crisis in the euro region is easing, making the use of unorthodox monetary policies less necessary. The magnitude and scope for action is ample. In 1Q 2011 the JPY dropped by 14% vs. EUR and in 1Q 2012 it lost 13%. Neither of these moves appeared to hurt EMU exports. According to the OECD, the yen remained slightly overvalued against the euro in 2Q2013.

8.000 7.500 7.000 6.500 6.000 5.500 5.000 4.500 4.000 3.500 3.000

EX P O RT S - J AP AN

60 40 20 0 -20

Exports are improving, in a sign that the JPY depreciation would be paying off… '04

'05

'06

'07

'08

'09

'10

'11

'12

-40

'13

-60

(SAM) Internat ional Trade, Export s, Total, NSA, (bll JPY) (Le ft ) (% 1YR) International Trade, Expo rt s, Total, NSA, JPY - Japan (Right)

Japan Cust oms

30000

©FactSet Rese arch Syst ems

CURRENT A CCOUNT - JA PA N

25000 20000 15000 10000 5000 0 -5000

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 (M O V 3 M ) Bo p, C urre nt A c c o unt, T o t a l, S a , H undre d M il J py - J a pa n

Bank of Japan

©Fact Set Res earch Sys tems

Sources: Bank of Japan, Factset, Gavekal


Corporate Review

Table of Contents Executive Summary Overall Economic Environment  Global â&#x20AC;&#x201C; The World Economy. A birdâ&#x20AC;&#x2122;s eye view.  Asia  USA  Eurozone  Latin America

Market Snapshot. Performance and Volatility Market Outlook  Equity. Short-Term Outlook (Flow Analysis) & Long-Term Outlook (Fundamental Analysis)  Interest Rates. Core Global Fixed Income  Sovereign Risk (European Periphery)  Corporate Credit  Commodities & Precious Metals  Forex

Summary Table for financial market prospects & Asset Allocation Proposal

137


Corporate Review

138

Market Outlook Summary Table

Short Term Asset Class

Instrument

S&P Stoxx 600 Equity

Current

Performance

Fundamental

Performance

27/11/2013

(1-2 months)

Target

(12 months)

1.807

(0%, +5%)

1.850

2,4%

324

(0%, +5%)

370

14,2%

Mexbol

41.522

(0%, +5%)

47.500

14,4%

Bovespa

51.861

(0%, +5%)

52.000

0,3%

768

(0%, +5%)

925

20,4%

FDSAG Asia Pac xJapan

(1) Expected performance at year end.

Fundamental

Fixed Income (2)

Bund 10y

1,72%

0,01%

1,75%

1,44%

Treasury 10y

2,73%

0,30%

2,75%

2,58%

Sovereign Risk

Spain

4,14

(0%, +5%)

3,25

11,3%

Europe

Italy

4,08

(0%, +5%)

3,25

10,7%

(10 year Yields)

Portugal

5,89

(0%, +5%)

5

13,0%

Ireland

3,5

(0%, +5%)

3

7,5%

Greec e

8,58

(0%, -5%)

7,5

0,1722

Average

4,40

3,63

10,6%

70

1,55%

(2) Expected performance includes price and coupon effect. (3) Credit performance excludes interest rate effect, and refers to spread performance and coupon (FRNs).

Itraxx Main (â&#x201A;Ź) Corporate Credit CDX Main (US$) - EUR & usd (3) X-Over (EUR)

77,766

-0,53%

68,628

-0,52%

65

1,39%

322,249

-1,86%

300

4,58%

(1)

(2)

(3)


Corporate Review

139

Market Outlook Summary Table Short Term Asset Class

Instrument

Fundamental

Current

Performance

Fundamental

Performance

29/11/2013

(1-2 months)

Target

(12 months) 5,7%

EM bonds

Taiwan

1,74%

(0%, +5%)

1,24%

Asia (in local)

Thailand

4,11%

(0%, +5%)

3,80%

6,6%

Indonesia

8,66%

(0%, +5%)

8,20%

12,3%

Malaysia

4,07%

(0%, +5%)

3,75%

6,7%

India

8,74%

(0%, +5%)

8,00%

14,7%

Philipines

3,65%

(0%, +5%)

3,50%

4,9%

EM bonds

Brazil

10,88%

(0%, +5%)

12,00%

1,9%

Latam (in local)

Mexic o

6,21%

(0%, +5%)

6,00%

7,9%

Colombia

6,74%

(0%, +5%)

6,50%

8,7%

Peru

5,47%

(0%, +5%)

5,00%

9,2%

Chile

5,02%

(0%, +5%)

4,50%

9,2%

-8,1%

Oil Commodities

92,49

(0%, -5%)

85

CRY

273,50

(0%, -5%)

275

0,5%

Gold

1247,61

(0%, -5%)

900

-27,9%

(1) Expected performance at year end. (2) Expected performance includes price and coupon effect. (3) Credit performance excludes interest rate effect, and refers to spread performance and coupon (FRNs).

Fx (Always US$

EUR/USD

EUR/JPY perspective, except for the JPY exchange USD/JPY rate, where we use a MXN/USD JPY perspective )

BRL/USD

1,361

(0%, -5%)

1,4

-2,8%

139,2

(0%, -5%)

160

-13,0%

102,3

(0%, -5%)

114

-10,3%

13,1

(0%, -5%)

12,75

-2,4%

2,3

(0%, -5%)

2,6

12,2%


Corporate Review

Global Asset Allocation Proposal Tactical Asset Allocation Proposal â&#x20AC;&#x201C; Nov 2013

Conservative Max Drawdown

Moderate

< 5%

5%/15%

Strategic Tactical (%) (%)

Asset Class

Balanced

Strategic (%)

Growth

15%/30%

Tactical (%)

Strategic (%)

30%>

Tactical (%)

Strategic (%)

Tactical (%)

Money Market

15

15

10

10

6

6

4

4

Fixed Income Short-Term

25

25

15

15

5

5

0

0

Fixed Income OECD Government

30

30

20

20

12

12

5

5

Core Fixed Income

7.5

5

3

Peripheral Risk

23

15

9

Corporate Invest. Grade (1) Fixed Income EM / HY

20 5

15

20

7

10

15

15

14

15

1.25 4

11

5

4

21

10

14

Fixed Income Asia

4.9

9.8

14.7

9.8

Fixed Income Latam

2.1

4.2

6.3

4.2

High Yield Equity OECD

0.0 5

5

US Equity

0

Asian Equity

Risk Parameters(2)

30

8

55 8.3

25.5 10

16

4.8

0.0

0.0 55

4.5

12.8 5

0.0

Latam Equity

0.0 30

2.3

4.3 0

Commodities

15

0.8

European Equity Equity Emerging

0.0 15

46.8 12

19

9.6

3.2

11.5

6.4

7.7

0

0

5

2.5

7

3.5

9

4.5

100

97

100

100

100

105

100

105

VaR

2.6%

9.3%

15.5%

21.4%

CVaR

4.6%

18.7%

32.0%

41.5%

maxDD(*)

-2.1%

-8.1%

-14.4%

-19.2%

(1) Within corporate credit, our preferred strategy is being long Financial Senior peripheral (vs financial senior of core countries) (2) Risk parameters are based on Strategic positioning

140


Corporate Review

141

Legal Disclaimer All the sections in this publication have been prepared by the financial institutionâ&#x20AC;&#x2122;s team of analysts. The views expressed in this document are based on the assessment of public and private information. These reports contain evaluations of a technical and subjective nature on economic data and relevant social and political factors, from which the financial institutionâ&#x20AC;&#x2122;s analysts have extracted, evaluated and summarized the information they believe to be the most objective, subsequently agreeing upon and drawing up reasonable opinions on the issues analyzed herein. The opinions and estimates in this document are based on market events and conditions that took place before the publication of this document, and therefore cannot be determining factors in the evaluation of future events that take place after its publication. The financial institution may hold views on financial instruments that differ completely or partially from the general market consensus. The market indices chosen have been selected using the exclusive criteria that the financial institution regards as most appropriate. The financial institution cannot in any way guarantee that the predictions or events given in this document will take place, and expressly reminds readers that any past performances mentioned do not in any circumstances imply future returns; that the investments analyzed may not be suitable for all investors; that investments can fluctuate over time in terms of their share price and value; and that any changes that might occur in interest rates or currency exchange rates are other factors that may also make it unadvisable to follow the opinions expressed herein. This document cannot be regarded, under any circumstances, as an offer or proposal to buy the financial products or instruments that may have been mentioned, and all the information herein is for guidance purposes and should not be regarded as the only relevant factor when it comes to making a decision to proceed with a specific investment. This document does not, therefore, analyze any other determining factors for properly appraising the decision to make a specific investment, such as the risk profile of the investor, his/her knowledge, experience and financial situation, the duration or the liquidity of the investment in question. Consequently, investors are responsible for seeking and obtaining appropriate financial advice in order to assess the risks, costs and other characteristics of any investments they wish to make. The financial institution cannot accept any responsibility for the accuracy or suitability of the evaluations or estimates of the models used in the valuations in this document, or any possible errors or omissions that may have been made when preparing this document. The financial institution reserves the right to change the information in this document at any time, whether partially or in full.


Corporate review 2014's strategic outlook