Andbank Corporate Review March 2017 by Andbank

GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS

ANDBANK CORPORATE REVIEW March 2017

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Contents Executive Summary

Country Pages USA

Europe

China

India

Japan

Brazil

Mexico

Argentina

Equity Markets Fundamental Assessment

Short-term Assessment. Risk-off shift probability

Technical Analysis. Main indices

Fixed Income Markets Fixed Income, Core Countries

Fixed Income, European Peripherals

Fixed Income, Corporate Bonds

Fixed Income, Emerging Markets

Commodities Energy (Oil)

Precious (Gold)

Forex

Summary Table of Expected Financial Markets Performance

Monthly Asset & Currency Allocation Proposal

19 2

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Executive Summary USA - Many FOMC participants anticipate a hike “fairly soon”. Hard data keeps pace but there is no strong acceleration. Equity market may move higher but we see more downside risk than upside opportunity. Our fundamental year-end target for the S&P500 remains unchanged at 2233 and the exit point at 2456. Still cautious view on Treasuries. Positive in HY. Europe - With the market fully pricing in the Trumpflation trade, it seems that any positive surprises are more likely to come from outside the US, and mostly from the Euro zone. Fundamental target price for the Stox 600 at 349. Sell at 383. For the Spanish Ibex our target price has been revised to 9,716 (from 9,500). Sell at 10,687. Underweight Bunds. Mixed view on peripheral bonds. Cautious view on credit. China - GDP figures show that growth was remarkably stable in 2016 at around 6.7%. Our optimism fits with the last figures released in the NBS

Unionpay

surveys

showing

that

consumer

sentiment

has

improved in recent months. We keep our view for the Chinese equity market as ATTRACTIVE. Fundamental price for the Shenzhen at 2,039. Exit point at 2,243. Government bonds also attractive. Yuan stable. India - The demonetization debacle threatened investors’ faith in Delhi’s ability to manage economic reforms. As such, the budget was carefully calibrated in a move to reassure financial markets. Equity (Sensex)

ATTRACTIVE.

Fundamental

price

29,126.

Bonds:

ATTRACTIVE. 10Y bond target at 5.7% Japan - Abe is neutralizing the accusations that Japan is a currency manipulator. Similarly, Abe has signaled the importance of the Japanese firms’ investments in the US and the upcoming billionaire investment in the next years. Such a development could work for both sides. Equity (Nikkei 225): NEUTRAL-NEGATIVE. Fundamental price 18,599. Bonds: EXPENSIVE (USELESS). 10Y bond target 0%. Brazil - There is still room for a more rapid Selic rate reduction. Equities (Ibovespa): NEUTRAL-POSITIVE. Target 66,423. Sell at 73,000. Government Bonds: POSITIVE. Mexico - It seems like Trump’s aggressive rhetoric against Mexico has diminished. We believe that the risk of a disruptive event in the NAFTA negotiations is low. Equity market outlook: Neutral. Bonds outlook: Cautious. Argentina - recession is bottoming. The sources of this recovery however are mainly coming from public spending, and could be shortlived. Negative outlook in government bonds and Fx. Neutral in equities

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

USA:

MARCH 2017

The Fed doesn’t appear in a hurry to raise rates dramatically

Do you feel dizzy? Monetary conditions are clearly accommodative while fiscal policy is neutral

Growth in the US could keep pace but the structural shape is now vulnerable

Fed: Our base case continues to be two rate increases for 2017 Many FOMC participants anticipated a hike “fairly soon”. Fed’s outlook on the fiscal front: FOMC members see considerable uncertainty about the fiscal outlook. Some see the possibility of fiscal easing as an upside risk to their economic forecasts, while others noted that other changes in government policies could pose downside risks. A few participants also expressed the concern that policy changes discounted by equity markets may not materialize. Yellen’s view: Though markets took Yellen’s testimony as hawkish, her policy outlook appeared largely unchanged. She confirmed that every meeting is “live” and said that altering the size of the balance sheet would not be used as an active tool for monetary policy. Furthermore, she clarified that there would need to be sufficient space to address weaknesses before reinvestment would end. Macro front: We keep our 2017 GDP target unchanged at 2.3% • General assessment: Hard data keeps pace but there is no strong acceleration in investment spending yet. We see moderate growth in capital investment of 2.0% QoQ annualized for Q1. • Stable Durable Goods Orders came in a bit above consensus, increasing 1.8% MoM in January. Ex-transport orders turned negative for the first time in seven months falling to -0.2% MoM from 0.9%. • Weak Goods Shipments (non-defense and ex-aircraft) came in at a disappointing -0.6% MoM – the lowest value since July 2016. Machinery shipments were especially weak, with growth at -1.6%. Core capital goods orders this month were also weak, declining by 0.4%. • Housing sector is weakening: Pending home sales declined 2.8% (MoM) in January, with the level of pending home sales now sitting at a 12-month low. The largest declines were in the West (-9.8%) and Midwest (-5.0%), while sales increased in the Northeast (+2.3%) and South (+0.4%). The recent rise in mortgage rates is also weighing on new contract signings –including in last week’s softer-than-expected new home sales report– raising the possibility of an upcoming decline in closed transactions. Inflation: We doubt that CPI uptick will last. 2017 target at 2.2 • Core CPI came in above expectations at 0.31% MoM, which lifts the YoY reading to 2.3%. However, we are hesitant to jump to the conclusion that the uptick in core goods inflation will be lasting. • At the time, FOMC Chair Yellen expressed skepticism about the core inflation uptick, noting that there may be some transitory factors boosting inflation. Financial Markets: (Very capable of shrugging off bad news) Equities (S&P): NEUTRAL. Markets may move higher but we see more downside risk than upside opportunity. Our fundamental year-end target for the S&P500 remains unchanged at 2233 and the exit point at 2456. The distribution of market outcomes appears asymmetrical, with nearterm downside catalysts including recognition among investors that lower corporate tax rates may not take effect until 2018, possible multiple Fed hikes and European elections. 4Q16 EPS reporting season stats remain mixed for large caps; trends look better for small and mid-caps. With reporting season winding down, 75% of large caps, 74% of mid-caps and 64% of small caps have beaten consensus EPS expectations. Bottom up, consensus EPS growth expectations for 2017 have inched lower. For the S&P 500, data indicates that consensus 2017 growth expectations are now at 8.3% (vs. 9.2% as of Jan 6th). If this trend persists, it is likely to present a challenge for equity markets given extremely high valuations, noting that guidance trends remain quite frustrating. ! Bonds: CAUTIOUS. UST10 target 2.75%. Political climate is both pushing and pulling on global rate markets. US politics are pushing core yields higher, but European politics are pulling them lower. Yields could continue to reprice higher if the market's current expectations for looser fiscal policy are largely realized. We still see outbreaks from our expected range towards 3% in the UST10 yields by year-end 2017, while we see no imminent catalysts to move long-end yields sharply higher. Credit: CDX IG: NEGATIVE (Target 70). Current spreads are below our 2017 target. HG bond spreads have moved to the tighter end of the range recently, supported by a big decline in supply and a solid earnings season. Uncertainty about which companies will benefit or be hurt by the fiscal reform. OW: Financials – Materials – Technology. UW: Utilities – Healthcare – Telecommunications. Credit: CDX HY: NEUTRAL (Target 340). Current spread level near our target. Yields are now at five month lows amid Trump/Congressional optimism, a positive earnings season, agreed oil production cuts and limited new supply (net issuance in February was about half of January). YTD inflows have been the second largest since the financial crisis. OW: Financials – Discretionary – Technology – Media UW: Commodities – Telecommunications.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

Europe:

MARCH 2017

Macro surprises surpassed by political risks SORPRESAS MACRO

MACRO SURPRISE

200 150 100 50 0 -50 -100

ene-17

ene-16

ene-15

ZONA Euro

ene-13

ene-12

ene-11

ene-10

ene-09

ene-08

ene-07

ene-06

ene-05

ene-04

ene-03

-200

ene-14

-150

Fuente: Bloomberg, ANDBANK ESPAÑA

PRECIOS en la Zona Euro

PRICES - EUROZONE

1 Tasa subyacente YoY

IPC general YoY

nov-16

nov-15

nov-14

nov-13

nov-12

nov-11

nov-10

nov-09

nov-08

nov-07

nov-06

nov-05

nov-04

nov-03

nov-02

nov-01

nov-00

nov-99

-1

nov-98

0 nov-97

IPC general y subyacente (en %)

Fuente: Bloomberg, ANDBANK ESPAÑA

Although low, the growth structure in the Euro area seems more balanced than in the USA

ECB in wait-and-see mode Time to collect data and evaluate: After January meeting, when no further stimulus was discussed and news was limited to the scaling down of monthly purchases, it now seems to be time for the ECB to compile data. Tapering may start to be discussed around mid year (after French elections). Should the ECB follow the FED’s path, purchases could be reduced by 2018, and 2019 would then be time to start increasing rates, as Weidmann has already suggested. Until then, we are going to see different approaches on ECB forward guidance on the table. Macro figures: growth surprise or short term tailwinds? Sentiment remains upbeat, with surveys in February surprising on the upside, particularly PMI services that seem to track GDP better than manufacturing readings do. Healthy growth with employment and industrial data on the rise (unemployment rate at 9.6%) and industrial production picking up. GDP is expected to settle at around 0.4% QoQ for the rest of the year. Admittedly, surveys could be close to their peaks, but the scope for surprise growth has increased. Inflation rose again in January mainly driven by the energy component. Headline CPI 1.8% YoY. Core CPI 0.9% YoY, with overall CPI likely to peak in February. Outlook: Into 2017, CPI numbers are expected to slow to 1.5% YoY for headline inflation, and will be close to 1% YoY for core inflation (wage pressures remain subdued). Inflation expectations, as expected, have moderated since January, waiting for confirmation of the oil price trend + Trump’s next fiscal measures. Politics: France takes center stage • The Netherlands will hold general elections on 15th March. Polls give the victory to the ultra-right party PVV, within a fragmented Parliament that would require a coalition between five different parties initially not willing to negotiate with the PVV. Though the Netherlands enjoys a positive economic situation, increasing inequality seems to explain the rise in populism. Though “Nexit” is not a central scenario, EU skepticism has increased with the outgoing Parliament ordering an official dossier on its EU membership. • France will come next (7th May): Polls suggest Le Pen would win in the first round, but would be defeated by either candidates in the second round, with Macron leading. Financial markets (mainly fixed income) seem to have priced in this scenario, but are far from envisaging a Le Pen victory (15% probability). • Italy: The noise regarding the restructuring of the financial system is ongoing. Italicum review by the Constitutional Court gave a green light to the bonus given to the party that reached the 40% mark, but rejected the constitutionality of the second round. Given Italian political fragmentation, with no party close to the 40% threshold, Italicum reforms look impossible to implement and the most likely outlook is a continued gridlock in parliament, suggesting that a reform agenda is unlikely. Financial Markets Outlook Equity (STOX 600): NEUTRAL. Fundamental target price at 349. Sell at 383. EPS in 2016 finally came in at 20.43 (from 21.3), with no effect on our 2017 target price. See page 12 for fundamental parameters. ! Equity (SPAIN IBEX): ATTRACTIVE. We are slightly raising our fundamental target price to 9,716 (from 9,500). Sell at 10,687. 2016 sales and EPS came in lower than anticipated in 4Q16. We raise margins (from 8% to 8.2%) and PE (from 15x to 15.5x). See page 12 for fundamental parameters. ! Bonds: NEGATIVE. We are sticking to our targets for 2017: 10Y Bund 0.70%, SP 1.9%, POR 3.3%, IE 1.4%. New target for Italy: 2.3% (2.1% prev.). In the short term, uncertainty is likely to persist until the end of the French elections. ECB purchases will be reduced from April onwards, with net supply turning positive in March. More pressure to come on bonds as the year advances with taper talk intensifying. Credit Itraxx IG Europe: NEGATIVE (Target 80). Spreads have slightly widened since our last committee. Large outflows from European IG bonds despite the ECB maintaining its program (though the amounts were below average). This movement can continue with the earnings season coming to an end and kick-off in the election marathon that could result in companies speeding up their issuance activity. Sectors: Bank subordinated debt (due to steeper yield curves). ! Credit Itraxx Xover HY: NEGATIVE (We reduce our target to 350 from 380). At 283 bp currently in the index, we consider HY bonds as expensive. Spreads have slightly widened since our last committee and this shift could intensify due to below-average redemptions in Q2.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

China:

MARCH 2017

Conditions for small & medium size firms are improving

It seems that Chinese authorities are effective in dealing with, and controlling, bubbles (at the very least, more effective than Western economies)

The threat of a conflict with China is fading. CEI is a gauge of the relative share price performance of USlisted firms with revenue exposure to China

Currency manipulator? The PBoC has been working hard to avoid a sharp RMB depreciation (which YTD has stabilized from 6.96 to 6.86 vs the USD)

Activity Indicators – We do not see problems on the horizon GDP figures show that growth was remarkably stable in 2016 at around 6.7%. Other growth proxies (used to overcome the mistrust in official data) also indicate that growth rebounded in 2016 following a downturn in 2015 (that was not reflected in official data). Monthly figures point to some softening in momentum, with production in some key metals slowing, but we downplay this since it comes after an acceleration in output volumes until recently. Electricity output continued to hold up well in December. Public vs private: Capital spending in manufacturing and real estate sectors continued to accelerate in December, but this was more than offset by a slowdown in state-driven investment in infrastructure. The mood of the population The pace of retail sales has relaxed in real terms but this is not worrisome since growth remains at a sustainable (and thus healthier) 9% y/y in real terms. Our optimism fits with the last figures released in the NBS Unionpay surveys showing that consumer sentiment has improved in recent months. Similarly, the PBoC surveys suggest that the share of depositors saying they would spend rather than save rose to the highest level since 2009. Labor market has also strengthened in recent months, with local labor bureaus showing that the ratio of job openings to job seekers rose to the highest level in 4Q16 since 2014. Seemingly, the employment component of Markit’s PMIs has also improved recently. Business sentiment Corporate profits were up 8.5% in 2016, the biggest increase since 2013. Both Caixin and Markit manufacturing PMIs point to a pick up in momentum since the middle of last year. Large firms seem to fare best, but conditions for small and medium firms have also improved. Cooper and steel production recovered slightly last year (although aluminum output growth slumped). However, recovery in steel output has been driven by a surge in price and may not last much longer. Property Indicators After surging sharply in 1H16, property sales and prices have slowed recently as restrictions reintroduced on home purchases have started to bite. Despite this, the pace of construction continues to hold up relatively well (8% y/y in 2016) supported by continued investment. External Indicators External activity jumped in January, though we have to take this cautiously as trade data tends to be volatile at the start of the year. The jump in exports was driven by a surge in shipments to other emerging economies, though exports to the US and the EU edged up too (which may signal a slight uptick in global demand at the start of the year). Imports also rose in January, driven primarily by goods for domestic use, and to a lower extent by imports for re-export. That said, we acknowledge that industrial commodity imports have increased in part due to the rise in commodity prices. In volume terms, growth has down-ticked. Trade surplus with the US and the EU remain near record highs, but has narrowed with the rest of the world thanks to the rise in commodities. Financial Indicators The Renminbi has remained fairly stable since August against a broad based basket of currencies. Against the US dollar the Renminbi has appreciated since the turn of the year, in part due to a tightening of capital controls in China, which helped to contain depreciation expectations and control capital outflows. Bloomberg has created a version of its flagship global bond index including Chinese government bonds, prompting market participants to focus attention on the country’s bond market. Will this translate into a significant increase in foreign demand for Chinese bonds? The country’s interbank markets have been open to foreign financial institutions since 1Q16 and the value of bonds held by foreigners has risen recently (although foreign ownership as a % of the total has changed little). Maybe more stability in the FX market is needed. Financial Markets Equity (Shanghai): NEUTRAL. Fundamental price 3,322. Equity (Shenzhen): ATTRACTIVE. Fundamental price 2,039. Exit point at 2,243 Bonds: ATTRACTIVE. 10Y bond target 2.9% FX: FAIR VALUE USDCNY fundamental target at 6.75-6.8

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

India: Modi rejects “buying” votes and prioritizes fiscal consolidation

GDP growth is the highest within the EM category (both in q/q and y/y terms)

Plenty of room for favorable monetary conditions and growth

India enjoys a broad and healthy base for further growth

The budget signaled a clear compromise with long-term stability. Following the decision to scrap large denomination banknotes, the budget was carefully calibrated in a move to reassure financial markets after the IMF estimated that the demonetization will drain 1pp off growth this fiscal year. The document shows that India remains wedded to fiscal responsibility. The demonetization debacle threatened investors’ faith in Delhi’s ability to manage economic reforms. This February’s budget was therefore the most significant of Modi’s three-year administration which is under pressure to get the economy back on its feet. The bad news is that in some analysts’ view this self-imposed restraint makes clean-up of India’s state banks more difficult to achieve. Where did we come from and where are we now? India has come a long way since 2013, when it was classed among the “Five Fragile” emerging economies. In its efforts to control both external deficits and inflation, the Modi administration has succeeded in rebalancing many of its troubles and shift investors' perception of India to become one of the most important investment destinations. The result of all this has been exceptional performance by the Indian debt market and a rise in positions in the Competitiveness and Doing Business rankings. Politics The political stakes are high, with five states going to the polls in March, in what is already known as "the mini referendum” on Modi’s policies. These include Uttar Pradesh –home to one in six Indians and 80 parliamentary seats– where Modi’s BJP swept to power. If the BJP loses the state, its prospects for the general election in 2019 look dim. The Modi Factor. Modi’s political approach is definitively different and healthier. While Indian politicians traditionally buy votes (spending policies), Modi has promised to reject such practices and instead prioritize fiscal consolidation and economic stability in order to achieve the long-awaited credit rating upgrade and to continue attracting outside investment to finance India’s development plans. That is why India has not added fiscal incontinence to its woes despite the negative effects of the demonetization. In short, Modi’s government is aiming to boost long-term growth by keeping spending under control while instilling a sense of trust in the economy. Understanding Modi’s 2017-18 Economic Plan Total budgeted expenditure of INR21trn (some $310bn), pegging the fiscal deficit at 3.2% of GDP. Although a shade over the original target of 3%, it is tight enough to satisfy the rating agencies. Finance minister Jaitley expects to hit the 3% deficit target in 2018-19, halving the deficit level seen in 2011-12. Rural government investment: 25% increase (to INR 2trn) Infrastructure: 8% increase in railways (to INR 1.3trn), 11% increase in highways (to INR 640bn). Housing loans: INR 200bn and granting “infrastructure” status to affordable housing allowing developers to access cheaper credit. Tax cuts: For urban middle-class and small corporations (which account for 95% of all Indian companies). Long-term outlook: Fiscal prudence is positive, though there are downsides. This fiscal prudence is reassuring for international investors. Sound financial management and reining in external imbalances means the rupee is unlikely to tank, which in turns increases the attractiveness of other Indian assets. The bad news is that in the short-term, fiscal prudence and Delhi’s commitment to cut the deficit makes it harder to press ahead with a decisive clean-up of India’s state banks (perhaps the biggest obstacle to generate growth). With a 12% NPL rate in the 27 public banks, investment could remain stalled. Public lenders need an estimated capital injection of US$30-50bn according to local sources, but Delhi’s budget has offered them US$11bn spread over several years. In exchange, Delhi’s budget offered much needed infrastructure spending. Trying to “crowd in” private investment (which has been in the doldrums since 2012). All said, the government estimates GDP growth will bounce back to 7% this year even without a revival in private investment. Financial Markets Equity (Sensex): ATTRACTIVE. Fundamental price 29,126 Bonds: ATTRACTIVE. 10Y bond target at 5.7% FX: FAIR VALUED

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

Japan:

MARCH 2017

Tokyo has the means to avoid a trade war with the US It is time for realpolitik Japanese prime minister Shinzo Abe kept his second meeting with Donald Trump since the November 8 US election. The auspices hardly appear propitious. The US has pulled out of the TPP, has railed against Japan for undervaluing the yen, complained about the costs of providing Japan with US defense and bemoaned the lack of US-built cars on Japan’s roads. Yet, although the objectives of both countries may appear to be at odds (the US wants to revitalize its manufacturing industry and make its allies shoulder a greater burden of the defense costs while Japan wants to avoid a trade war while it continues reinventing its economy) there is enough space to create a deal that represents a win for both parties. Can a trade war with the US be avoided? Abe is neutralizing the accusations that Japan is a currency manipulator by pointing out that the BoJ has not intervened in the FX market since 2011. He can point out that the yen is trading at a two month high against the US dollar. Regarding the BoJ’s policy of QQE, Abe replies that it is necessary in order to buy time for his Abenomics to take effect, which in turn will be much in America’s own economic interest. Regarding Trump’s complaints that Japan buys too few US-made cars, Abe can demonstrate that Japan no longer erects barriers against imports of American autos, and that it is simply that there is minimal Japanese demand for the sort of big and large-engine American cars. On the other hand, Abe can point out that Japanese manufacturers have made more than US$400bn in direct investments in the US, where they employ hundreds of thousands of workers directly. Just the week before the meeting, Toyota’s president reiterated plans to invest US$10bn in its US plants over the next five years. Furthermore, Abe will probably offer his support for Trump’s planned US$1trn infrastructure plan, pledging that giant GPIF will buy US infrastructure bonds. Abe, in order to avoid a trade spat, can also offer a promise to ramp up Japan’s defense spending (currently running at a 1% of Japan’s GDP, which is comparable with Germany). Talks are that Tokyo can increase this by 20% or even double over the five-year period beginning 2019. This would amount to a major military program (exactly the sort Trump has demanded). More importantly, and given the lack of knowledge in some areas of Japan’s defense industries, notably in advanced missile systems (according to our local sources), there would be plenty of lucrative work for specialist US defense contractors. Such a development could work for both sides. Trump can achieve his aims of greater investment in US manufacturing and more defense spending from a key ally. Abe can avoid a trade war. BoJ & Financial markets In switching last summer from QE to QQE with yield curve control, keeping the 10-year yield pegged at zero (that is with no yield and no capital gains), the key 10Y JGB has been rendered useless for investment purposes. In response, Japanese institutions and retail investors alike have bailed out of the market and monthly trading volumes have sunk to a fraction of the levels seen a year ago. This leaves the BoJ as the only player in the market. With so little depth in the JGB market, any attempt to taper would lead to a dramatic rise in yields that would threaten to choke off Japan’s fragile recovery. The BoJ therefore has little choice but to stick with QE in what I consider a “policy trap”. This “policy trap” has significant implications, especially in a world of rising long rates, in the form of flows out of the Yen and into foreign currency bond markets, as well as for the Japanese equity and real estate markets (as suggested by institutional and retail investors, which have been enthusiastic buyers of foreign bonds). This trend will continue. Low rates have encouraged share buybacks (+30% y/y), and persuaded pension funds and insurance companies to allocate more funds to domestic equities. This trend could last for a while. Preferred sectors are financials, construction firms and property developers (as ultra low borrowing costs have underpinned demand for apartments in big cities, encouraging institutions to invest in commercial property). Last but not least, although Japanese institutions have been tilting portfolios toward domestic equities since the early summer, foreign investors, especially from the US, remain hugely underweight. Financial Markets • Equity (Nikkei 225): NEUTRAL-NEGATIVE. Fundamental price 18,599. Bonds: EXPENSIVE (USELESS). 10Y bond target 0%. FX: NEUTRAL. USD-JPY fundamental target at 112.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

Brazil:

MARCH 2017

Rhetoric on trade is certainly welcome but hopes for progress still low

There is still some room for a

BRL seems to rally be trading extensionat fair value

Central Bank Lower than expected current inflation figures offer room for a more rapid Selic rate reduction. Furthermore, according to Central Bank Market Report ("Focus") as of February 17th, expected annual inflation (IPCA) for 2017 is 4.43% (4.71% just 4 weeks ago and 6.29% in 2016). We will see another 75 bps downward move towards 11.5% per annum in the next Copom meeting on April 11-12th. News on proposals about reducing Central Bank annual inflation target for 2019 to 4.0% will not be a headwind in the short term. This target will be set by the end of next June. Current annual inflation target for 2017 and 2018 is 4.5%, with an upper/lower band of 6.0/3.0%. Reforms agenda: Fiscal Fiscal adjustment has been implemented at a slower pace than initially planned since GDP growth has disappointed lately and revenues from asset sales and public concessions have been modest so far. The first great step to rein in public accounts was taken with Constitutional Reform PEC 55 (finally passed on its 5th vote in the Senate). PEC 55 puts an effective cap on public expenditure for 20 years. Another key reform (Previdencia) is already on course. In the week of 15th December the Constitution and Justice Commission (CCJ) approved the admissibility of the Pension Reform PEC. The proposal will now go to a special commission in February. BNDES returns R$ 100 billion to the Treasury and reduces government gross debt by 1.6% of GDP. The amount is part of the R$ 532 billion that the bank owes to the Federal Government. Further room to cut debt? Reforms agenda: External Trade It’s clear that Brazil’s government senses an opportunity in President Trump’s protectionist instincts. Chile and Peru are being courted following President Trump’s decision to pull out of TPP, free trade talks with Europe are continuing and a recent meeting between President Temer and Argentina’s president, Mauricio Macri, focused on efforts to revive the Mercosur trade bloc. This shift is important since Brazil’s economy continues to be the most closed in the world. Total trade, measured as imports and exports of goods and services, is equivalent to just 27% of GDP (the lowest of any major emerging or developed economy with the exception of Argentina). Why? Brazil’s infrastructure is notoriously bad. Whereas China has no fewer than 10 ports capable of handling 100m tons of cargo a year, Brazil has none. A poor road network is part of the reason that Brazilian soy farmers face field-to-port costs that are nearly five times higher than their counterparts in the US. More fundamentally, tariff and non-tariff barriers remain significant. While average tariff rates have fallen over the past thirty years, they are still among the highest in the emerging world. All of this is a legacy of import protection, which formed the bedrock of Brazil’s economic development model in the 1960s and 70s. Brazil has more active disputes in the WTO than any other emerging economy. Political Risk The so-called "Car-Wash Operation" will impact President Temer's closest friends and senior team members. However, it will not be an issue for getting reforms through Congress. Economic Outlook Government's forecast for next year's GDP growth is 1.0%, while market consensus is 0.5%. We see GDP growth for 2017 at 0.5%. Some important research firms are improving their GDP growth projections for 2018. Capital Economics believes that inflation is dropping like a stone and that this trend could extend as underlying prices are starting to ease too as the impact of last year’s currency fall unwinds (and the last appreciation shift will impact prices on the downside), as well as the high level of spare capacity in the economy. This research will help the BCB to cut the Selic rate to around 9.00% by end 2017. One consequence of a lower interest rate forecast is that some firms are already pushing up their forecasts for GDP growth in 2018, with some major firms already projecting 2.8% growth. Financial Markets: Equities (Ibovespa): NEUTRAL-POSITIVE. Target 66,423. Sell at 73,000. We might see some upside price stretching (5%-10%) due to foreign investor and local pension fund demand at the margins, as long as structural reforms get approved by Congress later in the year. ! Government Bonds: POSITIVE. We cut our 10Y Loc bond target to 9.75% (from 10%). We see real interest rates around or below 5.25% per annum at year end. With inflation at 4.5% this means nominal yields at 9.75%. We keep to see 5.25% for the USD bond. FX: NEUTRAL. Target at 3.2 (we do not rule out a rate below 3.00)

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

Mexico:

MARCH 2017

We bet on the softer option, rather than the hard line in NAFTA negotiations NAFTA It seems like Trump’s aggressive rhetoric against Mexico has diminished and the diplomatic teams of both countries have started to work normally. NAFTA’s renegotiation has started with a more active participation of Luis Videgaray, the new chancellor. While NAFTA has increased bilateral trade with the US by $380bn (from $106bn in 1994 to $482bn today and accounting for 45% of GDP), we believe that the risk of a disruptive event in the negotiations is low. We would bet on a modernization and renegotiation of the current treaty rather than a break from it. Why? Of course the US has a dominant position in the negotiation, however, Mexico also has a lot to say and this balances their positions for reaching an agreement that satisfies both parties. For example, excluding cars, it is Mexico that bears a trade deficit with the US. That is because the US exports a lot of agricultural products to Mexico -for examplespecifically from the Midwest. This means that in the event of an aggressive stance resulting in a break from NAFTA, the US Midwest would be severely harmed, something to be seriously considered since this region is the heartland of Trump's electorate. Mexico has plenty of experience in trade negotiations, having been negotiating the TPP accords in the labor and environmental areas. Mexico also has trade agreements with 45 countries (more than the vast majority of countries), which highlights its indisputable experience of negotiating trade deals. Mexico has stated that it is open to negotiating and modernizing NAFTA, but will strongly resist anything that means restrictions on free trade, such as the imposition of tariff barriers. The soft line: We guess that the bulk of the negotiations will refer to the “Rules of Origin”. These are a set of rules that determine if a product is eligible for free trade. One of these main rules is the Value Added Content (or Regional Value Content), which in turn is divided into two groups: Product Specific or Wide Regime. The latter contains “De minimis rules” (that stipulate the maximum portion of external materials in one product) and the “Accumulation rule” (that allows imported products to be treated as if they were domestic). These rules are very flexible and the negotiation will probably come from this side. Central Bank, rates & FX Banxico raised its reference rate by 50 bp in February to 6.25% arguing that inflation risks have increased and that a negative foreign exchange outlook remains. The most recent surveys show that analysts expect the central bank rate to close 2017 between 7 and 7.25%. The Exchange Commission (together with the Ministry of Finance) announced a new mechanism to control FX volatility. The bank will auction exchange rate hedges that won’t have a negative impact on its international reserves stock. The first auction will take place on March 6th for a total of 1 billion USD. Inflation. CPI rise over the Banxico midterm target of 3% (+/- 1%) thanks to the first stage of the gasoline price liberalization and the rise in domestic gas prices. Although price increase in February was mitigated by the political decision to subsidize energy prices again, the knock-on effect from the FX depreciation became more evident during the first 15 days of the month. Economic indicators Consumer confidence fell to its lowest historical level according to the January survey, with household conditions for the next 12 months collapsing due to the uncertainty of Trump’s economic policy. Public finances: the last report for 2016 showed that government efforts were insufficient in achieving a primary balance surplus. On the other hand, the Debt/GDP ratio reached 50.5% at its wider point - a level that rating agencies consider sufficient to downgrade the sovereign note. Financial Markets: Equities (IPC): NEUTRAL. Substantial uncertainty is already priced in. The IPC is trading at a 12m FWD P/E of 16.9x, 10% premium vs. historical. Target price 46,267. Sell at 48,000 ! Bonds: MIXED. We cut our yield target for the 10y local government bond to 7.75% (from 8%), and the 10Y bond in USD is also cut to 4.75% from 5%. A one-notch rating downgrade is probably already incorporated in Mexican yield curve. Current spread between M10 and T10 is at highest levels since 2011 (500 bp). We do not expect an up-sloped yield curve due to stable inflation expectations and a low growth scenario. ! FX: NEGATIVE. We slightly raise our year-end target to 21.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

Argentina:

MARCH 2017

On course for a key year for transformation. Latest Developments: The last two months of 2016 had to scare more than one investor as the government’s main financing option (international and local debt markets) became more expensive and flows to EMs diminished. As these dynamics have now stabilized and forecasting indicators are showing some recovery, these fears have faded. Tax Amnesty: December 31st 2016 was the principal deadline for this program and the results point to a major success with US$98 bn of assets declared by Argentineans (in a US$530 bn economy). Some 86% of these declared assets remain offshore, while 14% has stayed locally. The next (and final) deadline is March 31st. Previous government used monetary issuance to cover fiscal gap (causing high levels of inflation). After holdouts issue was resolved, the current government changed its source of financing and tapped international debt markets to cover its fiscal needs until it can implement reforms necessary to recover the fiscal balance (gradualism). There are two aspects of paramount importance in the president’s plan: The External Debt to GDP is at just 33.5%, as is government legitimacy, which will be tested in mid-term elections this year. Macro: Economic Activity: 3Q 2016 national accounts show recession is bottoming. The sources of this recovery however are mainly coming from public spending. High frequency data (Auto production, cement, etc.) are showing that activity rebounded in January. It is essential that the government restarts economic growth before mid-term elections (October 2017) as they are seen as a test of support for the government. Our targets are that GDP will fall 2% in 2016 and that it will grow 3% in 2017. Fiscal: After last month’s cabinet reshuffle in which Nicolas Dujovne took over as Minister of Finance, the government has confirmed 2017 goal of 4.2% primary deficit. However, following years’ targets were revised upwards from 1.8% to 3.2% in 2018 and 0.3% to 2.2% in 2019. They also introduced quarterly goals and will publish monthly information about fiscal accounts. Although this change is not good news as it delays fiscal consolidation, it makes more sense considering the path of adjustments made to date. Primary deficit for 2016 was 4.6% in line with government’s target. Inflation: Knock-on effects of devaluation and tariff adjustments led inflation to close 2016 at nearly 40%. Government’s target for this year is in the 12-17% range. However, considering that this is an electoral year and the stickiness of core inflation, we think target will not be met and expect inflation to end 2017 at 20%. Financial Markets: FX: ARS ended 2016 with yearly depreciation of 23%. Big USD inflows from debt issuance, tax amnesty and better conditions for foreign investors to invest locally, made depreciation much lower than inflation. For the current year, we think ARS will continue to depreciate, but this time more in line with the inflation path, to end 2017 at 18.50 (approx. 20% annual depreciation). Fixed Income: Current 10Y Govt Bond in USD (Global 2026) is trading at 6.78% YTM. Considering latest developments and prospects for 10Y US Treasuries, we set our target for 2017 at 7.50%. Strategy: 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 (Global 22/4/19 @3.1% YTM, Bs.As. Province 14/9/18 @ 2.88% YTM, Bs.As. Prov. 15/6/19 @ 3.36% YTM). Equities: There has been a strong recovery this year for Argentine ADRs. Some equities still look cheap but will mostly depend on the success Macri achieves with his measures to reestablish macroequilibrium in Argentina. Examples of companies that could benefit from Macri’s policies are YPF, Financials (BMA, BFR, GGAL) and Utilities (PAM, EDN, TGS)

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Equity Markets GLOBAL EQUITY INDICES - FUNDAMENTAL ASSESSMENT Sales per Share

Net EPS

Andbank's

Sales

Andbank's

EPS

Margin Sales growth per Share Net Margin

EPS

INDEX

2017

Growth PE ltm PE ltm CURRENT Fundam. E[Perf] to

2017

Entry

Exit

Index

2016

2017

2016

2017

PRICE

Price

Fundam

Point

USA S&P 500

1.160

119,0

10,3%

10,0%

1.276

10,0%

128

7,2%

20,03 17,50

2.383

2.233

-6,3%

2.009,7

2.456,3

Europe STXE 600

295

20,4

6,9%

3,7%

306

7,6%

13,8%

18,29 15,00

374

349

-6,7%

313,9

383,7

7.350

538,0

7,3%

4,0%

7.644

8,2%

627

16,5%

18,24 15,50

9.815

9.716

-1,0%

8.744,0

10.687,1

Mexico IPC GRAL

30.886

2.291,0

7,4%

7,0%

33.048

7,0%

2.313

1,0%

20,70 20,00

47.415

46.267

-2,4%

44.416,5

48.117,9

Brazil BOVESPA

51.104

3.900,0

7,6%

5,5%

53.915

7,7%

4.151

6,4%

17,12 16,00

66.786

66.423

-0,5%

59.780,6

73.065,2

Japan NIKKEI 225

19.494

995,7

5,1%

2,5%

19.981

5,2%

1.039

4,4%

19,46 17,90

19.379

18.599

-4,0%

17.668,7

19.528,6

China SSE Comp.

Spain IBEX 35

2.501

212,7

8,5%

8,0%

2.701

8,2%

221

4,1%

15,21 15,00

3.234

3.322

2,7%

2.990,1

3.654,6

China Shenzhen Comp

821

67,5

8,2%

9,0%

894

8,0%

6,0%

29,99 28,50

2.026

2.039

0,7%

1.835,4

2.243,3

Hong Kong HANG SENG

12.170

1.807,0

14,8%

3,0%

12.535

14,5%

1.818

0,6%

13,06 12,50

23.596

22.720

-3,7%

20.447,9

24.991,9

India SENSEX

14.280

1.503,0

10,5%

11,0%

15.851

10,5%

1.664

10,7%

19,33 17,50

29.048

29.126

0,3%

26.213,3

32.038,4

379

47,8

12,6%

7,5%

407

12,6%

7,4%

9,51

454

449

-1,1%

404,3

494,1

MSCI EM ASIA (MXMS)

8,75

ANDBANK ESTIMATES

RISK-OFF PROBABILITY: Short-term view Andbank's Global Equity Market Composite Indicator (Breakdown)

Buy signals Positive Bias Neutral Negative Bias Sell signals FINAL VALUATION

Current

Month

1 2 7 6 6 -3,2

1 4 3 7 7 -3,4

Andbank’s Global Equity Market Composite Indicator Preliminary assessment of the level of stress in markets

current

-5

-10 Market is Overbought

Area of Neutrality Sell bias

Buy bias

+10 Market is Oversold

Andbank GEM Composite Indictor: AREA OF NEUTRALITY WITH A SELL BIAS. Our broad index has moved from a -3.2 level last month to -3.4 (in a -10/+10 range), settling in an area that suggests that the market is moderately overbought (although not significantly stressed). We therefore conclude that: a) the market is expensive although in terms of flows and managers’ positioning the movements have been gradual rather than violent. b) Admittedly, the likelihood of a sudden Risk-off shift is increasing, but there is still room for the market to go deeper into the “overbought” area. Positioning: Macro strategy managers reduced their equity betas and fixed them below their long-term mean. JPM’s option skew monitor (difference between the implied volatility of out-of-the-money (OTM) call options and put options) doubled its positive skew (more demand for calls than puts). Fund managers remain optimistic. Some 59% expect a stronger economy in the next year. This positive sentiment may explain the high current allocation in equities and low in cash. Strategists are overweighting US stocks in their portfolios which could become a headwind if the trend goes further. The trailing 12m P/E ratio for $SPX is 21.1, above the 10-year average (16.1).

TECHNICAL ANALISYS: Short-term (ST) and medium-term (MT) o o o o o o o

S&P: BULLISH. Supports 1&3 month at 2280/2450. Resistance 1&3 month at 2245/2450. STOXX600: SIDEWAYS-BULLISH. Supports 1&3 month 351/359. Resistance 1&3 month at 387 IBEX: SIDEWAYS-BULLISH. Supports 1&3 month at 9135. Resistance 1&3 month at 9724 €/$: SIDEWAYS-BULLISH. Supports 1&3 month at 1.04/1,035. Resistance 1&3 month at 1.09 Oil: SIDEWAYS-BULLISH. Supports 1&3 month at 49. Resistance 1&3 month at 56,5/62,6 Gold: SIDEWAYS-BULLISH. Supports 1&3 month at 1180/1122. Resistance 1&3 months at 1303 US Treasury: SIDEWAYS-BEARISH. Supports 1&3 month at 2.30/2.11. Resist. 1&3 months at 2.55/2.65

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Fixed Income – Core Country Bonds: UST 10Y BOND: Floor 1.85%, Ceiling 3-3.25%. New Target 2.75% 1. Swap spread: Swap rate continued to recover and fell to 2.32% (from 2.39% last month). The 10Y Treasury yield upticked to 2.45% (from 2.44%). The swap spread therefore fell to -15 bps (from -4bps last month). For this spread to normalize towards the +25bp area, with 10Y CPI expectations (swap rate) anchored in the 22.25% range, the 10Y UST yield would have to move towards 1.87% (this could be considered a floor). 2. Slope: The slope of the US yield curve upticked to 123bp (from 122bp). With the short end normalizing towards 1.25% (today at 1.22%), to reach the 10Y average slope (of 184bp), the 10Y UST yield could go to 3.09%. 3. Real yield: A good entry point in the 10Y UST could be when the real yield hits 1%. Given our CPI forecast of 22.25%, the UST yield would have to rise to 3-3.25% to become a “BUY”.

BUND 10Y BOND: Ceiling 0.90%. Fundamental target 0.70% 1. Swap Spread: Swap rates fell to 0.67% (from 0.77% last month), and the Bund yield also fell to 0.26% (from 0.41%). The swap spread therefore upticked to 41 bps (from 36bps). For the swap spread to normalize towards the 30-40bp area, with 10Y inflation expectations (swap rate) anchored in the 1-1.25% area, the Bund yield would have to move towards 0.77% (entry point). 2. Slope: The slope of the EUR curve ticked up to 118bps (from 108). If the short end “normalizes” in the -0.25% area (today at -0.91%), to reach the 10Y average slope (121bp), the Bund yield would have to go to 0.96%.

Fixed Income – Peripheral Bonds

(10Y yield targets)

Spain: 1.90% ! Italy: 2.30% (revised up from 2.1%) Portugal: 3.30% Ireland: 1.40% Greece: 7.50%

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Fixed Income – EM Govies. Why so calm? The known negative factors: 1. A strong dollar has been synonymous with "bad news" for emerging markets in the past (think of 1997). 2. Higher interest rates/yields in the US did not help in the past (think of the Taper Tantrum of 2013). 3. The prospects for greater protectionism smell of something "toxic" to emerging mercantilist countries. The not-so-known positive factors: 1. After a prudent reconstruction, the majority of EMs now have better external balance situations (India, Brazil, etc.), which makes them less dependent on external financing in dollars. 2. In past episodes, emerging markets generally had overvalued currencies. Today however, most are undervalued (MEX, TRY, RUB...), which means that the risk of capital flight is lower. 3. If the EMs are now more synchronized with the developed economies, emerging assets should hold up well in a monetary tightening environment in the USA. Furthermore, a marginal tightening in EM (caused by higher yields) may even be useful in containing any risk of overheating. 4. EM firms now increasingly rely on the debt market and less on their domestic financial systems. In 1997, bank loans in USD accounted for 65% of domestic debt in USD. Today, USD bank loans represents 54%. Therefore, banks in EMs are not so exposed to USD volatility.

Our Rule of Thumb: To date, our rule of thumb for EM bonds has been “buy” when the following two conditions are met: 1. US Treasury bond is cheap or at fair value 2. Real yields in EM bonds are 150bp above the real yield in the UST bond.

10 Year

Yield

Last

Yield

Govies

reading

Real

3,83% 3,02% 2,70% 2,50% 3,23% 1,42% 0,52% 2,04% 2,25%

3,62%

Taiwan

7,45% 6,84% 4,52% 3,33% 4,12% 2,68% 2,27% 2,17% 1,14%

Turkey

10,92%

Russian Federation 8,18%

10,23% 7,28% 7,13% 6,48%

India EM ASIA

Philippines China Malaysia Thailand Singapore South Korea

EME

Do real yields in EM bonds provide sufficient spread? A good entry point in EM bonds has been when EM real yields are 150bp above the real yield in the UST, when this is at fair value. Hence, and assuming that the first condition is met, we should only buy those EM bonds with a real yield at 2.5% (See the bonds in green in the table).

CPI (y/y)

Indonesia

Brazil LATAM

Is the UST cheap or at fair value? Historically, a good entry point in the 10Y UST has been when real yields are 1.75%. Given the “new normal” of ZIRPs, a good entry point in the 10Y UST bond could be when the real yield is 1%. Given our 2017 target for US CPI of 2-2.25%, a theoretical fair value (entry point) should be with nominal yields at 3-3.25%. The first condition is not met.

10 Year

Mexico Colombia Peru

Projected change in Yield -1,00%

3,82%

-1,00%

1,82%

-0,50%

0,83%

0,00%

0,89%

0,00%

1,26%

-0,50%

1,74%

-0,50%

0,13%

0,00%

-1,11%

1,00%

9,22% 5,00%

1,70%

-0,50%

3,18%

-1,00%

5,44% 4,74% 5,49% 3,27%

4,79%

-1,00%

2,54%

-0,75%

1,64%

-0,50%

3,21%

-1,00%

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Commodities – Energy (Oil, WTI) Fundamental target at $45. Buy at $30. Sell at $55. Short term drivers for oil prices point to flat/lower prices. (+) Saudi Arabia wants $60 oil: Reuters reported that sources from within OPEC have said that Saudi Arabia wants crude prices to be around $60/barrel this year. The article notes that this is the level that the Saudis and their Gulf allies believe would encourage investment in new fields but not lead to a jump in US shale output. It adds that more than $1T in oil projects have been canceled or delayed since mid-2014, raising fears in some quarters of a supply shortage and a spike in prices. (+) Iran says oil prices over $55 harmful for OPEC: Reuters reported that Iran's oil minister said yesterday an increase in oil prices to more than $55 was not in the interest of OPEC as it would lead to a rise in output by non-OPEC producers. (-) Border-adjustment tax favors drillers but hits refiners: The US energy sector is divided by Republicans' border-adjustment tax proposal, with domestic drillers in favor (as it would make imported crude more expensive) but many refiners opposed due to the likelihood it will raise input prices. (-) Hedge funds raising exposure to commodities: According to Bloomberg reports, hedge funds are raising their exposure to commodities as prices rally and investors respond to macro shifts, including the prospect of accelerating inflation under President Trump. Hedge funds have never been so confident that prices will break higher (money managers boosted their bullish bets on WTI to a record level, with the net-long position up 6% in the week ended 21-Feb). It highlights that investors appear to be focused on production agreements. (-) Rising exports make the US a factor in the global market: FT reports that with outbound oil shipments surpassing 1.2M bpd since the lifting of the export ban in 2015, this is filling the gap in world markets created by OPEC cutbacks. US producers sent 1.2M barrels of crude onto world markets last week while until recently, the US was exporting about 500K bpd. At the same time, OPEC removed about 890K bpd from the world market in January. The US has become more integrated into the world oil market with US exports now outstripping last month's daily production of Algeria, Ecuador or Qatar. America may now have some authority as a swing producer, a situation which presents a further challenge to Saudi Arabia and other OPEC members. (-) Oil rig count climbs again in the US: The WSJ noted that the US oil rig count rose by 5 in the past week to 602, marking another week of increases. The rig count has been rising since last summer, but is still down from a peak of 1,609 in October 2014. (-) Cut in marginal costs for drillers points to more output at each oil price level: US shale drillers have recently halved their cost base thanks in part to standardization of drilling equipment, resulting in a cut of nearly one third in their exploration and development costs. However, this may be offset by rising costs to hire experienced crew and outsourcing critical oil services. (-) Oil futures curve raises doubts: Brent for next month delivery has risen 15%, but the December 2018 contract is up only 6%. The weakening of the six-month contango has decreased from $4.50/barrel to ~$2.60 and has the potential to make more than 100M barrels currently stored in tankers at sea flood back into the market and undermine recent stronger prices. Structural drivers for oil point to low prices in the long run... (-) Alternative energies picking up the baton: Producers must bear in mind that the value of their reserves is no longer dictated by the price of oil and the quantity of their reserves, but rather by the amount of time for which they can pump before alternative energies render oil obsolete. In order to delay this deadline as long as possible, it is in producers’ interests to keep the oil price low as long as possible (keeping the opportunity cost of alternative energy sources as high as possible). (-) Growing environmental problems will gradually tighten legislation and production levels: Producers are aware that the value of their reserves depends on the amount of time they can pump at current levels before tougher environmentinspired regulation comes in. For example, Saudi Arabia has between 60 to 70 years of proven oil reserves at current output pace, but with mounting concern about climate change and growing environmental problems that will likely continue to put big pressure on the market for fossil fuels over the coming decades, Riyadh’s most serious risk is of sitting on a big chunk of “stranded reserves” that it can no longer extract and sell. Saudi Arabia (and the other producers) therefore has a powerful incentive to monetize as much of its reserves as soon as possible by pumping as much oil as it can (if only to fund the construction of a less oil-dependent economy). (-) The re-entry of Iran is a game changer equivalent to a structural change in the global energy market. Iran insists that it must be allowed to step up its output from 3.6m to 4m bbl/day. This would imply that Saudi Arabia (the world’s largest producer) would have to take the most, if not all, of the proposed cuts in its own output, but this is somewhat incompatible with the condition imposed by the Saudis of not losing market share under the agreement. (-) OPEC’s producers are no longer able to fix prices: There are good reasons to believe that any deal reached from now on involving the freezing of production would prove ineffective. Back in the 1970s or the early 2000s, the exporters’ cartel agreed to cut output and the approach worked well since it was easy to defend market share as the principal competition was among oil producers (in particular between Opec and non-Opec producers). That is not the case today. Today’s biggest threat to any conventional oil producer comes from non-conventional producers and alternative energy sources. Energy cut from conventional oil will easily be offset by a quick increase in shale oil production, which means that OPEC producers are no longer able to fix prices. (-) Global imbalance of supply over demand runs at 1mn bbl/day: Even if the proposed output cuts are confirmed, this deal will not be a game-changer for the international oil market. The global oil market’s imbalance of supply over demand continues to run at 1m bbl/day according to Opec itself. Opec’s proposed production cut will therefore be insufficient to reverse the oil glut. (-) Shale producers to raise output heavily at $60 in oil price: The IEA agency said that $60 price for oil would be enough for many US shale companies to restart stalled production.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Commodities â&#x20AC;&#x201C; Precious (Gold) Fundamental price US$ 1,050/oz. Buy at US$ 900/oz. Sell above US$1,200. 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 base year 2009, as a proxy for the global deflator) rose to $1090 (from $1075 last month). Nevertheless, in real terms gold continues to trade well above its 20-year average of $786. Given the global deflator (now at 1.123), for the gold price to stay near its historical average in real terms, the nominal price (or equilibrium price) must remain near US$882. 2. Gold in terms of Silver (Preference for Store of Value over Productive Assets): This ratio has ticked down to 68.12x (from 70.67x last month) and remains well above both its 20-year average of 61.14, suggesting that Gold is expensive (in terms of silver). For this ratio to reach its long term average level, assuming that Silver is well priced, then the Gold price should go to $1,127 oz. 3. Gold in terms of Oil (Gold / Oil): This ratio rose to 23.27x (from 22.97x last month) but still remains well above its 20-year average of 14.63. Considering our fundamental long-term target for oil at US$45pbl (our central target), the price of gold must approach US$658 for this ratio to remain near its LT average level. 4. Gold in terms of the DJI (Dow Jones / Gold): This ratio has moved to 16.56x (from 6.49x last month), still below its LT average of 20.34x. Given our target price for the DJI of $20,000, the price of gold must approach US$983 for this ratio to remain near its LT average. 5. Gold in terms of the S&P (Gold / S&P500 index): This ratio has ticked up to 0.532x (from 0.529x last month), but is still above its LT average of 0.5822x. Given our target price for the S&P of $2,233 the price of gold must approach US$1,300 for this ratio to remain near its LT average. 6. Speculative Positioning: CFTC - CEI 100oz Active Future non-commercial contracts: longs remained stable at 219.6k (from 218.14k). Shorts fell to 95.9k (from 111.10k) => Net position increased to +123k (from +107.04k). Therefore, speculators still remain long in gold. 7. Financial liberalization in China. Higher â&#x20AC;&#x153;quotasâ&#x20AC;? each month in the QFII are widening the investment alternatives for Chinese investors (historically focused on gold). 8. Central bank gold buying. Gold stocks at central banks are still considerably higher than 2008 levels. Positive drivers: 1. Negative yields still make Gold attractive. The disadvantage of gold relative to fixed income instruments (gold does not offer a coupon) is now neutralized, with negative yields in a large number of global bonds, although the importance of this factor is diminishing as yields continue to rise. 2. Relative size of gold: 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 (just 0.08% of the total in the financial markets).

GOLD SPECULATIVE POSITIONS

Long Futures Net Futures

Short Futures 16

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Currencies – Fundamental Targets There has been a sharp decrease in the global USD position in the last month, with investors having slashed a net long exposure against the other currencies to the tune of US$14.65bn (from US$25.6 bn last month). This sharp cut has shifted the positioning in the USD to its lowest since October 2016. This could help explain why the USD has lost ground against some major EM currencies in the last month, such as the BRL, MXN, INR, THB, etc. Outlook: The global position in the greenback is now far below the US$+30.5bn seen in January 2016, and far below the US$+48.8bn net long position seen in January 2015, meaning that the USD is no longer expensive and that there is now much more room to build new long positions in USD.

•

EUR/USD: Fundamental Target (1.00)

Global investors are short in the EUR to the tune of US$-7.67bn (less short than US$-8.9bn last month). This means that positioning in the Euro is now even less short than in January 2016 (US$-19bn). More importantly, in terms of the 3-yr Z-score, the market positioning in EUR is near the longest seen in the last three years. If the investor pattern continues and they decide to hold average exposures seen in the last three years, the stage is set for further falls in the Euro. Known positives for USD: (1) Rising positive carry on US dollar debt instruments. (2) The fact that the Fed has a tightening bias, while most other central banks still have easing bias. (3) The possible continued improvement in the US trade balance through greater domestic energy production. (4) According to the BIS, two years ago there was US$10trn of unfunded positions leveraged with USD. Now that other currencies are signaling their easing stance more clearly, many of these leveraged positions could change their currency of funding (asking for € or ¥ loans and buying back the $ to repay the loans). Known negatives for USD include: (1) The US president is a clear mercantilist, and mercantilists tend to dislike strong currencies. Trump’s desire to relaunch manufacturing in the US cannot happen without a weaker dollar. (2) The US dollar is increasingly overvalued on a PPP against many currencies. (3) Almost everyone is now bullish on the US dollar.

• • • • • • • • • •

JPY: Target (112); EUR/JPY: Target (112). Still very stressed shorts in JPY’s Z-score. GBP: Target (0.83); EUR/GBP: Target (0.83). Trump trade vs Brexit uncertainty. CHF: Target (0.95); EUR/CHF: Target (0.95). Net shorts & stressed levels in CHF. MXN: Target (21); EUR/MXN: Target (21) BRL: Target (3.20); EUR/BRL: Target (3.20) ARS: Target (18.5); EUR/USD: Target (18.5) RUB: NEUTRAL Mkt Value of Change vs AUD: NEUTRAL-POSITIVE Net positions last week 1-yr Max 1-yr Min 1-yr Avg CAD: NEUTRAL-NEGATIVE Currency (Bn $) (Bn $) (Bn $) (Bn $) (Bn $) CNY: Target (6.75-6.80)

Max

7,0

Min Current

USD vs All USD vs G10 EM EUR JPY GBP CHF BRL MXN RUB AUD CAD SPECULATIVE POSITION IN THE FX MARKETS (3Yr - Z SCORES. Max, Min & Current in 1Yr)

14,65 14,80 0,15 -7,67 -5,52 -5,17 -1,11 0,79 -1,41 0,77 2,57 1,87

0,02 0,01 -0,01 -1,49 0,09 -0,07 0,32 -0,05 0,07 -0,03 0,72 0,39

28,7 28,4 1,2 -3,1 8,6 -1,2 1,4 0,8 -0,4 1,3 4,6 2,0

-6,9 -7,1 -1,7 -19,0 -9,3 -7,8 -3,1 0,0 -2,3 0,0 -1,2 -2,7

Current Z-score 3-yr -0,44 -0,45 0,43 0,74 -0,36 -0,94 -0,42 1,34 -0,46 1,99 1,11 1,62

11,5 10,9 -0,6 -10,0 2,9 -5,2 -0,4 0,3 -1,3 0,4 1,6 0,2

ANDBANK

3-year Z-Score:

5,0

Current Position - 3 year average position 3-year Standard Deviation

3,0

1,0

Values above +1 suggest positioning may be overbought

-1,0

-3,0

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

Values below -1 suggest positioning may be oversold

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Market Outlook â&#x20AC;&#x201C; Fundamental Expected Performance

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Monthly Global Asset & Currency 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

20,9

10,0

15,8

5,0

11,7

5,0

9,8

Fixed Income Short-Term

25,0

31,1

15,0

21,2

5,0

10,5

0,0

4,9

Fixed Income (L.T) OECD

30,0

22,5

20,0

15,0

11,3

5,0

3,8

US Gov & Municipals & Agencies

11,3

7,5

5,6

EU Gov & Municipals & Agencies

2,3

1,5

1,1

0,4

European Peripheral Risk

9,0

6,0

4,5

1,5

Credit (OCDE)

20,0

Investment Grade USD

16,0

20,0

4,8

16,0

15,0

4,8

12,0

1,9

5,0

3,6

4,0 1,2

High Yield Grade USD

6,4

4,8

1,6

Investment Grade EUR

1,6

1,2

0,4

High Yield Grade EUR

3,2

2,4

0,8

Fixed Income Emerging Markets

5,0

7,5

10,0

15,0

Latam Sovereign

1,5

2,3

3,0

4,5

Latam Credit

0,9

1,3

1,7

2,6

Asia Sovereign

1,7

2,5

3,3

5,0

Asia Credit

1,0

1,5

2,0

3,0

Equity OECD

5,0

4,5

20,0

18,0

32,5

29,3

50,0

45,0

US Equity

2,3

9,0

14,6

22,5

European Equity

2,3

9,0

14,6

22,5

Equity Emerging

0,0

5,0

4,8

10,0

9,5

10,0

9,5

Asian Equity

0,0

2,5

5,0

Latam Equity

0,0

2,2

4,5

Commodities

0,0 Energy

0,0

2,5

0,0

1,8

5,0

0,2

3,5

5,0

0,4

3,5 0,4

Minerals & Metals

0,0

0,5

1,1

Precious

0,0

0,8

1,6

Agriculture

0,0

0,3

0,5

REITS

0,0

2,5

2,3

5,0

4,5

Currency Exposure (European investor perspective) EUR

90,8

83,8

80,8

76,3

USD

9,2

16,2

19,2

23,7

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.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

Principal Contributors

Alex Fusté – Chief Global Economist – Asia & Commodities: Equity, Rates, FX +376 881 248 Giuseppe Mazzeo – CIO Andbank USA – U.S. Rates & Equity. +1 786 471 2426 Eduardo Anton – Portf. Manager USA – 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 Luis Pinho – CIO Andbank LLA Brazil – Bonds, FX & Equity Brazil. Andrés Davila – Head of Asset Management Panama – Venezuela. +507 2975800 Marian Fernández – Product Manager, Europe – Macro, ECB & Gov. bonds. +34 639 30 43 61 David Tomas – Wealth Management, Spain – Spanish Equity. +34 647 44 10 07 Andrés Pomar – Portf Manager Luxembourg – Volatility & ST Risk Assessment +352 26193925 Carlos Hernández – Product Manager – Technical Analysis. +376 873 381 Alejandro Sabariego – Portfolio Manager Luxembourg – Flow & Positioning. +352 26 19 39 25 Alicia Arriero – Portfolio Manager Spain– European Banks. Credit HG & HY. +34 91 153 41 17

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW

MARCH 2017

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 documentâ&#x20AC;&#x2122;s publication and cannot therefore be decisive in evaluating events after the documentâ&#x20AC;&#x2122;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 investorâ&#x20AC;&#x2122;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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