GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Andbank’s Monthly Corporate Review May 2016
“As Saudi Arabia ramps up production at its highest level in more than 30 years, U.S. shale is being forced to cut back”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Contents Executive Summary
3
This month’s news in charts
4
Country Pages USA Europe China India
5 6 7 8
Japan
9
Brazil
10
Mexico
11
Argentina
12
Equity Markets Fundamental Assessment
13
Short-term Assessment. Risk-off shift probability Technical Analysis. Main indices
13 13
Fixed Income Markets Fixed Income, Core Countries Fixed Income, European Peripherals
14 14
Fixed Income, Corporate Bonds
15
Fixed Income, Emerging Markets
15
Commodities Energy (Oil)
16
Precious (Gold)
17
Forex
18
Summary Table of Expected Financial Markets Performance
19
Monthly Tactical Asset Allocation Proposal
20 2
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Executive Summary USA - The U.S. Fed has realigned its policies toward economic growth, a shift that seems unlikely to change quickly. This shift in policy has resulted in the dollar retreating from its highs and commodity prices rebounding from multi-year lows.
Europe - No more measures are expected from the ECB in the short term, but further technical details on the corporate bond program could be delivered. Since the last ECB announcement, corporate bonds and equity markets have outperformed and macro surprises are trending upwards.
Spain - For the Spanish Ibex, we are beginning to anticipate events in Brazil and Argentina and the potential positive impact that these may eventually have on Spanish multinationals.
China – A flurry of big cross-border M&A deals by Chinese companies has left analysts scratching their heads. However, China is simply finding its appropriate place on the global M&A stage for an economy of its size and financial heft.
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).
Japan – The true state of the nation is not good, whatever some may claim. Some 62% of analysts surveyed anticipate a further reduction in rates to -0.3% in 2016, with more asset purchases.
Brazil - The sheer scale of the allegations that are mounting against the government means that President Rousseff is unlikely to finish her term in office. The House of Representatives has decided to move forward with the impeachment, which is now in the hands of the Senate.
Mexico - A combination of tighter monetary and fiscal policy will offset the benefits of a weaker peso and keep the brakes on Mexico’s economy over the coming years. Nonetheless, the structural reform package that has been steadily implemented in recent years will eventually start to bear fruit and lift economic growth.
Argentina - Coming back to the marketplace! The US Court of Appeals confirmed the order issued by Judge Griesa lifting the pari passu injunction, which will mean that Argentina can now sell bonds in the international financial markets.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
The month in charts... for you to ponder where we are.
Libor-OIS spread (Overnight Index Swap)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
USA:
Mixed feelings, but not ideal
Do you feel dizzy?
The Fed, the economy and inflation The U.S. Fed has realigned its policies toward economic growth, a shift that seems unlikely to change quickly. This shift in policy has resulted in the dollar retreating from its highs and commodity prices rebounding from multi-year lows. Tamer-than-expected core and headline CPI results in March were consistent with the tone of much of the U.S. economic data in the first quarter. Headline and core CPI figures, which were each projected to rise by 0.2%, rose only 0.1% in the month instead. As a result, the 12-month change for the headline slipped back to 0.9% from 1.0% prior and the core moderated back to 2.2% from 2.3%. In the underlying details of core inflation, the shelter (housing) trend should be watched, as the single largest component of the CPI. Overall, rent pressures should remain firm, as long as the labor market continues to post healthy job gains. We maintain our view that the next Fed rate move will most likely be a hike in June, although we do not rule out this rate hike coming from the September FOMC meeting. 2016 GDP growth estimate of 2% and a FY16 CPI of 1.5% Markets & Forecasts: In this environment, we believe: (1) The U.S. is not facing an imminent recession, although the pace of economic growth will be modest. (2) Many factors are likely to fuel volatility during 2016, including Brexit, the U.S. presidential election, central bank policy shifts and global growth concerns. (3) Conditions do not call for defensive positioning but do warrant caution. (4) In a slow growth environment, growth stocks remain attractive, but a weakening dollar and central bank policies have created opportunities among cyclicals. Discussions continue to dominate the question about whether rising labor costs will have a noticeable negative impact on U.S. equities profits. Wages have begun to accelerate and will increasingly erode profits. During the last five years, while corporate earnings and equity prices have risen sharply, wages have grown at an annual rate of just 2% (the slowest pace in at least the last 50 years and well below the 30-year average of 3%). However, wages are no longer stagnating (average hourly earnings are nearly growing at the fastest pace in five years, and with unemployment already at 5%, the strength of the labor market should support further acceleration). Additionally, the surprisingly dovish approach recently adopted by the Fed makes labor cost inflation an even more immediate risk than previously expected. Thus, as the current cycle matures, the extended level of profit margins represents the largest threat to the pace of corporate earnings growth. (At 8%, S&P 500 net profit margins sit just below their record cyclical and secular highs, which were reached in late 2014 ahead of the oil price decline). Similarly, total US corporate profits represent 8% of GDP, slightly below the highest levels on record. GS suggests that every 100bp rise in wages has an impact on margins that results in a -0.7% cut in EPS. The Q1 earnings season has just been launched and expectations continue to decline. During the past three months, Q1 2016 consensus EPS estimates declined in all but one of the 10 industry sectors. The positive side is that when profits are reported they often show a modest upside surprise. As for profits, the Q1 consensus forecast is an 8% yoy decline. However, looking towards the remainder of the year, the consensus forecast improves in every quarter ($26.52 for Q1, then $29.52, $31.57 and $32.52). Our current base case is ~4.6% sales growth and negative EPS growth of ~2.5% in 2016, which gives us a year-end S&P 5 target of 1949.
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Europe:
A more positive mood since the last ECB announcement. ECB No more measures are expected in the short term, but technical details on the corporate bond program could be delivered: (1) Will senior insurance bonds be bought? (2) Will the ECB rely on primary markets to buy large blocks of paper? (3) Will there be limits by country/ISIN? QE limits will be part of the debate, with doubts around Draghi rekindling the possibility of lower rates. What has changed since ECB’s last announcement? On the positive side, credit has outperformed and macro surprises are trending upwards, while on the negative side, inflation expectations have not recovered despite the oil price uptick and the euro has strengthened (partly due to the Fed’s cautious approach). Banking sector (Surveys show a mixed-to-positive picture) Fresh surveys about bank lending conditions show: (1) Tightening in home loans in Q1 2016, largely driven by regulatory issues. (2) Lending conditions for businesses eased thanks to competition. (3) Good news on the demand side in the form of a continued increase in loan demand across all loan categories. Impact of QE. The banks pointed to an overall improvement in their financial situation as a result of the QE, with the exception of bank profitability. “QE has had a net easing effect on credit conditions for business and housing loans while there was no impact on consumer credit”. Impact on the NIRP. Some 81% of banks reported a decline in net interest income over the past six months with little impact on increased lending. Politics Approaching a “busy summer” in terms of political issues. We have heard positive comments from France (“A Euro Area Finance Minister is needed”), and Merkel pushing for structural reforms. The campaign for the 23rd June “Brexit” referendum in the UK has just started. Latest polls suggest growing support for remaining in the EU, though opinion polls remain tight. Volatility lies ahead as we get closer to that date with the currency being the main risk. In Italy, banks and government have finally agreed a backstop in the bank recapitalization through a rescue fund, Atlante. Systemic risks should be reduced and it should be good news for weaker banks and the system as a whole, although execution risks remain and the fund is unlikely to provide material relief to the bad loan overhang. France is approving reforms on the labor front (35-hour working week, layoffs) with more to come despite the protests. In Spain, if no new PM is elected by May 2nd, snap elections would be held on June 26th, following the Brexit referendum. In Ireland, after inconclusive elections on February 26th, no agreement has yet been reached. A stable majority might come from a first-ever combination: Fine Gael and Fianna Fail, with the Labor party also reconsidering a role in the minority government. Markets Peripheral rates could trade sideways. We are sticking to our targets for 10yr bond yields: Spain 1.4%, Italy 1.3%, Portugal 2.5%, Ireland 0.8% Core fixed income (Bund): Somewhat linked to the US Treasury forecast, but could stay at these levels in the short term. Target 2016 of 0.4%. Corporate bonds: New issuance has recovered, particularly in investment grade, with some positive signs from HY. Stability following March’s strong reversal of the indexes. Room for improvement seems limited in credit, but ECB corporate purchases starting in June should prepare the ground for less volatility and narrower spreads. We keep our targets for IG spreads (at 65) and HY (at 290). Equity: Sharp cut in analysts’ estimates for FY16 EPS to €21. We keep our €24 estimate and our target of 360 for the Stoxx600.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
China:
A flurry of big cross-border M&A deals by Chinese companies has left analysts scratching their heads.
UK banks creating close ties with Chinese markets
Chinese outward direct investment rises again A flurry of big cross-border mergers and acquisitions by Chinese companies has left many people scratching their heads: Stateowned ChemChina’s US$43bn bid for Swiss agrochemical firm Syngenta, or private insurance conglomerate Anbang’s surprise US$13bn offer for Starwood Hotels. Chinese international acquisitions are on track to exceed US$100bn in Q1 (almost as much as in FY15). Why? 1. China is simply finding its appropriate place on the global M&A stage for an economy of its size and financial heft. Dealogic data shows that the US$106bn of China’s outbound M&A was just 2% of the US$5trn in global M&A. China’s economy accounts for 14% of world GDP. 2. The OBOR initiative has been another explanatory factor. Technically, OBOR is a program for investments in infrastructure in Central and SE Asia, but companies and governments are interpreting it far more broadly (following the signals from China’s leadership that investing abroad is politically approved). 3. The recent crash in the domestic stock market and concerns about a potential devaluation of the RMB have certainly increased incentives for big firms to diversify their portfolios outside China (Alibaba’s $1.4bn, Anbang’s $4.7bn and Fosun’s $5bn are just some examples) Our interpretation 1. China is changing rapidly and moving into a new phase. In the past, China’s outward direct investment was a matter of stateowned companies doing resource deals and infrastructure. Now, an increasing share of these outward investments is made by private firms –some 30% of the announced deals– which is undoubtedly a major shift. 2. The range of interests is broadening. Rhodium data shows how the raw materials share of Chinese ODI plummeted from 83% in 2011 to 16% in 2015. The range of target sectors is now quite diverse (consumers goods, tech, entertainment, industry, real estate, etc.). Real estate accounts for a small slice of the pie. 3. In the long run, a broader portfolio of international assets will strengthen China’s BOP situation by generating a large income stream. This will allow it to keep running current account surpluses even as its trade account deteriorates, translating into a much lower funding requirement. Thanks to its accumulated large trade surpluses, China is on its way to become the world’s biggest net creditor, meaning that international investments will be handled by private Chinese companies. Why is a wide range of targets and players important? This goes against the popular notion that when private entrepreneurs buy assets abroad, it is because there are fleeing a collapsing country. In these cases, the pattern is quite simple and limited to the purchase of assets whose value lies in their tangibility (usually concentrated in one sector). The current Chinese outbound M&A shows an investment pattern that is more consistent with the idea that China’s private firms are profit-seeking actors on the hunt for new opportunities. The basis of Western analysis called into question again This dramatic rise in Chinese ODI has occurred in the last few months, just as foreign investors were concerned about a destabilization of the RMB due to a massive loss of FX reserves. The question is then quite simple: Why would Beijing green light this massive outward investment and capital outflow? Simply put, because they knew such fears were unfounded (again). They knew that most of the capital outflows in the past year came from repayment of foreign currency debt and hedging by exporters and importers, but there was no evidence of people spiriting cash out of the country because they thought the roof was about to cave in. That is why regulators focused on various short-term capital flows destabilizing the exchange rate while taking a relaxed stance on ODI activities. 7
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-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 2 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 23mn passengers and over 3mn tons of freight per day, but the sprawling network is the same as that laid down by the British before Independence (1945). Comparisons with China are startling: In 1990, China’s 58,000km rail network lagged behind India’s 62,000km, but by 2015 China’s had doubled to 121,000 km whereas India’s had barely grown to 66,000km. In percapita 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 per freight and 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 4km 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 dozen 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 increase in transport of bulk commodities). Govt forecasts that coal demand will rise from 900mn tons to 1.5bn tons in 4 years. Steel is expected to grow from 80mn tons to 400mn 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 MAY-16
Japan: The true state of the nation is not good, whatever some may claim BoJ BoJ’s Iwata said “Rates may eventually need to be lowered to -0.7% or perhaps to -1%”. According to a poll, 62% of analysts surveyed anticipate a further reduction in rates to -0.3% in 2016, with more asset purchases. Kuroda has reiterated a willingness to ease policy and that they will not hesitate to implement new measures within the three dimensions of the policy framework (Quantity, Quality and Rates). At Columbia University (NY) the BoJ Governor clarified that negative rates boost the effects of existing policy measures by directly pushing down the short-end of the yield curve. Meanwhile, Mitsubishi UFJ Financial Group president, Nobuyuki Hirano, said that households and businesses have become skeptical about the effectiveness of policy measures to address the current economic problems, adding that there is no guarantee that negative rates will encourage capex given that rates have already been low for over a decade. Politics PM Abe is calling for G7 action on the global economy, with Japan showing leadership by proposing supplementary budget for FY16. LDP vice president Komura calls for fastest implementation of 2016 budget followed by the supplementary budget. Government has already consolidated plans to formulate supplementary budget for FY 2016, with Japan to front-load 8% of FY16 public works spending into H1 (some ¥10T out of the ¥12T budgeted). GPIF to delay (bad) earnings report until after elections. They will be announced on July 29, three weeks later than usual, amid expectations of the worst financial performance since the global financial crisis. Markets New ETF to make debut on the Tokyo Stock Exchange in May, focused on stocks of companies that raise wages or expand employment and capital spending. The BoJ has announced plans to buy ¥300B ($2,7B) of this ETF as part of its asset purchase program. Japan Post Bank plans to add REITs to its portfolio amid the low yields on bonds. The bank has already set up an investment department focused on REITs. 10-year JGB yield at -0.08%. Re-opened auction with a bid-to-cover at 3.9x!! (vs 3.2 for the previous one). BoJ is buying as much sovereign debt as the government is issuing. Bid-ask spreads have widened to 0.12%. Banks Japanese Banking Association says that the negative rate policy will work over time by supporting consumption and investment, though it will hurt earnings in the short run. Bankers still calling for more pro-growth policies (monetary action and deregulation). Activity (not improving, in fact getting worse) March Tankan large manufacturers business conditions index +6 vs +12 in December. March Tankan large non-manufacturer +22 vs +25 in December. Large firm capex plans (0.9%) vs and +9.8% in FY15. PMI Services March at 50 vs 51.2 in February. BoJ Consumer sentiment index in Q1 falls to -22.5 (vs -17.3). Outlook index in Q1 falls to -30.9 (vs -19.9). Leading Composite Index hits low of 99.8 in February (vs 101.8 in January). Coincident Composite Index hits low of 110.3 in February (vs 113.5 in January). Core machinery orders falls -9.2% m/m in February (vs +15% in January). M&A slumped in Q1: -67% in transactions to acquire overseas business. Deals in Asia dropped -88% (In Europe -68%). Fast Retailing Group cuts FY profit guidance for second time (to ¥120B from ¥180B). Current Account balance raised in February (to ¥1.7B from ¥1.5B in Jan). March corporate bankruptcies -13.2% (vs +4.5% in February). CPI & Wages The pace of price hikes in Japanese supermarkets slowed dramatically in April with their own CPINow index growth trend of 0.72% as of Monday, marking the weakest in nine months and well below the 1.21.4% in March. CPI expectations lowered – firms now forecast +0.8% in one year (lower than the 1% in December). BoJ to cut forecasts in the semi-annual outlook report from the current estimates of +0.8% in FY16 and +1.8% in FY17. Wages at +0.4% y/y (low growth, though up-ticking from January).
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Brazil:
Farewell Dilma!
Politics The sheer scale of the allegations that are mounting against the government means that President Rousseff is unlikely to finish her term in office. The House of Representatives decided to move forward with the impeachment, which is now in the hands of the Senate. Brazil's Vice President, Michel Temer (who will supposedly replace Dilma), is assembling a team of respected economists to help revive confidence in the Brazilian economy. Here we present some of the economic proposals put forward by the program entitled "A Bridge to the Future": 1. Limit current federal spending growth to a level below the annual economic growth rate. 2. Halt the surge in Brazil's debt as a % of GDP within three years and bring inflation back to the mid-point of the central bank's official target, at 4.5 percent. 3. Set a minimum age for retirement and uncouple pension benefits from minimum wage adjustments. 4. Scrap the existing formula under which Brazil's minimum wage is automatically adjusted based on past economic growth and inflation. The executive and legislative branches of government would set future increases based on annual budget allowances. 5. Make government expenditure on health and education optional instead of mandatory, with a view to easing their burden on the federal budget. 6. Make long-term adjustments to public finances without resorting to tax increases, except in cases of extreme urgency. 7. Reduce the central bank's intervention in the foreign currency market and the stock of currency swaps, which has led to massive debt sales and driven up national debt. 8. Simplify Brazil's tax system and secure tax exemptions for exports and investment. 9. Relax labor laws to facilitate business and reduce costs. 10. Sell state assets if necessary and expand concessions to business groups for infrastructure and logistic projects. We believe the market will like the measures, in the same way that we (as investors) like what we have read about this program, which if implemented, could mean that Brazil (and its assets) outperform. Economics: The good & the not so good. The focus on political developments also seems to be distracting attention from more encouraging signs from the real economy – inflation is falling and the trade balance is improving dramatically. The external headwinds that pushed Brazil into recession could ease over the course of this year. 1. Growth in China (Brazil’s largest trading partner) should recover. 2. After three years of sharp falls, the prices of Brazil’s main commodity exports are expected to rebound. 3. Trade balance is at a 3-year high ($20bn 12m sum). With the Real set to remain weak, this positive contribution to growth could well continue. 4. Despite being weak (according to historical standards), we expect the Real to stabilize. This (and the unwinding of last year’s increase in regulated prices) will help the inflation rate to fall well below the current highs of 10.5% and stabilize at around 6.5%-7%, which in turn will allow the CB to ease monetary conditions and boost credit and investment. The irony is that despite Brazil being in its deepest recession since records began, fixing the economy is relatively easy. What is needed is (1) Tighter fiscal policy, (2) Lower interest rates –once inflation has been fixed and the base effects of the rise in subsidized prices have run out of steam-, (3) A weak currency, as we have already, and (4) Some key structural reforms. On the negative side, there is evidence that political developments are pushing Brazil deeper into recession. (1) Consumer confidence fell back in March (after rising in Jan and Feb); (2) Some GDP trackers suggest that GDP is contracting by almost 8% y/y; (3) Unemployment rate reached a seven-year high of 8.2%; and (4) The public deficit widened to 10.8% of GDP (mainly due to sharp falls in tax revenues), creating a dire fiscal situation with no room for policy support.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Mexico:
The structural reform package will eventually start to Economics lift economic growth
In recent months, the pace of expansion in economic activity has slowed somewhat, affected by the weakness of the industrial sector. The strong correlation between the Mexican manufacturing industry and US industrial activity (which is decelerating) has hurt exports of manufactured products, which are the most important component of Mexico’s export sales. This is in addition to the significant drop in oil exports caused by the current situation in the global energy sector. Private consumption indicators suggest that economic growth will continue at a relatively high rate. Inflation still supportive of growth The Mexican peso depreciation in 2016 has not affected the price formation process in the economy. In March, inflation remained below the Bank of Mexico’s 3% long-term target (2.60%), which is supportive from a monetary policy perspective. Monetary Policy In March the Bank of Mexico decided to keep its reference rate at 3.50%, pending more information about the normalization of the US Fed’s monetary policy. A stronger performance by the Mexican peso in March compared to the previous two months helped the central bank to take a waitand-see stance. Politics Mexican Ministry of Finance received MXN 239bn pesos from Bank of Mexico “profits”, of which 70% will be used to buy back existing debt and reduce the amount of debt issued during 2016. The generated savings will help to capitalize Pemex, due to the risks that the state-owned energy company represents to public finances, as highlighted by Moody’s in its latest sovereign rating review. The Finance Ministry will deliver MXN 73 bn pesos in monetary relief to the company as well as changing the tax system, which could generate an extra 50,000 million pesos of liquidity. Pemex must agree to reduce its current liabilities and implement mechanisms to properly record and manage its labor liabilities. Financial Markets FX. Although the peso appreciated by about 5% in March, it ended the quarter slightly down after being the hardest hit currency against the dollar in February. Our year-end target remains at 17.5. Fixed Income. Bonds performed reasonably well in April, posting YTD gains of 5% both in local and USD denominated bonds. Non-resident holdings of peso-denominated government securities have remained fairly constant. For the M10 we expect a central point target of 6.00, while the USD denominated Mexican bond (UMS10) should be around 3.5 – lower than our last forecast due to the decline in EM spreads in March. Equity. Concerns about global growth deceleration and corporate indebtedness in China have been key drivers for commodity price adjustments and therefore in LatAm markets. However, Mexico is not among the most exposed economies to China’s deceleration and remains closely linked to the US. Consumption will continue to recover, at least during 1H16. We also like selected airport and banking sector stocks. We prefer companies with high exposure to USDdenominated revenues. We estimate 1Q16 sales growth of 13% and 9% in EBITDA. Net income should be positive on the back of FX depreciation. IPC target circa 48,000.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Argentina
Returning to the marketplace! Holdouts US Court of Appeals confirms the order issued by Judge Griesa lifting the pari passu injunction. Argentina can now sell the bonds needed to finance the payments to its holdout creditors. Argentina offered 4 tranches of new debt totaling 15bn. Demand for this issue was 67bn or 4.5x. The 3yr bond was sold at 6.25%; 5yr bond at 6.875%; 10yr bond at 7.5% and the 30-yr bond at 8.0%. 10.50bn of the total will be used to pay holdouts, while 6bn will be used to finance the fiscal deficit and to start infrastructure projects to stimulate activity. This new issuance will have little impact on international reserves as much of it will be used to pay holdouts. Economics Economic activity is still showing signs of contraction mainly due to the measures taken by the government to reduce imbalances inherited from previous administrations. These include the lifting of exchange controls, cutting export taxes, increasing interest rates, adjustments to public tariffs and printing less money, among others. These caused a significant deceleration in economic activity, but analysts expect a better 2nd half when infrastructure projects start and FDI should gradually improve. Inflation remained above 3% m/m in March and ended the 1Q16 at around 12% according to different indicators. We therefore think that the government’s range of 2025% will be difficult to accomplish. Moreover, April’s inflation is expected to accelerate due to the hike in tariffs. Markets FX: ARS spot @ 14.13 continues to strengthen due to contraction in monetary policy by the BCRA. Settlement with holdout creditors is easing pressures in the FX market, although we think USD inflows will hardly be enough to finance FX needs and offset the effects of the formidable inflation. We believe that a target of 18 for this year seems appropriate. Fixed Income: We like the short-term government/quasi bonds, specially the Bonar 2018, New Global NY law 2019, Provincia BA 2018 and YPFDAR 2025. Equities: Strong rally seen in the last few months. Some stocks still look cheap but will mainly depend on the success of Macri’s measures in reestablishing macro equilibrium in Argentina. Some of the companies that could benefit from Macri’s policies include YPF (the stock has massively underperformed its regional and asset-class peers following nationalization. Under the new government, offshore investments could help the company to develop unexplored natural resources); BMA, BFR & GGAL in the financial sector (Compared to regional peers, Argentina’s banks have recovered a little from 2001 crisis levels. Also, in an economy that has a low level of banking use, a normalization in the macro environment could be really beneficial); and PAM, EDN & TGS in the utilities sector (Kirchner’s government’s froze utility tariffs for 12 years. A gradual normalization of tariffs could be a major trigger 12 for these companies).
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Equity Markets GLOBAL EQUITY INDICES - FUNDAMENTAL ASSESSMENT
Index
Sales per Share 2015
S&P 500 INDEX/d 1.130
Andbank's Sales Andbank's Net Margin Sales Growth per Share Net Margin 2015 2016 2016 2016
EPS 2015
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
301
21,7
7,2%
3,5%
311
7,7%
24
10,5%
16,04 15,00
IBEX 35 INDEX/d 7.875
641,4
8,1%
0,7%
7.927
8,1%
642
0,1%
14,54 14,50
MXSE IPC GRAL /d28.542
1.888,1
6,6%
7,7%
30.739
7,3%
2.254
19,4%
24,05 21,30
BVSP BOVESPA I/d 55.578
3.377,2
6,1%
5,5%
58.635
6,5%
3.811
12,9%
15,72 13,12
NIKKEI 225 INDEX20.408
1.018,6
5,0%
2,0%
20.816
5,0%
1.041
2,2%
16,98 15,80
SSE COMPOSITE/d2.652
233,9
8,8%
7,0%
2.838
8,8%
250
6,8%
12,63 13,00
HANG SENG INDE/d 13.064
2.015,3
15,4%
2,0%
13.325
15,4%
2.052
1,8%
10,60 10,00
S&P SENSEX/d
12.559
1.432,9
11,4%
11,0%
13.941
11,8%
1.645
14,8%
18,19 17,00
MSCI EM ASIA
411
34,1
8,3%
7,0%
440
8,3%
37
7,0%
19,49 18,21
STXE 600 PR/d
INDEX CURRENT PRICE 2.092 348 9.327 45.417 53.083 17.290 2.954 21.362 26.064 665
2016 2016 TARGET E[Perform.] PRICE % Ch Y/Y 1.949 -6,8% 360 3,3% 9.310 -0,2% 48.000 5,7% 50.000 -5,8% 16.445 -4,9% 3.247 9,9% 20.521 -3,9% 27.965 7,3% 665 0,0% 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 3 11 1 0 3,6
7 2 11 2 0 3,2
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 slightly from 3.6 to 3.2 in a -10/+10 range, suggesting that the market is not oversold and remains in a neutral zone with no stress. We do not consider the market is cheap, although we cannot say it is expensive. At current levels, a risk-off shift in the equity markets would mean that the market would quickly become oversold (cheap). o Positioning (speculators, HF, managers): Although there is a certain degree of optimism in the market, as we mentioned last month, there are still many flags urging caution. High cash levels (above the 3-year-average) means that managers remain unconvinced. o Flows (Funds & ETFs): According to the Fund Flows report from some of our sources, US$5.4bn flowed into US equities compared to a bad run for EUR equities (net outflows) and remarkable outflows in €HY (€1.2bn). The S&P P/E blended forward 12m level continues to rally down, with US companies quoting cheaper than in 1Q15. Using the contrarian approach followed in our GEM Composite Indicator, this makes us bullish. o Sentiment: The BNP Love/Panic US Index is in Buy territory at its lowest ever level (-72.7%) even lower than in 2008/2012. The strongest driver for “Panic” sentiments’ move seen last week came from Commodity composite bullish index. Allocations to commodities were near one of the lowest levels in the survey's history (20% underweight). Ned Davis Crowd indicator, which aggregates several different sentiment indicators, remains in the optimist area and our position is therefore bearish.
TECHNICAL ANALISYS (Short and medium-term assessment) o o o o
S&P: SIDEWAYS/BULLISH. Support: ST at 2050 / MT at 1800. Resistance: ST at 2134 / MT at 2134. STOXX50: MOD.BULLISH. Support: ST at 2900 / MT at 2684. Resistance: ST at 3325 / MT at 3325. IBEX: SIDEWAYS/BULLISH. Support: ST at 8000 / MT at 7500. Resistance: ST at 9250 / MT at 9250. €/$: Support at 1.09. Resistance at 1.17.
13
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Fixed Income – Core Country Bonds:
NEGATIVE STANCE
UST 10Yr BOND: Entry point above 2.5% yield // Floor at 1.92%. Ceiling 3.00% 1. Swap spread: Swap rates fell to 1.61% (from 1.75%), as did the 10Y UST to 1.89% (from 1.95%). The swap spread therefore remained stable (-28bp from -20bp). For this spread to normalize towards the +20bp area, with 10Y CPI expectations (swap rate) anchored in the 2%-2.25% range, the 10Y UST yield would have to move towards 1.92% (this should be considered a floor). 2. Slope: The UST yield curve has remained stable (to 106bp from 107bp). With the short end normalizing towards 1.25%, to reach the 10yr average slope (175bp), the 10Y UST yield could go to 3.00%. 3. Given the “new normal” (ZIRPs), a good entry point in the 10Y UST could be when real yield hits 1%. Given that our 2016 CPI forecast is now 1.5%, UST yield would have to rise to 2.5% to become a “BUY”. EURO BENCHMARK 10Yr BOND: Target at 0.6% yield // Ceiling at 0.85% 1. Swap Spread: Swap rates upticked to 0.58% (from 0.56%) and the Bund yield rose to 0.23% (from 0.18%). The swap spread therefore fell to 35bp (from 38bp). For the swap spread to normalize towards the 30-40bp area, with 10Y inflation expectations (swap rate) anchored in the 1%-1.25% range, the Bund yield would have to move towards 0.8%. 2. Slope: The slope of the EUR curve rose to 71bp (from 65bp). 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 could be trading sideways, so we are sticking to our targets. Spain: 1.4%. Recent public debt figures disappointed. Spain may request more time to achieve stability targets. The European Commission may adopt harsher wording on Spain’s fiscal issues, especially in the light of the fiscal slippage in 2015. S&P has reconfirmed Spain’s credit rating at BBB+ with a ‘Stable Outlook’. Italy: 1.3%. Portugal: 2.5%. On April 29 DBRS will review the current investment-grade rating (important for ECB QE eligibility). Risks remain over DBRS rating review (the only rating agency to hold an investment grade opinion of Portugal, making its bonds eligible for QE purchases). A downgrade is not in our base scenario. DBRS has held this rating on Portugal since 2012 during periods when Portuguese yields were much higher than at present; and S&P overview seems supportive. Ireland: 0.9% target.
14
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Fixed Income – Corporate Bonds & EM Govies FIXED INCOME – CORPORATE CREDIT US$ IG & HY CDX HY: Bond yields and spreads fell 9bp last month and are 225bp below the peak on February 11, although they have rallied +9.13% above February’s market bottom. Primary market: YTD issuance totals 61 companies selling $31bn, compared with 80 companies selling $42bn during the same period in 2015 (a decline of 23%). However, issuance accelerated in 1H April, with +US$9.1bn bonds sold, equaling the total volume sold during the whole of March (US$9.2bn) and representing almost 30% of total YTD issuance. Inflows in the secondary market, which continued to accelerate during the month, have certainly helped. Outlook: Current spread level 432 bp. We lower our target to 400 bp (from 425 bp). High yield bonds continue to benefit from a continued rally in oil, higher stocks and solid trade numbers, even though default rates have accelerated to a par-weighted 3.56%. In April three companies filed for Chapter 11 bankruptcy (coal miner Peabody’s $5.9bn; and oil and gas producers Energy XXI’s $2.9bn and Goodrich’s $292mn, following the trend in March when 16 companies defaulted totaling $16.4bn. Some 24 companies have defaulted YTD with debt totaling $36.3bn. We remain cautious about the Energy and Materials sectors in which we expect defaults to continue. Overweight: Financials, Media, Retail, Tech and TMT. Underweight: Metals and Mining, Energy. CDX IG: Investment grade yields and spreads decreased 12bp last month, some 57bp below the peak seen on February 11. Investment Grade ETFs are now 4.76% above February’s market bottom. Outlook: Current spread 74 bp. 2016 target 63 bp. Sector view: Overweight Financials, Materials, Technology. Underweight: Utilities, Healthcare, Industrials.
EUR IG & HY Indices have been stable following March’s strong reversal. We would reiterate our last comment: “Though the room for improvement now seems limited in the credit market, the ECB purchases starting in June should lay the foundation for a less volatile environment (in the short term) and reduced spreads until ECB purchases begin” New issuance has recovered, particularly in investment grade, with some positive signs in HY. By sector, materials have massively outperformed following the oil recovery and the adjustments made by the firms involved (both in terms of dividend cuts, reduced investment and personnel savings). We are continuing with our bond picking approach, favoring sectors backed by ECB purchases. Banks posted general improvements in their financial situations as a result of the QE, with the exception of bank profitability. “QE has had a net easing effect on credit conditions for business and housing loans while there was no impact on consumer credit”. Risks: Lower growth and a very complicated environment of negative rates (making fixed income instruments less attractive). Target for the Itraxx IG Europe at 68bp (currently trading at 68 bp). Target for the Itraxx HY at 290 (currently trading at 292 bp).
10 Year
CPI (y/y)
10 Year
Yield
Last
Yield
Govies
reading
Real
3,35%
4,20%
5,61%
1,85%
1,50%
2,09%
1,60%
1,31%
Taiwan
7,55% 7,46% 3,58% 2,91% 3,86% 1,74% 2,00% 1,80% 0,86%
EME
Turkey
9,01%
Mexico
Indonesia India Philippines EM ASIA
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 globally), 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 USTs this year is 0.45% (1.95%-1.50%), the real yield of the EM bonds should be at least 1.45% (see table).
LATAM
FIXED INCOME - EMERGING MARKETS (GOVIES): “The two conditions are not met”
China Malaysia Thailand Singapore South Korea
2,68%
1,18%
-0,85%
2,59%
0,00%
2,00%
1,28%
0,52%
0,14%
0,73%
8,81%
0,20%
Russian Federation 9,18%
12,92%
-3,74%
12,78% 5,87% 7,99% 6,74%
10,67%
2,10%
2,13%
3,74%
Brazil Colombia Peru
6,77%
1,22%
4,40%
2,35%
15
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Commodities ENERGY (OIL): Fundamental target at $40. Range (Buy at $30. Sell at $50). Price & volatility Doha meetings failed to produce a deal, which underscores the poor state of OPEC relations and shows that the cartel no longer exists in any meaningful sense, leading to a growing risk of higher OPEC supply. Geopolitics Saudi Arabia's allies believe oil minister al-Naimi is no longer in control of his country's oil policy, usurped by 31-yearold Prince Mohammed. Some OPEC oil ministers said al-Naimi had no authority to negotiate policy at the Doha meetings. Other Gulf OPEC sources said that the Saudi’s decision came as a complete surprise to them. It pointed out that the kingdom usually consults with Kuwait, the UAE and Qatar. A senior source said he thought Naimi himself was unaware of the change of plan until late in the game. Saudi prince cautioned that if other producers increased output, Saudi Arabia could respond in kind. The prince said that the kingdom could increase output by more than 1M bpd, or about 10%, to 11.5M. Or even to 12.5M bpd if there was demand for it. Saudi's decision to break negotiations in Doha serves to highlight a significant shift in the kingdom's oil policy. For decades Saudi Arabia has refused to use oil as a diplomatic weapon, but at the weekend it did just that as part of an intensifying conflict with Iran. Saudi appears willing to risk lower prices that will hurt its own economy in the belief they will hurt Iran (and US shale) more. However, there are other catalysts right now that could support oil prices: Kuwait reduced its crude oil output and refining production due to the largest petroleum workers' strike in years. Kuwait Oil Co cut crude output to 1.1M bpd from its normal production level of ~3M bpd (although it has recently output to 1.5M bpd). Forecasts: Moody's Investors Service has deprived 19 energy companies of their investment-grade ratings this year, dropping many by several notches into the deeper reaches of junk territory. The sweep through the sector by Moody's reflects the firm's forecast that commodity prices will not rebound much in coming years. Abu Dhabi's oil chief sees the crude market balancing by end of 2017, with prices rising in the medium term. He expects to see a slow but upward improvement in prices in the medium term, although prices will remain volatile in the short term. Russian energy minister sees $50 oil by year-end: Reuters reported that Russia's oil minister said he sees global oil prices at $40-45 in the second half of 2016, with the potential to rise to $50 by the end of the year. Cornerstone Analytics said the price of crude should hit $85 by the end of 2016. Demand growth and a contraction in non-OPEC supply are both supportive for the first time in about 8 years. A poll of 31 analysts found that they had raised their average price forecasts for 2016 for the first time in 10 months. Analysts expect Brent to average $38.60 in Q2 and $40.90 for the year (from $40.10 in the last survey). Most analysts agreed the oil price may not have much reason to fall below January's lows, while softer demand projections and a weakening economic outlook could limit the scope for bigger gains. The CEOs of some of the biggest and best oil trader companies (Trafigura, Mercuria, Castleton and Glencore) have said the down market is behind us and a rebalancing of global supply and demand could take place in the latter half of 2016. The companies said the price collapse has triggered a surge in demand and led to a collapse in investment in new supplies. Supply: Iran's oil production to reach pre-sanctions level by June (4M bpd), reaffirming Teheran’s commitment to boost output. Oil exports jumped again in March, rising by 250K bpd to surpass 2M bpd. The IEA said Iran is expected to add 500K bpd of supply within a year from its existing oilfields after sanctions were lifted. In fact, Iran's oil minister says it will keep raising production until it reaches the market position it enjoyed before sanctions (which will prevent oil prices from rising significantly). Russian oil output is highest in 30 years ahead of meeting (rose 0.3% to 10.91M bpd in March), raising questions over the country's commitment to freeze output. Russian officials said yesterday that the country may boost production and exports. Daily output in 2016 could grow by 100K barrels to 10.81M. It noted that Russian crude producers can boost output even in an environment of low oil prices as their operating costs don't exceed $4/barrel. Kuwait's oil production is set to return to normal (3M bpd) after the strike came to an end. Output was 1.5M bpd during the strike. Iraq increased crude output to a record level in March, rising to 4.55M bpd from 4.46M in February. US shale output reaching 2-yr low, falling to 4.84M bpd in May. Production in Bakken may fall to 1.05M bpd, 17% below the December 2014 peak, and to 2.03M bpd in Permian, slightly less than in April. Permian production has trended upward even as crude fell. Supertankers in a huge jam: As ports struggle to cope with a global oil glut, huge queues of supertankers have formed in some of the world's busiest sea lanes, where some 200M barrels of crude lies waiting to be loaded or delivered. It said the vessels would stretch for almost 25 miles if put in one straight line. The worst congestion is in the Middle East and Asia. 16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Commodities GOLD: Buy at US$ 900/oz. Sell above US$1,100. New target price!! 1,000 (from 900) Negative drivers: 1. Gold in real terms. Gold has declined in real terms (from $1,105 last month to $986) and is now closer to its 20-year average of $754, although still considerably higher. Given our global deflator (we use the US Implicit Price Deflator-Domestic Final Sales base year 2009 as a proxy) now at 1,097 (from 1.1033), for the gold price to stay near its historical average in real terms, the nominal price must remain near US$827. 2. Gold in terms of Oil (Gold / Oil): This ratio has fallen to 28.95x (from 32.12x last month) but still remains above its 20-year average of 14.21. If the average oil price stays at $40 (our central target), the nominal price of gold must approach US$568 for this ratio to remain near its LT average level. 3. New Ratio!! Gold in terms of the S&P (Gold / S&P500 index): This ratio has moved to 0.598 (from 0.522 last month), still below its LT average of 0.58x. Given our target price for the S&P of $1949, the price of gold must approach US$1,130 for this ratio to remain near its LT average. 4. Gold in terms of the DJI (Dow Jones / Gold): This ratio has moved to 14.67 (from 14.37 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 raised to 286k from prior 258k. Shorts fell to 72k from prior 79k => Net positions increased to +213k from prior +178k (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$173bn (2.5% of the world's gold and just 0.08% of the total in the financial markets).
17
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-16
Currencies • EUR/USD: MT Target (1.05) Short futures in EUR/USD have declined for 4 weeks in a row and the net contracts are now around neutral (net contracts are worth US$ -7.4bn, from US$-10bn 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 Z-score terms, the EUR is among the longest currencies held by investors, relative to the 3-year positioning. All this suggests that the EUR/USD could go lower.
• • • • • • • • •
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). The CNY is gradually appreciating (now at 6.49 from 6.58 in February). After a poorly handled attempt to move to a more market-determined exchange rate and the likelihood that the foreign exchange market has now largely priced in the prospect of mild Federal Reserve tightening, the US dollar is likely to weaken over the six to 12 months. Values of Change vs Net positions last week 1-yr Max (Bn $) (Bn $) (Bn $)
Currency USD vs All USD vs G10 EM EUR JPY GBP CHF BRL MXN RUB AUD CAD
0,95 0,10 -0,85 -7,41 7,62 -4,58 1,08 0,40 -1,33 0,09 2,70 0,19
-1,39 -1,85 -0,46 0,20 0,82 -0,46 0,34 -0,02 -0,43 -0,01 0,67 0,18
45,3 44,0 0,1 -6,5 7,6 0,7 1,4 0,4 0,3 0,1 2,7 0,6
1-yr Min (Bn $)
1-yr Avg (Bn $)
0,0 0,1 -2,8 -30,4 -11,7 -4,6 -3,2 -0,3 -2,7 -0,1 -4,7 -5,1
24,7 24,8 -1,3 -16,4 -1,8 -2,2 -0,1 0,0 -1,3 0,0 -1,7 -2,5
Current Z-score 3-yr -1,55 -1,80 -0,40 0,35 2,73 -1,13 1,13 0,74 -0,70 0,78 1,40 1,34
ANDBANK
4,0
Max 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 MAY-16
Market Outlook – Fundamental Expected Performance Performance Performance Performance Asset Class
Indices
Equity
USA - S&P 500 EUROPE - STOXX 600 SPAIN - IBEX 35 MEXICO - MXSE IPC
Current
2016
Expected
YTD
27/04/2016 27/04/2016
Target
Performance*
1,8%
2,3%
2.092
1949
-6,8%
3,3%
-4,9%
348
360
3,3%
-7,15%
5,9%
-2,3%
9.326
9310
-0,2%
2015
Last month
-0,73% 6,79% -0,39%
-1,0%
5,7%
45.417
48000
5,7%
BRAZIL - BOVESPA
-13,31%
3,8%
22,5%
53.083
50000
-5,8%
JAPAN - NIKKEI 225
9,07%
1,1%
-9,2%
17.290
16445
-4,9%
CHINA - SHANGHAI COMPOSITE
9,41%
1,2%
-16,5%
2.954
3247
9,9%
-7,16%
4,9%
-2,5%
21.362
20521
-3,9%
KONG KONG - HANG SENG INDIA - SENSEX
-5,03%
4,7%
-0,2%
26.064
27965
7,3%
MSCI EM ASIA
-7,90%
1,7%
0,4%
665
665
0,0%
Fixed Income
US Treasury 10 year govie
-0,7%
3,6%
1,90
2,50
-2,86%
Core countries
UK 10 year Guilt
-1,8%
3,1%
1,64
2,00
-1,20%
German 10 year BUND
-1,2%
3,0%
0,29
0,40
-0,63%
Fixed Income
Spain - 10yr Gov bond
-1,1%
2,0%
1,59
1,40
3,09%
Peripheral
Italy - 10yr Gov bond
-2,0%
1,3%
1,49
1,30
3,05%
Portugal - 10yr Gov bond
-2,9%
-4,2%
3,11
2,50
8,03%
Ireland - 10yr Gov bond
-1,8%
1,9%
0,94
0,80
2,09%
Fixed Income
Credit EUR IG-Itraxx Europe
0,2%
0,4%
71,63
65
0,48%
Credit
Credit EUR HY-Itraxx Xover
0,7%
1,5%
305,25
290
2,33%
IG & HY
Credit USD IG - CDX IG
0,3%
1,3%
74,50
63
1,79%
Credit USD HY - CDX HY
0,6%
2,5%
442,73
400
5,23%
2,65
7,7%
14,9%
9,01
9,01
9,01%
EM Europe (Loc) Russia - 10yr Gov bond
-4,11
1,2%
7,4%
9,18
10,18
1,18%
Fixed Income
Indonesia - 10yr Gov bond
1,10
2,4%
12,9%
7,55
7,20
10,37%
Asia
India - 10yr Gov bond
-0,10
1,0%
4,9%
7,46
7,03
10,87%
(Local curncy)
Philippines - 10yr Gov bond
0,21
0,8%
5,0%
3,58
3,35
5,42%
China - 10yr Gov bond
-0,79
-0,1%
0,1%
2,91
2,36
7,27%
Malaysia - 10yr Gov bond
0,05
0,2%
3,8%
3,86
3,35
7,96%
Thailand - 10yr Gov bond
-0,26
0,1%
6,5%
1,74
1,27
5,50%
Singapore - 10yr Gov bond
0,30
-0,5%
5,4%
2,00
1,47
6,27%
South Korea - 10yr Gov bond
-0,44
0,2%
3,1%
1,80
2,00
0,20%
Taiwan - 10yr Gov bond
-0,60
0,0%
1,5%
0,86
0,97
0,01%
Fixed Income
Mexico - 10yr Govie (Loc)
0,45
1,7%
5,1%
5,87
6,00
4,83%
Latam
Mexico - 10yr Govie (usd)
0,19
1,8%
5,3%
3,58
3,50
4,20%
Brazil - 10yr Govie (Loc)
4,07
7,7%
34,8%
12,78
13,50
6,98%
Brazil - 10yr Govie (usd)
3,25
2,2%
16,4%
5,92
6,00
5,27%
7,04
7,00
7,36%
Fixed Income
Turkey - 10yr Gov bond
Argentina - 10yr Govie (usd) Commodities
Fx
CRY
-23%
3,0%
5,8%
181,5
190,0
4,69%
Oil (WTI)
-30%
21,3%
17,4%
44,9
40,00
-10,97%
GOLD
-10%
17,3%
0,2%
1.244,7
1.000,0
-19,66%
EUR/USD (price of 1€)
4,2%
0,2%
1,131
1,05
-7,19%
GBP/USD (price of 1$)
0,9%
-1,5%
0,68
0,65
-5,06%
GBP/EUR (price of 1€)
5,1%
-1,4%
0,77
0,68
-11,83%
CHF/USD (price of 1$)
-3,0%
0,6%
0,97
1,00
2,86%
CHF/EUR (pric e of 1€)
1,0%
0,8%
1,10
1,05
-4,54%
JPY/USD (price of 1$)
-7,4%
-1,2%
111,35
120
7,77%
JPY/EUR (pric e of 1€)
-3,5%
-1,0%
125,95
126,00
0,04%
MXN/USD (price of 1$)
1,3%
0,3%
17,39
17,50
0,63%
MXN/EUR (price of 1€)
5,5%
0,5%
19,67
18,38
-6,60%
BRL/USD (price of 1$)
-11,0%
-3,1%
3,52
3,30
-6,35%
BRL/EUR (pric e of 1€)
-7,3%
-2,9%
3,99
3,47
-13,09%
ARS/USD (price of 1$) CNY (price of 1$)
10,5% 0,0%
-2,3% -0,2%
14,29 6,49
18,00 6,20
25,96% -4,50%
* For Fixed Income instruments, the expected performance refers to a 12 month period
19
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-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
19,3
10,0
14,0
5,0
11,6
5,0
12,6
Fixed Income Short-Term
25,0
27,6
15,0
18,0
5,0
9,9
0,0
6,3
Fixed Income (L.T) OECD
30,0
24,0
20,0
16,0
15,0
12,0
5,0
4,0
US Gov & Municipals & Agencies
9,6
6,4
4,8
1,6
EU Gov & Municipals & Agencies
2,4
1,6
1,2
0,4
European Peripheral Risk Credit (OCDE)
12,0 20,0
8,0 20,0
20,0
6,0 15,0
15,0
2,0 5,0
5,0
Investement Grade USD
6,0
6,0
4,5
1,5
High Yield Grade USD
6,0
6,0
4,5
1,5
Investement Grade EUR
3,0
3,0
2,3
0,8
High Yield Grade EUR
5,0
5,0
3,8
1,3
Fixed Income Emerging Markets
5,0
Latam Sovereign
5,0
7,5
1,8
7,5
10,0
2,6
10,0
15,0
3,5
15,0 5,3
Latam Credit
0,8
1,1
1,5
2,3
Asia Sovereign
1,8
2,6
3,5
5,3
Asia Credit
0,8
1,1
1,5
2,3
Equity OECD
5,0
4,5
20,0
18,0
32,5
29,3
50,0
45,0
US Equity
1,8
7,2
11,7
18,0
European Equity
2,7
10,8
17,6
27,0
Equity Emerging
0,0
0,0
5,0
4,8
10,0
9,5
10,0
9,5
Asian Equity
0,0
2,6
5,2
5,2
Latam Equity
0,0
2,1
4,3
4,3
Commodities
0,0
0,0
2,5
1,4
5,0
2,8
5,0
2,8
Energy
0,0
0,4
0,8
0,8
Minerals & Metals
0,0
0,3
0,6
0,6
Minerals & Metals
0,0
0,6
1,1
1,1
Precious REITS
20,0
0,0 0,0
0,0
0,1 0,0
0,0
0,3 2,5
0,0
0,3 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.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW MAY-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 MAY-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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