GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Andbank’s Monthly Corporate Review June 2016
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Contents Executive Summary
3
This month’s news in charts
4
Country Pages USA
5
Europe
6
China
7
India
8
Japan
9
Brazil
10
Mexico
11
Argentina
12
Equity Markets Fundamental Assessment
13
Short-term Assessment. Risk-off shift probability
13
Technical Analysis. Main indices
13
Fixed Income Markets Fixed Income, Core Countries
14
Fixed Income, European Peripherals
14
Fixed Income, Corporate Bonds
15
Fixed Income, Emerging Markets
15
Commodities Energy (Oil)
16
Precious (Gold)
17
Forex
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Summary Table of Expected Financial Markets Performance
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Monthly Tactical Asset Allocation Proposal
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Executive Summary USA - We note that the pace of economic recovery has not yet gained additional traction and this may keep the Fed on hold for the time being. We would not be surprised if the Fed postpones the next rate hike until September, although our base case scenario still includes two rates hikes in 2016. Europe - At its last meeting, the ECB offered more detail on the corporate purchases program: eligible sectors, maturities, limits per ISIN, etc. The European scenario remains relatively benign for government bonds (peripherals) and credit. Spain - New elections will be held on June 26th, following the Brexit referendum. The latest polls point to a hung parliament, but with some shifts in the left-wing parties that could prove to be relevant. A bipartite coalition that results in a weak government seems the most probable scenario, which is undoubtedly bad news because it portends a possible prolonged period of instability. China - Beijing is standing by its economic policy approach of proactive fiscal policy, prudent monetary policy, while also strengthening the implementation of supply-side reforms. China’s Academy of Social Sciences forecasts that the economy will grow by 6.6-6.8% in 2016 India - Modi’s government has put improving transport infrastructure at the top of its agenda (a first and necessary step to create the intended manufacturing boom). One major reason for the underinvestment has been banks’ unwillingness and inability to lend, but this is being fixed with the recent bills passed in order to reform the financial sector. Japan – The BoJ’s board members have differing views on the merits of NIRPs. Some members blame anxiety among the banks, lack of public understanding and exacerbated market turbulence on this policy. FY profits for Japan’s major banks are at a four-year low (-6.9% y/y) Brazil - Brazil’s Senate has voted 55-22 to put President Rousseff on trial. A new government under Vice-President Michel Temer is likely to pursue more market-friendly policies. The main features of Temer’s plan look like an investor’s “wish list” which, in principle, should be taken as “supportive” for Brazilian assets. Mexico - Low oil prices have hit Mexico’s state-owned oil company hard and the government finally stepped in with financial support for Pemex. While the bailout doesn’t address Pemex’s fundamental problems, the package should help to alleviate its short term financial constraints. Argentina - After the initial euphoria, it is now time to face the effects of the necessary adjustment measures. Economic activity still shows signs of contraction mainly due to measures taken by the government to reduce the imbalances inherited from previous administrations.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
The month in charts
Libor-OIS spread (Overnight Index Swap)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
USA:
Investors seem complacent rather than bullish
Do you feel dizzy?
Why do some analysts sound so cautious on the US economy? Corporate profits (ex-financials) are down more than -14% over the last two years. Since 1945, whenever the two-year rate of change for corporate profits has turned negative, a US recession has followed in the very short term. The only exception was 1985 when the US dollar fell abruptly along with rates and oil prices. The yoy change in US industrial output has also turned negative. Some argue that since 1945 this measure has never swung into negative territory without a US recession unfolding (see chart 1). This contention seems to suggest that negative growth in US industrial production is the cause of a recession, however, as chart 1 shows, the recessions of 1957, 1960, 1969 and 1973 all started with US industrial output showing positive growth rates. Thus, we can not state that a negative growth in US industrial activity has historically led to a recession. Data Q1 GDP growth stood out as the weakest quarter since 1Q’ 14. Real US GDP grew by only 0.5% saar, largely held back by a collapse in corporate fixed investment and a continued drag from inventories and net exports. This was below the +0.7% consensus and stands as the weakest quarterly growth rate since the 0.9% decline posted for Q1 2014. While disappointing, there are a few mitigating factors in the report: 1. Some of the weakest areas in the Q1 GDP report were concentrated in the energy and mining sectors (with a 70% collapse in investment). Excluding these known areas of concern, growth looked much healthier and -more importantly- the drag from these industries will become less severe in the quarters ahead as a simple matter of arithmetic. 2. Expenditure on private consumption held up better than anticipated in Q1, rising by an annualized 1.9% in real terms. However, it was skewed heavily towards services (+2.7%) rather than goods (+0.1%). 3. Residential investment rose by a strong 14.9% in Q1 (or +10.65 y/y), exceeding even our optimistic estimate. Outlook & the Fed GDP: We expect a “modest” rebound in Q2 GDP on the back of: (1) less drag from mining investment, (2) disposable personal income that rose +2.9% in Q1, following +3.4% in FY2015, and after personal savings rose 5.2% in Q1 (+5% for FY15), giving wings to a further strengthening in consumer spending and better movement in inventories. The pick up in GDP will be modest since residential investment is unlikely to keep pace. Our FY16 GDP estimate is 2%. Headline CPI rose to 1.1%, but core goods prices returned to deflationary territory, with import prices continuing to fall. A general interpretation could be that prices of goods continue to fall while prices of services are rising. We expect the continuing strong labor market data to drive core inflation readings gently higher in the medium term. The Fed. We note that the pace of economic recovery has not yet gained additional traction and this may keep the Fed on hold for the time being. We would not be surprised if the Fed postpones the next rate hike until September, although our base case scenario still includes two rates hikes in 2016. Markets Equity: Equity investors seem complacent rather than bullish about the near-term prospects for US stocks. The S&P 500 has a forward P/E of 16.7x and a 5% pull back would lower P/E to 15.8x, implying an index level of 1950. Investor sentiment remains fragile and, given lackluster corporate earnings, the fear of another retreat is high. Bonds: UST10 target at 2.20%, CDX IG at 63, CDX HY at 400.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Europe:
Stability on the macro front, but corporate results fall ECB At its last meeting, the ECB offered more detail on the corporate purchases program. (1) It will include bonds issued by European firms even if the parent company is outside of the Eurozone; (2) Insurance bonds will also be eligible; (3) Maturities ranging from 6 months to 31 years (commercial paper is included), (4) A limit of 70% per ISIN; (5) ECB will buy in both primary and secondary markets and (6) Without any restriction on the minimal amount issued (benefiting small and mid-size companies). In addition, the volume of monthly purchases could be considerably higher than initially thought (50% higher than the amount estimated). Hard data Inflation: Modest recovery in expectations, but prices could stay in negative territory until 2H16 (when they should start to pick up). Expectations for average 5-year CPI remain anchored at 1.5% in Europe (much lower than the 2.1% for US CPI). Current level of the headline CPI for the Eurozone remains negative (-0.1%), while the underlying CPI remains below 1% (negative trend recently in both cases). Activity: Recent dynamics (and short term prospects) could well be defined as “stable”. Latest EC projections came without any surprises and were in line with market expectations. Macro surprises in the Eurozone have gained momentum compared with the sharp deterioration witnessed in the UK (referendum contagion?). Politics (a busy political agenda) UK: The June 23rd Brexit referendum is the main source of tension, with a narrow margin in the polls for the “Remain” vote. Volatility lies ahead as we approach the date, with the currency being the main risk. The consensus is a sharp decline in the pound against the dollar if the “Leave” vote wins, while if the “Remain” vote wins, GBP will be back to our target levels. Potential consequences for the economy are unclear, as well as the political reaction among the remaining EU members. Spain: New elections will be held on June 26th, following the Brexit referendum. Latest polls point to a hung parliament, similar to the one seen after December, but with some shifts in left-wing parties that could prove to be relevant. The leftist Podemos and Izquierda Unida will run on a joint ticket and could overtake the center-left PSOE party. An agreement on a coalition to form a government will still be needed, which will complicate the situation further given the state of complete opposition between the three main forces. A bipartite coalition that results in a weak government seems the most probable scenario, which is undoubtedly bad news as it will further prolong the instability. Markets Peripherals spreads have widened during the last month. European scenario remains relatively benign for government bonds (low growth, low inflation, increased ECB purchases). We are sticking to our targets for 10yr bond yields: Spain 1.4%, Italy 1.3%, Portugal 2.5% and Ireland 0.9% Core fixed income (Bund) could stay at these levels in the short term. Target for 2016 of 0.4%. Corporate bonds: Stable during April and May (following strong reversal of the indexes in March). “Room for improvement seems limited in credit, but ECB corporate purchases starting in June should lay the foundations for less volatility and reduced spreads”. We keep our targets for IG spreads (65) and HY (290). Equity (STXE 600): We are cutting our sales growth estimate (from 3.5% to 0%) and our Margins estimate (from 7.7% to 7.4%), resulting in a lower FY16 EPS target (from 24€ to 22€). We are raising the PE target slightly (to 15.5). Price target is now 345 (from 360 previously). 6
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
China:
Chinese consumers are alive and kicking China in 2025 - How to succeed in the Chinese market place? The number of affluent consumers (annual income >US$21,000) continues to grow fast. Although Chinese incomes are not normally distributed, the current pattern of household wealth in China can be summarized in two broad ways: 1. A 25% rise in average household income (from US$10,000 to US$12,500) generates a seven-fold rise in the number of households with income above US$15,000. 2. If average income grows by 7% in 2016, the number of “affluent” households will rise by almost twice as much (14%), from 82m to 93m in 2016. The result is a sudden, huge increase in demand for the kinds of goods and services that people only start buying once their income exceeds US$15,000: SUVs, foreign travel and affordable luxuries like chocolate, yoghurt and coffee. Future dynamics: Even if we assume that GDP growth slows gradually to 5% by 2020, and to 3.5% by 2025, the number of affluent households will rise by two-thirds to 137m by 2020, and to 182m by 2025. In summary: (1) Chinese consumers are alive and kicking. (2) High-end consumption is likely to prove resilient over the next decade even in the face of deepening industrial malaise. (3) Understanding the acceleration phenomenon and consumer differentiation will be critical to success in the Chinese market place. Economic Policy China’s approach: Beijing is standing by its fiscal policy and prudent monetary policy, while also strengthening the implementation of supply-side reforms. China’s Academy of Social Sciences forecasts that the economy will grow 6.6-6.8% in 2016 on the back of (1) Fiscal policy remaining proactive, (2) Prudent monetary policy being more flexible, (3) Investment in infrastructure, and (4) Stabilization in real estate investment. Fears overblown? China is still providing aid to bloated sectors, but it seems that fears are overblown. Government aid did rise to more than CNY119B last year, up from ~CNY92B yuan in 2014, but this is still a low figure (around US$18bn). Authorities acknowledge the risk that excessive leverage poses to asset markets, yet at the same time it notes that if high leverage is managed properly then risks can be minimized. April CPI +2.3% y/y (vs +2.3% in March); PPI (3.4%) y/y (vs -4.3% in March). Good for corporate margins. Reforms Land: China’s Ministry of Land and Resources will reduce or halt the supply of land for cities that have high property inventories. Outbound acquisitions: China plans to remove the need for State Council approval for large (>US$2bn) sensitive outbound acquisitions and will allow Chinese companies to compete for the same target. Excess capacity: Efforts to tackle excess capacity will be accelerated with a focus on implementing differentiated credit policies (channeling stronger support to high-tech companies and those operating with a strong industrial base, while diminishing financial support to those with excess capacity). PPP: State Council to accelerate public-private projects. Pilot projects worth CNY600B to be announced next month. Railways & water: Ministry of Transport announced an action plan to invest CNY4.7T (US$0.7T) across 303 infrastructure projects until 2018, focused on the development of railways, highways, waterways, airports and urban rail. Risks Moody's: The percentage of state-owned enterprise liabilities that could potentially require restructuring totals 20-25% of GDP. IMF: “Further Chinese rate cuts and stimulus could increase the chance of unhealthy debt growth and risks, reviving old growth engines”. China’s corporate debt now stands at around 160% GDP. New mortgages of CNY2.2T ($344B) account for 45% of the increase in total loans in 2015, and total mortgages made up a 20% of banks' loans at the end of 2015. Surging mortgages are fueling credit risks 7 for China banks.
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
India:
India will move faster
The SSE has already reflected the fall in intermediation
The SSE has already reflected the fall in intermediation
A facelift that is starting to be felt India is ranked 87th in the World Economic Forum’s infrastructure quality index, but this could change over the coming years. The transport network has failed to keep up with huge increases in passenger numbers and freight volumes over the past two decades. The lack of efficient railways and roads lowers productivity, raises costs and holds back growth from reaching the 8%-10% target. Indian Railways operates 19,000 trains, carrying 23m passengers and over 3m tons of freight every day, but the sprawling network is the same as the one laid down by the British before independence (1945). Comparisons with China are startling – in 1990, China’s 58,000 km rail network lagged behind India’s 62,000 km, but by 2015 China’s had doubled to 121,000 km whereas India’s had barely grown to 66,000 km. In per-capita terms, China has invested 11 times more than India. Passenger and goods trains share the same track, but only 35% of capacity is used for carrying freight (and this capacity averages 25km/h). Roads have therefore taken up the slack (pushing rail’s share of freight from 50% to just 30%). Such a reliance on more expensive road transport costs the equivalent of 4.5% of GDP every year!! (China carries three times more coal by freight and per hour at less than half the cost per ton). The good news Modi’s government has put improving transport infrastructure at the top of its agenda (a first and necessary step to create the intended manufacturing boom). New rail minister Suresh Prabhu is trying to turn Indian railways into a professional institution with (1) Capex budgeted at INR1.2trn (3x the annual average under the previous government), (2) Foreign investment flowing in, and (3) An agreement with Japan to use its high-speed technology in exchange for a 50-year loan worth nearly INR 800bn, with a 15-yr grace period and rates of just 0.1%, and (4) GE and Alstom having won contracts to supply new locomotives but opening factories in India. The target is to create two dedicated rail freight corridors in the short term, with a further four on the table. Feeder routes for coal and steel, connecting clusters, logistics parks and ports. Dedicated freight lines are a crucial building block to achieve the goal of making India a manufacturing powerhouse. Daily track commissions have risen from 4 km to 7 km and will rise to 17 km in 2017 and 19 km in 2019. One major reason for the underinvestment has been banks’ unwillingness and inability to lend (with dozens of projects heldup by regulatory problems and many contractors finding themselves sitting on bank loans but unable to get the project running). (1) Delhi is now dipping into its own pocket, with road projects not sanctioned until the land has been acquired. (2) Delhi has built up a substantial public land bank to streamline the process. (4) State governments have been allowed to raise debt via SPVs in a good example of giving more fiscal autonomy to states. (5) Delhi allows foreign companies to take 100% ownership of rail infrastructure projects. (6) Ministry of Railways will develop real state investment around its stations in a plan to generate extra funds: US$130bn in 5 years February’s budget for 2016-17 has allocated a hefty US$32bn to rail and roads (against a backdrop of fiscal consolidation). This gives India more potential than any other large economy to boost activity. To sustain economic growth of 8-10% (target), India needs to address massive increases in power generation (including large increases in the transport of commodities in bulk). Govt forecasts that coal demand will rise from 900m tons to 1.5bn tons in 4 years. Steel is expected to grow from 80m tons to 400m tons in 15 years. With a savings rate of 28% of GDP, India has plenty of capital 8 to invest in new roads, railways, factories and ports.
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Japan: The US Treasury has put Japan on watch for possible unfair currency practices Hard Data Bad figures: (1) Total wages +1.4% y/y. Base wages +0.4% y/y, Special payments +19.8% y/y. (2) Consumer confidence in April down to 40.8 (vs 41.7 in March). (3) Services PMI in April down to 49.3 (from 50.0 in March). (4) LEI March down to 98.4 (from 98.9 in Feb). (5) Tertiary sector activity index in March fell to -0.7% y/y (vs -0.2%). (6) BoJ Consumption activity index for March fell to -0.5% (vs +0.5%). (7) Q2 GDP expected to contract according to Nikkei report, due to weak capital investment, weak private consumption, stronger Yen and Kumamoto earthquakes. (8) Profits: FY profits for Japan’s major banks at four-year low (-6.9% y/y) Good figures: (1) Preliminary Q1 GDP +0.4% Q/Q or 1.7% annualized, but 4Q revised down to -1.7% annualized (from -1.1%). (2) Bank lending +2.2% y/y in April (up from +2% in March). (3) Core machinery orders +5.5% m/m vs (9.2%) in February. CPI & Economic estimates CPI forecast: BoJ lowered inflation projections to 1.7% for 2017 after CPI slipped in March at the fastest pace in three years, with non-food CPI back into deflation territory. GDP Growth forecasts for FY2016 were cut from 1.5% to 1.2%. FY 2017 growth estimate was also cut. In fact, GDP fell 0.5% m/m in March, citing estimates from the Japanese Center for Economic Research. The main driver was private consumption, which dropped 1.9%. Although Q1GDP may be edging upwards (+0.2% saar) it will be driven by the extra leap year day. Excluding this factor, the economy may have contracted. FX Forex trading in JPY totaled ¥5.52 Quadrillion (some US$51.5T), with Japan accounting for up to 30% of the global FX market. If there was a “carry trade" (much of it funded in ¥) of about US$9T, the combination of that volume of transactions in JPY, along with the fact the JPY has appreciated, could mean that a large part of this carry trade will now be normalized. BoJ (Wait and see?) Kuroda told Boersen Zeitung that the bank needs to wait a few more months to see the impact of its stimulus measures on the economy. At the same time he said that that “he is not saying that the bank will stand pat until the policy effects can be confirmed”. “The QQE with negative rates is an extremely powerful policy scheme but there is no doubt that ample space for additional easing is available”. NIRP debate: BoJ’s board members have differing views on the merits of NIRPs. Some members blame anxiety among banks, lack of public understanding and exacerbated market turbulence on NIRP. QQE Effectiveness: After 4 years of QQE in Japan, the Nikkei is back to October 2014 levels, and the Yen (far from depreciating, as planned) has appreciated and is also back at 2014 levels. Until when? The big problem comes from investors and analysts that increasingly demand a stronger response from BoJ, which is worrying especially if one considers that the BoJ is already in the top 10 shareholders in 200 out of the 225 companies in the Nikkei. Reactions to the Yen’s strength Japan: Finance Minister Aso said Japan is concerned about the speculative and abrupt yen strength and will respond if necessary. Kuroda also reiterated that the bank would not hesitate to take additional measures to achieve its price stability target. Japan lacks G7 support for FX intervention to stop the yen's advance. US: The US Treasury has put Japan on watch for possible unfair currency practices. Japan’s Aso said that this does not limit Japan's action, including FX intervention. Outlook BoJ’s action: We fear that from now on every BoJ meeting resulting in a ponderous and cautious approach will result in a market slump. Today’s big hope for bulls is that the BoJ has held back this month, and therefore conserved ammunition that can be used in the next meeting. We do not consider this as a healthy situation. Abenomics: Some of our local sources even believe that the reflation plan conceived three years ago is in mortal danger, with a real risk of sliding into a deflationary black hole”.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Brazil:
Temer’s plan reads like an investor’s wish list
A much needed supportive monetary policy could be nearer
Politics Brazil’s Senate has voted 55-22 to put President Rousseff on trial. A new government under Vice-President Michel Temer is likely to pursue more market-friendly policies. What happens now? The Senate now has 180 days to convict Ms. Rousseff, at which point it will be decided whether she should be officially removed from office and replaced by VP Temer until elections in 2018. How do we see the outcome of November’s vote? It looks like a formality. It requires a slightly higher majority than today’s vote (two-thirds vs. >50% or 52 votes) but this is unlikely to be a major hurdle. Mr. Temer will be out and the entire cabinet will be replaced. Local media reports suggest that former head of the central bank, Henrique Meirelles, is in line to take over as Finance Minister. If confirmed, it would be an impressive appointment. During Meirelles’ time as the head of the central bank he forged a reputation as being tough on inflation and has recently made a string of interventions calling for curbs to government spending. Central Bank: Governor Tombini will be replaced Ilan Godfajn (an inflation hawk), although he will be slow to cut interest rates despite the economy’s continuing struggling. Outlook The main features of Temer’s plan read like an investor’s wish list, which in principle should be taken as “supportive” for Brazilian assets: (1) Cut the number of ministries from 32 to 22, (2) Fiscal policy to be tightened, (3) Pension system to be reformed, (3) Stakes in public companies to be sold. We expect the Central Bank to start tightening on the back of recent signs that inflation is declining. Admittedly rate cuts can be postponed, by we forecast a 200 bps cut during 2017 (from 14.25% to 12.25%), maybe starting during 4Q16. The Risks The fightback by the Workers’ Party and Dilma’s allies will be ferocious and could complicate efforts to pass the much needed legislation in Congress. The way they will fight Temer’s government and cause damage is through more immediate economic disruption, for example strikes and mass protests. There is a risk that Mr Temer will fall short of investors’ lofty expectations. Most of the good news from a shift in policy has now been priced in. If Temer disappoints, Brazilian assets will fall. Interest rates are unlikely to come down as quickly as markets expect, partly because any incoming Governor at the central bank will want to demonstrate inflation-fighting credentials. The Reforms Pensions: Brazil's new interim government plans to have a pension reform proposal drafted by June 3 after reviewing unions' suggestions next week, presidential chief of staff Eliseu Padilha told reporters on Wednesday. Debt renegotiation with states: Brazil's new 2016 fiscal target to be announced next week is likely to include renegotiated state debts and any losses by state electricity group Eletrobras. Central Bank: Brazil's interim government appointed chief economist of Banco Itau to head the central bank, in a further shift away from interventionist policies. Goldfajn, 50, an Israel born MIT graduate, has been widely praised on Wall Street for his orthodox approach to economics (an inflation hawk) and is expected by investors to be less vulnerable to political interference than Tombini, a technocrat appointed by Dilma. Meirelles also said on Tuesday that the government will propose a constitutional amendment to give "technical autonomy" to the BCB. Goldfajn has already stated that “priorities are to rebalance fiscal accounts with pension reforms and public spending caps”. The central bank aims to keep inflation at 4.5%, the center of its official target. Under Tombini's leadership, the central bank has repeatedly missed its annual inflation targets, denting its credibility.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Mexico:
Government’s bailout of Pemex underscores the fact that they can no longer rely on the company as a cash cow. Pemex Bailout Low oil prices have hit Mexico’s state-owned oil company hard. Last year, Pemex’s net (after tax) loss almost doubled to $33bn and the company made its first ever pre-tax loss. In response to Pemex’s rapidly deteriorating financial position, Moody’s recently downgraded the company’s foreign and local currency credit ratings by two notches to one above junk. Moody’s also changed the outlook for Mexico’s sovereign debt from stable to negative, indicating that a downgrade is possible (S&P rating for Mexico is > for domestic bonds and BBB+ for foreign bonds) Government finally stepped in with financial support for Pemex. The package has three parts: (1) $1.5bn cash lump sum. (2) $2.7bn to help pay for pensions owed this year. (3) A tax break on infrastructure projects worth some $2.9bn. In total, the package amounts to $7.1bn (or 0.7% of GDP). ST View: The package should help to alleviate Pemex’s short term financial constraints. Assuming that a planned $46bn cost cutting program is fully implemented, the package could return Pemex to pre-tax profit in 2016. LT view: The bailout doesn’t address Pemex’s fundamental problems. (1) Pemex pays an extraordinarily large amount of its income to the government in tax compared to other stateowned energy companies in Latin America. It pays more than 100% of its operating income. (2) The government’s decision to dedicate such a large portion of profits to be paid in the form of taxes has deprived it of capital expenditure, leaving Pemex with chronically low investment that has led to huge inefficiencies and low productivity, resulting in a sharp cut in oil output (from 3.5M bpd to the current 2.3M bpd). (3) Pemex needed to take on more debt to ease its cash flows shortages. Total debt is now above $100bn (or 10% of GDP), much higher than the US$60bn of debt in 2012. Government credit metrics (impact of Pemex bailout) The impact of this state aid on public finances should be limited. (1) The costs are manageable and the aid is not recurrent spending. (2) The fiscal deficit will remain at around 3.5% of GDP, with public debt remaining at around 49% of GDP. The state of the nation Activity: Manufacturing is decelerating (due to high correlation with US industrial activity), but private consumption continues to be supportive. The labor market is gradually recovering. FY16 GDP forecasts point to 2.3% growth. Inflation remains below the long term target of Banxico (3%). Central Bank: Rates were left unchanged at 3.5% following last month’s raise (+50bp). Governors consider the current stance as appropriate. Financial Markets FX. Our Mid-term target remains at 17.5. 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. Equity. 1Q16 earnings season has been one of the strongest since 2011. Sales +11% and net profits +27.1% yoy, with 59% of companies reporting above-consensus. We expect consumption (and earnings) to remain strong based on job creation, wage increases, low inflation and remittances. Mexico will also benefit from a strong US labor market (the US receives 80% of Mexican exports) but also from the recent advances in diversifying Mexico’s economic structure through major reforms. IPC target circa 48,000. Our favorite sectors are consumption, airports , auto parts and materials.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Argentina
After the initial euphoria, it is now time to face the effects of the necessary adjustment measures
It seems as if the initial euphoria over the change of government had faded
Recent developments Secretary of Finance confirmed the government will not sell bonds abroad until 2018. (Shortage of Argentinian bonds in the market?). To cover current fiscal deficit, the government will attempt to attract funds through a tax amnesty, which the Macri administration is confident will attract a significant volume of funds. According to government figures, Argentineans hold more than 200bn in assets outside Argentina, of which less than 10% is declared. Unofficial figures put it at 400bn USD. Hard data Economic activity still shows signs of contraction mainly due to measures taken by the government to reduce imbalances inherited from previous administrations: (1) Adjustments in public tariffs, (2) Reduction in export taxes, (3) Sharp increase in interest rates, (4) Removal of exchange controls, (5) Decrease in money supply, etc. All of these much needed measures have caused a significant deceleration in economic activity. Analyst expect a better 2nd half due to the start of various projects and a pick up in FDI (on the back of regained businesses confidence with the new government). Moreover, the dollar price index for Argentina’s exports has risen approx. 18% YTD since start-of-year lows mainly due to soybean rally. Inflation stood at a worrying 6.5% m/m in April due to big tariff increases imposed this month. However, core inflation came down to 2.8% m/m in March (lower than the 3.5% in April). Financial Markets FX. ARS spot @ 14.13 continues to be relatively strong due to contractive monetary policy from the central bank. Although the settlement with holdout creditors is easing pressures on the ARS, we think USD inflows will hardly be enough to finance FX needs. Inflation inertia also continues to be negative for the currency. We therefore believe a target of 18 for this year seems appropriate (approx. 35% annual depreciation). Fixed Income. Following the tax amnesty plan announcement on May 12th, the 10yr bond yield went from 7.30% to 6.80% at present. We consider this amnesty plan to be a positive move as it tries to use genuine assets instead of continuing to use debt to finance fiscal deficit. However, at this point we are maintaining our target price for the 10yr Global 2026 USD bond at 7% until we see more details of this tax amnesty and can better assess its chances of success. Provinces are starting to issue debt. Mendoza issued 500mn at 8.62% maturing in 2024; Neuquén issued 235mn at 8.625% maturing in 2028. Cordoba and City of Buenos Aires are also expected to issue debt in the next few days. We continue to like short term government/quasi bonds: Bonar 18 at 4.86% yield, Global 19 at 4.32% yield, Bs As Prov 18 at 5.42% or YPFDAR 2025 at 7.99% yield. Equity. There has also been a major recovery in the equity markets in the last few months. Some stocks still look cheap but future performance will mainly depend on the success that Macri achieves with his measures to reestablish macro equilibrium in Argentina. Companies that could benefit from Macri’s policies include YPF (under a new government, offshore investments could help the company develop unexplored natural resources); some financials (BMA, BFR, GGAL) due to a low rate of bank penetration; and some utilities (PAM, EDN, TGS) due to the normalization in tariffs after years of being frozen.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Equity Markets GLOBAL EQUITY INDICES - FUNDAMENTAL ASSESSMENT
Index
Sales per Share 2015
Andbank's Sales Andbank's Net Margin Sales Growth per Share Net Margin 2015 2016 2016 2016
EPS 2015
S&P 500 INDEX/d 1.130
EPS 2016
EPS Growth PE ltm PE ltm 2016 2015 2016
117,6
10,4%
4,6%
1.182
9,7%
115
-2,5%
17,79 17,00
21,7
7,2%
0,0%
301
7,4%
22
2,6%
16,06 15,50
IBEX 35 INDEX/d 7.875
641,4
8,1%
0,7%
7.927
8,1%
642
0,1%
14,15 14,50
MXSE IPC GRAL /d28.542
1.888,1
6,6%
7,7%
30.739
7,3%
2.254
19,4%
24,30 21,30
BVSP BOVESPA I/d 55.578
3.377,2
6,1%
5,5%
58.635
6,5%
3.811
12,9%
14,65 13,12
NIKKEI 225 INDEX20.408
1.018,6
5,0%
2,0%
20.816
5,0%
1.041
2,2%
16,47 15,80
STXE 600 PR/d
301
SSE COMPOSITE/d2.652
233,9
8,8%
7,0%
2.838
8,8%
250
6,8%
12,07 13,00
HANG SENG INDE/d 13.064
2.015,3
15,4%
2,0%
13.325
15,4%
2.052
1,8%
10,12 10,00
S&P SENSEX/d
12.559
1.432,9
11,4%
11,0%
13.941
11,8%
1.645
14,8%
18,40 17,00
MSCI EM ASIA
411
34,1
8,3%
7,0%
37
7,0%
18,90 18,21
440
8,3%
INDEX CURRENT PRICE 2.091 349 9.077 45.883 49.483 16.772 2.823 20.397 26.367 645
2016 TARGET PRICE 1.949 345 9.310 48.000 50.000 16.445 3.247 20.521 27.965 665
2016 E[Perform.] % Ch Y/Y -6,8% -1,0% 2,6% 4,6% 1,0% -2,0% 15,0% 0,6% 6,1% 3,1%
ANDBANK ESTIMATES
RISK-OFF SHIFT PROBABILITY
Andbank's Global Equity Market Composite Indicator (Breakdown)
Buy signals Positive Bias Neutral Negative Bias Sell signals FINAL VALUATION
Previous
Current
Month
Month
7 2 11 2 0 3,2
4 3 9 5 1 0,9
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 fallen again (from 3.2 to 0.9 in a -10/+10 range), suggesting that the market is no longer oversold and is trading in a neutral zone. The market is now less cheap although we cannot say it is expensive. At current levels, a risk-off shift probability in the equity markets is higher than a month ago, but if a risk-off shift takes place, the market would quickly become oversold again. o Positioning (moderately positive): A wide variety of positioning strategies depending on the type of investor. Speculators are now long equities vs rates, hedge funds are slightly underweight, strategists are neutral, and asset allocators are long cash, meaning that managers remain unconvinced. o Flows - Funds & ETFs (moderately negative): Allocations last month to US equities fell back to their 8-year low in May. Europe remains underweight (14 straight weeks; longest streak since Feb’08) and in emerging market allocations too, with $2.3bn outflows (largest in 16 weeks). o Market vs Data – Surprise indexes (moderately negative). o Sentiment (moderately positive): The BNP Love/Panic US Index is still in Buy territory with a very low mark of -65% (lower than 2008/2012 levels). The strongest driver for sentiment indexes once again comes from a Commodity composite bullish index (which aggregates commodity sentiments for Crude Oil, Gold, Copper, Corn, Soybeans and Raw Sugar).
TECHNICAL ANALISYS: Short Term (ST) and medium-term (MT) o o o o o o
S&P: SIDEWAYS. Support ST at 2000 / MT at 1972. Resistance ST at 2134 / MT at 2134. STOXX50: MOD. BULLISH. Support ST at 2860 / MT at 2789. Resistance ST at 3156 / MT at 3325 IBEX: MOD. BULLISH. Support ST at 8256 / MT at 7968. Resistance ST at 9360 / MT at 9544 €/$: Support ST at 1.12 / MT at 1.09. Resistance ST at 1.17 / MT at 1.17 €/$: Support ST at 1.12 / MT at 1.09. Resistance ST at 1.17 / MT at 1.17 Gold: Support at 1190. Resistance at 1306
13
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Fixed Income – Core Country Bonds:
NEGATIVE STANCE
UST 10Yr BOND: Entry point above 2.5% yield / Floor at 1.80% / Ceiling 3.00% 1. Swap spread: Swap rates remained stable at 1.61% during the month, but 10Y Treasury yield fell 9bp to 1.80% (from 1.89%). The swap spread therefore rose to -19bps (from -28bp). For this spread to normalize towards the +20bp area, with 10Y CPI expectations (swap rate) anchored in the 2% range, the 10Y UST yield would have to move towards 1.80% (this could be considered a floor). 2. Slope: The UST yield curve has flattened (to 101bp from 106bp). 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 1.5%, UST yield would have to rise to 2.5% to become a “BUY”.
EURO BENCHMARK 10Yr BOND: Entry point at 0.65% / Ceiling at 0.88% 1. Swap Spread: Swap rates fell 3bp to 0.55% (from 0.58%) and the Bund yield also fell 7bp to 0.16% (from 0.23%). The swap spread therefore rose by 3bps to 38bp (from 35bp). For the swap spread to normalize towards the 30-40bp area and with 10Y inflation expectations (swap rate) anchored and normalized at 1%, the Bund yield would have to move towards 0.65% (entry point). 2. Slope: The slope of the EUR curve fell 4bp to 0.67bp (from 71bp). When the short end “normalizes” in the 0.25% area, to reach the 10yr average slope (113bp), the Bund yield would have to go to 0.88%.
Fixed Income – Peripheral Bonds:
NEUTRAL STANCE
Peripherals: Spreads have widened during the last month, while core yields have remained low. European scenario remains relatively benign for government bonds: low growth, low inflation, increased ECB purchases (the ECB’s purchases of government bonds have been expanding at a pace of 20 bn euros per week). Peripheral bonds could be trading sideways, so we are sticking to our targets. Spain: 1.4% (Risk premium on the upside due to political factors. S&P has reconfirmed Spain’s credit rating at BBB+ with a ‘Stable Outlook’. Italy: 1.3% (S&P has just confirmed its long and short-term sovereign credit ratings for Italy at 'BBB-/A-3', with stable outlook). Portugal: 2.5% (DBRS confirmed the investment-grade rating for Portugal. Important for ECB QE eligibility, though it has not spurred the expected outperformance of Portugal within peripherals. Anticipated supply seems to be the reason together with the EC pending pronouncement on Portugal’s fiscal program. Greece’s aid program could be approved at the end of May. Greece has moved forward with new measures (retirement age, VAT) complying with creditors’ requirements. We do not foresee a risk-off scenario in Greece as the EU approach has also relaxed somewhat. Ireland: 0.9% (A political agreement was reached in May. Fine Gael and Fianna Fail. Political uncertainty will persist. The recent upgrade from Moodys 14 will help.)
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Fixed Income – Corporate Bonds & EM Govies FIXED INCOME – CORPORATE CREDIT US$ IG & HY
EUR IG & HY
Performance: US corporate credit has been less benevolent (compared with the more stable performance in the EUR market). CDX IG: Spreads rose from 73bp to 85bp, while CDX HY spreads rose from 450bp to 461 bp. The trend towards tighter spreads came to an end this month, probably on the back of greater supply during the month absorbed by the usual number of investors. Primary market: HY new issuance reached almost US$11bn as of May 15th and will probably overtake the US$17bn recorded in April (higher than the US$9bn seen in March). Moreover, this month’s issuance is even better than the first half of May 2015 (US$10.4bn). YTD issuance totals US$50bn (80 companies), although this is still lower than the same period last year (US$65bn; 121 companies), but the difference is now much narrower. Outlook: We believe that the conditions are in place to regain the lower spreads seen last month: a healthier and normalized primary market, historical lows in Government bond yields, equity markets offering low potential upside, etc. Strategy: CDX IG – Target 63. In 2016 we believe that a bond-picking approach across all sectors will be more important than a sector-based approach. However, we recommend: Overweight: Financials, Materials, Technology. Underweight: Utilities, Healthcare, Industrial. Strategy CDX HY – Target 400. Looking at the historical average, HY spreads may look cheap, however some factors could prevent spreads from falling to historical lows: Recovery rates are now lower, lower duration of the credit cycle, etc. Excluding energy and mining, US HY may look fair value. Overweight: Financials, Media, Retail, Technology, Telecommunications . Underweight: Metals and Mining, Energy.
Performance: The corporate credit market remained stable through April and May (following the strong reversal of the indexes after March), with no significant changes since last month. Insurance bonds outperformed after the ECB confirmed that they would be eligible for its corporate purchases program. Meanwhile, spreads in basic materials have widened recently following an exceptional performance on the back of the oil price recovery and the adjustments made by firms in the sector (dividend cuts, reduced investment and personnel savings). Primary Market: Primary markets are busy as the earnings reporting period comes to an end, with issuers taking advantage of this “window” (improved funding conditions) ahead of the ECB June purchases. Very comfortable bid-to-cover ratios, with new issues skewed towards the long end of the curve (10 years). Risks: A very complicated environment of negative rates (fixed income instruments are less attractive). Outlook: Room for improvement seems limited, but the ECB corporate purchases starting in June should lay the foundations for less volatility and tighter spreads. Strategy: We favor a bond picking approach in sectors backed by ECB purchases and “rising stars” (HY bonds that could be upgraded to IG). Targets - Itraxx IG: 65bp (currently trading at 79 bp). Itraxx HY: 290 (currently trading at 331 bp).
FIXED INCOME - EMERGING MARKETS (GOVIES): “The two conditions are not met” 10 Year
CPI (y/y)
10 Year
Yield
Last
Yield
Govies
reading
Real
3,60% 5,34% 1,10% 2,30% 2,15% 0,03% -1,10% 1,02% 1,88%
4,15%
Taiwan
7,75% 7,47% 3,54% 2,94% 3,84% 2,05% 2,07% 1,79% 0,86%
Turkey
10,02%
6,57% 7,30%
3,46%
Russian Federation 8,85%
12,70% 6,10% 8,12% 6,44%
9,83% 2,54% 8,06% 3,95%
2,87%
Indonesia India EM ASIA
Philippines China Malaysia Thailand Singapore
EME
South Korea
Brazil LATAM
To date, our rule of thumb for EM bonds has been “buy” when 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 1.5%, UST bonds should be at 2.5% 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 UST this year is 0.45% (1.95%-1.50%), the real yield of the EM bonds should be at least 1.45% (see table).
Mexico Colombia Peru
2,13% 2,44% 0,64% 1,69% 2,03% 3,17% 0,77% -1,02%
1,55%
3,56% 0,06% 2,50%
15
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Commodities ENERGY (OIL): Fundamental target at $40. Range (Buy at $30. Sell at $50). Geopolitics Libya: Expectations of Libyan oil revival are fading as conflict between factions intensifies. Eastern official told Arabian Gulf Oil Co (which controls production in the region) that tankers are not allowed to depart without approval. Eastern oil fields, responsible for some 75% of Libya's total production, may be forced to halt within a month, with the tanks at the blockaded Hariga port filling up quickly due to factional strife. The oil flowing from some fields is high in wax and will solidify in the pipelines if it doesn't move (this output could be lost). Saudi Arabia insists on prioritizing market share rather than reducing output to boost prices, as “the weak global market reflects structural changes”. An OPEC source stated to Reuters that “Saudi Arabia does not give a damn about OPEC any more, and it is deepening the OPEC divide”. Certainly a reflection of OPEC’s new and reduced capacity to set prices. Iran is ready for joint action with OPEC but… only once it restores former output. An official with the national oil company said joining OPEC members in adopting a quota policy could happen after Iran reaches pre-sanctions output and export levels (around 4M bpd). Supply US: Shale producers say that if oil price reaches $50-55, DUC wells (Drilled but Uncompleted) may start to pick up considerably (140-170 a month in the Permian basin). Devon Energy Corp stated that it will ramp up drilling and spending if oil prices continue to recover, joining a growing list of companies expecting an increase in activity as the oil price picture improves. The company could start adding incremental drilling activity if oil prices hit $50 and could double capital spending if they reach $60. Another big oil firm, Noble Energy, said it expects to spend less than the $1.5B it had budgeted for the year, but would consider spending more on US shale assets if crude prices moved and stayed above $50. Canada: More than 90% of the production taken offline due to the wildfire emerged unscathed. Producers in the Fort McMurray area to resume production in the coming days. Iraq: The country fixed output higher at 4.3M bpd in April, up from 3.25M bpd two years ago. Exports approached a record high in April, rising to 3.36M bpd (from 3.29M bpd in March) and close to its all-time high of 3.365M bpd. Russia: Oil output at 10.84M bpd, still close to a 30Y record of 10.91M bpd. Sources said production edged slightly down in April because of seasonal maintenance at oilfields and refineries. Historical record is 10.91M bpd. Energy firms also foresee end to the rally Global producers: At US$45, producers are hedging prices heavily. The flurry of hedging kicked off when prices went through $45 earlier in April, and picked up in recent weeks (which means that they see lower oil prices in the future). Forward selling into 2017 tightened the structure of the forward curve, with December 2017's premium to December 2016 narrowing to $1.30, its lowest since June 2015. That spread had been as wide as $2.15 just four days earlier. European energy companies spent billions of dollars to profit from contango and bolstered Q1 earnings by pumping (buying) several billion dollars' worth of oil and keeping it in storage tanks after fixing the sale price in the futures market. This trading opportunity is starting to fade following the recent flattening of the contango effect. Royal Dutch Shell employed about $1B of capital in Q1 buying oil for storage that would be sold later at a higher price. Nevertheless, contango is fading (much flatter slope in the forward curve), indicative of what the future might hold: Front-month WTI futures have rallied 21% this year, but the five-year-forward WTI contract fell 2.6% over the same period. After the rally in the spot oil price, the frontmonth WTI is now roughly at the same level as six months ago, but the price of the longest-dated contracts has fallen about $6 over the period. Does this reflect the view that shale production could rebound as prices recover, capping any sustainable rally? If true, this would put a de facto ceiling on the oil price. However, we tend to see it from another perspective: This "lower-for-longer“ view for the oil price (reflected in the much stable and lower 5-year contract price) could suppress investment, which in turn could represent a de facto floor for the oil price. Some Forecasts: IEA (supportive of price): The IEA's chief said oil prices may have bottomed out, provided that the health of the global economy does not pose a concern. Recent outages, such as in Nigeria and Kuwait, may have driven the rally. “We need to see a rebound in upstream oil investment this year, since a third year of decline in investment would be problematic and cause oil price spikes and increase volatility”. Citigroup (supportive): The bank says that the stock prices of the companies it covers are pricing in $65 oil, while others put the number as high as $70-75. By contrast, futures contracts through 2020 are trading below $55. Lenders in US (negative). US banks are tightening standards on loans to energy companies according to the Fed's senior loan officer survey. The survey shows that most domestic and foreign banks expect delinquency and charge-off rates on loans to energy firms to deteriorate over the remainder of 2016 (which means that they do not expect prices to recover significantly). Most domestic banks said energy loans account for less than 5% of their outstanding C&I loans. Structural Outlook: Cutting-edge projects sidelined on price concerns: Global energy majors are sidelining big ideas that they touted just a couple of years ago as “the future of the industry”. Casualties include (1) Ultra-deep-water drilling projects, (2) Huge boats that serve as floating liquefied natural gas factories, and (3) Technology that could drastically reduce emissions from burning fossil fuels. As of March, the industry has deferred or cancelled $270B in projects since crude prices began crashing two years ago. The industry spent about 15% less on research and development in 2015.
16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Commodities GOLD: Buy at US$ 900/oz. Sell above US$1,100. New target price!! 1,000 (from 900) Negative drivers: 1. Gold in real terms. Gold price has risen in real terms (from $986 last month to $1129) and continues to trade well above its 20-year average real price of $762. Given our global proxy for the global deflator (we use the US Implicit Price Deflator-Domestic Final Sales base year 2009 as a proxy) now at 1.1054 (from 1.1033), for the gold price to stay near its historical average in real terms, the nominal price (or equilibrium price) must remain near US$842 (higher than last month’s US$827 equilibrium price). 2. Gold in terms of Oil (Gold / Oil): This ratio has fallen to 25.94x (from 28.95x last month) but still remains above its 20-year average of 14.23. If the average oil price stays at $40 (our central target), the nominal price of gold must approach US$569 for this ratio to remain near its LT average level. 3. Gold in terms of the S&P (Gold / S&P500 index): This ratio has moved to 0.612x (from 0.598x last month), still below its LT average of 0.5806x. Given our target price for the S&P of $1949, the price of gold must approach US$1,131 for this ratio to remain near its LT average. 4. Gold in terms of the DJI (Dow Jones / Gold): This ratio has moved to 13.95 (from 14.67 last month), still below its LT average of 20.4x. Given our new target price for the DJI of $16,700, the price of gold must approach US$818 for this ratio to remain near its LT average. 5. Positioning in gold points to further falls: CEI 100oz Active Future non-commercial contracts: longs rose to 337 from 286k last month. Shorts remained stable at 72k => Net positions increased to +264k from prior +213k (Speculators are once again longer than a month ago). 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. Monetary stimulus by ECB and BOJ continues, but not by the Fed (remember the price of gold is in USD). 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. Recent pick up in central bank gold buying. Despite this, gold stocks at central banks are still considerably higher than 2008 levels. 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$173bn (2.5% of the world's gold and just 0.08% of the total in the financial markets).
17
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Currencies The USD positioning remains net short to the tune of US$-3.6bn compared to -6.9bn two weeks ago, and much lower than the US$+44.3bn net USD positioning during the last 12 months.
• EUR/USD: MT Target (1.05) Short EUR futures (vs USD) have been steadily declining since November and total contracts are now around neutral (net contracts in EUR are worth US$-3.2bn, up from US$ -7.4bn last month). There is plenty of room for speculators to reach the lower end of the range (-30.4bn) seen last year by building shorter positions in EUR. In Zscore (3-year) terms, the EUR positioning is the highest seen in the last 12 months and among the longest currencies held by investors, together with JPY, CAD, AUD and RUB. All this suggests that the EUR (and these currencies) could go lower vs the USD.
• • • • • • • • •
JPY/USD: MT Target (120). JPY/EUR: MT Target (126) GBP/USD: MT Target (0.65). GBP/EUR: MT Target (0.68) CHF/USD: MT Target (1.00). CHF/EUR: MT Target (1.05) MXN/USD: MT Target (17.5). MXN/EUR: MT Target (18.4) BRL/USD: MT Target (3.30). MXN/EUR: MT Target (3.47) RUB/USD: UW RUB AUD/USD: UW AUD CAD/USD: UW CAD CNY/USD: MT Target (6.20). After a poorly handled attempt to move to a more market-determined exchange rate, the CNY is likely to continue its long-term (although mild) positive trend.
Currency
Values of Change vs Net positions last week 1-yr Max (Bn $) (Bn $) (Bn $)
USD vs All USD vs G10 EM EUR JPY GBP CHF BRL MXN RUB AUD CAD
-3,53 -4,65 -1,12 -3,19 6,75 -3,47 0,53 0,01 -1,25 0,13 1,82 1,76
2,17 2,18 0,01 -0,09 -0,01 -0,32 -0,36 0,00 0,01 0,00 -0,99 -0,25
44,3 43,6 0,1 -3,1 8,2 0,7 1,4 0,4 0,0 0,1 4,6 2,0
1-yr Min (Bn $)
1-yr Avg (Bn $)
-6,8 -7,1 -2,8 -27,1 -11,7 -5,0 -3,2 -0,3 -2,7 -0,1 -4,7 -5,1
21,0 20,4 -1,3 -14,0 -0,8 -2,3 0,0 0,0 -1,3 0,0 -1,1 -2,2
Current Z-score 3-yr -1,71 -1,93 -0,48 0,71 2,23 -0,80 0,67 0,05 -0,64 1,17 1,25 2,02
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 Max 4,0
Min Current
SPECULATIVE POSITION IN THE FX MARKETS (3Yr - Z SCORES. Max, Min & Current in 1Yr)
3,0 2,0 1,0 0,0 -1,0 -2,0 -3,0 -4,0
ANDBANK -5,0 USD vs All
USD vs G10
EM vs USD
EUR vs USD
JPY vs USD
GBP vs USD
CHF vs USD
BRL vs USD
MXN vs USD
RUB vs USD
AUD vs USD
CAD vs USD
18
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Market Outlook – Fundamental Expected Performance Performance
Performance
Performance
Current Price
Target
Expected
2015
Last month
YTD
26/05/2016
Year End
Performance*
-0,73%
0,0%
2,3%
2.091
1949
-6,8%
6,79%
0,4%
-4,7%
349
345
-1,0%
SPAIN - IBEX 35
-7,15%
-2,2%
-4,9%
9.080
9310
2,5%
MEXICO - MXSE IPC
-0,39%
1,0%
6,8%
45.883
48000
4,6%
BRAZIL - BOVESPA
-13,31%
-6,8%
14,1%
49.483
50000
1,0%
JAPAN - NIKKEI 225
9,07%
-3,3%
-11,9%
16.772
16445
-2,0%
CHINA - SHANGHAI COMPOSITE
9,41%
-4,8%
-20,2%
2.823
3247
15,0%
KONG KONG - HANG SENG
-7,16%
-4,7%
-6,9%
20.397
20521
0,6%
INDIA - SENSEX
-5,03%
1,4%
1,0%
26.367
27965
6,1%
MSCI EM ASIA
-7,90%
-3,0%
-2,7%
645
665
3,1%
Asset Class
Indices
Equity
USA - S&P 500
26/05/2016 EUROPE - STOXX 600
Fixed Income
US Treasury 10 year govie
1,4%
0,7%
4,3%
1,85
2,20
-1,0%
Core countries
UK 10 year Guilt
0,1%
1,9%
5,0%
1,42
2,00
-3,2%
German 10 year BUND
-0,2%
1,2%
4,1%
0,15
0,40
-1,9%
Fixed Income
Spain - 10yr Gov bond
0,1%
1,0%
2,9%
1,49
1,40
2,2%
Peripheral
Italy - 10yr Gov bond
4,1%
1,3%
2,5%
1,37
1,30
1,9%
Portugal - 10yr Gov bond
3,8%
1,7%
-3,0%
2,98
2,50
6,8%
Ireland - 10yr Gov bond
1,8%
1,6%
3,5%
0,76
0,90
-0,4%
Fixed Income
Credit EUR IG-Itraxx Europe
0,0%
0,5%
70,94
65
0,4%
Credit
Credit EUR HY-Itraxx Xover
0,0%
1,8%
304,01
290
2,0%
IG & HY
Credit USD IG - CDX IG
-0,1%
1,4%
77,12
63
1,7%
Credit USD HY - CDX HY
-0,2%
2,8%
449,06
400
5,0%
-13,4%
-5,4%
10,4%
9,68
9,25
17,7%
46,7%
3,1%
11,0%
8,83
9,75
12,8%
Fixed Income
Turkey - 10yr Gov bond
EM Europe (Loc) Russia - 10yr Gov bond Fixed Income
Indonesia - 10yr Gov bond
-1,1%
-1,7%
11,7%
7,79
7,00
14,1%
Asia
India - 10yr Gov bond
8,6%
0,0%
5,4%
7,47
7,00
11,2%
(Local curncy)
Philippines - 10yr Gov bond
2,1%
0,6%
6,1%
3,49
3,00
7,4%
China - 10yr Gov bond
9,9%
-0,1%
0,1%
2,92
2,36
7,4%
Malaysia - 10yr Gov bond
3,8%
-0,1%
4,4%
3,83
3,35
7,7%
Thailand - 10yr Gov bond
4,8%
-2,6%
4,4%
2,02
1,25
8,2%
-0,2%
-0,5%
5,0%
2,08
1,50
6,7%
South Korea - 10yr Gov bond
6,1%
0,3%
3,4%
1,78
2,00
0,0%
Taiwan - 10yr Gov bond
6,4%
0,2%
1,8%
0,83
1,00
-0,5%
Singapore - 10yr Gov bond
Fixed Income
Mexic o - 10yr Govie (Loc)
2,2%
-1,6%
4,0%
6,07
6,00
6,6%
Latam
Mexic o - 10yr Govie (usd)
2,4%
-0,5%
5,1%
3,64
3,50
4,7%
Brazil - 10yr Govie (Loc)
-20,2%
-0,9%
35,2%
12,89
13,50
8,0%
Brazil - 10yr Govie (usd)
-21,6%
0,6%
17,6%
5,86
6,00
4,7%
6,80
7,00
5,2%
Argentina - 10yr Govie (usd) Commodities
Fx
CRY
-23%
1,7%
4,8%
184,6
190,0
2,9%
Oil (WTI)
-30%
13,1%
34,4%
49,8
40,00
-19,7%
GOLD
-10%
-1,4%
15,5%
1.224,9
1.000
-18,4% -6,2%
EUR/USD (pric e of 1 EUR)
-10,23%
-0,9%
3,0%
1,119
1,05
GBP/USD (pric e of 1 USD)
5,67%
-0,7%
0,3%
0,68
0,65
-4,5%
GBP/EUR (pric e of 1 EUR)
-5,00%
-1,6%
3,4%
0,76
0,68
-10,4%
CHF/USD (price of 1 USD)
0,77%
1,7%
-1,3%
0,99
1,00
1,1%
CHF/EUR (price of 1 EUR)
-9,48%
0,7%
1,7%
1,11
1,05
-5,2%
JPY/USD (pric e of 1 USD)
0,52%
-1,5%
-8,9%
109,60
120
9,5%
JPY/EUR (pric e of 1 EUR)
-9,88%
-2,5%
-6,0%
122,64
126,00
2,7%
MXN/USD (price of 1 USD)
16,45%
6,2%
7,4%
18,44
17,50
-5,1%
MXN/EUR (price of 1 EUR)
4,56%
5,3%
10,7%
20,64
18,38
-11,0%
BRL/USD (pric e of 1 USD)
49,01%
1,4%
-9,6%
3,58
3,30
-7,8%
BRL/EUR (pric e of 1 EUR)
33,78%
0,4%
-6,9%
4,00
3,47
-13,5%
ARS/USD (price of 1 USD) CNY (pric e of 1 USD)
51,47% 4,6%
-1,0% 0,9%
9,3% 0,9%
14,14 6,55
18,00 6,20
27,3% -5,4%
* For Fixed Income instruments, the expec ted performanc e refers to a 12 month period
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-16
Monthly Tactical Global Asset Allocation Proposal Conservative
Moderate
Balanced
Growth
< 5%
5%/15%
15%/30%
30%>
Max Drawdown
Strategic Tactical (%) (%)
Asset Class
Strategic (%)
Tactical (%)
Strategic (%)
Tactical (%)
Strategic Tactical (%) (%)
Money Market
15,0
19,4
10,0
14,0
5,0
10,5
5,0
11,2
Fixed Income Short-Term
25,0
29,8
15,0
19,5
5,0
9,7
0,0
5,6
Fixed Income (L.T) OECD
30,0
21,0
20,0
14,0
15,0
10,5
5,0
3,5
US Gov & Municipals & Agencies EU Gov & Municipals & Agencies European Peripheral Risk Credit (OCDE)
20,0
4,2
3,2
1,1
0,0
0,0
0,0
0,0
14,7
9,8
7,4
2,5
20,0
20,0
20,0
15,0
15,0
5,0
5,0
Investement Grade USD
5,0
5,0
3,8
1,3
High Yield Grade USD
5,0
5,0
3,8
1,3
Investement Grade EUR
4,0
4,0
3,0
1,0
High Yield Grade EUR
6,0
6,0
4,5
1,5
Fixed Income Emerging Markets
5,0
5,5
7,5
8,3
10,0
11,0
15,0
16,5
Latam Sovereign
2,2
3,3
4,4
6,6
Latam Credit
1,1
1,7
2,2
3,3
Asia Sovereign
1,1
1,7
2,2
3,3
Asia Credit
1,1
1,7
2,2
3,3
Equity OECD
5,0
4,5
20,0
18,0
32,5
29,3
50,0
45,0
US Equity
1,4
5,4
8,8
13,5
European Equity
3,2
12,6
20,5
31,5
Equity Emerging
0,0
0,0
5,0
5,0
10,0
10,0
10,0
10,0
Asian Equity
0,0
2,5
5,0
5,0
Latam Equity
0,0
2,5
5,0
5,0
Commodities
REITS
6,3
0,0
0,0
2,5
1,8
5,0
3,5
5,0
3,5
Energy
0,0
0,3
0,5
0,5
Minerals & Metals
0,0
0,1
0,2
0,2
Minerals & Metals
0,0
1,2
2,5
2,5
Precious
0,0
0,2
0,4
0,4
0,0
0,0
0,0
0,0
2,5
0,0
5,0
0,0
This recommended asset allocation table has been prepared by the Asset Allocation Committee (AAC), made up of the managers of the portfolio management departments and the product managers in each of the jurisdictions in which we operate. Likewise, the distribution of assets within each customer profile reflects the risk control requirements established by regulations.
20
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE-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 JUNE-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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