GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Andbank’s Monthly Corporate Review August-September 2016
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Contents Executive Summary
3
The month in charts
4
Country Pages USA
5
Europe
6
China
7
India
8
Japan Brazil Mexico Argentina
9 10 11 12
Equity Markets Fundamental Assessment Short-term Assessment. Risk-off shift probability Technical Analysis. Main indices
13 13 13
Fixed Income Markets Fixed Income, Core Countries Fixed Income, European Peripherals Fixed Income, Corporate Bonds Fixed Income, Emerging Markets
14 14 15 15
Commodities Energy (Oil) Precious (Gold)
16 17
Forex
18
Summary Table of Expected Financial Markets Performance
19
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Executive Summary USA - US growth is likely to remain on an up move. the risks seem balanced: From a local perspective, we do not fear either a big economic slowdown or a recession. The near record low yields certainly reflect a more pessimistic assessment of the economic outlook than ours. Europe - After the strong start of the year, GDP would have slowed down in the second quarter. Readings could worsen in the next few months (as suggested by the latest ZEW index). PMIs registered a widespread advance on the manufacturing front in June, whilst worse readings on the service PMI followed in France and Germany. Investment remains fragile, while consumption growth remains supportive. We keep our target price for the STXE 600 at 312, although we consider it more as a floor due to the very conservative assumptions we have made. Spain - Just small steps in the political arena since the last elections. Minority government with PSOE abstention as central scenario, as a third election would reinforce PP votes, harming the rest of the political parties. China – The PBOC still claims to be aiming for a “basically stable” exchange rate vs both the US dollar and the CFETS. Since 3rd June, however, the Renminbi has weakened both in trade-weighted terms and against the dollar. Continued declines may leave the PBOC sorely lacking in credibility in the eyes of global investors. India – Renewed US-India entrenched link may have important geopolitical and economic implications for New Delhi. An informal alliance with India will help the USA to strengthen its grip across the whole of Asia. On the other hand, India is also receiving support from China, which is also seeking closer cooperation with India under its OBOR initiative. In sum, India’s pivot to the West is real and it will likely continue, while regional cooperation with China will remain. Japan – Japan has a track record of taking the advice of renowned US economists before making big policy shifts. In that regard, considering Bernanke’s visit and Abe’s victory and having reached the limits of the unconventional monetary policy, there is a widespread perception that Japan could take the experiment further by adopting so-called helicopter money. Brazil - In a longer and more detailed decision statement the central bank said its nine-member board voted unanimously to leave the benchmark Selic rate at 14.25 percent, in a clear sign of the hawkish identity of the new chair and board of governors. In our view, the Central Bank has gained the necessary credibility to believe that the inflation problem will be fixed in 2017, and thus, rate cuts could be more intense (which will no doubt represent a big support for the economy and the government credit metrics). Mexico - Median forecast for 2016 GDP has been cut to 2.30% (from 2.35%). Forecast for 2017 GDP is at 2.6% growth. Equity markets have recovered much of the losses generated by the referendum in the United Kingdom. The rally responds to an environment of seeking return that has caused the S&P 500, the Dow Jones and Mexbol to trade at historical highs as investors moved to US equities and also EM Equities. Argentina - 1H 2016 saw a fall in activity in mainly all sectors. Through May GDP declined 1.1% YoY. A recovery is expected during 2H, driven by: lower fiscal drag, lower inflation, lower interest rates, tax amnesty plan spillover, recovery of trading partners (i.e., Brazil) and an increase in government spending.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
The month in charts Companies are hoarding cash globally (except in the US)
Proprietary projections estimate stable global growth
Libor-OIS spread (Overnight Index Swap)
Are Emerging economies starting an investment cycle?
Hard commodities seem to have changed course
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
USA:
Is America working? We have no doubts about this
Do you feel dizzy?
Our outlook for the Economy & Risks US growth is likely to remain on an up move: (1) Consumption growth averaged 2% in 2010-2013 and accelerated to 3% in the past 11 quarters, powered by a rising labor market, labor income (which has managed to grow at 4.4% p.a), improving consumer confidence, and strong household balance sheets. (2) The housing sector picked up steam and the improvement was seen across a broad array of indicators: construction, sales volumes, and home prices. We expect the housing sector to help maintain growth through the rest of the year, with mortgage rates declining to near historic lows, boosting the prospects for owner-occupied housing, a laggard so far in the recovery. (3) Another tailwind to growth this year likely comes from government spending. Fiscal policy subtracted from growth for much of the recovery, but has become a small positive since 2015. (4) Business investment, on the other hand, has been slowing. What began as a weakness concentrated in natural resource industries has turned into a more general downturn in spending on equipment and structures. Overall, business investment contracted 4.5% in Q1, and early indicators point to no growth in Q2. However, we expect H2 to fare a bit bitter. In sum, the risks seem balanced: From a local perspective, we do not fear either a big economic slowdown or a recession. The risks remain focused on the external side (related to Brexit or renewed turbulence in China). Accordingly, we maintain our current forecast for GDP growth in 2016 (slightly below 2%). What is the bond market’s assessment? The near record low yields certainly reflect a more pessimistic assessment of the economic outlook than ours. But the strong performance of the equity and credit markets casts some doubt on the extent of the market’s growth pessimism. The Fed The repeated delays of 2016 have convinced many market participants that the FOMC is “constitutionally dovish” and will continue to find excuses not to tighten policy, despite the fact that PCE inflation has been gradually improving and will reach the Fed’s 2% target, driven by shelter, an acceleration in wage growth, and a pickup in services prices. Significant monetary policy divergence could eventually result in excessive dollar appreciation. Financial Markets: (A high ability to shrug off bad news) ! Equity market: Equity Bulls pushed the S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJIA) to new all-time highs. Interestingly, the push by Equity Bulls has been in the face of some negative geopolitical events, including a terrorist attack in Nice, a coup attempt in Turkey, the events in both Dallas and Baton Rouge. All in the aftermath of the Brexit vote. Where does this strength come from? Proven economic resilience, expectations for better economic growth and positive earnings surprise. The picture remains that of flat earnings, which will persist over the next year. We are slightly adjusting our year-end target for the S&P 500 from 1949 to a new 2000, based on the expected moderate recovery in EPS and maintaining a stretched PE of 17. Nevertheless, we consider the S&P as “EXPENSIVE” because: (1) Zero profit growth is not consistent with high stock valuations and 2Q results will show the seventh consecutive quarter of declining year/year operating EPS (-3%, but +1% ex-Energy). (2) Valuations are already at historical extremes, with the S&P 500 trading at a forward P/E of 17.6x, ranking in the 89th percentile since 1976. Most other metrics such as P/B, EV/EBITDA, and EV/Sales paint a similar picture. These valuations are only justifiable because of the historically low interest rate environment. (3) Many Financials will have lower profits if low interest rates persist. Our Bank equity research team this week cut their EPS forecasts by 5%7%. (4) Low rates will also detract from earnings by increasing the value of current pension liabilities through lower discount rates. In 2012, the pension liabilities of three firms combined to subtract nearly $2 from S&P500 EPS. We expect a similar effect this year from pension funds. (5) The fall in US unemployment hints at wage inflation. 5
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Europe:
Probabilities of exit from some other EU members are low ECB The ECB approaches its next meeting (21st of July) with increasing odds of some fine-tuning of the QE program as the scarcity problem increases. What could change? An extension of the program beyond March 2017 (6 months?), accompanied by an amendment in the criteria/ limits applied: (1) Purchases allocated as a percentage of the market value (debt weighted), rather than the current ECB capital key criteria. A controversial option, as this would favor Italian and French debt vs. German bonds. (2) Limits per ISIN being lifted up from the current 25/33%. This option has the advantage of having been activated twice in the past. (3) Removal of the depo rate as the threshold for purchases. This could liberate 500 bill. of German bunds that could become eligible. One clear effect could be a bullsteepening of the curve. (4) As an option of last resort we can see a depo rate cut, inflicting even more harm on a financial sector that is already being damaged. Macro front: Mixed picture After the strong start of the year, GDP would have slowed down in the second quarter. Readings could worsen in the next few months (as suggested by the latest ZEW index). PMIs registered a widespread advance on the manufacturing front in June, whilst worse readings on the service PMI followed in France and Germany. Investment remains fragile, while consumption growth remains supportive. Inflation expectations remain low, though have ticked up recently. Politics & Reforms United Kingdom: (1) Markets have mostly recovered the losses suffered in the days following the referendum, with volatility coming down. Domestic focused companies suffered the most, while global stocks have profited from the sterling pound decline. (2) Quick succession for Cameron, with Theresa May being appointed as Prime Minister only two weeks after the referendum. Mrs. May has already appointed two Brexiters as Secretary of Foreign Affairs and Secretary for the Exit from the EU, although Brexit is not in Mrs May’s 2016 agenda. (3) The EU, meanwhile, has preferred a “wait and see approach”, with the ball remaining in the UK’s court, as the UK has responsibility for invoking article 50 of the Lisbon Treaty to trigger the two-year period of exit negotiations. The EU has sent a clear message of principles: “free market access linked to free movement of people”. (4) Economic impact hard to estimate, but first numbers point to a slash of 0.5% growth in 2017 for the Eurozone, according to the ECB. Consumer confidence has already declined in the UK and could slide into recession before the end of the year. (5) BoE will probably cut interest rates at its next Meeting (on 4th August), after leaving them on hold in July. Spain: Just small steps in the political arena since the last elections. Ciudadanos and PP reached an agreement on the Congress President but still in negotiation time. Key dates: 3rd August (first vote), 5th August (second vote). Minority government with PSOE abstention as central scenario, as a third election would reinforce PP votes, harming the rest of the political parties. Sanction procedures from the EC have been opened on Spain and Portugal for not taking the necessary steps to meet the deficit targets in 2015. Both countries have made their case and stand ready to adopt adjustments on the expenditure front in 2016 and budget 2017. In the case of Portugal, the 2016 cuts amount to 0.2% of GDP and the 2017 cuts are expected to be 0.6% of GDP. Markets Equities (STXE 600): We keep our target price at 312, although we consider it more as a floor due to the very conservative assumptions we have made for sales growth (0%), margins (7.4%) and PE (14). In the Spanish Ibex, we keep our target price at 8347 (also considered a floor). Core bonds: Bund yield target at 0.20% Peripherals 10Y yields: Italy 1.4%, SP 1.3%, POR 2.8% 6 !Credit: IG Itraxx 75 (from 85). HY Itraxx to 325 (from 360)
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
China:
PBoC credibility under serious scrutiny PBoC credibility is under scrutiny The PBOC still claims to be aiming for a “basically stable” exchange rate vs both the US dollar and the CFETS. This claimed stability was true in the period from January to 3rd June (with the USDDXY declining by -5.4% and the CNY allowed to decline vs its CFETS basket but by a more moderate -3.9%); meaning that the CNY was in fact more stable vs the rest of currencies and also vs the USD. Since 3rd June, however, the Renminbi has weakened both in tradeweighted terms (-2.84%) and against the dollar (-1.8%), while the DXY has appreciated by 2.3%. Continued declines may leave the PBOC sorely lacking in credibility in the eyes of global investors. There are two possible explanations for this contradictory message from the PBOC and its actions: (1) Policymakers never intended to keep the currency stable. At the end of the day, as the PBOC itself noted, the global market share of China’s exporters was continuing to rise. Thus, a weak currency is in their own interest. (2) The relative stability seen in the period between May and June was indeed aimed at settling nerves about the outlook for the Chinese currency, but the PBOC’s action could prove to be short-lived, since it was certainly easy to carry out the supposed stability strategy because at the time, the USD was declining against major currencies. So the PBOC painlessly guided the CNY higher against the USD while still letting the trade-weighted rate decline. Certainly, the further depreciation of the CNY since the Brexit vote has received little attention, with investors keeping their calm and preventing a rerun of a global sell-off. But attention will return to the Renminbi if the PBOC allows the currency to depreciate further and capital outflows rebound. The longer the PBOC takes to meet its promised target of “stability”, the more difficult it will be to maintain control and the larger the scale of the interventions that will be needed to prevent capital outflows. Economics Private firms play a diminishing role in the country’s debt buildup: The nation’s private sector credit fell to 35% of national debt in 2015 (from 48% in 2008), while state sector debt rose slightly to 53% of total debt, since SOE investment surged in H1 2016. Recent policy easing and a rebound in credit growth has helped to avert the so-called “hard landing” that not so long ago many feared was imminent. In fact, the S&P has just revised up its growth forecast for China to 6.6% for 2016 (from 6.35%), and to 6.3% for 2017 (from just over 6%). However, the agency warned that this growth rate is unsustainable, given that credit growth has been running at about twice the pace of nominal GDP growth. Indeed, there are some signs that economic activity is recovering. However, we also acknowledge that underlying problems in the economy persist: (1) Problems of excess capacity and inefficient investment. (2) Continued reliance on credit to drive growth. (3) Concerns about the financial sector. We expect these imbalances to return to the forefront of policymakers’ minds now that worries about the immediate outlook have eased. Which means that the authorities should now accelerate the reform agenda to tackle these problems Reforms Infrastructure investment regulations eased: China Insurance Regulatory Commission (CIRC) announced that insurers will no longer need to obtain regulatory approval to invest in infrastructure. This results in their scope of investment being expanded. Insurers have invested a total of ($134.3B) into infrastructure projects since 2006. IPO funding: Chinese regulators have imposed tighter restrictions on new IPOs. This regulatory shift comes after last year’s turmoil following IPO liberalization. As a result, initial public offerings in China’s A-share market dropped 80% y/y in the first half of the year, which means that companies with financial problems are likely to be shut out of the market.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
India:
US-India entrenched link. What are the economic implications for India? The SSE has already reflected the fall in intermediation
Tremendous improvement in the external balance = Less need for funding = Increased capacity to absorb external shocks.
Credit has normalized at a much more sustainable pace. Good in terms of future path in NPLs.
The SSE has already reflected the fall in intermediation
A Megatrend might be taking shape right now, of course, in the region of the world where the most constructive and significant events occur. You might have heard that India has recently failed in its attempt to join the 48-country Nuclear Suppliers Group (NSG) due to the opposition of China. Admittedly, this has been a setback for Modi since access to the NSG would have improved India’s access to foreign nuclear technologies and because Modi has spent two years trying to boost India’s global clout. Nevertheless, the result itself was not significant when compared with the US support for India in the face of Beijing’s opposition because of the simple fact that the US support may have, according to our local sources, important geopolitical and economic implications. I guess that it was not for nothing that Obama defined the US’s ties with India as the “defining partnership of the 21st century”. During the Cold War, socialist India was closer to the USSR; this made the US favor Pakistan. But now, the rise of China is pushing India and the US closer. I also ask myself, What could strengthen the US-India link? What could the economic implications be? I started by picking up the phone and talking to all my specialized colleagues in that part of the world. What follows is a synthesis of all the information gathered and some plausible conclusions. The US needs India to maintain its current primacy in Asia. For that reason, an informal alliance with India will help to contain China’s bid for regional hegemony. Just recall that the US already maintains long-term alliances with Japan, South Korea, the Philippines and Australia and is strengthening ties across Southeast Asia. That is why bringing India into the US-led security network is critical because its sheer size and its location near the Persian Gulf and the African seaboard, which gives access to sea lanes carrying China’s oil and gas imports. In sum, with India on board, the US can strengthen its grip across the whole of Asia. All this should not sound so strange since, in fact, the US-India links began to tighten a few years ago. The origins of this recent US-India strategic relationship date back to their nuclear agreement in 2005 (although, admittedly, relations had been weakened when Modi came to power in 2014, mainly due to some trade disputes -India’s purchase of French aircraft rather than US ones-, the arrest of an Indian diplomat in NY, and even the denial of a US visa for Modi). However, US-India relations have improved rapidly under India’s current leadership: (1) In 2015, Modi and Obama signed a “Joint Strategic Vision for the Asia-Pacific and Indian Ocean Region”. (2) Both sides have renewed a 10-year defense framework agreement (“Maritime Security Dialogue”). For its part, India is also motivated to strengthen the link with the US for several reasons: 1. There is an economic imperative to attract foreign capital, especially US capital, since the US is already India’s top trade partner when services are included. There is already talk of a free-trade agreement. 2. India would also like US investors to open factories in India, which could accelerate Modi’s “Make in India” campaign. 3. It is no coincidence that India has abolished the cap on foreign investment in its defense industry. The US offers India access to the advanced technologies needed to strengthen its industry and military. 4. India is also motivated by Beijing’s long-standing strategic partnership with Pakistan, where China is preparing to invest billions of US dollars in a new strategic transport corridor under its OBOR initiative, while Chinese companies are expanding their presence in Sri Lanka, Bangladesh and the Maldives. Thus, the country is receiving support from Washington (and US companies) while China is also seeking closer cooperation with India under its OBOR initiative (India was included in the ABII, the official financial body aimed at ensuring proper implementation of the OBOR initiative). At the same time, Modi is encouraging greater Chinese investment, especially in new railways and other hard infrastructure, as part of its “Make in India” campaign. This is why I do not believe that India will turn its back on the region’s biggest economy. In short, New Delhi is being courted by Washington and Beijing, while she lets herself be loved by both. India’s pivot to the West is real and it will likely continue, while regional cooperation with China will remain. India could enjoy the best of both worlds and this is supportive for India.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Japan: Abe and Bernanke have met and this was not merely a social call.
Japan has a track record of taking the advice of renowned US economists before making big policy shifts. In that regard, it seems that the Abe and Bernanke meeting this month will not merely be a social call. Another aspect to be considered is that Mr Abe probably now sees his mandate reinforced after a win in the weekend’s Upper House election, and looks set to follow up with more stimulus. How do we see it? (Short term outlook) Considering Bernanke’s visit and Abe’s victory, and having reached the limits of the unconventional monetary policy, there is a widespread perception that Japan could take the experiment further by adopting so-called helicopter money. The market reacted quickly, with investors greeting both Abe’s victory in the weekend’s election, and the Bernanke visit, by bidding the Nikkei up by 7.5% in just three sessions. A clear sign that they also believe that further stimulus is on its way. What is helicopter money? This concept was outlined in 1969 by Milton Friedman as an experiment to explain a full merger of both monetary and fiscal policy. Unlike a QE program (which involves the central bank buying existing assets through a temporary expansion of the monetary base), helicopter money involves permanent growth of the money base (money printing) to buy both existing and non-existing assets. The idea is for the government to issue new bonds to the central bank, which would pay for them with newly created money. The government could then spend the proceeds by boosting investments while cutting taxes, or directly send bank checks to its citizens. Unlike simple QE (which relies on the private sector playing its part through a rise in consumption after being ousted from markets – a sequence that is not taking place currently), helicopter money is aimed at guaranteeing a rise in total spending. In fact, to a certain extent, the BoJ and ECB are already using helicopter money by buying existing negative-yielding bonds. As the governments no longer have to repay the full notional amount of their borrowing, this is equivalent to forgiving debt to citizens, or giving them money. These central banks are financing the governments with their equity. In essence, this is a slow-motion degradation of the central bank’s balance sheet (though the market seems not to have shown much concern yet). Long-Term view. The implications of using helicopter money. So far, the reflationary aims of “Abenomics” have failed: (1) The nonfood core measure of inflation is back down at its 2013 level, (2) The most tangible result of Abe’s program has been a rise in public debt to about 230% of GDP from 215% in 2012 (meaning that nominal GDP has failed to respond proportionally to the stimulus). However, Japan has been toying with Einstein’s definition for “insanity” by doing the same thing over and over again hoping for different results. As we see it, Japan will continue toying with this “insanity” concept for two reasons: (1) Policymakers seem to stick with the argument that the policy prescription under which “Japan needs stimulus to stir inflation expectations” was correct but that the only problem was that the application of policy was too timid. (2) So long as officials believe that they still have options, even if that involves undertaking monetary actions not tried in the modern era of fiat money, the calculus would tilt to “doing something”. And (3) it goes without saying that some proponents (including Bernanke) advocate that the BoJ should double down on its bet. For this reason it is legitimate to think that helicopter money will happen. Long-term implications: The question you must ask yourself is not whether the additional stimulus will work. What does matter is that Japanese policymakers seem to have reached a point of no return, where the choice, at any market setback, will be to constantly double down on their bet or simply stop providing stimulus and wait for fate to wash over them. At this point I can assure you that neither of the two options is in the least reassuring. In sum, the situation is quite challenging. Market signals (spurred by the central bank action) and economic signals all point in conflicting directions. The financial market is entirely disconnected from economic fundamentals and, admittedly, could continue this way for a while. However, I fear that, in the end, there must be some sort of resolution process for these contradictory signals, and this resolution process must inevitably involve an adjustment of those aspects that do not conform to reality.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Brazil:
Meirelles confronted the political core of the Cabinet and imposed discipline in fiscal target but not enough for the agencies Real economy (gradual improvement continues) Car output +4.17% m/m in June (accelerating from +3.24%) Car sales +2.57% m/m in June PMI Composite rises to 42.30 (from 38.3) PMI Services rises to 41.40 (from 37.3) PMI Manufacturing rises to 43.2 (from 41.6) Trade balance fixed a surplus of US$3.97bn Lending grows at 0.14% m/m in June Inflation improvement continues, with the last reading in the IPCA at 0.35% m/m (from 0.78% previously), and 8.80% y/y (from 9.32% previously) On the negative side: Gross debt to GDP deteriorates to 68.6% (from 67.6%) Net debt to GDP was more stable, at 39.6% (from 39.5%) Retail sales declined m/m in the last report (May): -0.95% (or 8.95% y/y) Politics The election of Rodrigo Maia as a new lower house speaker in Brazil’s Congress suggests growing harmony, which will be helpful for the government’s reform agenda. Rodrigo Maia, a Temer ally from the right-leaning Democrats party, won the post signaling he would help Temer move ahead with reforms to pull the economy out of what could be its worst recession in a century. Fiscal Even though the recently announced 2017 primary deficit target of 139 billion reais ($42 billion) represents an improvement over 2016 (where the deficit target is fixed at 170bn reais), it was larger than the rating agencies deemed appropriate and higher than they had anticipated in absolute and relative terms. Both S&P and Moody’s said that Brazil’s new budget target underscores the slow pace of fiscal adjustment under the current government and is not enough to stop the country’s negative debt trends. Reforms Brazil’s government may not need a further spending freeze to meet fiscal goals because revenues are expected to recover in the second half of the year as the recession-hit economy stabilizes, government officials said on Wednesday. The government is considering securitizing up to 60 billion reais in debt to reduce its budget deficit, Central Bank In a longer and more detailed decision statement the central bank said its nine-member board voted unanimously to leave the benchmark Selic rate at 14.25 percent, in a clear sign of the hawkish identity of the new chair and board of governors. The bank’s new governor, Ilan Goldfajn, is aiming to improve communication and recover the credibility of a central bank that has failed to hit the 4.5 percent center of its official inflation target since 2010. In a statement that differed greatly from the laconic ones of the recent past, the bank said its own 2017 inflation forecast had dropped to the target of around 4.5 percent, from a previous reading of 4.7 percent. In our view, although later rather than sooner, the Central Bank has gained the necessary credibility to believe that the inflation problem will be fixed in 2017, and thus, rate cuts could be more intense (which will no doubt represent a big support for the economy and the government credit metrics). It is also worth noting that the interim government of Michel Temer has pointed out that “the Central Bank has complete autonomy to decide on rates”. Financial Markets !Bonds: We cut again our target for the 10yr Gov bond yield in local currency (to 12% from 13%) and the 10yr Gov bond yield in USD (to 5% from 5.5%). Equities: Target for the Bovespa unchanged at 50,000 10 FX: Target for the BRL/USD unchanged at 3.30
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Mexico:
The peso seems to have stabilized. The equity market still shows momentum. Bonds (local) still offer value. Economy: Is Mexico working? The high correlation of US industrial activity, which keeps decelerating, with the Mexican manufacturing industry has hurt the exports of this kind of goods, which are the most important part of the whole Mexican offshore sales (see the first chart). On the positive side, private consumption indicators continue to support the Mexican economy, and the labor market is gradually recovering. Median forecast for 2016 GDP has been cut to 2.30% (from 2.35%). Forecast for 2017 GDP is at 2.6% growth. Inflation & Monetary policy & Fx A surge in merchandise inflation reflects the effect of peso depreciation on tradable goods prices. In June, inflation remains below the 3% long-run objective of Banco de México, but is expected to rebound in the second half of the year (due to higher prices of gasoline and electricity). However, the longterm implicit inflation expectations have diminished. Banco de Mexico considered (before Brexit) that the relative monetary stance vis-à-vis the United States should continue to be a factor and exchange rate considerations should be viewed from the perspective of the price stability mandate. As the referendum results created a risk-off environment, particularly with depreciation of the peso, the national central bank decided to announce its commitment to act in a timely and decisive way to consolidate price stability. Finally, on June 30th, Banco de Mexico raised its monetary policy rate by 50bp (from 3.75% to 4.25%), arguing that peso depreciation could have an impact on price formation in the economy. The early signs of this decision are that it has worked and the upshot is that while the consensus thinks that the central bank has finished tightening for now, we cannot rule out a further rise over the second half of this year, specially following the bank’s clear attempt to get back ahead of the curve. Politics The anti-corruption law was signed by president Peña. Mexico central bank recommends an additional cut in spending to the Ministry of Finance. Although no new taxes have been agreed, the Senate would submit a proposal that would increase the tax on sugary beverages. Financial Markets FX. The Mexican peso benefited, just as all other emerging currencies benefited, from increased political certainty and lower risk aversion worldwide, even though it is still near 19 pesos per dollar and further volatility episodes cannot be ruled out. Our mid-term target level for MXN remains at 18.25. Fixed Income. For the M10 we expect a central point target of 6.00, while the USD-denominated Mexican bond (UMS10) should be around 3.5. Long term interest rates continue to decline in June despite the volatility generated by the Brexit vote, following the movement of UST bond rates. The curve has been flattening. Nonresident holdings of peso-denominated government securities have stayed roughly constant in peso terms since 2015. Equities. Equity markets have recovered much of the losses generated by the referendum in the United Kingdom. The rally responds to an environment of seeking return that has caused the S&P 500, the Dow Jones and Mexbol to trade at historical highs as investors moved to US equities and also EM Equities. In Mexico we reduced our exposure to stocks with high US debt and stocks exposed to the effects of higher interest rates. Conversely, we are increasing our exposure in defensive stocks. We are expecting second quarter 2016 corporate results around mid-single digit in EBITDA and Income. Target range: 48,000 50,000. 11
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Argentina
The much needed policy tightening is weighing on the real economy but a recovery is expected during 2H16
It seems as if the initial euphoria over the change of government had dissipated
The government approach The Macri administration is confident that it will attract large amounts of funds through a tax amnesty plan. According to government figures, Argentineans hold more than 200bn in assets outside Argentina, of which less than 10% is declared. Unofficial figures estimate it at 400bn USD. Fiscal amnesty terms are 10% penalty if declared in 2H2016; 15% penalty if declared in 1Q2017; 0% penalty when the investor buys one of the following two bonds: a) a non-negotiable 3yr maturity with 0% coupon, or b) a 7yr bond with 1% coupon negotiable after the 4th year. Fundamentals 1H 2016 saw a fall in activity in mainly all sectors. Through May GDP declined 1.1% YoY. A recovery is expected during 2H, driven by: lower fiscal drag, lower inflation, lower interest rates, tax amnesty plan spillover, recovery of trading partners (i.e., Brazil) and an increase in government spending. For the whole year, GDP is expected to decline 1% in 2016. The Fiscal Deficit was lower than expected in 1H. If this path continues, the primary fiscal deficit would fall to 2.8% in 2016, much lower than the official target of 4.8%. This better path is the result of reduction in subsidies and a decrease in capital expenditures. However, this path is not sustainable, as reduction in subsidies are on-ff events and also because public capital expenditure is expected to increase considerably in 2H. For 2016 we expect that the Government will meet its Fiscal Deficit Target of 4.8% primary deficit. For 2017 the Government has a 3.3% target, which we think will be much harder to achieve. Also, one thing to be aware of is probable legal challenge to tariff hikes as increases hit household bills and some judges have started investigations as to the legality of these hikes (it is worth mentioning that, due to claims, the Government decided to cap hikes at 400% increase). External situation & Foreign Reserves International reserves currently stand at 30bln. YTD Argentina has issued 30.9bln in external debt (19.2 treasury, 4.5 provinces and 2.2 corporations). Also, there were extraordinary payments for 14.2bln (9.4 holdouts, 2.7 past due interests to exchange bondholders, 2.1 Paris Club). So net of these extraordinary payments, what is left is US$16.8bn. Reserves increased YTD 8.4bln, so the country had an External Cash Flow Deficit of 8.4bln in this period, mainly explained by the Current Account Deficit plus residents’ outflows. Financial Markets FX. The ARS started to decline after BCRA started to cut rates on the front end of the curve during June, moving the 35-day rate from a high of 38% to 31.50%. This change is due to an improvement in the core inflation trend. Considering that the chances of a successful tax amnesty are high and FX needs will decrease, we set our target for the ARS/USD at 17. !Fixed Income. Current 10yr Govt Bond in USD (Global 2026) is trading at 6.23% YTM. Market trends favoring emerging markets combined with higher spread versus Latam peers make us decrease our Target for 10yr Global 2026 yield to 6.00%. Short Term bonds continue to offer interesting spread, despite the fact that their yield has come down considerably. These bonds will add very low volatility and very low repayment risk (Bonar 18, Global 19, Buenos 18). Longer dated bonds include more risks, as Argentina still needs to address several fundamental problems (fiscal deficit, inflation, etc.). Preferred bonds: BONAR 29-nov-18. GLOBAL 22-Apr-19. BUENOS 14-Sep-18. YPF GLOBAL 28-Jul-25 at 7.57% yield. Equities: Equities have also staged a major recovery in the last few months. Some still look cheap but will depend mostly on the success Macri gets with his measures to reestablish macro equilibrium in Argentina. Companies that could benefit from Macri policies include YPF (big underperformance vs peers. Under the new government the new offshore investments are possible and could help to develop unexplored natural resources). Financials (BMA, BFR, GGAL) due to the low level of bank account ownership and the normalization on the economic front, Utilities (PAM, EDN, TGS). 12
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Equity Markets GLOBAL EQUITY INDICES - FUNDAMENTAL ASSESSMENT
Index USA S&P 500 Europe STXE 600 Spain IBEX 35
Sales per Share 2015
EPS 2015
Andbank's Sales Andbank's Net Margin Sales Growth per Share Net Margin 2015 2016 2016 2016
1.130
117,6
10,4%
4,6%
1.182
301
21,7
7,2%
0,0%
301
EPS 2016
EPS Growth PE ltm PE ltm 2016 2015 2016
9,7%
115
-2,5%
18,49 17,44
7,4%
22
2,6%
15,79 14,00
7.875
641,4
8,1%
0,7%
7.927
8,1%
642
0,1%
13,40 13,00
Mexico IPC GRAL
28.542
1.888,1
6,6%
7,7%
30.739
7,3%
2.254
19,4%
24,71 21,74
Brazil BOVESPA
55.578
3.377,2
6,1%
5,5%
58.635
6,5%
3.811
12,9%
16,97 13,12
Japan NIKKEI 225
20.408
1.018,6
5,0%
2,0%
20.816
5,0%
1.041
2,2%
16,33 15,80
China SSE COMP.
2.652
233,9
8,8%
7,0%
2.838
8,8%
250
6,8%
12,62 13,00
HK HANG SENG
13.064
2.015,3
15,4%
2,0%
13.325
15,4%
2.052
1,8%
10,99 10,00
India SENSEX
12.559
1.432,9
11,4%
11,0%
13.941
11,8%
1.645
14,8%
19,52 17,00
411
34,1
8,3%
7,0%
37
7,0%
20,13 18,21
MSCI EM ASIA
440
8,3%
INDEX CURRENT PRICE 2.174 343 8.593 46.661 57.308 16.636 2.953 22.157 27.965 687
2016 E[Perform.] % Ch Y/Y -8,0% -9,0% -2,9% 5,0% -12,8% -1,1% 9,9% -7,4% 0,0% -3,2%
ANDBANK ESTIMATES
RISK-OFF PROBABILITY Andbank's Global Equity Market Composite Indicator (Breakdown)
Buy signals Positive Bias Neutral Negative Bias Sell signals FINAL VALUATION
2016 TARGET PRICE 2.000 312 8.347 49.000 50.000 16.445 3.247 20.521 27.965 665
Previous
Current
Month
Month
5 3 8 5 1 1,4
5 2 3 9 3 -0,7
Andbank’s Global Equity Market Composite Indicator Preliminary assessment of the level of stress in markets
0
-5
-10 Market is Overbought
+5
Area of Neutrality Sell bias
Buy bias
+10 Market is Oversold
o Score. Our Andbank GEM Composite Indicator has declined from 1.4 to -0.7 (in a -10/+10 range), suggesting that the market is starting to be slightly overbought, though it is still trading in a zone of neutrality (though we cannot say it is expensive). At current levels, a risk-off probability in the equity markets seems more likely than a month ago, but if a risk-off shift takes place, the market would quickly become oversold again. o Positioning (neutral to positive signal): Option skew monitor still shows a negative skew (similar levels to last month) and points to a higher demand for puts than calls, meaning that investors favor buying protection. We take a contrarian view. Macro Hedge Funds hit the 2nd highest level of beta since 2014 following the Brexit vote, although they quickly came back to their average level. o Flows - Funds & ETFs (mixed signals): Outsized inflows in the last week (USD$4.4 bn). By sector, outflows in financials ($ 1.23 bn) are the largest in 21 weeks and tech inflows ($ 0.4 bn) the largest in 13 weeks. By market, strong inflows into US equity ($ 13 bn) fostered by the possible Japanese helicopter and incited by the belief that every single interest rate in the world is heading to zero. Largest inflows over precious metals ($ 4.1 bn, gold and silver have soared as investors are forced to hedge against future populist policies), EM debt ($ 3.4 bn), Govt/Treasury ($ 3.3 bn). PE blended forward 12M keeps widening, thus it is getting expensive. o Market vs Data – Surprise indexes (moderately negative reading). o Sentiment (moderately positive reading): Many sentiment indicators are flagging short position: Ned Davis Crowd Sentiment Poll stays in the optimist area, so our position is bearish. NAAIM Survey also posts a bullish positioning (sell signal). Market Vane, Percentage of NYSE Stocks Closing above 200 Day Moving Average (70%).
TECHNICAL ANALISYS: Short-term (ST) and medium-term (MT) o o o o o o
S&P: Bullish. Supports 1&3 month at 2025/1993. Resistance 1&3 month at 2213/2298. STOXX50: Sideways-Bullish. Supports 1&3 month both at 2678. Resistance 1&3 month both at 3156 IBEX: MOD. Sideways-Bullish Supports 1&3 month at 7579/7500. Resistance 1&3 month at 8912/9360 €/$: Supports 1&3 month at 1.08/1.07. Resistance 1&3 month at 1.1432/1.17 Gold: Supports 1&3 month at 1251/1191. Resistance 1&3 month both at 1391 13 Oil: Supports 1&3 month at 43.03/37.64. Resistance 1&3 month at 50.53/51.64
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Fixed Income – Core Country Bonds: UST 10Yr BOND: 2016 target 1.7%, Buy above 2.3% yield, Sell below 1.70% / Ceiling 3.00% 1. Swap spread: Swap rates recovered some ground and rose in the month to 1.47% (from 1.34%). The 10Y Treasury yield rose to 1.6% (from 1.47%). The swap spread remained stable at -12bps (from -13bps). For this spread to normalize towards the +20 to 30 bp area, with 10Y CPI expectations (swap rate) anchored in the 2% range, the 10Y UST yield would have to move towards 1.70% (this could be considered a floor). 2. Slope: The slope in the UST yield curve has flattened to 87bp (from 95bp). With the short end normalizing towards 1.25%, to reach the 10yr average slope (175bp), the 10Y UST yield could go to 3.00% (ceiling). 3. Given the new normal of ZIRPs, a good entry point in the 10Y UST could be when the real yield hits 1%. Given our 2016 CPI forecast of 1.3%, the UST yield would have to rise to 2.3% to become a “BUY”.
BUND 10Yr BOND: 2016 target 0.2%, Buy above 0.80% , Sell below 0.60% 1. Swap Spread: Swap rates fell to 0.36% (from 0.40%) but the Bund yield rose to -0.08% (from -0.11%). Thus, the swap spread fell to 45bp (from 51bp). For the swap spread to normalize towards the 30-40bp area, with 10Y inflation expectations (swap rate) anchored and also normalized in the 1% area, the Bund yield would have to move towards 0.60% (entry point). 2. Slope: The slope of the EUR curve fell to 53bp (from 54bp). When the short end “normalizes” in the -0.25% area (today at -0.61%), to reach the 10yr average slope (113bp), the Bund yield would have to go to 0.88%.
Fixed Income – Peripheral Bonds: Spain: Target for the 10yr bond yield at 1.30%. In Spain, new elections were held on June 26th. Just small steps since then. Ciudadanos and PP agreed on the Congress President but still in negotiation time. Key dates: 3rd August (first vote), 5th August (second vote). Minority government with PSOE abstention as central scenario, as a third election would reinforce PP votes, harming the rest of the political parties. Sanction procedures from the EC have been opened on Spain and Portugal for not taking the necessary steps to meet the deficit targets in 2015. Both countries have made their case and stand ready to adopt adjustments on the expenditure front in 2016 and budget 2017. In the case of Portugal it amounts to 0.2% GDP of expenditure cuts in 2016 and 0.6% GDP of structural deficit in 2017. The Commission will take its final decision on 27th July. The procedure does not contemplate the automatic application of economic sanctions but a round of deliberations, which will probably take place in Autumn. Italy: 10 yr bond target at 1.4%. Portugal: target at 2.8%. Ireland: target for the 10yr bond yield at 0.9%. 14
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Fixed Income – Corporate Bonds & EM Govies FIXED INCOME – CORPORATE CREDIT US$ IG & HY Both IG and High-yield bonds performed well last month (spread narrowed). High-yield ETF YTD performance is +6.53% and Investment Grade ETF YTD performance is 7.99%. Primary market: Year to date, high-yield issuance amounts $88bn (higher than the $82bn issued during the same period of last year). June was the best month YTD and some research firms have increased their estimates for new issuance. US Investment Grade: Target for the CDX IG at 63. Ongoing global QE and low government bond yields continue to draw investment into US IG credit. It is difficult to see the demand for yield ending in the near term. Overweight Financials, Materials and Technology. Underweight Utilities, Healthcare and Industrials. US High Yield: Target for the CDX IG at 300. Despite the rally in high-yield and the decline in yields since mid-February, demand is not letting up, as we saw a strong month in inflows into the category. Although the bond default rate has risen to a 6-year high of 4.68%, this rise has been almost entirely driven by companies in the Energy and Metals/Mining sectors, as 20 Energy companies totaling $28.5bn and 4 Metals/Mining companies totaling $7.7bn have defaulted year-to-date (83% of 2016’s default volume). USD high-yield new-issue activity increased for a third consecutive month to $88bn vs $82bn in the same period last year. Overweight: Financials, Media, Retail, Technology and Telecommunications. Underweight Metals and Mining & Energy
EUR IG & HY New lows in yields, backed by the ECB corporate purchases program kicking off with robust numbers, being very supportive for credit. Monthly figures coming from the ECB purchases stand at around 9-10 bill. euros, including all sectors. Wide range of names (150 issuers, 440 ISIN) and even issuers with a credit profile close to high yield (like TELECOM ITALIA). A very flexible program is expected to bid the market (strong signal to the corporate bond markets). Increasing odds of some fine-tuning of the QE program as the scarcity problem increases. What could change? An extension of the program beyond March 2017, accompanied by an amendment in the criteria/limits applied: Purchases allocated as a percentage of the market value (debt weighted) rather than the current ECB capital key criteria. Limits per ISIN being lifted up from the current 25/33%. Removal of the depo rate as the threshold for purchases. Targets reinstated last meeting have already been reached in the IG space and we are even approaching those set at the beginning of the year. As for the sector performance, similar trends. Positive spillovers from ECB purchases into non-buy candidates (e.g. financials). Stock picking rather than a sector approach. !Credit Targets: IG Itraxx 75 (from 85). HY Itraxx to 325 (from 360)
FIXED INCOME - EMERGING MARKETS (GOVIES): “The two conditions are not met” 10 Year
Yield
Last reading
Real
3,45% 5,71% 1,90% 1,90% 2,04% 0,35% -1,63% 0,74% 0,91%
3,41%
Taiwan
6,86% 7,13% 3,04% 2,76% 3,56% 1,97% 1,75% 1,28% 0,68%
Turkey
9,38%
7,64% 7,50%
1,74%
Russian Federation 8,46%
11,79% 5,92% 7,63% 6,04%
9,49% 2,53% 8,75% 3,37%
2,30%
Philippines EM ASIA
10 Year
Yield
India China Malaysia Thailand Singapore South Korea
EME
CPI (y/y)
Govies Indonesia
LATAM
To date, our rule of thumb for EM bonds has been “buy” when the following two conditions are met: (1) US Treasuries are cheap or at fair value; and (2) Real yields in EM bonds are 175bp above the real yield in UST. Is the UST cheap or at fair value? Historically, a good entry point in the 10Y UST has been when real yields are at or above 1.75%. However, given the “new normal” (ZIRPs & NIRPs), a good entry point in the 10Y UST bond could be when the real yield is 1%. Given our 2016 target for US CPI of 1.3%, UST bonds should be at 2.3% to be considered cheap. So the first condition is not met. Do real yields in EM bonds provide sufficient spread? If the first condition is met, under the “new normal” (ZIRPs), a good entry point in EM bonds could be when EM real yields are 100bp above the real yield of the UST. Since the projected annualized real yield of the USTs from now on is 0.16% (1.46%-1.30%), the real yield of the EM bonds should be at least 1.16% (see table).
Brazil Mexico Colombia Peru
1,41% 1,14% 0,86% 1,53% 1,62% 3,37% 0,54% -0,23%
0,96%
3,39% -1,12% 2,67%
15
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Commodities ENERGY (OIL): Fundamental target at $40. Range (Buy at $30. Sell at $50). Trends Biggest build-up of stockpiles at sea since 2009. Traders hoard the most oil since 2009 and increased the fleet of ships deployed in the North Sea to store crude, the latest sign of faltering demand that has triggered the biggest buildup of stockpiles at sea since 2009. Nine tankers holding about 9M barrels are floating off the UK’s coast, up from 7M in May. The volume of oil in storage on ships worldwide reached 95M barrels at the end of June, the highest since the financial crisis. US oil and gas producers are funding themselves via selling shares at a record pace, a sharp turnaround from past years, when debt markets were the industry’s favored source of cash. US energy producers have raised $16B from share sales this year, more than 50% of the total $29B raised by oil producers globally. Equity raised so far this year accounts for 25% of the capital raised for the past five years. Bad omens for Western refiners. China’s refiners are flooding markets with products including diesel and gasoline. China’s total exports of refined fuels are up 45% overall so far this year (with much of the surge attributable to a leap in China’s shipments of diesel). In May, China’s exports of diesel had quadrupled on-year. Why? Refining margins have dropped by a third to around $4/barrel since Q1 across Asia and Chinese refiners may be following a strategy of boosting volumes. Distressed and bankrupt E&P (exploration and production) companies have seen their bonds rally sharply with the rebound in crude oil prices. At least a dozen bonds from deeply troubled E&Ps more than doubled in Q2. Ultra Petroleum’s 2024 bonds led the group, with a 623% gain. It said the recovery in oil prices means that the assets bondholders will inherit in a bankruptcy may be far more valuable than expected earlier in the year. Geopolitics. More supportive now for oil prices. OPEC is winning the market share war: The Middle East is back as the world’s dominant oil-producing region, churning out its biggest chunk of global output since the 1970s and giving OPEC an edge in its fight for market share. The IEA said Middle East production rose to a record high of 31.5M bpd in June amid near-record supplies from Saudi Arabia. More of those barrels appear headed for the US, which imported more than 5M bpd from the Middle East in April, up from 4.6M bpd a year earlier. The agency said the rise of Middle Eastern market share to 35% is "an eloquent reminder that even when US shale production does resume its growth, older producers will remain essential for oil markets". Is Saudi Arabia changing its strategy to a new one focused more on prices than on volumes? OPEC delegates say comments from Saudi Arabia are a change in tone and a sign the kingdom is looking to prop up the prices. The country’s oil minister said an oil price higher than $50 is needed to achieve a balance in oil markets in the long term. OPEC insiders say his comments contrasted with previous statements from Saudi officials, more tilted towards volumes and market share, rather than oil price. Kuwait sees oil at $60 until 2018: Kuwait’s oil minister believes oil will rise to a range of $50-60 until at least 2018 as demand increases and markets absorb an oversupply. He added that demand will pick up by Q4. He said OPEC should stick with its policy of pumping at near record levels as markets are coming into balance. However, private players see oil price lower. BNP Paribas and JBC Energy warn prices may sink amid weakening demand and the return of disrupted supplies. Canadian producers have restored most of the output halted from wildfires, while Nigeria revived some output in June after militant attacks. There is also a chance Libya could increase exports this month. The inventory overhang is another factor that should cap any upside in oil prices. Wood Mackenzie said in a report that aggressive cost cutting had increased the percentage of projects viable below US$60 to 70% (up from 50% a year ago). This means higher supply than thought just a few months ago. It also suggests that the industry has adapted to an energy sector that has definitely mutated from a monopolistic industry to a competitive one, and can cope now better with larger supplies and lower prices. Shale revolution extended to old wells seen unleashing more oil: IHS Markit Energy has reported that US oil explorers are yet to fully reap all the rewards of horizontal drilling techniques (which helped trigger the shale boom). These techniques still stand to boost production from conventional oil wells, where low permeability has restricted extraction to a fraction of their potential. Of the 46K horizontal wells surveyed, only 10% were in so-called tight conventional plays being drilled anew for more crude, signaling there is considerable untapped potential across the country. Sectors Oil tankers and carriers to face a dim environment in the next quarters. Oil tankers face tough waters over the next 18 months as a flurry of new ships pushes down freight rates, just at a time when buoyant oil demand slows. It seems like a temporary end of a successful run for the sector (for the owners of very large crude carriers, 2015 was the best year since the boom times of 2008 and the trend has continued in H1-16. However, daily charter rates are seen falling in H2-16, with the global fleet set to expand by only 7% in just six months as owners take delivery of some 85 new VLCC and Suezmax tankers). 16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Commodities GOLD: Buy at US$ 900/oz. Sell above US$1,100. Target price 1,000 Negative drivers: 1. Gold in real terms. In real terms the gold price (calculated as the current nominal price divided by the US Implicit Price Deflator-Domestic Final Sales, base year 2009, as a proxy for the global deflator) rose to $ 1195 (from $1186 last month) and continues to trade well above its 20-year average real price of $762. Given our proxy for the global deflator, now at 1.1046, for the gold price to stay near its historical average in real terms, the nominal price (or equilibrium price) must remain near US$842. 2. Gold in terms of Oil (Gold / Oil): This ratio has risen to 31.32x (from 27.4x) and still remains above its 20year average of 14.33. If the average oil price stays at $40 (our central target), the nominal price of gold must approach US$573 for this ratio to remain near its LT average level. 3. Gold in terms of the DJI (Dow Jones / Gold): This ratio has moved to 13.99 (from 13.27 last month), still below its LT average of 20.4x. Given our new target price for the DJI of $17032, the price of gold must approach US$834 for this ratio to remain near its LT average. 4. Gold in terms of the S&P (Gold / S&P500 index): This ratio has moved to 0.61x (from 0.64x last month), still above its LT average of 0.5808x. Given our target price for the S&P of $2000, the price of gold must approach US$1,161 for this ratio to remain near its LT average. 5. Positioning in gold points to further falls: CFTC - CEI 100oz Active Future non-commercial contracts: longs rose again to 366k (from 358k). Shorts rose to 81k (from 66k) => Net positions decreased to +285k (from +293k). Speculators remain very long in gold => Negative reading. 6. Financial liberalization in China. Higher “quotas” each month in the QFII are widening the investment alternatives for Chinese investors (historically focused on gold). 7. Central bank gold buying. Gold stocks at central banks are still considerably higher than 2008 levels. 8. Monetary stimulus by ECB and BOJ continues, but not by the Fed (remember the price of gold is in USD, and therefore much more affected by the Fed’s decisions). This points to the following dynamics: gold stable or downward in terms of USD; gold price following an upward trend versus the EUR and JPY, which means that the USD must rise relative to the EUR and the JPY. Positive drivers: 1. Negative yields make Gold attractive. The disadvantage of gold relative to fixed income instruments (gold does not offer coupon) is now neutralized, with negative yields in a large part of global bonds. 2. Amount of gold in the world: The total value of gold in the world is circa US$6.9tn, a fairly small percentage (3.2%) of the total size of the financial cash markets (212tn). The daily volume traded on the LBMA and other gold marketplaces is around US$173bn (2.5% of the world’s gold and just 0.08% of the total in the financial markets).
17
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Currencies – Fundamental Targets The global USD position has risen again this month and is now net long against the other currencies to the tune of US$10.7bn (from US$+8.14bn last month). Despite this shift, the global position in USD is still well below the US$+44.3bn net USD position seen in April 2015, which means that long positions could still be longer.
• EUR/USD: Fundamental Target (1.05) Speculators are now short in EUR (vs USD) to the tune of US$-13.7 (from US$-8.6bn last month) and have been steadily cutting their positions since November. Despite their net short positions, there is still plenty of room for speculators to reach the lower end of the range (-30.4bn) seen in March 2015 by building shorter positions in EUR. In Z-score (3-year) terms, the EUR is now positioned in the middle of the last 12 months range and is no longer among the longest currencies held by investors. All this suggests that the EUR is now fairly valued and that new short positions (which is possible) would make the EUR oversold in relation to it historical pattern.
• • • • • • • • •
JPY/USD: Target (110) JPY/EUR: Target (115.5) GBP/USD: Target (0.86) GBP/EUR: Target (0.90) CHF/USD: Target (1.00) CHF/EUR: Target (1.05) MXN/USD: Target (18.25) MXN/EUR: Target (19.16) BRL/USD: Target (3.30) BRL/EUR: Target (3.47) RUB/USD: UW RUB AUD/USD: UW AUD CAD/USD: UW CAD CNY/USD: Fundamental Target (6.45).
Currency USD vs All USD vs G10 EM EUR JPY GBP CHF BRL MXN RUB AUD CAD
Values of Change vs Net positions last week 1-yr Max (Bn $) (Bn $) (Bn $) 10,67 10,27 -0,40 -13,76 4,64 -6,10 0,60 0,35 -1,06 0,31 2,51 1,70
2,33 2,34 0,00 -1,65 -1,04 -1,12 -0,25 -0,02 -0,05 0,07 1,27 0,38
44,3 43,6 0,1 -3,1 8,2 0,7 1,4 0,4 0,0 0,3 4,6 2,0
1-yr Min (Bn $)
1-yr Avg (Bn $)
-6,8 -7,1 -2,8 -24,3 -10,5 -6,1 -3,2 -0,3 -2,7 -0,1 -4,7 -5,1
17,5 16,3 -1,2 -11,9 1,1 -2,6 -0,1 0,1 -1,4 0,1 -1,0 -1,8
Current Z-score 3-yr -0,72 -0,80 0,02 -0,19 1,58 -1,81 0,65 0,75 -0,45 2,56 1,44 1,75
3-year Z-Score: Current Position - 3 year average position 3-year Standard Deviation
Values above +1 suggest positioning may be overbought Values below -1 suggest positioning may be oversold
ANDBANK
18
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Market Outlook – Fundamental Expected Performance Performance
Performance
Performance
Current Price
Target
Expected
2015
Last month
YTD
01/08/2016
Year End
Performance*
-0,73%
3,4%
6,3%
2.174
2000
-8,0%
6,79%
3,1%
-6,3%
343
312
-9,0%
SPAIN - IBEX 35
-7,15%
3,9%
-9,9%
8.595
8347
-2,9%
MEXICO - MXSE IPC
-0,39%
1,0%
8,6%
46.661
49000
5,0%
-13,31%
9,7%
32,2%
57.308
50000
-12,8% -1,1%
Asset Class
Indices
Equity
USA - S&P 500
01/08/2016 EUROPE - STOXX 600
BRAZIL - BOVESPA JAPAN - NIKKEI 225
9,07%
6,1%
-12,6%
16.636
16445
CHINA - SHANGHAI COMPOSITE
9,41%
0,7%
-16,6%
2.953
3247
9,9%
KONG KONG - HANG SENG
-7,16%
6,6%
1,1%
22.157
20521
-7,4%
INDIA - SENSEX
-5,03%
3,1%
7,1%
27.980
27965
-0,1%
MSCI EM ASIA
-7,90%
3,2%
3,7%
687
665
-3,2%
Fixed Income
US Treasury 10 year govie
1,4%
-0,2%
7,7%
1,48
1,70
-0,3%
Core countries
UK 10 year Guilt
0,1%
1,3%
11,2%
0,69
1,00
-1,8%
-0,2%
-0,2%
6,3%
-0,11
0,20
-2,6%
German 10 year BUND Fixed Income
Spain - 10yr Gov bond
0,1%
0,9%
7,0%
1,01
1,30
-1,3%
Peripheral
Italy - 10yr Gov bond
4,1%
0,4%
4,4%
1,16
1,40
-0,7%
Portugal - 10yr Gov bond
3,8%
0,4%
-1,9%
2,90
2,80
3,7%
Ireland - 10yr Gov bond
1,8%
0,2%
6,5%
0,40
0,90
-3,6%
Fixed Income
Credit EUR IG-Itraxx Europe
0,5%
0,7%
66,38
75
-0,2%
Credit
Credit EUR HY-Itraxx Xover
0,7%
1,4%
335,42
325
1,5%
IG & HY
Credit USD IG - CDX IG
0,2%
2,0%
71,96
63
1,0%
Credit USD HY - CDX HY
0,5%
5,4%
402,73
325
4,4%
-13,4%
-4,5%
14,6%
9,39
9,25
13,4%
Fixed Income
Turkey - 10yr Gov bond
46,7%
-2,2%
15,7%
8,46
9,75
8,5%
-1,1%
3,7%
20,7%
6,86
7,00
5,7%
India - 10yr Gov bond
8,6%
2,3%
9,6%
7,13
7,00
8,1%
Philippines - 10yr Gov bond
2,1%
1,0%
10,4%
3,04
3,00
3,4%
China - 10yr Gov bond
9,9%
0,3%
1,9%
2,76
2,80
2,5%
Malaysia - 10yr Gov bond
3,8%
1,0%
7,3%
3,56
3,25
6,1%
Thailand - 10yr Gov bond
4,8%
-0,3%
5,3%
1,97
1,50
5,7%
-0,2%
0,5%
8,1%
1,75
1,25
5,7%
South Korea - 10yr Gov bond
6,1%
0,4%
7,8%
1,28
1,40
0,4%
Taiwan - 10yr Gov bond
6,4%
0,4%
3,2%
0,68
1,00
-1,9%
Fixed Income
Mexico - 10yr Govie (Loc)
2,2%
-0,2%
6,3%
5,92
6,00
5,3%
Latam
Mexico - 10yr Govie (usd)
2,4%
1,3%
9,9%
3,13
3,50
0,1%
Brazil - 10yr Govie (Loc)
-20,2%
3,0%
47,0%
11,79
12,00
10,1%
Brazil - 10yr Govie (usd)
-21,6%
1,5%
26,9%
EM Europe (Loc) Russia - 10yr Gov bond Fixed Income
Indonesia - 10yr Gov bond
Asia (Local curncy)
Singapore - 10yr Gov bond
Argentina - 10yr Govie (usd) Commodities
5,00
3,8%
6,00
8,1%
CRY
-23%
-6,8%
2,8%
181,0
190,0
5,0%
Oil (WTI)
-30%
-15,5%
11,7%
41,4
40,00
-3,3% -25,9%
GOLD Fx
4,87 6,23
-10%
0,6%
27,2%
1.349,9
1.000
EUR/USD (price of 1 EUR)
-10,23%
0,3%
2,8%
1,117
1,05
-6,0%
GBP/USD (price of 1 USD)
5,67%
0,3%
11,5%
0,76
0,86
13,7%
GBP/EUR (price of 1 EUR)
-5,00%
0,6%
14,7%
0,84
0,90
6,9%
CHF/USD (pric e of 1 USD)
0,77%
-0,5%
-3,4%
0,97
1,00
3,3%
CHF/EUR (price of 1 EUR)
-9,48%
-0,2%
-0,7%
1,08
1,05
-2,9%
JPY/USD (price of 1 USD)
0,52%
-0,2%
-14,9%
102,33
110
7,5%
JPY/EUR (price of 1 EUR)
-9,88%
0,1%
-12,4%
114,30
115,50
1,0%
MXN/USD (price of 1 USD)
16,45%
2,1%
9,1%
18,72
18,25
-2,5%
MXN/EUR (price of 1 EUR)
4,56%
2,3%
12,1%
20,91
19,16
-8,3%
BRL/USD (price of 1 USD)
49,01%
0,4%
-18,0%
3,25
3,30
1,6%
BRL/EUR (price of 1 EUR)
33,78%
0,7%
-15,7%
3,63
3,47
-4,5%
ARS/USD (pric e of 1 USD) CNY (price of 1 USD)
51,47% 4,6%
-0,3% -0,3%
15,9% -0,3%
14,99 6,64
17,00 6,45
13,4% -2,8%
* For Fixed Income instruments, the expec ted performance refers to a 12 month period XX (Target cut)
XX (Target raised)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Principal Contributors
Alex Fusté. – Chief Global Economist – Global & Asia: Macro, Rates & FX. +376 881 248 Giuseppe Mazzeo. – CIO Andbank US – U.S. Rates & Equity. +1 786 471 2426 Eduardo Anton. – Portf. Manager US – Credit & Quasi governments. +1 305 702 0601 J.A Cerdan. – Equity Strategist Europe – European Equity. +376 874 363 Renzo Nuzzachi, CFA. – Product Manager LatAm – Rates & FX. +5982-626-2333 Jonathan Zuloaga. – Analyst, Mexico – Macro, bonds & FX. +52 55 53772810 Albert Garrido. – Portfolio Manager Andorra – European Equity. +376 874 363 Ricardo Braga. – Product Analyst Brazil – Products. +55 11 3095 7075 Gabriel Lopes. – Product Analyst Brazil – Products. +55 11 3095 7075 Andrés Davila. – Head of Asset Management Panama – Venezuela. +507 2975800 Mª Angeles Fernández. – Product Manager, Europe – Macro & Rates. +34 639 30 43 61 David Tomas. – Wealth Management, Spain – Spanish Equity. +34 647 44 10 07 Andrés Pomar. – Portfolio Manager Luxembourg – Volatility. +352 26 19 39 25 Carlos Hernández. – Product Manager – Technical Analysis. +376 873 381
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
Legal Disclaimer All notes and sections in this document have been prepared by the team of financial analysts at ANDBANK. The opinions stated herein are based on a combined assessment of studies and reports drawn up by third parties. These reports contain technical and subjective assessments of data and relevant economic and sociopolitical factors, from which ANDBANK analysts extract, evaluate and summarize the most objective information, agree on a consensual basis and produce reasonable opinions on the questions analyzed herein. The opinions and estimates contained herein are based on market events and conditions occurring up until the date of the document’s publication and cannot therefore be decisive in evaluating events after the document’s publication date. ANDBANK may hold views and opinions on financial assets that may differ partially or totally from the market consensus. The market indices have been selected according to those unique and exclusive criteria that ANDBANK considers to be most suitable. ANDBANK does not guarantee in any way that the forecasts and facts contained herein will be confirmed and expressly warns that past performance is no guide to future performance, that analyzed investments could be unsuitable for all investors, that investments can vary over time regarding their value and price, and that changes in the interest rate or forex rate are factors which could alter the accuracy of the opinions expressed herein. This document cannot be considered in any way as a selling proposition or offer of the products or financial assets mentioned herein, and all the information included is provided for illustrative purposes only and cannot be considered as the only factor in the decision to make a certain investment. Additional major factors influencing this decision are also not analyzed in this document, including the investor’s risk profile, financial expertise and experience, financial situation, investment time horizon and the liquidity of the investment. As a consequence, the investor is responsible for seeking and obtaining the appropriate financial advice to help him assess the risks, costs and other characteristics of the investment that he is willing to undertake. ANDBANK expressly disclaims any liability for the accuracy and completeness of the evaluations mentioned herein or for any mistakes or omissions which might occur during the publishing process of this document. Neither ANDBANK nor the author of this document shall be responsible for any losses that investors may incur, either directly or indirectly, arising from any investment made based on information contained herein. The information and opinions contained herein are subject to change without notice.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW AUGUST-SEPTEMBER-16
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