Corporate review august september 2013 by Andbank

ANDBANK RESEARCH Global Economics & Markets

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

Monthly Corporate Review (from the beach) Outlook for the Global Economy & Financial Markets August - September, 2013

Corporate Review

Table of Contents Executive Summary Overall Economic Environment Asia - Braking to avoid a Western - style collapse Latin America – External vulnerabilities add to domestic imbalances Eurozone – New Andbank Peripheral Risk Indicator (APRI Composite) USA – Four reasons to believe that it is more appropriate to think of lengthening duration than to cut it

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

Corporate Review

Executive Summary Economy & Markets Asia - Admittedly, June PMIs for EM Asia point to a loss of economic momentum in manufacturing sector. And going beyond the headline figures, the main feature has been a deterioration in new orders, which points to a poor performance of the industrial activity in the short term. On the positive side, this slowdown in manufacturing activity ensures that central banks will be very cautious about tightening monetary policy. Keeping policy rates low in Asia should act as an anchor on local-currency bond yields. We still expect “decent” figures coming from the US and, despite the fact that some of this growth will be led by a more competitive manufacturing sector in the US, this will not represent a challenge for NIEs economies in Asia. Latam – The shift towards tighter monetary policy in the developed world, combined with the forecasted drop in most commodity prices over the medium to long term, threatens to expose key vulnerabilities in Latin America’s growth model. External vulnerabilities are a concerns but domestic vulnerabilities are also building (low investment ratios, a model that has leveraged spending on the boom of commodity prices, etc.). All other things being equal, a drop of commodity prices will lead to a widening of current account deficits. In order to avoid the 5% level in trade deficits, it will be necessary to reduce consumption, which in turn will lead to a lower pace of growth. Despite this, we would not bee too pessimistic at this stage. A re-run of the crisis of 1980s and 1990s is very unlikely. Eurozone – Our Peripheral Risk Indicator composite (APRI) for the southern European countries shows an aggregate score of 50.6 in July, suggesting that this group of economies not only have slowed the pace of deterioration, but in aggregate they have stopped falling and even have shown some positive dynamics in certain economic aspects. USA - Tapering of QE does not mean, in any way, an increase in interest rates (as in 1994), but long term yields have increased by the same amount (as in 1994), and tripled that shift in relative terms. Tapering does not mean that the Fed is going to sell its Treasuries. In fact, we project a three-steps “exit strategy”. (1) One year of diminishing marginal expansion in Fed’s balance sheet. (2) One year of “stability” in the total size of monetary base, A normalization of balance sheet’s size at the pace of Fed’s assets amortization, until 2Q 17. Only after this third phase, we could consider an increase in Fed funds rate.

Equities - ST view: Today, our flow indicators show an aggregate score of -6.1 (down from -4.8 last month), showing again a considerable degree of stress and suggesting that the market is, once again, overbought. Fundamental view: According to our 320 target value for the Stoxx 600, and following last month rally, there is now an upside potential of around 6.8% in this index. With regard to the S&P, we keep unchanged our target price of 1420, meaning that we project a -10% performance for this index until this level is reached. As regards Emerging Markets, our target price for the Mexbol is 46.000 (+14.5% from current level), and 52.000 for Bovespa (+6.4% potential). Regarding Asian equity markets, our 2013 forecast was of a mild appreciation of 7%. The strong rally seen in July (+10%) has placed the YTD performance in the -5.5% for these markets (far from the -15% seen in June). We still see a 12%-13% raise in the MSCI EM Asia (until the 475 level) Core Fixed Income: No changes in our target range for Bund & US Treasury. 1.5%-2.0% for the former and 1.5%-2.5% for the latter. Sovereign Risk (Periphery Europe): We have built in greater convergence with the German Bund. We still see additional gains on these issuers although some destabilizing factors may arise in summer, coming from the political arena or the recently agreed bank resolution mechanism. Most preferred: Italy, Spain & Portugal. Corporate Credit: Entry point for US CDX at 100 bps, and for the Euro Ittraxx at 125 bps. Buy European HY when crossover trades above 450. EM Bonds Asia (local currency): Recent collapse in the price of these bonds provides a great opportunity of entry. Volatility guaranteed. Projected performance from current levels stays at double digit for the next 12-16 month. EM Bonds Latam (local currency): The same reading as in Asian bonds. Volatility guaranteed. Most preferred: Chile, Brazil, Mexico and Peru. Commodities: Our target price for Oil (WTI) remains around $85. Buy in the $70s and sell above $95. Long in Energy (Gas) and neutral in Agricultural commodities. Short in precious metals (Gold, Platinum and Palladium) and minerals (Copper and Zinc). Fx: Short term range for the EUR in the 1.30-1.35. Fundamental target at 1.40. We consider Asian currencies attractive. Avoid JPY (vs EUR and USD). Short GBP vs EUR. In Latam, stay long in MXN (target at 12-12.25) but stay short in BRL (target above 2.4).

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Admittedly, June PMIs for EM Asia point to a loss of economic momentum in manufacturing sector, that continues to struggle The headline index only rose m/m only in three of the seven countries for which weâ&#x20AC;&#x2122;ve had references. Positive readings (3): Taiwan, India and Australia Negative readings (4): China, Vietnam, Korea and Indonesia (although in the latter, manufacturing activity keeps expanding)

Headline PMIs

Capital Economics, Markit

Headline PMI (China)

Capital Economics, Markit, Thomson Datastream

Corporate Review

And going beyond the headline figures, the main feature has been a deterioration in new orders. Which points to a poor performance of the industrial activity in the short term.

The significant bounce seen in Taiwan & Australia should be read in a context of prior weakness (since they follow exceptional weak readings)

The new orders component was at or below the 50 level for all but Indonesia (where the headline also points north).

Likewise export orders were weak across the board. This is particularly bad news for South Korea and Taiwan (both below 50)

In light of this development, we conclude that Indonesia remains the most attractive investment option at the moment; while Korea & Taiwan would be the worst option for us.

New Orders

Capital Economics, Markit

Corporate Review

On the positive side, this slowdown in manufacturing activity ensures that central banks will be very cautious about tightening monetary policy. The implications are clear

Keeping policy rates low in Asia should act as an anchor on localcurrency bond yields

Recent sell off in regional government bonds have brought yields significantly above policy rates, in what represents a good opportunity of entry.

13 12 11 10 9 8 7 6 5 4 3 2 1 0

POLICY RATES - ASESAN

'04

'05 Ta iwa n

Andbank, Central banks, IMF

'06

'07

Philippines

'08 Thaila nd

'09

'10 Malaysia

'11

'12

'13

13 12 11 10 9 8 7 6 5 4 3 2 1 0

Indone sia ÂŠFactSet Research Systems

Corporate Review

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) These economies are not as dependent on the West (developed) as one could imagine. Excluding unrepresentative cases like Vietnam or Singapore, the rest of emerging Asia economies have commercial links with the US that barely represents 4% of GDP.

Commercial links with the US barely represents a 4% of GDP

Commercial dependence is even lower when it comes to the euro-zone. Barely a 3% of their GDP. Capital Economics, Thomson Datastream

Corporate Review

We still expect â&#x20AC;&#x153;decentâ&#x20AC;? figures coming from the US, andâ&#x20AC;Ś despite the fact that some of this growth will be led by a more competitive manufacturing sector in the US, this will not represent a challenge for NIEs economies in Asia. Labor Productivity (as a % of US Level)

A combination of falling energy costs, new technologies and affordability of US workers means that outlook for the US manufacturing is better now. The best performing manufacturing sectors in the US recently have been: Producers of machinery, electronics and motor vehicles. That puts Singapore, Taiwan and Korea in the cross-hairs because the first two are specialized in machinery and electronics. The latter in electronics & motor vehicles..

Capital Economics, Thomson Datastream

Exports of Intermediates to US (2012, % of Total Exports to US)

The rest of Asian economies are well-placed in terms of competitiveness, because despite wage costs have risen at a fast pace in most Asian countries, they still remain a fraction of US costs. And despite these economies have lower productivity, they are closing that productivity gap, being China the economy showing the greatest progress. (see the upper chart) Additionally, a significant portion of the goods these economies send to the US are intermediate products rather than final goods (see the chart below). As such, most of Asian manufacturing economies will benefit from increased US demand for inputs.

Capital Economics, Thomson Datastream

Corporate Review

Some analysts fear a sharp slowdown in economic growth in Asia but, according to our projection of â&#x20AC;&#x153;decentâ&#x20AC;? data coming from the US (and European figures in 2013 better than in 2012), this hypothesis simply does not hold In order to have a broad picture of how competitiveness is evolving across the different regions around the world, we can compare the prices that the US is paying for its imports from various regions As the chart shows, Asian economies have actually gained in competitiveness compared with rivals in Latin America and Europe, meaning 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. (Of course, unless it is a slowdown induced from regional politics. In such a case, the short-term pain should be offset with long-term benefits)

US import prices by region (index)

Capital Economics, Thomson Datastream

Corporate Review

Asia â&#x20AC;&#x201C; About the latest developments in the â&#x20AC;&#x153;Shanquesterâ&#x20AC;? & Conclusions China's cash squeeze is likely to reduce credit growth this year by 750B yuan ($122B). An amount equivalent to a full month of net new credit at national level. The majority of analysts close to that economy admit the short term effects that this may have in the economy but they also approve the government's handling of the credit crunch, considering that this episode reinforces their expectations for policy reforms such as loosening controls of interest rates. Additionally, the Ministry of Finance issued a circular ordering central government agencies to cut their general expenditures in 2013 by 5%. Analysts expect now 7.5% growth in Q2 (from 7,7% in Q1) as credit tightening and overcapacity continue to weigh on the economy. Admittedly, June PMIs for EM Asia point to a loss of economic momentum in manufacturing sector; and going beyond the headline figures, the main feature has been a deterioration in new orders, which points to a poor performance of the industrial activity in the short term. On the positive side, this slowdown in manufacturing activity ensures that central banks will be very cautious about tightening monetary policy. Keeping policy rates low in Asia should act as an anchor on local-currency bond yields. As a result of the recent sell off in regional government bonds, yields are now significantly above policy rates, in what represents a good opportunity of entry. On the fundamental side, commercial links of these economies with developed economies are not as large as in the past. The major part of emerging Asia economies have commercial links with the US that barely represents 4% of GDP. This points to a certain degree of economic autonomy. Despite the fact that some of the US growth will be led by a more competitive manufacturing sector in the US, this will not represent a challenge for NIEs economies in Asia (newly industrialized economies) since they are still well-placed in terms of competitiveness. Despite wage costs have risen at a fast pace in most Asian countries, they still remain a fraction of US costs, and despite these economies still have a lower productivity, they are closing that productivity gap, being China the economy showing the greatest progress. Asian economies have actually gained in competitiveness compared with rivals in Latin America and Europe in the last decade, meaning 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.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

External vulnerabilities are a concern. A positive terms of trade shock should have resulted in an improvement in the Current Account position, but from 2008 Latin America’s trade balance has deteriorated significantly. Something certainly problematic

Now that we expect that commodity prices will fall back (or in the best case scenario will remain stable) due to a lower structural growth in China, or the fact that additional liquidity provided from central banks has come to an end, etc… this will inevitable result in a further deterioration of the current account position of Latin America countries (all else equal). Would these countries be able to fund deficits of this magnitude? Consider here that financing conditions for emerging economies relying on external debt are to become more challenging over the next years if the idea of a tighter monetary policy gains strength. History suggest that countries run into problems when deficits exceed 5% of GDP (according to Capital Economics).

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

The only way to prevent current account positions from becoming unsustainable is a negative growth in domestic demand. This will result in slower growth, higher unemployment, and weaker currencies in general. On the positive side, inflationary pressures should diminish considerably (driven by supply & demand factors), what should help to keep yields subdued.

LA TAM - TERMS OF TRADE & CURRENT ACCOUNT (big six)

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

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

C urre n t a cco unt ( % o f GDP ) (R ight) Te rm s o f Tra d e (Le ft) Andbank, WEO IMF, Citi

©FactSet Res earch S ys tems

Corporate Review

Domestic vulnerabilities are also building The boom in domestic demand over the past decade reflected a sharp run-up in consumer spending. By contrast, investment has lagged well behind.

FIXED CAPITAL INVESTMENT (% of GDP)

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).

COUNTRY

INVESTMENT X CAPITA (US$)

BRAZIL MEXICO ARGENTINA CHILE PERU URUGUAY

2.040 2.522 2.700 3.676 1.629 2.788

Trading Economics

If we compare per capita investment in Latin America’s countries with one of the developed economies showing the lowest figures in fixed capital investment you will realize this. (Spain currently has a gross fixed capital formation of €184 bn per year, which represents 18.4% of GDP, near US$5,314 in per capita terms). Germany records €464bn in fixed capital formation. A 18.1% of GDP but reaches the US$7,450 per capita. 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

Corporate Review

And the consequences of having such a poor growth model (with a minimal presence of investments) are clear. Latin America GDP % Y/Y Q1 2013

2.2%

0.7% 2.8% 4.2% 1.9%

4.8%

1. Low rates of investment during a prolonged period of time is starting to hold back growth…

4.8% 3%

2. … and are increasingly leading to bottlenecks on the supply side, which in turn causes: •

A rise in prices (although growth has sunk, i.e. in Brazil)

•

and significant delays in deliveries.

•

In short, a situation that perpetuates the problems of competitiveness in a world where survival depends increasingly on the progress in competitiveness

0.7

3.1

5.4

7.8

10.1

COST OF EXPORTING A SHIPPING CONTAINER (US$)

Capital Economics, Thomson Datastream

12.4

14.8

Corporate Review

An additional concern is the rapid build-up of private sector debt In order to determine if private debt has grown excessively to consider that the economic growth has been a credit-driven one, we must look at the change of these concept within a reasonable period of time. We see in the chart that, within the region, only Brazil has experienced a quantum leap in private debt, what means that Brazilian consumer boom has been supported by a large build-up of debt. The same could be said about China and Korea, but remember that these economies have private savings (measured from international reserves) equivalent to 45.3% and 27% of GDP respectively, while Brazil barely reaches the 16% CHANGE IN PRIVATE SECTOR DEBT (% PTS OF GDP)

Capital Economics, Thomson Datastream

But this figure by itself says little, since the severity of this dynamic will depend on the starting point in private debt. In other words, we must put the focus on the overall level of this private debt. In this regard, Chile & Brazil are the economies within the region with the highest gross private debt, although they present a levels that are still quite low by international standards. In summary, there has been a

LEVEL OF PRIVATE SECTOR DEBT (% OF GDP)

Capital Economics, Thomson Datastream

Corporate Review

Latam - Conclusions Region: •

The shift towards tighter monetary policy in the developed world, combined with the forecasted drop in most commodity prices over the medium to long term, threatens to expose key vulnerabilities in Latin America’s growth model.

•

External vulnerabilities are a concerns but domestic vulnerabilities are also building (low investment ratios, a model that has leveraged spending on the boom of commodity prices, etc.)

•

All other things being equal, a drop of commodity prices will lead to a widening of current account deficits. In order to avoid the 5% level in trade deficits, it will be necessary to reduce consumption, which in turn will lead to a lower pace of growth.

•

Despite this, we would not bee too pessimistic at this stage. A re-run of the crisis of 1980s and 1990s is very unlikely. Admittedly the external environment looks set to become challenging but we expect the deterioration (adjustments) will be gradual. (prices of commodities, tightening of Fed’s monetary policy, etc…)

Brazil: •

Growth is likely to remain lacklustre over the next couple of years for several reasons. (1) Credit looks set to slow after 5 years booming and because banks have tightened lending conditions. (2) Constraints on the supply side remain a brake on growth since they prevent investment from becoming a larger share of the economy. (3) Brazil remains the worst country in the region in terms of Gross Fixed Capital Investment as a % of GDP, with a mere 18% (4) The strong currency is weighing on competitiveness.

•

The current path of tightening in monetary policy, just when GDP growth stagnates, leaves the country with very little chances of positive surprises.

•

The good news could be that inflation is close to peaking (food inflation should soon start to slow), which means that interest rate hikes are likely to be more modest than the market expects (good for the economy, good for bonds). We bet on a stable Selic rate at 8%, or a mild hike of a maximum of 50bps (to 8.5%) in the next 12 months.

•

GDP & Markets Estimates: We lower our GDP estimate and predict a 2% growth in 2013. We think that 10 year bond yields could remain fairly stable at current levels (10.9%), so we feel comfortable recommending to buy long term government bonds. In terms of Equity, Brazilian market remains as the most cheap market within the region, although, admittedly, there are good fundamental reasons for that. Our target value for Bovespa stands at 52.000 (10% above current levels). We keep a cautiously positive stance in Brazilian Equities. Regarding the Real, and according to our fundamental view for this economy, we are more inclined to think that the Real could depreciate further against the USD. Currently trading in the 2.26 area, we consider that this cross will breach the 2.40 level (almost an additional 6% depreciation).

Corporate Review

Latam - Conclusions Mexico: •

we have several reasons to think that the slowdown in Mexico will be short-lived. (1) Inflation should start to ease over the second half of the year as the recent spike in food prices fades, helping to boost real income. (2) Despite the recent slowdown in the US economy, we still project a 1.75% - 2% GDP growth in 2013 (and 2% 2.5% in 2014), which is consistent with growth in Mexico of 3%-4% a year. (3) The government’s economic reform program should provide an additional prop to Mexican confidence, although the effects will not be seen until the following years.

•

GDP & Markets Estimates: •

GDP: We project a 3% growth in 2013 (admittedly, lower than the 3.9% pace seen in 2012, but still one of the healthiest pace within the region).

•

Financial markets: Certainly, the promising reforms initially announced from Mr Peña’s government, and formally presented in the agreements contained in the famous “Pacto por México”, helped to prompt the rally in Mexican financial assets during the first stages of 2013. However, the electoral process of June brought out certain political tensions that left such reforms in the background, reducing expectations and thus intensifying the falls in markets. Completed the electoral process, reforms come to the forefront in what could represent a positive driver for financial assets in Mexico. We recommend buying 10 year Government bond at current yields (6%) since we consider that a retracement in yields until the 5.20% level is possible. In terms of Equity, according with our economic projections for the 2H2013, we consider a healthy pace for EPS (in the 10% area) is feasible, which keeping stable the PE multiple, could bring the Mexbol to the 46,000 (11% above current levels). We recommend increase exposure to this asset class. Regarding the MXN, and considering all the aforementioned, along with the fact that a relaxation in monetary policy is no longer on the table, we are inclined to think of a continuum in the normalization (following the sharp depreciation seen in the MXN). We expect now that the MXN could normalize toward the 12 – 12.25 level (from the current 12.75). Nearly a 6% appreciation.

Corporate Review

Latam â&#x20AC;&#x201C; Key Forecasts

LATAM Brazil Mexico Argentina Colombia Chile Peru

(1)

GDP

(bn US$)

x Capita (US$)

2.400 1.150 450 331 250 175

12.000 10.088 11.250 7.043 14.706 6.034

GDP (% y/y) 2012 2013 f 2,80% 0,90% 3,90% 1,90% 4,00% 5,60% 6,30%

2,59% 2,00% 3,00% 1,00% 3,15% 4,30% 5,30%

Sources - Factset, Trading Economics (1) Inflation figures are the result of proxies used by private & independent research firms Changes: - As of date 24th july we have reduced our GDP estimates for Brazil from 2.75% to 2%. - This change in Brazil has brought down our forecast for the entire region, from 3% to 2.6%

Inflation (% y/y) 2012 2013 f 7,40% 5,40% 4,10% 23,50% 3,20% 3,00% 3,70%

7,60% 6,00% 4,00% 24,00% 2,50% 1,75% 2,75%

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Andbank Peripheral Risk Indicator (APRI) Questions & Answers

1. On the need to create our own set of indicators. The aim of this new tool (APRI) is simply to provide answers to some key questions. Is this group of economies stabilizing? Which of these countries shows higher difficulties and which ones are evolving better? In what areas? How close are them from fiscal targets? Are they really lowering primary deficits? Without a concrete vision on these aspects it is not feasible to undertake any reasonable investment strategy.

2. How to interpret the results? In order to facilitate the familiarization with the scores of our indices, and thus make the results easily understandable, we have decided to assimilate them to the results of other widely known indicators. Thus, a reading above 50 means that the factor under analysis is having a favorable performance in relation to previous observations. Similarly, a reading below 50 means the factor under study shows a deterioration. Since each time series is analyzed in relation to its three previous monthly observations (prior to the last update), APRISâ&#x20AC;&#x2122;s figures should be interpreted as the evolution of the specific time series in the past four months. Our APRI system also helps us to fully understand the nature of the development in one specific economy, providing the necessary clues to determine the consistency of such performance.

Corporate Review

Andbank Peripheral Risk Indicator (APRI) The First Reading

APRI Composite for the European peripherals shows an aggregate score of 50.6 in July, suggesting that this group of countries not only have slowed the pace of deterioration, but in aggregate they have stopped falling and even have shown some positive dynamics in certain economic aspects.

Italy and Portugal, the two economies showing better dynamics. The country shedding the highest APRI Composite in July is Italy, being thus the peripheral economy with the best dynamics in aggregate terms during the last four months. It should be noted, however, that the score for Italy lies primarily in the significant jump in the confidence surveys (54.6), although it is fair to recognize that Italy also accumulates the greater progress in the fiscal front (12 months cumulative budget balance of -3.19% vs -5.24% one year ago, and cumulative primary deficit of just -0.19% vs -2.58% one year ago). We could summarize for Italy that confidence surveys and fiscal figures outweigh the mediocre labor market and activity data. The second economy showing better aggregate figures is Portugal, emphasizing its progress in all areas except one (the labor component), a feature that perhaps makes Portuguese figures even more interesting than Italian ones. Portugal is the peripheral economy experiencing more progress in activity. In fact, its Q1 2013 GDP growth (saar) of -1.4% represents the lowest pace of contraction within these economies so far in 2013, placing Portugal as the country nearest the â&#x20AC;&#x153;desiredâ&#x20AC;? zero growth level (a station for which all of them must pass before showing GDP expansion). It should also be noted that the GDP pace recorded in Q1 remains well above the consensus forecast for the full year (-2.65%), paving the way for positive surprises in the case authorities manage to maintain current rates. The volume index of manufacturing production stands at 99.45 (vs the last 3 months average of 94.8), the highest compared to other countries in this group.

APRI Activity component shows an aggregate reading of 50.2 for this group of economies, pointing to a stabilization in this regard. Portugal and Greece are the countries showing clearest positive changes in this regard over the last four months (52.2 and 50.9 respectively). Spain shows a reading of 50, staying in the no-contraction & no-growth area, and maybe on the verge of delivering positive readings in the next months.

APRI Surveys of confidence is the component showing the most evident improvement at regional level, with a reading of 51.9, and exerting a significant influence on the final assessment of our APRI composite. By countries, Italy shows the greatest advance (54.6) followed by Ireland (53). The rest of economies remain slightly above the 50 area, suggesting that consumers and producers confidence would not be deteriorating further.

By contrast, APRI Labor component at 49.6 suggest that labor conditions are still deteriorating at regional level, although they are probably doing now at a much lower pace. Nevertheless, and in more detail, it can be seen how Portugal and Greece now show almost no deterioration, with just marginal declines in July.

APRI Fiscal component reveals that fiscal efforts undertaken by this group of economies has been substantial. Italy remains as the only country that has arguably reached all fiscal targets set by Brussels. In the case of Greece, despite all the noise coming from this country, authorities have fixed YTD cumulative primary deficit at -0.50% as of May 31st (vs -1.20% one year ago), and would be in a position to shed primary surplus in 2013. Additionally, budget balance stays at 2.10% (YTD cumulative), much better than the -5.6% recorded one year ago, although further efforts must be taken in order to meet the -4.10% target for the year.

Corporate Review

Andbank Peripheral Risk Indicator Summary breakdown

APRI - ACTIVITY COMPONENT

APRI - SURVEYS COMPONENT

APRI - LABOR COMPONENT

APRI - FISCAL COMPONENT

APRI - COMPOSITE

Italy

49,7

54,6

49,2

51,2

Spain

50,0

50,5

49,5

50,4

50,1

Portugal

52,2

Ireland

48,4

53,0

49,8

Greece

50,9

50,7

49,9

50,9

50,6

Aggregate

50,2

51,9

49,6

50,8

50,6

50,8

49,9

50,7

50,9 50,4

Corporate Review

Andbank Peripheral Risk Indicator APRI Activity Component

sm en t

Avg last 3m (exc l last observ)

se s

Volume Idx Prod, Manuf Last Month

sm en t

Consensus (for the Year) as of July 2013

se s

(2)

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

sm en t

NEAR TERM ACTIVITY FIGURES

PERIPHERAL RISK INDICATOR APRI - ACTIVITY COMPONENT

Italy

-2,6%

-2,4%

49,8

-1,80%

49,3

90,90

91,03

49,9

49,7

Spain

-2,1%

-2,0%

49,9

-1,60%

49,5

92,43

91,55

50,5

50,0

Portugal

-1,4%

-4,9%

53,1

-2,65%

51,1

99,45

94,80

52,5

52,2

Ireland

-2,3%

-0,6%

48,5

0,80%

47,3

95,77

97,01

49,4

48,4

Greece

-1,5%

-1,9%

50,3

-4,20%

52,4

86,87

87,11

49,9

50,9

(1)

50,2

(1) For Greec e we use the 12m moving average of the QoQ annualized growth rate. (2) In the sec ond assessment, we c ompare the annualized GDP growth rate rec orded in the most rec ent observation with the consensus estimate for the full year. If c urrent pace falls below full year consensus estimate, the index will yield a negative reading (below 50). By c ontrast, when current rate is higher than full year estimate, the index reading will be above 50.

Corporate Review

Andbank Peripheral Risk Indicator APRI Surveys Component

sm en t se s

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

sm en t se s

Avg last 3m (exc l last observ)

se s

EC - GENERAL ECON SITUATION (12fw)

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

sm en t

SURVEYS OF ECONOMIC CONDITIONS & SENTIMENT

PERIPHERAL RISK INDICATOR APRI - SURVEYS COMPONENT

Italy

-19,4

-33,2

56,9

-7,4

-26,1

59,3

-89,8

-84,8

47,5

54,6

Spain

-26,4

-31,4

52,5

-27,8

-31,2

51,7

-91,8

-86,2

47,2

50,5

Portugal

-51,9

-54,2

51,2

-61,3

-62,6

50,6

-91,4

-92,6

50,6

50,8

Ireland

-21,8

-29,9

54,1

-24,1

-33,0

54,4

-75,6

-76,9

50,6

53,0

Greece

-64,8

-68,0

51,6

-59,7

-63,2

51,7

-95,2

-93,0

48,9

50,7

51,9

Corporate Review

Andbank Peripheral Risk Indicator APRI Labor Component

Spain

16,35

Portugal

36,48

49,3

12,2

11,9

48,7

49,2

16,22

50,7

36,55

37,23

49,1

26,9

26,6

48,7

49,5

78,77

78,98

49,8

37,55

37,93

49,5

17,6

17,7

50,3

49,9

Ireland

1,846

1,847

49,9

34,60

34,93

49,5

13,6

50,0

49,8

Greece

3,656

3,586

51,7

40,45

40,97

49,4

26,9

26,6

48,5

49,9

35,95

(1)

Avg last 3m (excl last observ)

se s 49,6

sm en t

22,67

PERIPHERAL RISK INDICATOR

Unemployment Rate

se s

22,58

Avg last 3m (excl last observ)

Italy

Weekly Hours of Work

sm en t

Avg last 3m (excl last observ)

se s

TOTAL EMPLOYED (MM Persons)

sm en t

LABOR MARKET DYNAMICS

APRI - SURVEYS COMPONENT

49,6

(1) For Portugal we use an index base time serie, since we do not have the number of total employed in a monthly basis.

Corporate Review

Andbank Peripheral Risk Indicator APRI Fiscal Component

Data as of

31-may

Italy

-3,17

Spain

-2,39

Portugal

(1)

-5,24

51,8

-3,17

-1,89

49,6

-5,78

-5,80

-1,65

-1,95

50,3

-3,36

-2,10

-5,60

53,1

-5,08

(2)

-2,90

49,8

-0,19

50,0

-0,65

-5,50

51,9

-4,10

49,1

(3)

(1)

sm en t

Primary Balance YTD Cumulative (1y ago)

se s

Primary Balance YTD Cumulative

sm en t

Budg. Balance Target Year (2013)

se s

Budg. Balance YTD Cumulative (saar)

se s

Budg. Balance YTD Cumulative (1y ago)

Budg. Balance YTD Cumulative

sm en t

FISCAL PROGRESS

PERIPHERAL RISK INDICATOR APRI - FISCAL COMPONENT

-2,58

52,1

51,2

-2,60

51,7

50,4

-0,86

-0,69

49,9

50,7

-0,50

-1,20

50,6

50,9

(1)

(4)

Ireland Greece

50,8

(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 central gov applies a 0,7% target for Autonomous Communities, the target for the central government could be fixed at 5,8%. (4) We have not got homogeneous fiscal data for Ireland yet.

Corporate Review

Spain Checking our GDP estimates for Spain in 2013 SPAIN'S GDP FIGURES

2012

2013

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

QUARTERLY GDP Chained 2000 (bn EUR)

%Q/Q flat

%Q/Q annualized

•

192,07 191,32 190,69 189,18 188,16 187,97 188,44 189,38

Our calculations indicate that GDP growth in Spain could end near the -1.22% level in 2013 (admittedly, lower than our initial estimate of late 2012 of around -0.75%, but still better than consensus estimates).

-0,54% -0,10% 0,25% 0,50%

-2,16% -0,40% 1,00% 2,00%

•

The -1.22% GDP growth we project for Spain in 2013 can be split into two components. The “drag effect” (dynamics of last year) represents -0.86% (thus, accounting 70% of the total fall in GDP), while the “Current year dynamics” (attributable exclusively to 2013) show a much more benign pace of contraction of just -0.37%.

•

This -0.37% is the “base pace” that best describes the actual intensity of activity today. It should be therefore, the reference pace for 2014 GDP estimates (not the -1.22%). A rate that being so close to 0% provides enough credibility to positive growth estimates in 2014. Clearly, an aspect to be considered.

•

Our lower 2013 GDP estimate is not based in the figures released today for the Q2 GDP in Spain (0.1% q/q or -0.4% in annual pace) considered by us as positive. The reason behind our revision lies on the bad figures for Q4 2012 GDP (unknown to us at the time), that fuelled the “drag effect” for the entire 2013 in more than 50bps to the aforementioned -0.86%. (see the table).

Andbank estimates Nivel medio / Avg level GDP 12

190,8

Nivel medio / Avg level GDP 13 Nivel medio / Avg level GDP 13 (if all 2012 q/q = 0%)

B C

188,5 189,2

[B/A]-1 [C/A]-1 [B/C]-1

-1,22% -0,86% -0,37%

Tasa crecim Total esperado / T. Expected GDP growth 2013 Efecto arrastre / Drag effect (%) Dinamicas crecimiento / Growth dynamics 2013

Calculations made by Andbank

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

1st. Because of the quantity & quality of jobs being created in the US â&#x20AC;˘

Charles Gave defines perfectly this as one of its biggest worries about the medium term outlook for the US economy.

Corporate Review

… and this poor process of job creation in the US, has prompted structural changes in the median income level

•

Charles Gave demonstrates this by measuring first the difference in job growth for part time vs full time workers (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 earn now lower wages.

•

This can be clearly seen in the sharp decline in the real median income in the last 7 years.

•

Put simply (in words of Mr Gave), “Median income has slumped”

•

And we, in Andbank, strongly believe that this process requires a long time to be reverted…

•

… causing demand factors to exceed supply factors …

•

… which leaves us with our long held central scenario of disinflationary pressures.

Corporate Review

2nd. Why to think that this secular trend could now revert? 8,00

US Treasury Bond 10 Year Yield

8,00

7,20

6,40

5,60

4,80

4,00

3,20

2,40

1,60

The only explanation at all convincing to justify a change as decisive, should be based on: (1) The hypothesis of a structural change in the process of global disinflation. (2) or the hypothesis of a dramatic decrease in the globalization process itself, so that developed economies stop importing such deflation. Lords. That is simply not going to happen!

Apr-13 Jul-12 Oct-11 Jan-11 Apr-10 Jul-09 Oct-08 Jan-08 Apr-07 Jul-06 Oct-05 Jan-05 Apr-04 Jul-03 Oct-02 Jan-02 Apr-01 Jul-00 Oct-99 Jan-99 Apr-98 Jul-97 Oct-96 Jan-96 Apr-95 Jul-94 Oct-93 U S B enc hmark B ond - 1 0 Y ea r - Y ie ld Tullet Prebon

10 Yr YIELDS - DEVELOPED ECONOMIES ©FactSet Res earch Sys t ems

'84

'86

'88

'90

'92

US - 10 Year - Yield Canada - 10 Year - Yield Tullet Prebon Information

'94

'96

'98

'00

'02

UK - 10 Year - Yield Germany - 10 Year - Yield

'04

'06

'08

'10

'12

Japan - 10 Year - Yield ©FactSet Research Systems

Corporate Review

3rd. Because this adjustment within the secular trend could have been completed. 1. Tapering of QE does not mean, in any way, an increase in interest rates (as it was in 1994). 2. However, long term yields has increased by the same amount (as in 1994), and tripled that shift in relative terms 3. Tapering does not mean that the Fed is going to sell its Treasuries. 4. In fact, we project a three-steps “exit strategy” i.

One year of diminishing marginal expansion in Fed’s balance sheet (until 2Q 14).

ii.

One year of “stability” in the total size of monetary base (until 2Q 15).

iii.

A normalization of balance sheet’s size at the pace of Fed’s assets amortization (until 2Q 17)

iv.

Interest rates rise (conditioned on the activity pace approaches the potential rate)

Corporate Review

4th. Swap spread in the US remain at historical lows and this should normalize towards the 40-50 bps. Meaning that, with no inflationary pressures at sight that bring the swap curve upwards â&#x20AC;Ś, this can only be materialized through a decline in UST yields.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Financial Markets Performance Performance by Asset Class (1 month)

Performance by Asset Class (YTD)

(Performanc e in %)

Equity

-20

-15

-10

-5

Equity

S&P Index

5,6

S&P Index

Stoxx 600

5,2

Stoxx 600

Nikkei 225

10,1

MSCI Em Asia

8,0

MSCI Em Latam

Fixed Income

18,6 6,9 31,4

MSCI Em Asia

-5,5 -15,1

Fixed Income

German Government Bonds 10 Yr

0,7

US Generic Govt 10 Year Yield

-5,3

GBI EM Broad Asia

2,7 0,1

LATAM EMGILB 3- 5yrs Inc ome

-2,0

US Generic Govt 10 Year Yield

-0,4

CS Asian Bond Total Total Rtn

GBI EM Broad Latam

Alternative Investments

-2,6 -14,5

Alternative Investments

FTSE NAREIT Equ Reits

5,0

HFRI Fund of Funds Composite I

-0,3

1,4

Markit iBoxx TIPS Inflation- Li

-0,3

2,4 -3,6

Reut/Jeff Commodity Index 10,3

GOLD SPOT $/OZ

3,3

Credit Suisse Blue Chip Hedge 2,8

Reut/Jeff Commodity Index

7,6

HFRI Fund of Funds Composite I

-1,4

Credit Suisse Blue Chip Hedge

Figures as of date:

-10

Nikkei 225 MSCI Em Latam

4,5

-30

GOLD SPOT $/OZ Markit iBoxx TIPS Inflation-Li

-20,9 -8,1 2,4

29/07/2013

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

Corporate Review

Financial Markets Performance - YTD

130 125 120 115 110 105 100 95 90 85 80

GLOBAL EQUITY (Index 100)

+9.5%

+8,2%

Jan

Feb S&P 500 STOXX 600

Andbank, MSCI, S&P Corp, Stoxx

Mar

Apr

Euro STO XX 50 MSCI AC Asia

May

Jun

Jul

130 125 120 115 110 105 100 95 90 85 80

MSCI AC Asia P acific e x JP Latin America ÂŠFactSet Research Sys tems

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Equity â&#x20AC;&#x201C; 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).

Nature of Index

Today, our indicators show an aggregate score of -6.1 (down from -4.8), showing again a considerable degree of stress and suggesting that the market could be slightly overbought. Aggregate Result in our Flow & Sentiment Indicators

Buy signal Positive Bias Neutral Negative Bias Sell signal FINAL VALUATION

Market is Overbought

Current

Month

0 2 4 9 7 -4,8

1 1 1 8 11 -6,1

-5

-10

Area of Neutrality Sell bias

Buy bias

+10 Market is Oversold

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 Citi Economic Surprise Index Citi Macro Risk 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 -0,5 0,5 -0,5 -1 -0,5 -0,5 1 -0,5 -1 -1 -0,5 -1 -1 -1 -0,5 -1 -1 -1 -1 -1 0 -0,5

Corporate Review

Equity â&#x20AC;&#x201C; Mid to Long-term Outlook Fundamental Approach

Corporate Review

I guess that it will not catch you by surprise if I say that monetary expansion (QE) does not lead to an expansion in credit

Corporate Review

… and, as there is no Credit cycle …

… there is no economic cycle … … NOR A CORPORATE EARNINGS CYCLE!

Corporate Review

â&#x20AC;Ś which inevitably leads us to the conclusion (insistently defended) that the S&P performance has been a mere question of MULTIPLES!!

â&#x20AC;Ś which have expanded at the same pace as the monetary base.

At this point, everybody realizes that the million dollar question is: What will be the medium-term Money Impulse?

So let’s go with the million dollar question. What will be the medium-term money impulse?

According to our proxies for assessing the intensity of the QE program (these proxies are the Beveridge curve, the velocity of money and the risks assumed in the Fed’s balancesheet) …

… we can draw central and alternative scenarios for the future pace of the Fed’s QE and thus the future size of the central bank’s balance sheet.

This should help us determine the trend in PE multiples and thus, keeping our estimates for EPS stable, derive the target value for the S&P.

Corporate Review

Fed (21% of GDP)

ECB (18% of GDP) BoJ (32% of GDP)

BoE (22% of GDP)

Corporate Review

1st Scenario: Fed continues expanding monetary base at a monthly pace of $85bn

Report date:

23-MAY-2013

Legend USBC0065051 = USBC0065072 = USBC0064693 = FRBH41T2LNH@US = Dates 26-dic-2013 26-nov-2013 27-oct-2013 27-sep-2013 28-ago-2013 29-jul-2013 29-jun-2013 30-may-2013 30-abr-2013 29-mar-2013 28-feb-2013 31-ene-2013 31-dic-2012

Monthly Pace in QE Monetary Base (bn $) 3.684 3.599 3.514 3.429 3.344 3.259 3.174 3.089 3.004 2.929 2.844 2.741 2.673

24% of GDP

3m Change 255 255 255 255 255 255 245 246 264 257 200 125 75

85 3m Change in 3m Change Money Impulse 0 0 0 10 9 -9 -12 45 138 182 212 159 94

Money Impulse (in US$bn)

Corporate Review

2nd Scenario: Fed continues expanding monetary base but at a gradually slower pace (reducing the pace of monthly purchases by10bn each month) Report date:

23-MAY-2013

Legend USBC0065051 = USBC0065072 = USBC0064693 = FRBH41T2LNH@US =

26-dic-2013 26-nov-2013 27-oct-2013 27-sep-2013 28-ago-2013 29-jul-2013 29-jun-2013 30-may-2013 30-abr-2013 29-mar-2013 28-feb-2013 31-ene-2013 31-dic-2012

Monthly Pace in QE

Dates Monetary Base (bn $) 3.404 3.389 3.364 3.329 3.284 3.229 3.164 3.089 3.004 2.929 2.844 2.741 2.673

22.6% of GDP

QE implementation 15 25 35 45 55 65 75 85

-10

3m Change 75 105 135 165 195 225 235 246 264 257 200 125 75

3m Change in 3m Change Money Impulse -90 -90 -90 -70 -51 -39 -22 45 138 182 212 159 94

Money Impulse (in US$bn)

Corporate Review

Now let’s plot the monetary impulse under the two scenarios. Let’s go with the 1st scenario. In such a scenario, the “money impulse” will follow the path suggested by the blue dotted line (projected by Andbank) … … and, as such, growth in the PE multiple will follow a similar trajectory, which suggests … … a sharp reduction in PE growth in June (experiencing a slight contraction in the 3Q and stability in 4Q)

Money impulse under the 1st Scenario (Fed continues expanding monetary base at a monthly pace of US$85bn).

Corporate Review

Now let’s plot the monetary impulse under the two scenarios. Let’s go with the 2nd scenario.

In such a scenario, the “money impulse” path suggested in the chart points to a continuous re-pricing of equities, such that we could witness a 5% decline each month in the PE multiple of the S&P (relative to its previous 3-month value), starting this summer.

Money impulse under the 2nd Scenario (Fed continues expanding monetary base but at a gradually slower pace, reducing monthly purchases by 10bn each month.

Corporate Review

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 2013 PE ratio (ltm) at December 1st Scenario: 85bn monthly in QE

February March April May June July August September October November December

Money Impulse

PE ratio (3m% change)

45 -12 -9 0 10 0 0 0

2,3% -0,6% -0,5% 0,0% 0,5% 0,0% 0,0% 0,0%

PE 2013 Projected 14,15 14,15 14,51 15,04 14,07 14,44 15,04 14,14 14,44 15,04 14,14

These are the figures we must consider when assessing the fundamental value of the S&P

2nd Scenario: 10bn monthly slowdown in QE

February March April May June July August September October November December

Money Impulse

PE ratio (3m% change)

45 -22 -39 -51 -70 -90 -90 -90

2,3% -1,1% -2,0% -2,6% -3,5% -4,5% -4,5% -4,5%

PE 2013 Projected 14,15 14,15 14,51 15,04 13,99 14,23 14,66 13,50 13,59 14,00 12,90

Corporate Review

Using our two most probable scenarios, we can derive a reasonable range of valuation for the S&P 2013 Projected 2013 Projected 2012 EPS Growth EPS (%) EPS (US$)

S&P (under the 1st scenario) S&P (under the 2nd scenario)

103,79 103,79

2,42 2,42

106,30 106,30

2012 PE Multiple

PE muiltiple under the 2 scenarios

Target Price

13,36 13,36

14,14 12,90

1.503 1.371

Current Price

1.692 1.692

29/07/2013

This is the range of valuation we take as a reference for the S&P (1,371 â&#x20AC;&#x201C; 1,503).

Whenever the S&P breaches the limits during this year we recommend taking action.

Fundamental Change (%)

-11,1% -18,9%

Corporate Review

Conclusions 1.

The money impulse is not going to accelerate in the future. It could even slow down if the Fed just decides to expand the monetary base at a slower pace.

Therefore, the 2013 PE should stabilize at some point between 12.9 and 14.1 (well below the current level of 15 in PE ltm)

We keep our 2013 EPS growth estimates unchanged at 2.49% yoy.

Putting together all the factors (EPS & PE), we obtain a fundamental valuation for the S&P that falls within a narrow range (1,371 - 1,503)

We “fundamentally” feel more comfortable with the 2nd scenario: A gradual slowdown in the expansion of the monetary base starting in June-July, (although we recognize a low degree of predictive ability in any subject, and particularly in a political issue like this).

Therefore, we are more prone to think that 2013 PE should move closer to the lower band of our target range for PE (12.9 – 14.1) …

… so we still feel very comfortable with the PE proposal we made at the beginning of the year (in the region of 13.3), which, together with our EPS projection (+2.49%), gave us our target value of 1,420 for the S&P, a level we have decided to keep stable.

1,420 is nothing more than our target value and does not imply that we bet on an S&P price stalled at this level. Market participants think and make decisions differently each day, which is how prices move away from our “fair value”. Just take it as a reference at which we humbly think the market should quote at some point in the near to mid future.

Corporate Review

Our fundamental value and the expected performance for the S&P 500 and the Stoxx 600 (Europe)

P = EPS x PE

2013 Projected 2013 Projected 2012 EPS Growth EPS (%) EPS (US$)

S&P Stoxx 600 29/07/2013

103,79 22,1

2,42 11,4

106,30 24,62

2012 PE Andbank's Multiple projections for 2013 PE 13,36 12,43

13,36 13

Target Price

1.420 320

Current Price

1.692 299

Fundamental Change (%)

-16,0% 7,1%

Corporate Review

Why are we comfortable with our 2.49% estimate for EPS growth in the S&P, when consensus is at 6.4%?

Corporate Review

Why are we comfortable with our 2.49% estimate for EPS growth in the S&P, when consensus is at 6.6%? Analystsâ&#x20AC;&#x2122; estimates for S&P profit growth (%) +12.8%

+10.5%

+6.4%

Corporate Review

S&P – Fundamental Outlook Long-term view

18 2000

1981

1929

Price-Earnings Ratio

30 1901

1966

23.80

20 6

10 5

Long-Term Interest Rates

Price-Earnings Ratio (CAPE, P/E10)

Long-Term Interest Rates

2 1921

0 1860

1880

1900

1920

1940

1960

1980

2000

2020

0 2040

The Shiller PE* is in the region of 23.8, still well above its historical average (16.1). From this perspective, we cannot conclude that the S&P represents a historical “buy” opportunity. *Trailing PE using 10yr average earnings adjusted for inflation.

Corporate Review

Global Equity Ranking â&#x20AC;&#x201C; Fundamental Outlook Long-term view

P to Book Avg grade Hierarchy World South Korea Hong Kong Russia India Germany Japan Turkey Italy Brazil China Australia Poland France Eurozone Canada Israel Spain United States Taiwan Indonesia Mexico South Africa Thailand United Kingdom Sweden Chile Malaysia Switzerland

-2,20 -1,78 -2,59 -0,76 -0,27 -0,54 -0,60 -1,65 -1,53 -1,57 -0,85 -1,57 -0,75 -0,59 -1,35 -0,85 -1,31 2,21 -0,12 2,44 1,69 0,94 1,60 0,47 0,44 -0,07 0,78 1,69

2 3 1 12 17 16 14 4 7 6 11 5 13 15 8 10 9 27 18 28 26 23 24 21 20 19 22 25

Price to Earnings Avg grade Hierarchy -1,25 -0,91 -1,94 -0,81 -1,02 -0,55 -0,56 1,04 -0,40 -1,38 -0,23 -0,66 1,42 1,05 -0,56 0,22 1,59 0,54 0,87 0,41 0,81 0,09 0,66 1,96 0,76 1,63 0,44 1,81

3 5 1 6 4 10 8 22 11 2 12 7 24 23 9 14 25 17 21 15 20 13 18 28 19 26 16 27

Price to dividend Avg grade Hierarchy -0,97 0,28 1,74 0,40 0,08 -0,68 -0,02 0,40 0,95 1,77 1,43 3,66 0,23 -0,07 1,37 0,68 1,18 -0,45 -0,22 -0,34 -0,26 0,72 -0,27 0,10 0,83 -0,17 0,72 0,48

1 14 26 15 11 2 10 16 22 27 25 28 13 9 24 18 23 3 7 4 6 20 5 12 21 8 19 17

EV to EBITDA Avg grade Hierarchy -0,55 -0,87 -2,08 -1,32 -0,12 -1,15 -0,32 -0,42 0,64 -0,66 0,04 -1,13 0,22 0,26 -0,14 0,58 -0,24 0,85 0,60 1,00 0,55 0,67 1,12 1,46 0,22 0,89 0,41 1,36

7 5 1 2 12 3 9 8 21 6 13 4 14 16 11 19 10 23 20 25 18 22 26 28 15 24 17 27

Real yield ratio Avg grade Hierarchy -0,02 1,35 3,10 0,54 0,80 -0,36 -0,08 0,27 1,05 -0,88 0,17 -1,33 0,24 0,16 -0,68 -0,04 0,19 -0,31 -0,46 -0,23 -0,45 -0,32 -0,77 0,11 -1,13 -0,95 -1,44 -1,17

12 2 1 5 4 18 14 6 3 23 9 27 7 10 21 13 8 16 20 15 19 17 22 11 25 24 28 26

VALUATION composite Avg grade Hierarchy 5 5,8 6 8 9,6 9,8 11 11,2 12,8 12,8 14 14,2 14,2 14,6 14,6 14,8 15 17,2 17,2 17,4 17,8 19 19 20 20 20,2 20,4 24,4

1 2 3 4 5 6 7 8 9 9 11 12 12 14 14 16 17 18 18 20 21 22 22 24 24 26 27 28

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

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

Swap spreads have continued increasing during July for the 3rd straight month, in a clear sign that market reaction in the swap curve has been even more aggressive than in the global bond market. Despite this upward shift, it cannot be said that strong implicit inflation is expected in the long term (2.75% in USA and 1.98% in Eurozone).

An increase in the swap spread in both currencies means that Treasury and bund now reflect not only inflation expectations but something more. This higher spread points to the existence of a relatively higher demand for Treasuries and bund as a result of market fears. Maybe a sign that global macro risks & financial stress are now higher.

EUR swap spread is already at historical average level and, accordingly, the spread could remain stable at this level (stability in bund if we admit that the 10 yr swap fairly reflects inflationary pressures).

However, the swap spread in the US remain at historical lows and this should normalize towards the 40-50 bps. Meaning that, with no inflationary pressures at sight, this can only be materialized through a decline in UST yields.

USD: SWAP10 â&#x20AC;&#x201C; Govie10

EUR: SWAP10 â&#x20AC;&#x201C; Govie10

Corporate Review

Core Fixed Income – US Dollar Performance & Perspectives • Significant upward shift in the slope of the USD yield curve during the last two months. As in previous episodes, it has been the long end that has experienced a major pick-up in yield. • The 2-10 year slope is now fixed at 224 bps (well above its long-term average, and higher than the previous month’s 178 bps) • 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 foresee short maturities (0-2 years) remaining structurally well-anchored at historical lows (around 0.25%). Long end of the yield curve (10 years): Our fundamental range for the 10 yr Treasury yield remains stable at 1.5%-2.5%. Therefore, at current levels, and according to our expectation on growth and inflation, we feel structurally comfortable with gradually buying Treasuries at 2.50% - 2.60%. We estimate that the 10yr yields will trade again within our fundamental range in the medium term. Obviously, nobody can say where the “market dynamics” will bring the 10yr yield. In fact, seeing the intensity of the dynamics, the 3% level cannot be ruled out.

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Core Fixed Income – Euro Performance & Perspectives • Certain normalization has been seen after the sell-off in the long end of the curve last month. 10 yr bund yield has declined from 1.78% to 1.65% in the last four weeks. • After this, the 2-10 year slope is fixed now at 150 bps (well above its long-term average) • Fundamental outlook: Short end of the curve: Our fundamental view for economic growth and inflation in the Eurozone is consistent with a relatively dovish stance in ECB policy. We foresee short maturities (0-2 years) remaining wellanchored at historical lows (around 0%0,25%). Long end of the yield curve (10 years): Our fundamental range for the 10 yr bund yield remains stable at 1.5%-2.0%. Obviously, nobody can say how strongly these range limits can be broken. Recently, the lower band was broken by more than 25 bps, and maybe this time the upper band could be broken in the same way (25-35 bps). Nevertheless, according to our expectation on growth and inflation, we consider that at 2% the 10-year bund yield represents a good entry opportunity.

Corporate Review

Core Fixed Income â&#x20AC;&#x201C; EUR & USD Expected Performance

Figures as of date:

USD

EUR

29/07/2013

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 Performanc e Performanc e Performanc e Performanc e Short Term

Expected Performance (Fundamental)

29-Jul-2013

Short Term Target

2yr

0,15

0,00

-15

1,96

0,30%

0,03%

0,30%

0,15%

0,33%

0,45%

3yr

0,22

0,07

0,10

-15

-12

2,86

0,44%

0,04%

0,35%

0,22%

0,47%

0,57%

4yr

0,41

0,25

0,32

-15

-9

3,83

0,58%

0,07%

0,34%

0,41%

0,65%

0,75%

5yr

0,64

0,49

0,58

-15

-6

4,68

0,71%

0,11%

0,27%

0,64%

0,82%

0,91%

6yr

0,84

0,68

0,81

-15

-3

5,31

0,81%

0,14%

0,84%

0,95%

0,98%

7yr

1,03

0,88

1,04

-15

6,09

0,92%

0,17%

- 0,03%

1,03%

1,10%

1,01%

8yr

1,23

1,08

1,27

-15

6,83

1,03%

0,21%

- 0,25%

1,23%

1,24%

0,99%

9yr

1,48

1,32

1,54

-15

7,62

1,15%

0,25%

- 0,51%

1,48%

1,40%

0,96%

10yr

1,65

1,50

1,75

-15

8,45

1,28%

0,28%

- 0,84%

1,65%

1,55%

0,81%

2yr

0,30

0,25

-5

1,92

0,11%

0,05%

0,11%

0,30%

0,16%

0,41%

3yr

0,58

0,43

0,46

-15

-12

2,92

0,43%

0,10%

0,34%

0,58%

0,53%

0,92%

4yr

1,03

0,79

0,85

-24

-18

3,81

0,92%

0,17%

0,68%

1,03%

1,09%

1,71%

5yr

1,35

1,02

1,11

-33

-24

4,68

1,57%

0,23%

1,13%

1,35%

1,79%

2,48%

6yr

1,66

1,23

1,36

-43

-30

5,52

2,36%

0,28%

1,67%

1,66%

2,64%

3,33%

7yr

1,97

1,45

1,61

-52

-37

6,29

3,28%

0,33%

2,30%

1,97%

3,61%

4,27%

8yr

2,19

1,58

1,76

-61

-43

6,95

4,27%

0,37%

2,97%

2,19%

4,64%

5,16%

9yr

2,44

1,73

1,95

-71

-49

7,89

5,59%

0,41%

3,86%

2,44%

5,99%

6,30%

10yr

2,55

1,75

2,00

-80

-55

8,37

6,71%

0,43%

4,61%

2,55%

7,13%

7,17%

Duration

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

European Sovereign Risk Trends Periphery (CDS 5yr) 1400 PERIPHERAL

1200 1000 800 600 400 200

Portugal

Spain

Ireland

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Italy

Having significantly normalized in 2H2012 and 1Q2013, peripheral bonds have deteriorated abruptly in the last month (+100 bps in spreads)

Corporate Review

European Sovereign Risk Trends Core Countries

Belgium

France

Germany

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

Jul-12

Jun-12

May-12

Apr-12

300 275 250 225 200 175 150 125 100 75 50 25 0

Austria

This deterioration in market conditions has not affected the â&#x20AC;&#x153;first categoryâ&#x20AC;? of countries in the Eurozone (+10 to 15 bps in France, Belgium, Germany & Austria)

Corporate Review

Sovereign Risk Recommended Strategy â&#x20AC;&#x201C; Consistent with our APRI

CURRENT LEVELS FOR SOVEREIGNS

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

Peripheric

Recommendation Overweight

Greec e

10,05

840

Neutral

Portugal

6,45

480

445

Overweight

Ireland

4,40

275

150

Neutral

Spain

4,64

299

256

Overweight

Italy

4,42

277

257

Overweight

29/07/2013

We recommend start buying gradually at current levels, although admittedly, temporary increase in tensions should not be dismissed.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Corporate credit Recent Performance & Recommendation

Corporate Credit - EUR

Corporate Credit - USD

Itrax Main

200

140

180

130

CDX Main

120

160

110 140 100 120

100

Figures as of date:

29-7-13

EUR Corporates (Ittraxx): Last month, Itrax was quoting in the 130-140 bps area, and we considered those levels as “attractive”. Now corporate bonds trade in the 100 bps area, therefore being now expensive. We continue recommending entering this asset class at 125 bps. Best names are those that incorporate sovereign risk premium in their price. Above those levels, strong buy.

USD Corporates (CDX): We placed our “entry point” at 100 bps. After having reached that level we are now clearly below. Temporary extension in spread widening cannot be ruled out. Buy above 100 bps level. At 125 bps, Strong Buy.

Corporate Review

Credit â&#x20AC;&#x201C; HY EUR Recent Performance & Recommendation Markit iTraxx Europe Crossover 1000 900 800 700 600 500 400 300 200 100 0

Having broken the level of 500 bps in spread in June, we considered this asset class as Attractive.

Now, near the 400 bps, we consider this asset class as slightly expensive. Temporary extension in spreads widening cannot be ruled out. Buy in the 450-500 bps area. At 600 bps, Strong Buy.

Corporate Review

Corporate Credit â&#x20AC;&#x201C; EUR, USD & HY Expected Performance SHORT TERM OUTLOOK FOR EUR CREDIT - 3M - (ex-interest rate risk)

Spread effec t

Change (bp)

Price effect

From

Change

22,8

-0,80%

102,2

125

22,8

Spread effect

0,31%

Eur3m+

1,02%

0,31%

Coupon effect

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

SHORT TERM OUTLOOK FOR USD CREDIT - 3M - (ex-interest rate risk)

0,53%

0,64%

0,49%

-0,15%

Price effect

From

Change

12,8

-0,45%

102,2

115

12,8

Spread effect

1,56%

Eur3m+

1,02%

1,56%

Coupon effect

Total Effect Yield effec t

0,20%

100

25,5

0,25%

USLib3m+

0,74%

0,25%

0,64%

0,49%

-0,15%

-15

0,64%

0,58%

-0,06%

Price effect

From

-0,37%

74,5

10,5

1,42%

USLib12m+

0,74%

1,42%

Yield effec t

0,64%

0,58%

-0,06%

-6

Price effect

From

12,7

-0,45%

412,3

425

12,7

Coupon effec t

1,10%

USLib3m+

4,12%

1,10%

Total Effect

0,65% 0,64%

0,49%

-0,15%

-15

0,53%

Change

MID TERM OUTLOOK FOR European HY - 12M - (ex-interest rate risk) Change (bp)

Price effect

From

37,7

-1,32%

412,3

450

37,7

Coupon effec t

4,80%

USLib12m+

4,12%

4,80%

Total Effect

3,48% 0,64%

0,58%

-0,06%

Spread effec t

Yield effect

-6

0,20%

Change

1,05%

Change (bp)

Yield effect (5yr bond)

0,53%

10,5

SHORT TERM OUTLOOK FOR European HY - 3M - (ex-interest rate risk)

Spread effec t

Change

Change (bp)

Total Effect

1,11% -6

74,5

MID TERM OUTLOOK FOR USD CREDIT - 12M - (ex-interest rate risk)

Change (bp) Coupon effect

From

-0,89% -0,64%

Yield effec t (5yr bond)

MID TERM OUTLOOK FOR EUR CREDIT - 12M - (ex-interest rate risk)

Spread effec t

Price effect

25,5

Total Effect

-0,49% -15

Change (bp)

Change

0,20%

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 but the notion of “sector risk” is gaining momentum in Europe. Despite this, in many cases (French, German and many northern names), bank bonds are extremely expensive.

The two investment categories we recommend within this universe are:

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

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

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

1st. The primary driver of the commodities super-cycle (the construction-led heavy industrial boom) has now slowed and we suspect that this slowdown is clearly structural (not just cyclical) For a long time, market consensus was that Chinese growth seen in the last decade could be maintained, and with it, the industrial boom. It was on the back of this that the super cycle in commodities took place. However, we have argued on many occasions that, despite our positive outlook for Asia (and China in particular), the latest 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 heavy industrial boom (and growth) has slowed in a manner that is structural and not just cyclical.

CHINA HEA VY INDUSTRIA L BOOM & COMMODITY PRICES

-25

-50

-75

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

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

©Fact Set Res earch Sys tems

1. This new “normal” will not necessarily imply big additional falls in industrial commodity prices … 2. … but it means that the prospects for a new structural bull market for the next few years are dim. 3. Chinese heavy industrial output growth looks likely to stabilize at around a level which has been associated with a zero y/y growth in commodity prices.

Corporate Review

2nd. Those who think that India will pick up China’s baton as a leader in commodity consumption … seem increasingly likely to be disappointed

GDP GROWTH & INDUSTRIAL A CTIVITY - INDIA

-4

-8

-8 '09

'10

'11

'12

'13

GDP Growth (%y/y) - C ons tant P ric es (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

©FactSet Res earch Sys tems

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

Corporate Review

3rd. Metal producers and miners have been clearly caught off guard The pace at which some producers have expanded capacity of production 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, what will eventually will help to tighten the markets, although WILL NOT PREVENT THE OVERSUPPLY IN METALS & MINERALS during a long period of time (years), and this should keep prices subdued

220

WORLD PRODUCTION OF INDUSTRIAL & ENERGY COMMODITIES (Index)

220

200

180

160

140

120

100

80 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 P rimary A luminium

C rude Steel

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

Energy (O il, Gas , C oal) ©FactSet Res earch Systems

Corporate Review

Conclusions 1. The primary driver of the commodities super-cycle has now slowed and we suspect that this slowdown is clearly structural 2. China must “sacrifice” growth, what means that must not embark in Pharaonic programs of economic stimulus if it wants to ensure the necessary credibility of its currency and bond market. This calls into question the hitherto bright horizon for commodities 3. India is definitely losing steam, which evidences the lack of an obvious replacement of the biggest source of incremental demand for commodities. 4. Abundant capacity in industrial related commodities makes an oversupply in metals & minerals inevitable for a long period of time. 5. This new “normal” will not necessarily imply big additional falls in industrial commodity prices but it means that the prospects for a new structural bull market for the next few years are dim. 6. Therefore, we consider in our central scenario for industry related commodities, prices could remain within a range.

Corporate Review

Dry Commodities Real vs. speculative demand Spot Commodities prices continue decreasing at a very gradual pace while Futures prices are adjusting at a faster pace.

The price for transporting dry commodities remains stable at record lows (suggesting that volumes and thus real demand are also low). Despite the structural downtrend seen in commodity prices during 2H2012 and 2013, spot and derivative prices remain high, as suggested by a low real demand (Baltic index). Based on this approach, we maintain

our long-held cautious stance in dry commodities for the medium to long-term view.

Corporate Review

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

2.000 1.800 1.600 1.400 1.200 1.000 800 600 400 200 0 '68 '72

the nominal price of gold should stay near US$1,000.

'76 '80 '84 '88 '92

'96 '00 '04 '08

'12

2.000 1.800 1.600 1.400 1.200 1.000 800 600 400 200 0

50 45 40 35 30 25 20 15 10 5 0

GOLD PRICE / OIL PRICE

This ratio has breached the historical average value of 12.85 for first time in 5 years. This shift has been due largely by oil price increase

25 20

©FactSet Research Systems

GOLD PRICE IN TERMS OF EQUITY

'96

'98

'00

A ndbank, Dow Jones & Com pa ny

'02

'04

'06

'08

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

50 45 40 35 30 25 20 15 10 5 0

A ndb ank, London Bullion Market A ssociatio n

©FactSet Rese arch Systems

GOLD – NOMINAL vs REAL PRICE: The gold price continues experiencing a significant adjustment and is now around US$1,050 in real terms. Despite this, it is still expensive from a historical perspective. The gold price in real terms should approach US$800 (LT average), which means, given that the deflator is at 116.4, that the nominal price of gold should stay near US$1,000. GOLD PRICE / OIL PRICE: The value of this ratio stands at 12,41 (below the historical average value of 12.85 for first time in 5 years). 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 19.9. Currently this ratio is fixed at 11.83. If the DJI remains stable at DJ Industria l Average - Inde x P rice Lev el / London Gold (AM Fix ing $/ozt) - Price current levels, the gold price should decline towards US$800 in Trendline: A ve ra ge order for this ratio to be near its LT average level.

'94

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

Gold, De flated by US infla tion Andbank, Dow Jones & Company

'10

'12

©FactSet Rese arch Systems

Corporate Review

Central bank actions explain much of the gold price behaviorâ&#x20AC;Ś but they do not seem to be feeding the chances of a new rally.

Corporate Review

Precious Metals Gold: Toward the US$1,150 area? Criteria

Andbank's Long Term considerations

Rationale

Financial Liberalization in China

Expensive

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. There is a perception that the new Chinese government will announce reforms in the "Third Plenum" oriented toward a financial liberalization that could widen the investment alternatives for Chinese investors. This could significantly reduce the demand for gold.

Gold in Real Terms

Expensive

The gold price continues experiencing a significant adjustment and is now around US$1,050 in real terms. Despite this, it is still expensive from a historical perspective. The gold price in real terms should approach US$800 (LT average), which means, given that the deflator is at 116.4, that the nominal price of gold should stay near US$1,000.

Gold in terms of Oil (Gold / Oil)

The value of this ratio stands at 12,41 (below the historical average value of 12.85 for first time in Slightly expensive 5 years). 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.

Gold in Terms of Equity (Dow / Gold) Expensive

The 15yr average value for this ratio is 19.9. Currently this ratio is fixed at 11.83. If the DJI remains stable at current levels, the gold price should decline towards US$800 in order for this ratio to be near its LT average level.

There is no evidence of a high correlation between QE and the price of gold. However, speculation on additional QE helps keep gold well supported, although we do not support such hypothetical correlation.

Gold & Money Impulse

Expensive

We have revised this approach to incorporate the money impulse coming from the central banks expanding their monetary base (MB). Since 2008 the Fed has increased the MB by US$2.3trn (from 800bn to 3,100bn); the ECB has increased the MB by US$450bn (from 1,250bn to 1,700bn); the BoJ by US$600bn (from 1,000bn to 1,600bn); and the BoE by US$400bn (from 100bn to 500bn). In total, the four main central banks have expanded money by US$3.75trn (from 3.15trn to 6.9trn), i.e. 2.19 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.

Debt crisis in Europe.

Expensive

The satisfactory political resolution of the debt crisis in Europe should help ease systemic concerns and bring the gold price down to well below current levels.

Final Assessment

Expensive

We consider that gold remains expensive. In the long term, we feel comfortable setting the target price for gold in the US$ 1,100 -1,200 area.

Gold & QE

Corporate Review

Commodities (by groups) Viewed in Perspective ENERGY

x 1.97 in 10Y => 7.0% annual rate

CROPS

x 2.2 in 10Y => 8.0% annual rate

600

500

400

300

200

100

600

'04

'05

'06

'07 W TI

'08 Co a l

'09

PRECIOUS METALS

'04

'05

'06

'08 P la tin um

'04

'05

'09

'10

Gold

'06

1.000 900 800 700 600 500 400 300 200 100

'07

0 '13

'12

x 4.7 in 10Y => 17% annual rate

P a lla dium Andbank, NYMEX

'11

Na tura l Ga s

Andbank,D ow Jones & Company

1.000 900 800 700 600 500 400 300 200 100

'10

'11

'12

'13

'07

W he a t

'08

'09

So ybe a n

'10 Sug a r

Andbank, CRB

700

'11

'12

600

0 '13

MINERALS

x 2.54 in 10Y => 9.8% annual rate

700

600

500

400

300

200

100

'04

'05

'06

'07 C o p pe r

Andbank, London Metal Exchange

'08

'09

Nick e l

'10

'11

'12

0 '13

Corporate Review

Commodities Andbank’s Assessment CURRENT 10 YEAR Index100 (T-10Y) PERFORMANCE Energy

ANNUALIZED GROWTH

ANDBANK'S ASSESSMENT

Oil Coal Gas

197,3 345,4 169,7 76,9

97% 245% 70% -23%

7,0% 13,2% 5,4% -2,6%

FAIR VALUE EXPENSIVE FAIR VALUE VERY CHEAP

Corn Wheat Soybean Sugar Cotton

216,0 253,8 188,9 265,1 221,4 150,7

116% 154% 89% 165% 121% 51%

8,0% 9,8% 6,6% 10,2% 8,3% 4,2%

FAIR VALUE FAIR VALUE FAIR VALUE EXPENSIVE FAIR VALUE CHEAP

Precious Palladium Platinum Gold Silver

211,6 431,7 203,1 367,7 399,2

112% 332% 103% 268% 299%

7,8% 15,7% 7,3% 13,9% 14,8%

FAIR VALUE BUBBLE FAIR VALUE EXPENSIVE EXPENSIVE

Minerals Cooper Nickel

254,6 397,1 151,3

155% 297% 51%

9,8% 14,8% 4,2%

FAIR VALUE EXPENSIVE CHEAP

Crops

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

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

USD/EUR Pointing to a lower USD (higher EUR) 35

FOREIGN CURRENCY RESERVES (monthly imports equivalent)

5 0

As of June, four out of the six central banks most actively holding currency reserve, decided to increase exposure to the USD. China increased the presence of currency reserve from the 20.1 monthly imports equivalent near to the 22 area. India, Korea and Brazil followed the same pattern. This fact could be behind the strong performance of the USD seen in May. We still expect a normalization of the nominal value of currency reserve held by these central banks, towards the levels seen in the 1999 – 2007 period, although this is probably going to be a long process. As this occurs, the USD will lose on of the big supports so far has had.

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

A ndbank, Natio nal Central Banks

Japan S .Ko rea

U SD FLO W TO THE W ORLD

6,00

The flow of USD with respect the global volume of commercial trade has reached 1998 levels. Although this may sound like a shortage of USD (apparently supportive for that currency), from a historical perspective it is not. So, we consider this factor as market-neutral for the USD in the short term. In a longer-term view, we see some aspects (such as the development of a RMB debt market and the RMB as a new reserve currency) as somewhat negative for the USD, although we are still far from that point.

5,00 4,00 3,00 2,00 1,00 0,00 -1,00

'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Quarterly US Current Account deficit as a % of Quarterly Global Trade Recess ion P eriods - United States

US Bureau of Economic Analysis

Corporate Review

USD/EUR Andbank’s Assessment Criteria

Tensions in Europe

Global accumulation of the Reserve Currency

Short positioning in € (CFTC. Options & Futures, ECA cur)

US Current acc ount balance

Final Assessment

Effect on USD (Short- Term view)

Effect on USD (Longer- Term view. >12m)

NEUTRAL

NEGATIVE

APRI Composite for the European peripherals shows an aggregate score of 50.6 in July, suggesting that this group of countries not only have slow ed the pace of deterioration, but in aggregate they have stopped falling and even have show n some positive dynamics in certain economic aspects.

NEGATIVE

As of June, four out of the six central banks most actively holding currency reserve, decided to increase exposure to the USD. China inc reased the presence of currenc y reserve from the 20.1 monthly imports equivalent near to the 22 area. India, Korea and Brazil followed the same pattern. This fact could be behind the strong performance of the USD seen in May.We still expect a normalization of the nominal value of c urrency reserve held by these central banks, towards the levels seen in the 1999 – 2007 period, although this is probably going to be a long process. As this oc curs, the USD will lose on of the big supports so far has had.

NEGATIVE

NEUTRAL

NEGATIVE

NEUTRAL TO NEGATIVE (1,30 - 1,35)

NEGATIVE (1,40)

Rationale

Short contracts (non-commercial) in EUR are 94k (more than last month’s 71k), while long contracts are 62.9k (much less than the 91k seen one month ago). The net position in EUR is thus -31k (last month's net positioning was long euro by 20k c ontracts). Current positioning could be considered slightly positive for the EUR (negative for the USD) in the short term. The flow of USD with respec t the global volume of commerc ial trade has reac hed 1998 levels. Although this may sound like a shortage of USD (apparently supportive for that currency), from a historical perspective it is not. So, we consider this fac tor as marketneutral for the USD in the short term. In a longer-term view, we see some aspects (such as the development of a RMB debt market and the RMB as a new reserve currenc y) as somewhat negative for the USD, although we are still far from that point. Since 2008 the Fed has expanded the monetary base by US$2.3trn, while the ECB has done so at a much slower pac e. Despite the fac t that the market has begun to inc orporate a sort of tapering in the Fed’s QE, it is not c lear when this will take place. Meanwhile, the ECB has started to move, shrinking the monetary base in recent months. We consider this divergence in monetary polic y to be supportive for the euro (negative for the USD).

Corporate Review

Asian Fx

These currencies have been hit hard during Q2 2013 (and accumulate YTD losses of -3.2%)

108

EM ASIA CURRENCIES vs USD (inv erse quote - index)

108

106

104

102

100

94 However they look to be stabilizing recently

PHP

MYR

Jul 13

Andbank, WM Reuters Factset

THB

Jun 13

IDR

May 13

Apr 13

Mar 13

Feb 13

Jan 13

92 90

CNY ÂŠFactSet Research Systems

Corporate Review

Asian Fx

The RMB’s satellites are a “buy” Asian Currency Diffusion Index

Diffusion Index 3mth smoothed (lhs) Asian curr Index (rhs)

1,300

Jun-13

Mar-13

-0,50

Dec-12

0,800

Jun-12

-0,40

Sep-12

0,850

Mar-12

-0,30

Dec-11

0,900

Jun-11

-0,20

Sep-11

0,950

Mar-11

-0,10

Dec-10

1,000

Sep-10

0,00

Jun-10

1,050

Mar-10

0,10

Dec-09

1,100

Jun-09

0,20

Mar-08

STRONG SELL

1,150

Sep-09

SELL

0,30

Mar-09

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

BUY

1,200

Dec-08

Asian currencies are still cheap relative to the USD.

0,40

Sep-08

POSITIVE OUTLOOK

1,250

Jun-08

STRONG BUY

0,50

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.

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

Overall velocity of money. As velocity increases, the “animal spirits” grow in financial markets. We take the variation rate in 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.

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.

Performance of the RMB.

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.

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Are Real Yield differentials a good proxy for currency performance? 6,00

REAL Y IELDS CORE COUNTRIES (10 year bonds)

6,00

5,00

4,00

3,00

2,00

1,00

0,00

-1,00

-2,00

-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 King dom ÂŠFactSet Res earch Systems

According to this approach, most analysts would have recommended JGBs in the last two years as the most appealing fixed income investment, since they provided the highest real yield during the 20112012 period.. In doing so, investors would demand a high quantity of JPY currency, leading to a significant appreciation vs the rest of currencies showing lower real yields, until this gap is closed.

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â&#x20AC;Ś However, 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 & F x - 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

ÂŠFactSet Research Systems

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

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Short JPY – Long EUR: The new government seems desperately keen to achieve now what it did not achieve in the last decade

The BoJ has formally announced a very aggressive monetary easing through an asset purchase program (equivalent to 30% of GDP). It has set the new inflation target at 2% (having been unable to reach a structural 1% CPI growth over the last decade) In fact, there has been deflation in 12 of the last 13 years and the only year with inflation “above” zero was 2008, with prices rising a paltry 1.37%. So it’s time for reflection. If the BoJ has been unable to reflate the economy after countless QE programs, what will it have to do in order to accelerate prices by 2%? Honestly, I cannot imagine how aggressive the monetary expansion will have to be. Therefore, we fear that this is not going to feel great for the JPY.

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How far and how fast can the JPY depreciate? EUR/JPY (EURJPY-FX1)

HOW FAR? Viewing the 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 0.2 5 0 .4 0 0 9 :3 2:4 2 A M

0 .3 1 % JP Y

D e c - 12 - Jul-1 3

130 125 120 115 Ja n

Feb

Ma r

Ap r

Ma y

Ju n

Ju l

EUR/JPY (EURJPY-FX1)

1 3 0.2 9 0 .4 4 0 9 :3 1:4 2 A M

0 .3 4 % JP Y

Jul-9 3 - J ul-1 3

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

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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. If Shinzo Abe does get the BoJ to adopt more radical measures – and given the dynamics in Japanese exports and its current account (see the charts), this seems all the more likely – it is conceivable that the euro may bear all the weight. 5. Why? It’s simply a question of “money supply power”. The ECB is straitjacketed with far more restrictions than the BoJ. 6. EMU financial conditions are improving … spreading the perception that a systemic crisis in the euro region is easing. 7. 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. 8. According to the OECD, the yen remains overvalued by nearly 9% against the euro.

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

Exports are improving … '04

'05

'06

'07

'08

'09

'10

'11

-20 -40 -60

'12

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

Japan Cust oms

30000 25000 20000

CURRENT A CCOUNT - JA PA N

30000

… and finally, the JPY depreciation would be paying off

25000 20000

15000

10000

… what gives even more legitimacy to continue doing it.

5000 0 -5000

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

5000 0 -5000

(M O V 3 M ) B o 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

Sources: Bank of Japan, Factset, Gavekal

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Summary Table for financial market prospects & Asset Allocation Proposal

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Market Outlook Summary Table Short Term Asset Class

Instrument

Performance

Fundamental

Performance

30/07/2013

(1-2 months)

Target

(12 months)

1.690

(0%, -5%)

1.420

-16,0%

300

(0%, -5%)

320

6,8%

Mexbol

40.182

(0%, -5%)

46.000

14,5%

Bovespa

48.854

(0%, -5%)

52.000

6,4%

419

(0%, -5%)

475

13,5%

Bund 10y

1,65%

1,55%

1,75%

0,81%

Treasury 10y

2,55%

7,13%

2,00%

7,17%

8,4%

S&P Eurostoxx 600 Equity

MSCI Em. Asia

(1) Expected performance includes price and coupon effect. (2) Credit performance excludes interest rate effect, and refers to spread performance and coupon (FRNs). Changes in the month: 1. We have increased target yields for 10yr Brazilian bond (from 9,9% to 10,5%)

Fixed Income (1)

Fundamental

Current

Sovereign Risk

Spain

297

(0%, -5%)

250

Europe

Italy

276

(0%, -5%)

225

8,5%

(-150 p.b during 2013)

Portugal

465

(0%, -5%)

400

11,5%

(spread levels

Ireland

218

(0%, -5%)

200

5,3%

in 10Y c ash bonds

Greece

817

(0%, -5%)

600

0,27198

Average

314

269

8,4%

115

1,11%

We have increased target yields for 10yr Mexican bond (from 4,77% to 5,20%)

vs German bund)

We have increased target yield for 10yr bonds of Chile, Peru & Colombia (60bp decrease after the recent sell of. Taking as a benchmark, the rally of 40 bp expected in Mexican bond from current levels)

Itraxx Main (â&#x201A;Ź) Corporate Credit - EUR CDX Main (US$) & usd (2) X-Over (EUR)

102,161

-0,49%

74,458

-0,64%

1,05%

412,279

0,65%

450

3,48%

(1) Expected performance includes price and coupon effect. (2) Credit performance exclude interest rate effect, and refers to spread performace and coupon (FRNs)

Corporate Review

Market Outlook Summary Table Short Term Asset Class

We have increased target yields for 10yr Mexican bond (from 4,77% to 5,20%)

Instrument

Fundamental

Current

Performance

Fundamental

Performance

30/07/2013

(1-2 months)

Target

(12 months)

EM bonds

Taiwan

1,51%

(0%, +5%)

0,69%

8,1%

Asia (in local)

Thailand

3,90%

(0%, +5%)

3,09%

10,4%

-50 bp c onvergenc e

Indonesia

8,10%

(0%, +5%)

5,78%

26,7%

during 2013

Malaysia

3,98%

(0%, +5%)

2,98%

12,0%

India

8,24%

(0%, +5%)

7,79%

11,8%

Philipines

3,98%

(0%, +5%)

3,64%

6,6%

EM bonds

Brazil

10,88%

(0%, +5%)

10,50%

13,9%

Latam (in local)

Mexic o

6,10%

(0%, +5%)

5,20%

13,3%

-25 bp c onvergenc e

Colombia

6,93%

(0%, +5%)

6,15%

13,2%

during 2013

Peru

5,17%

(0%, +5%)

4,42%

11,2%

Chile

5,28%

(0%, +5%)

4,54%

11,2%

Oil

103,05

(0%, -5%)

-17,5%

CRY

282,04

(0%, -5%)

300

6,4%

Gold

1326,50

(0%, +5%)

1200

-9,5%

Commodities

EUR/USD Fx (US$ perspective. In the EUR/JPY JPY exchange rate, under USD/JPY the JPY perespective )

1,326

1,4

-5,3%

130,0

(0%, +5%)

160

-18,8%

98,0

(0%, +5%)

110

-10,9%

MXN/USD

12,8

(0%, +5%)

12,15

-4,8%

BRL/USD

2,3

(0%, +5%)

2,4

5,6%

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Global Asset Allocation Proposal Global Asset Allocation Proposal Conservative Max Drawdown

Moderate

< 5%

5%/15%

Strategic Tactical (%) (%)

Asset Class

Balanced

Growth

15%/30%

30%>

Strategic (%)

Tactical (%)

Strategic (%)

Tactical (%)

Strategic Tactical (%) (%)

Money Market

Fixed Income Short-Term

Fixed Income OECD Government

Core Fixed Income

Peripheral Risk Corporate Invest. Grade Fixed Income EM / HY

Fixed Income Asia

2,6

5,0

7,0

4,6

Fixed Income Latam

2,6

5,0

7,0

4,6

High Yield Equity OECD

2,6 5

5,0 15

7,0 30

4,6 55

US Equity

0,8

2,3

4,2

7,7

European Equity

4,4

12,8

23,9

43,4

Equity Emerging

Asian Equity

0,0

4,8

9,0

10,7

Latam Equity

0,0

3,2

6,0

7,1

Commodities Risk Parameters(1)

0,0

2,5

3,3

4,2

100

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) Risk parameters are based on Strategic positioning

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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.