Andbank corporate review april 2015 by Andbank

GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS

Monthly Corporate Review April, 2015

OIL WAR!

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Contents Executive Summary ……………………………………………………………………………………………………………3 The World at a Glance ………………………………………………………………………………………………………4 Market Outlook. Summary Table of Expected Performance

……………………………………5

Asset Allocation Proposal …………………………………………………………………………………………………6 Country Pages USA: Is the FED running out of “Patience? ………………………………………………………………7 Euro zone: Are you nervous? The party has just begun!

………………………………………8

Asia: Steady growth over the next couple of years …………………………………………………9 China: The true epicenter of the oil’s earthquake?

………………………………………………10

India: RBI will keep its pro-easing stance ………………………………………………………………11 Japan: Yen carry-trade at six-year high

………………………………………………………………12

Mexico: Energy reform’s Round 1.2 shows Poor signals ………………………………………………13 Brazil: Fiscal adjustment amidst political turmoil ……………………………………………….…14 Other Markets: EMEA, Asia & LatAm

……………………………………………………………………15

Equity Markets Short Term Assessment ……………………………………………………………………………………………17 Fundamental Assessment …………………………………………………………………………………………17 Fixed Income Markets Fixed Income, Core Countries …………………………………………………………………………………18 Fixed Income, European Peripherals ………………………………………………………………………18 Fixed Income, Emerging Markets ……………………………………………………………………………19 Fixed Income, Corporate bonds ………………………………………………………………………………19 Commodities

…………………………………………………………………………………….……………………………20

Forex …………………………………………………………………………………………………………………………………22

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Executive Summary -

Economic & Financial Market Outlook

USA - The Fed no longer says they're be impatient in raising rates. We see factor in determining when and how backdrop will likely rule out a mid-year

"patient“, but this does not mean that the Fed will “inflation performance” to continue to be the key fast the FED will move, and the current benign hike.

Eurozone - The ECB has released projections (very optimistic in our view) ahead of the recent EC figures. GDP growth is projected at a pace of 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017. Consumption and confidence are peaking, but industrial activity remains weak and uneven. ECB - The main doubts/hurdles about the implementation of the ECB’s QE refer to scarcity factors due to: (1) the high volume of bonds yielding negative returns, (2) the willingness of domestic IMFs to sell their bonds, since they need to keep a flow of income. Nevertheless, Draghi says that he sees no signs of scarcity of bonds. EM Asia & Other – Emerging Asia (excluding China and India) grew by 4.2% y/y, with regional growth being remarkably stable. Looking ahead we expect growth to pick up after the recent slowdown. China - China's long-awaited International Payment System to process cross-border yuan transactions is ready and may be launched as early as the fall. China is actively communicating with the IMF on the possibility of including the yuan in the basket of the Special Drawing Rights (SDRs). India – While the CPI has risen in the last three months, we do not think this will cause the RBI to shift its pro-easing stance (good for growth). Banking: NPLs are at 4% and restructured loans at 9% but the risk of a banking crisis is low. Mexico – For the second month in a row consumption data were stronger than expected but the energy reform’s Round 1.2 is showing poor signs. Mexican oil price consolidation below 50 USD is starting to worry the Finance Ministry about its future income. Brazil – The Selic rate was raised to 12.75% (50bp), leaving the door open for further rises. The government announced a BRL 21 bln primary surplus in January, posting the first result for Dilma´s 2nd term. We remain confident the government will deliver the 1.2% of GDP primary fiscal surplus in 2015. 82.4% of fiscal measures do not depend on Congress (only 17.6% of measures requires congressional approval) Equity Markets: Keep long in Equity markets in general. Preferred: Eurozone, Spain, Asia Pacific ex-Japan, India, China and Mexico. Fixed Income Markets: Start buying the T10 in the 2.25% area. Wait for bunds until 1%. Stay long in Peripherals until yields are well below 1%. Some EM bonds still offer value: In hard currency we prefer Brazil and Mexico. In local currency, those with real yields above 3% (Malaysia, Thailand, Peru and Brazil). Commodities: Following the sharp declines in commodities seen during the 2H2014, we believe that a normalization around current levels could take place. Avoid markets whose budgets depend a lot on the price of commodities (CARBS). Target range for oil US$30-50.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

The World at a glance North Ame rica

-2.0

Figures correspond to the last official quarterly report (which in most cases is 3Q14)

â&#x20AC;&#x201C; Last quarterly report. GDP rate (%y/y)

2.6%

2.5%

2.1%

0.0

L ati n Ame ri ca

-2.3% 4.2% 3.5% 1.8%

-0.2%

0.8%

2.0

6% 4.4% 3.8% -0.7%

EU28 0%

2.1%

1.5%

0.6%

3.4%

0% 3.1%

0.2%

4.0

2.3% 2.4% 2.7%

2.7% 0.9% 3.6%

4.1%

-0.3%

1.5% 1.5%

6.0

Asi a 4.5% -0.4% 7.3% 5.4% 6%

2.2%

6.9%

8.0

5.8% 5.0%

2.7%

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Market Outlook â&#x20AC;&#x201C; Fundamental Expected Performance Performance Performance Current Fundamental Expected YTD Last month 26/03/2015 Target Performance*

Asset Class

Indices

Equity

S&P 500 (USA) MSCI EMU MSCI UK Spain - Ibex 35 Asia Pac x Japan - Factset Japan - Nikkei 225 China - Factset Mkt Index India - Factset Mkt Index Mexico - IPC Brazil - Bovespa

-0.1% 17.5% 4.8% 11.4% 9.7% 11.6% 17.8% 6.2% 0.2% 1.1%

-2.6% 2.7% -0.8% 2.8% 3.6% 3.6% 10.4% -4.3% -2.7% -2.3%

2,056 219 2,025 11,454 322 19,471 301 546 43,229 50,579

2,138 228 2,012 11,549 353 20,178 316 622 47,503 53,220

4.0% 3.9% -0.7% 0.8% 9.6% 3.6% 4.8% 13.9% 9.9% 5.2%

Fixed Income Core countries

US Treasury 10 year govie German Bund 10 year govie

1.9% 2.9%

0.4% 0.5%

1.99 0.19

2.20 0.25

0.33% -0.33%

Fixed Income Peripheral

Spain - 10yr Gov bond Italy - 10yr Gov bond Portugal - 10yr Gov bond Ireland - 10yr Gov bond Greece - 10yr Gov bond

3.0% 4.8% 7.8% 4.7% -9.8%

0.0% 0.3% 0.8% 0.8% -14.1%

1.27 1.32 1.77 0.68 10.92

0.90 0.90 1.25 0.50 7.50

4.27% 4.64% 5.96% 2.16% 38.30%

-2.4% 16.8%

-1.1% 10.6%

8.41 11.60

7.00 14.50

19.70% -11.56%

0.6% 0.5%

0.1% -0.1%

0.93 0.95

0.70 0.80

3.14% 1.43%

India - 10yr Gov bond Indonesia - 10yr Gov bond (Local & hard crncy) China - 10yr Gov bond Philippines - 10yr Gov bond Thailand - 10yr Gov bond Malaysia - 10yr Gov bond

1.5% 6.4% 1.7% -1.4% 1.8% 2.8%

-0.1% -2.5% -1.5% -0.3% 0.2% -0.1%

7.90 7.35 3.55 4.15 2.70 3.91

7.25 6.50 2.50 3.75 2.50 3.75

13.07% 14.18% 11.92% 7.31% 4.33% 5.16%

Fixed Income Latam

Mexico Mexico Brazil Brazil -

1.1% -0.3% -3.9% -4.5%

-1.6% -0.9% -3.3% -1.9%

5.85 3.48 13.16 4.89

5.75 3.25 12.00 4.00

6.68% 5.32% 22.48% 12.01%

Commodities

CRY Oil (WTI) Gold

-4.3% -3.9% 0.8%

-0.4% 7.9% -0.9%

220.1 51.43 1,209.40

224.0 40.00 900.00

1.75% -22.22% -25.58%

EUR/USD JPY/USD JPY/EUR CNY/USD MXN/USD BRL/USD GBP/USD GBP/EUR ASEAN Currency Basket (Index)

-9.8% 1.0% 10.6% -0.1% -2.4% -19.7% -5.1% 5.2% -1.7%

-2.6% -0.3% 3.2% 0.7% -0.8% -10.1% -3.8% -1.1% -1.0%

1.09 119.38 131.00 6.21 15.09 3.18 0.67 0.74 98.29

1.00 130.00 130.00 5.90 14.50 3.00 0.68 0.68 105.00

-8.41% -8.90% 0.76% 5.03% 3.89% 5.72% -0.92% 7.57% 6.83%

Fixed Income Turkey - 10yr Gov bond EM Europe (Loc) Russia - 10yr Gov bond Fixed Income IG & HY (Swap spread)

Investment Grade USD Investment Grade EUR

Fixed Income Asia

- 10yr Govie (Loc) - 10yr Govie (usd) 10yr Govie (Loc) 10yr Govie (usd)

* For Fixed Income instruments, the expected performance refers to a 12 month period

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Monthly Global Asset Allocation Proposal * As an illustration we show the impact of our changes in a Moderate portfolio.

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

16.0

10.0

6.0

5.6

4.0

3.6

Fixed Income Short-Term

25.0

20.0

15.0

11.3

5.0

3.5

0.0

Fixed Income OECD Government

30.0

24.0

20.0

15.0

12.0

8.3

5.0

3.3

US Treasury

0.0

German Bund

0.0

European Peripheral Risk Corporate Invest. Grade

24.0 20.0

15.0 20.0

25.0

0.0

8.3 15.0

17.4

3.3 5.0

5.6

Inv. Grade USD

20.0

18.8

13.0

4.2

Inv. Grade EUR

6.7

6.3

4.3

1.4

Fixed Income EM / HY

5.0

6.7

10.0

12.5

15.0

17.4

10.0

11.1

Fixed Income Asia

1.7

3.1

4.3

Fixed Income Latam

3.3

6.3

8.7

5.6

High Yield

1.7

3.1

4.3

2.8

Equity OECD

5.0 US Equity

6.7

15.0

1.7

European Equity Equity Emerging

Commodities

26.7

0.0

30.0

14.1 5.0

6.3

34.7

55.0

8.7

4.7

5.0 0.0

18.8

2.8

15.3

26.0 10.0

11.6

61.1

45.8 12.0

13.3

Asian Equity

0.0

3.1

5.8

6.7

Latam Equity

0.0

3.1

5.8

6.7

0.0

5.0

1.3

7.0

1.6

9.0

2.0

This table of recommended asset allocation has been prepared by the Asset Allocation Committee, comprised of the directors of the portfolio management departments in each of the jurisdictions in which we operate. The recommended weights in each asset class are aligned with the conclusions of the Andbank Investment Committee (AIC) that are reflected throughout this document. Likewise, the distribution of assets within each of the customerâ&#x20AC;&#x2122;s profiles meets the risk control requirements established by the regulation.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

USA:

Is the FED running out of “Patience” ?

All employees – Total Nonfarm (Thousands of persons)

Unemployed plus want a job plus involuntary part time

Policy The Fed no longer says they're "patient“, but this does not mean that the Fed will be impatient in raising rates. In fact, in the new dot plot, Fed policymakers decreased their median estimate of the federal funds rate in December 2015 to 0.625% from an earlier estimate of 1.125%. Expectations for rates over the next couple of years have also dropped, indicating a more dovish sentiment than at the end of last year. See also how the new median dot for the end of 2016 is at 1.875% (down from 2.5% in the December statement). So, when? We see “inflation performance” continuing to be the key factor in determining when and how fast the FED will move, and the current benign backdrop will likely rule out a mid-year hike. Will a stronger dollar do some of the Fed's work for it? Most Fed policymakers are not concerned about the USD rise. They see the share of external trade as being small, and have noted that the effects of a strong USD on net exports are modest. Economy & Forecasts • The Fed also changed its outlook for the economy, replacing "growth continues at a "solid pace" with “growth has moderated somewhat”. • GDP forecast 3% (unchanged) • CPI y/y at 0.8% (unchanged) • Unemployment at 5.5% • 10Yr Treasury at 2.20% Financial Markets’ Outlook Equity: “HOLD” Sales +4.9% vs. 2.43%, Margins 10% vs. 10%, EPS 125$ (+4.9%), E[PEltm]:17.1 vs. 17.2 in 4Q14. Target 2.138 Gov. Fixed Income: ”SELL” Inv. Grade Credit: “HOLD” HY: “HOLD”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Euro zone:

Are you nervous? The party has just begun!

ECB scenario

Escenario macro BCE

IPC

CPI

PIB real GDP

mar-15 dic-14 sep-14 jun-14 mar-14 mar-15 dic-14 sep-14 jun-14 mar-14

2015E 0,0% 0,7% 1,1% 1,1% 1,3% 1,5% 1,0% 1,6% 1,7% 1,5%

2016E 1,5% 1,3% 1,4% 1,4% 1,5% 1,9% 1,5% 1,9% 1,8% 1,8%

2017E 1,8%

2,1%

Fuente: BCE

Producción Industrial INDUSTRIAL PRODUCTION (% Y/Y) 10 5 0 -5 -10 -15

IP Alemania IP Italia

-20

IP Francia IP España

feb-92 dic-92 oct-93 ago-94 jun-95 abr-96 feb-97 dic-97 oct-98 ago-99 jun-00 abr-01 feb-02 dic-02 oct-03 ago-04 jun-05 abr-06 feb-07 dic-07 oct-08 ago-09 jun-10 abr-11 feb-12 dic-12 oct-13 ago-14 jun-15

-25

CENTRAL BANK’S BALANCE SHEETS

(as a % of GDP)

Policy And finally, Draghi started his QE. An open ended program that could (will) continue beyond Sept. 2016 should it be necessary. The program will be equivalent to 11% of GDP by Sept. 2016, with the ECB holding around 15% of the outstanding EGB market. The main doubts/hurdles about the implementation of the ECB’s QE refer to scarcity factors due to: (1) the high volume of bonds yielding negative returns, (2) the willingness of domestic IMFs to sell their bonds, since they need to keep a flow of income, and (3) the willingness of foreign investors – mainly central banks in Asia and Middle East – to sell their euro-denominated bonds in taking advantage of the ECB’s program, and reinvest the proceeds in higher yielding US dollar denominated assets. Remember that these central banks have spent decades diversifying their wealth away from the US dollar. Additionally, we doubt this could happen easily with the US increasingly prone to use the US dollar as an instrument of diplomacy (a process know as “weaponizing the dollar”. This “scarcity effect” will exert even more downward pressure on yields and, therefore, further increases in equities (most favored high dividend stocks). Economy The ECB has released projections (very optimistic in our view) ahead of the recent EC figures. GDP growth is projected at a pace of 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017. Consumption and confidence are peaking, but industrial activity remains weak and uneven. Financial Markets’ Outlook Equity (MSCI EMU): “HOLD” Sales 0.65% vs. 0.52%, Margins 5.25% vs. 4.7%, EPS €11.4 (+10.7%),E[PE ltm]: 20 vs. 18.2 4q14. Target 228 Core Gov Fixed Income: “SELL” Peripheral bonds “BUY” Inv. Grade Credit:“HOLD” 8 HY: “HOLD”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Emerging Asia:

Steady growth over the next couple of years Policy & Economics Emerging Asia (excluding China and India) grew by 4.2% y/y, with regional growth being remarkably stable for the past two years. If we consider China and India, the regional pace is even stronger (since both economies are posting GDP pace at levels clearly above the region as a whole). Top performers are Philippines (growing at a 7% y/y pace thanks to an increase in government spending) and Malaysia (circa 6% y/y growth). Thailand is getting back on track following last year’s political unrest, which severely disrupted the economy, and is now growing near a pace of 2% y/y.

6.50

EMERGING ASIA - GDP PROJECTIONS (%Y/Y )

6.50

6.00

5.50

5.00

4.50

4.00

'12 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '34 '36

4.00

(% 1YR) Gdp, Real - Emerging Asia Trendline : Average Andbank, Oxford Economics

©FactSet Research Systems

Projections & Best picks Looking ahead we expect growth to pick up after the recent slowdown. (1) These countries are well-placed to benefit from strong US growth. (2) They are all big winners from lower oil prices. (3) Well anchored inflation means monetary policy is set to remain loose. Gathering together all these factors, we can draw a general picture in which most countries will continue to record steady growth over the next couple of years. Philippines is seen to be the region’s star performer. India is also seen as one of the best performers. (1) It shows lower trade dependence, (2) lower leverage, (3) is implementing reforms, and is reducing oil subsidies. The RBI has cut repo rates, but with inflation collapsing further rate cuts are more than likely. Financial Markets’ Outlook Equity: “BUY” Sales +8.7% vs. 7.9%, Margins 8% vs. 7.6%, EPS $22.6 (+14.1%), E[PE ltm]: 14.6 vs. 14.7 in 4Q14. Target 330. Gov. Fixed Income: “BUY” Inv. Grade Credit:“BUY” Fx (Diffusion Index): “BUY”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

China:

The true epicenter of the oil’s earthquake?

Capital Economics

Geopolitics Xi Jinping’s ability to capitalize on Russia’s international isolation transformed China from a “price-taker” to a “price-setter” in the energy markets. Xi Jinping’s anti-corruption campaign contributes to the fall in oil prices. For years, PetroChina and other SOEs were tasked with finding commodity deals outside China. Some deals were done on un-economical terms, but with a change in the incentives the urgency of securing commodity deals has disappeared. Thus, Xi Jinping’s anti-corruption drive could have been as much of a catalyst for the sudden implosion of the oil market. A lot of money that flowed into the commodity sector was Chinese. Once conditions changed, the money stopped flowing and the bubble imploded. China's long-awaited International Payment System to process cross-border yuan transactions is ready and may be launched as early as the fall. Reforms The Ministry of Finance has issued its quota of bonds regional governments can issue. FTSE launches first onshore bond index. Onshore debt hit $5.8T last year (third largest bond market globally) Yuan included in SDR basket in near future? Yi Gang, vice-governor of the PBoC, said China is actively communicating with the IMF on the possibility of including the yuan in the basket of Special Drawing Rights (SDRs). Economics Subdued inflation will bring another rate cut. The CPI remains in the 1%-2% range. February Loans +14.3% y/y (vs. 13.9%) M2 12.5% y/y (10.8%) Financial Markets’ Outlook Equity: “BUY” Sales +6.7% (from 8.3% in 2014), Margins 8.35% (from 7.95%), EPS $19.6 (+12%), E[PE ltm]: 16. Target 316 Fixed Income: “BUY” Inv. Grade Credit:“BUY” 10 Fx: “BUY”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

India: 20

The RBI will keep its pro-easing stance

INDUSTRIAL PRODUCTION - INDIA (%Y/Y, MA3m)

-4

-8

-8 '10

'11

'12

Total

'13

Manufacturing

Mining & Q uarrying

Andbank, India Ministry of Statistics

'14 ©FactSet Research Systems

INDIA - EXTERNAL BALANCE (% OF GDP)

-2

-4

-6

-8

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

-8

Trendline: 1 Year Moving Average Andbank, Reserve Bank of India

©FactSet Research Systems

Reforms The 2015 budget has been announced and these are the main decisions: Cuts in Current Expenditures and subsidies. They are looking at public wages and subsidies (kerosene and liquefied cooking gas = 1.5% of GDP). Deficit target of 3.8% in 2016). Public investment consolidation. Tax reform: The new GST law would mean a broader tax base and a more stable flow of revenues. Disinvestment, although it appears that (again) privatization plans will miss the targets. Economics The CPI picked up in February to 5.4% y/y, driven entirely by food prices. Core inflation remains low and flat. While the CPI has risen in the last three months, we do not think this will cause the RBI to shift its pro-easing stance. For a start, inflation remains well below the RBI’s 6% target. Core inflation has not risen. Accordingly, we still see further rate cuts ahead. Industrial Production grew by 2.6% y/y in January (stronger than most had expected). December data was also revised up (to 3.2% y/y). Despite these good figures, caveats abound since growth is still extremely weak Banking: NPLs are at 4% and restructured loans at 9% but the risk of a banking crisis is low: (1) NPLs are not high according to EM standards. (2) 90% of NPLs are held by state-owned banks. (3) There is little risk of credit rising to unsustainable levels. (4) The majority of lending comes out of local deposits (L/D <1. Much lower than in the rest of the EM). Making Indian banks far less vulnerable to a sudden stop in capital. Financial Markets’ Outlook Equity – “BUY” Sales +4.5% (from 3.8% in 2014), Margins 7.05% (from 7.05%), EPS 27.7 (+4.6%), E[PE ltm]:22.4. Target 622 Fixed Income: “BUY” Fx: “BUY”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Japan:

Yen carry-trade at six-year high

JAPAN - SALES & WAGES (%Change Y/Y)

6.00

20 15

4.00

10 2.00

0.00

0 -5

-2.00

-10 -4.00

-15

-6.00

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14

-20

(M O V 1 Y , % 1Y R) Japan - Sales (Right) (% 1 Y R)Japan, Real Wage (Left) Andbank, Factset Research System

©FactSet Res earch Systems

JAPAN - CPI (% Change Y/Y)

4 3 2 1 0 -1 -2 -3

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

(% 1YR) CPI, 2010=100, Index - Japan Andbank, BoJ

©FactSet Research Systems

JAPAN NIKKEI - NET MARGIN & PE (LTM, REP)

6 5

4 3

2 15

1 0

10 5

-1 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

-2

(MOV 1Y) Japan Nikkei 225 - Net Margin (Right) Japan Nikkei 225 - PE (Left) Andbank, Nikkei

©FactSet Res earch Systems

Policy International investors continue their Japanese stock buying (EPFR Global data). US investors have put a net $7.9 bln into Japanese equity funds over the past 11 weeks despite continued skepticism about the government's ability to implement structural reforms. Why this interest from investors? (1) Diverging monetary policies between the BoJ (supporting equities) and the Fed come as a tailwind for Japanese stocks. (2) GPIF support resulting from government reform, and the fact that Takahiro Mitani is to stay as GPIF head (Mitani has presided over the GPIF while the fund has increased its exposure to risky assets). The market value of the BoJ's stock portfolio surpassed ¥10T, standing second only to the GPIF (¥27T) as the largest investor in Japanese stocks. Household stock holdings increased to more than ¥100T from ¥76T 2 years ago. Yen carry-trade at six-year high: Institutions borrowed ¥10.2T in November for international investments. This puts (and will put) downward pressure on the currency. Economics 4QGDP revised downwards (0.4% q/q vs. 0.6% consensus). Capex also cut (-0.1% q/q vs. 0.3% consensus). Nevertheless, the Government upgrades its view of the economy and sees activity picking up gradually, though some soft spots remain. Prices continue to trend lower: UTokyo Daily Price index, which showed that daily prices were down 0.2% y/y on average the week through 12-Mar. The professor that runs the survey suggested that the BoJ should target wage growth rather than inflation. Financial Markets’ Outlook Equity: “HOLD” Sales 10.4% vs. 10.4%, Margins 4.9% vs. 4.9%, EPS 902 (+10.4% ), E[PE tm]: 20.7 vs. 21.3 4q14. Target 18.681 (3.8%) Fixed Income: “HOLD” 12 Fx : “SELL” (vs. USD)

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Mexico: 6

Energy reform’s Round 1.2 shows poor signals

GDP GROWTH - US vs MEXICO

8 6

4 2

0 -2

-2

-4 -4 -6

-6 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

-8

(% 1YR ) MEX - Eco nom ic Activity Ind ica tor (as a Pro xy fo r GDP) (Right) (% 1YR ) US - GDP (Left) Andbank, INEGI, US Bureau of Economic Analysis

©FactSet Research Systems

MEXICO - PUBLIC SECTOR OIL REVENUES

40 20

-20

-40

-60

6 4

-80 '05

'06

'07

'08

'09

'10

'11

'12

'13

'14

-100

Exports, Oil, Millions USD (Left) (MOV 3M , % 1YR)Budgetary Revenues, Oil Related, Total (Right) Andbank, Bank of Mexico

12 11 10 9 8 7 6 5 4 3

©FactSet Research Systems

MEXICO - CAPITAL FLOWS (Quarterly, bn$US)

20 15 10 5 0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

-5

(MOV 12M) FDI Mexico ($bn) (Left) (MOV 1Y) Foreign Investment Portfolio, Mexico ($bn) (Right) Andbank,Bank of Mexico

©FactSet Research Systems

Policy & Economics Inflation data maintained their downward trend. This time it was caused by an important drop in prices of agricultural products which tend to be temporary. For the second month in a row consumption data were stronger than expected; department stores and shop sales grew 5.1% in February and local and external vehicle sales increased around 10% on an annual basis. Global Monetary policy divergence impact on FX, prompting the Mexican Exchange Rate Commission to announce an intervention in the market by a daily 52 million USD auction. Mexican oil price consolidation below 50 USD is starting to worry the Finance Ministry about its future income; Luis Videgaray forecast more expenditure cuts in 2016 budget. Energy reform: Round 1.2 shows poor signals: 26 companies have signed up to access National Hydrocarbons Commission data for the first blocks on offer out of a total of 42 companies interested in bidding. Economic proposals will be delivered on July 15. In the second phase of Round 1, nine blocks in Tabasco and Campeche’s shallow waters were announced (winners will be notified on September 30). According to the Ministry of Energy, Pemex’s previous investments in these fields guarantee incremental production of up to 124,000 barrels of oil per day. Fx: The intervention of the Exchange Commission and mixed data in the US mitigated the currency movement. Equities: We expect results to improve gradually (backed by the US growth, a strong USD, and domestic consumption). Risks coming from oil and the Fx are already priced in. (Walmex, Liverpool, Alfa, Vesta, Rassini… preferred) Financial Markets’ Outlook Equity: “BUY” Fixed Income (Loc): “BUY” Fixed Income (USD): “BUY”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Brazil:

Fiscal adjustment amidst political turmoil

BRL REER

Terms of Trade

The country remains a net creditor (reserves cover total debt). This should mitigate any risk of capital controls / USD rationing

Average GDP growth (2004-2013)

Policy The Selic rate was raised to 12.75% (50bp). Open for further rises. The government announced a BRL 21 bln primary surplus in January, posting the first result for Dilma´s 2nd term. First signs of congress disputes. The Finance Minister measures to cut tax exemption were rejected by the Deputy Chamber, in a sign of disagreement and challenging the government. The fear is that the political crisis could lead to the Congress “freezing” and compromising the fiscal adjustment. We remain confident that the government will deliver the 1.2% of GDP primary fiscal surplus in 2015. (1) Weak economic data will lower fiscal revenues (by R$37bn) but will also lower expenses since a % of expenses are linked to fiscal revenues. (2) Higher inflation should boost fiscal revenues. (3) 82.4% of fiscal measures do not depend on Congress (only 17.6% of measures requires congressional approval). According to some experts, much of the impact of the scandal had already been priced into Brazilian markets. The recent fall in the Real has more to do with the idea that central bank support for the currency may be scaled back. Economics The February CPI was 1.22% (7.7% y/y), due to hikes in administered prices (transport and energy). Inflation could peak at 8% in 2015 ( 5.7% in 2016). GDP will decline to 0% in 2015 (then at 1.5% in 2016). The Budget deficit will improve from 6.7% in 2014, to 5.5% in 2015 and 4.2% in 2016. CA deficit, from 4% in 2014 to 3.5% in 2015 and 3% in 2016. Primary budget -0.6% in 2014 to 1.2% and 2% Financial Markets’ Outlook Equity: “BUY” Fixed Income (Loc): “BUY” Fixed Income (USD): “HOLD”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Others: EMEA & LatAm West – Russia Conflict: Monthly News flow: STILL A NEGATIVE MOOD? (19 negatives, 2 Neutral, 15 positives) Russia: (-) Foreign Ministry: Russia has right to deploy nuclear weapons in Crimea. (-) Russia has started military exercises in the Southern region of Stavropol (-) Russia barred 2 EU politicians from attending funeral of Boris Nemtsov (-) Defense minister says Russia could protect its interests in Arctic via military means. (+)Russia and Ukraine agree to double OSCE observers to 1,000 -German Steinmeier(+)Lavrov says ”tangible progress” achieved in implementing package of measures agreed in Minsk. (=)Putin and his top officials take 10% pay cut. (+)Energy minister says gas supply to Europe in 2015 will not be lower than 2014. (-) Russia and Egypt to hold joint naval drill in Mediterranean (defense ministry) (-) Russia orders Northern Fleet to be on full alert for combat readiness exercise (Def. Ministry) (-) Deputy Foreign Minister says Moscow concerned about increase in NATO exercises held close to Russian borders. (=) Putin asks leaders of Belarus and Kazahstan to consider forming common currency union with Russia (++) Energy minister says Russia will consider a discount for gas supplies to Ukraine (++) Russia will not request early repayment of debt owed by Ukraine OSCE and UN: (+) Ukraine expected to complete heavy weapons withdrawal by mid March. (+) Ceasefire holding. Ukraine: (-) Military says 5 serviceman killed in east Ukraine, 9 wounded (during the month) (-) Government reports 16 truce breaches by militias (++) Poroshenko submits draft resolution on special status for Donetsk and Luhansk. (-) Poroshenko accuses separatists of respecting ceasefire. Calls for further sanctions. USA: (-) Treasury Secretary Jack Lew: “The US is ready to increase costs to Russia if it continues to undermine Ukranian sovereignty. (-) Biden: The US will provide Ukraine with an additional $75million in non-lethal defensive equipment and drones. (-) US places new sanctions on 1 Russian Bank and 8 pro Russian Ukrainian ones. (--) US House approves to supply lethal arms to Ukraine. Moscow says that it will not stay different. (+) Kerry & Lavrov meet for talks on Iran, Syria and Ukraine. (-) State Department asks Vietnam to stop helping Russian bomber flights. (-) The US does not recognize the treaty signed between Russia and South Ossetia EU: (+) EU leaders to link Russian sanctions to full implementation of Minsk Accord. Western powers agree that sanctions against Russia will only be lifted if Minsk agreement is fully implemented. (-) Stenmeier: We are still far away from a solution in Ukraine (+) Stenmeier: “It is clear that there cannot be a military solution to crisis in Ukraine” (+) Stenmeier to meet Russian and Ukraine foreign ministers (-) UK’s Hammond: Russia has potential to pose greatest threat to Britain’s security.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Others: EMEA & LatAm Argentina: FX: Official @ 8.78 , Blue 12.88. The appreciation of the USD globally continued in the latest sessions, particularly affecting the BRL and the EUR. In this context, the BCRA marginally accelerated the pace of depreciation of the Peso. Reserves: the decrease has been marginal, and the MTD decline in March amounts to only USD 98 million, according to preliminary information. Agro: USD export settlements continue low, and have totalled USD 2.3 billion YTD, implying a fall of 27% against a year ago. Monetary: Money issuance to finance fiscal needs has already reached ARS 22 billion so far this year, against ARS 5 billion in the same period of 2014. This has been the main factor behind the acceleration of the monetary base to 29.0% at the end of February. The acceleration could have been stronger if it were not for the strong sterilization policy conducted by the BCRA. Debt Markets: Judge Griesa issued a ruling on March 5, prohibiting Citibank Argentina from processing the payments on USD local law exchange bonds issued by Argentina. Griesa agrees with the plaintiffs that the local law exchange bonds denominated in USD are external debt based on the fact that they were not â&#x20AC;&#x153;offered exclusively within the Republic of Argentinaâ&#x20AC;?. Liquidity issues are being addressed, i.e. the City of Buenos Aires started the cycle of rollovers needed for 2015, reserves remain stable. Watch for possible problems for the government to roll over debt. Recommended Strategy: Argentina bonds remain firm. Upside from current levels depends on the political front (elections, agreement with holdouts, etc.). Buy Bonar 24 on the dips, ARGENTINA 8.75% 05/07/2024 @ 105.75 YTM: 8.35%. NOW Hold the new city of Buenos Aires Bond BUEAIR 8.95 02/19/21 @ 105.50 YTM: 7.58%. The City always traded inside the Sovereign curve, strong financials of the City, bonds are governed by English law and not implied in the pari passu case. Venezuela About the current state of the nation: (1) GDP contracted by 4% in 2014. (2) The shortage of hard currency worsened (and thus, the shortage of imported products). (3) Inflation skyrocketed to 65% y/y. Politics: Venezuelan President Nicolas Maduro has been granted the power to govern by decree until 31 December 31, after the United States issued new sanctions against Venezuelan officials. We do not expect he will use this permission to issue market friendly laws. Looking ahead to the next parliamentary elections, the National Electoral Council reported that constituencies will not change at all. In the last elections, the government won more than 50% of the Assembly with less than 50% of the votes by changing the constituencies (districts). In the latest poll the government political parties are receiving no more than 20% of approval, In order to reverse this situation, the government could use the fictional attack from the US or maybe use any savings they might have to fill supermarket shelves again. Projection: (1) The strains in the balance of payments look set to get even worse now that oil prices have fallen. (2) With all prices below $50-$60, export revenue will fall by about $25 bln (or 12% of GDP). (3) Given that the government has no savings to continue funding a current account deficit, the loss of revenues will have to be matched with cuts in imports. Thus, shortages of goods will be even worse. (4) This will cause inflation to climb to near 16 100%.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Equity Markets SHORT – TERM ASSESSMENT. RISK-OFF PROBABILITY: LOW Aggregate Result in our Flow & Sentiment Indicators

Buy signal Positive Bias Neutral Negative Bias Sell signal FINAL VALUATION

Current

Month

2 2 9 5 4 -1.6

0 4 11 3 4 -1.6

Andbank’s System of Flow & Positioning indicators. Table of Stress Assessment in Risky Assets

-5

-10 Market is Overbought

Area of Neutrality Sell bias

Buy bias

+10 Market is Oversold

Reading: Our Andbank system of flow and positioning indicators shows an aggregate score of -1.6 in a range of -10/+10 (broadly the same level seen last month), suggesting a lack of stress in the equity markets. As such, a sudden deep and sustained risk-off shift is unlikely. If a correction takes place this should prove to be short-lived. Surveys: Tail risk of “equity bubble” surges, net % saying stocks "overvalued" highest since May’00 and big jump in allocation to Alternative Investments (highest since Aug. 2008). Positioning: But positioning unambiguously risk-on: equity allocation 7th highest in past 15 years; cash levels dip to 4.6%. We also see record allocation to Eurozone stocks, US allocation collapses to lowest since Jan '08 (Chart 1), EM close to capitulation. Lower oil, higher dollar brings record exposure to consumer discretionary, and rotation to banks, materials, tech, away from energy, staples. Cyclicals and high Beta tilt. Flows: From ETF flows we see equity keeps attracting flows, YTD 31B (vs. +14B in the same period in 2014), although we are seeing an important divergence between Europe/Japan (big inflows) and EM (important outflows) and the US. The outflows from Precious Metals and TIPS are also remarkable, showing the investors’ expectations towards inflation. FUNDAMENTAL ASSESSMENT: “BUY” 2014 2015 2014 2015 2015 2014 2015 Sales E[Sales] Net E[Net E[Profit] Index EPS E[EPS] Index % Ch y/y % Ch y/y Margin Margin] % Ch y/y Local* Local* S&P 500 2.43% 4.86% 10.03% 10.03% 4.9% 119.45 125.3 MSCI Eurozone 0.52% 0.65% 4.77% 5.25% 10.7% 10.28 11.4 MSCI UK 1.68% 0.00% 6.57% 5.91% -10.0% 117.65 105.9 Ibex 35 -9.46% 3.75% 4.39% 5.27% 24.5% 500.33 622.9 Factset Asia P. x Japan 7.91% 8.70% 7.60% 7.98% 14.1% 19.34 22.1 Nikkei 225 10.73% 10.73% 4.87% 4.87% 10.7% 828.30 917.2 Factset China 8.38% 7.54% 7.95% 8.35% 12.9% 17.47 19.7 Factset India 3.80% 4.56% 7.05% 7.05% 4.6% 26.52 27.7 Mexico IPC 5.00% 6.04% 8.79% 9.00% 8.6% 2400.00 2605.8 Bovespa 6.96% 8.00% 7.04% 7.74% 18.8% 3733.00 4435.0

2014 2015 INDEX PE ltm E [PE ltm] CURRENT PRICE 2,056 17.22 17.07 18.21 20.00 219 16.54 19.00 2,025 20.60 18.54 11,454 16.68 16.00 322 22.34 22.00 19,471 13.75 16.00 301 20.93 22.42 546 18.59 18.23 43,229 14.84 12.00 50,579

2015 2015 TARGET E[Perform.] PRICE % Ch Y/Y 2138 4.0% 228 3.9% 2012 -0.7% 11549 0.8% 353 9.6% 20178 3.6% 316 4.8% 622 13.9% 47503 9.9% 53220 5.2%

* Except for the fol l owi ng ma rkets : As i a Pa c x Ja pa n, Chi na a nd Indi a , where EPS ha ve been reported i n US$.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Fixed Income Markets FIXED INCOME – CORE COUNTRIES UST 10Yr BOND: “HOLD”. New entry point at 2.25% yield. 1. Both Treasury and swap rates have decreased (- 20bp), but the swap spread remains at a historical low of 5bp (2.02-1.97). For this spread to normalize at 30-40bp, with inflation expectations (swap rate) well anchored, further declines in the US 10yr Treasury Yield (towards 1.75%) should take place. 2. The slope is now lower (135bp vs. 146 last month). With the short end in a 0.5%-0.75% range, to reach the LT average spread (120bp), the 10T yield should go to 1.82%). EURO BENCHMARK 10Yr BOND: “SELL”. Entry point at 1.0% yield. 1. The swap spread remains at a historical high of 137bp (vs. 126bp last month): 1.530.15. For this spread to normalize at around 30-40bp, with inflation expectations (swap rate) well anchored, we need to see increases in the Euro 10yr bond towards 1.18%). 2. The slope remains low (39bp vs. 56bp last month). With the short end in a -0.1%/-0.2% range, to reach the LT average spread (116bp), the 10y Bund yield should go to 0.96%). US D - 10Yr GOVIE Vs SWAP

EUR - 10Yr GOVIE Vs SWAP

1,5

3,5

0,8

0,6

2,5

0,4

0,2

-0,2

'05

'06

'07

'08

'09

'10

USD 10Y Swap R ate (Le ft) USD 10Y Treas ry Y ield (Le ft)

'11

'12

'14

1,5

-0,5

1 -1

0,5 0

'10

Swap Sp re ad 10Y USD (Rig ht)

Andbank, Tullet Prebon

350

'13

0,5

'12

'13

-1,5

'14

EUR 10Y Swa p R a te (L e ft) Swa p Sp re a d 10Y EU R (Rig ht) EUR 10Y Gov b ond Y ie ld ( Le ft)

USD YIELD CURVE SLOPE 10/2 Yr (bps)

'11

Andbank, Tullet Prebon

EUR YIELD CURVE SLOPE 10/2 Yr (bps)

350

300

300 250

250

200

150

100

0 -50

-100 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13

-100

0 -50

0 '05

'06

'07

'08

'09

'10

'11

'12

'13

'14

-50

10Y Yield - 2Y Yield Trendline : Ave rag e

(10Y Y ie ld - 2Y Yie ld) Tre n dline : Ave ra ge Andbank,Tullet Prebon

300

Andbank, Tullet Prebon

FIXED INCOME – EUROPEAN PERIPHERALS: “BUY” 35

10 Yr Govies - European Peripherals

'10

'11

'12 Ita ly Sp ain

Andbank, JPM Chase

Portug al Ire land

'13

'14

• •

•

We continue betting on further declines in yields (at the mercy of Draghi’s QE). We expect the 10Yr yield to fall below 1% in the Spanish and Italian bonds. To 1.25% in the Portuguese bond and 0.50% in the Irish bond. Regarding Greece, if eventually there is a final agreement to extend the bailout program (in exchange for reforms), yields could normalize again. However, the risk of a debt reestructuring is high.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Fixed Income Markets FIXED INCOME - EMERGING MARKETS (GOVIES): “HOLD” 10 Year Yield Real

2.21%

0.51%

1.69%

Taiwan

1.57%

-0.19%

1.76%

Thailand

2.73%

-0.52%

3.25%

Malaysia

3.92%

0.09%

3.83%

Singapore

2.44%

0.03%

2.40%

Indonesia

7.51%

7.35%

5.00%

2.51%

Philippines

4.15%

2.47%

1.69%

China

3.51%

1.43%

2.08%

India

7.84%

5.37%

2.47%

Turkey Russia

7.98% 12.37%

7.62% 16.70%

6.00% 13.00%

1.98% -0.63%

Brazil Mexico Colombia Peru

13.18% 5.74% 6.82% 5.90%

7.70% 3.00% 4.36% 2.77%

8.00% 3.00% 4.36% 2.77%

5.18% 2.74% 2.46% 3.13%

EM ASIA

S.Korea

EME

CPI (y/y) Andbank's Estimate

LATAM

10 Year CPI (y/y) Yield Last Govies reading

Our rule of thumb for EM bonds has been “buy” when (1) the 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, a good entry point in the US 10yT could be at 0.75% in Real Yield (today’s real yield is 2.1%, thus, Treasuries are cheap) Do the EM bonds provide enough spread? Given the “new normal”, a good entry point in EM bonds could be when Real EM yields are 75bp above the real yield in the UST. Since UST real yield today is 2.1% we should buy those EM bonds with Real yield at 2.85% (2.1% + 75bp). (See the table).

Cheap valuations

Expensive Valuations

FIXED INCOME – CORPORATE BONDS: USD CORPs – IG: “HOLD”, HY: “HOLD” Spreads now at 92bp (from 94). Financials at 79 from 76, industrials at 100 from 105, and utilities at 90 from 87. IG: Hold. New entry point at 120. Limited gains, but new issues are very attractive. HY: Hold. Just 17% are oil-related firms. USD strength is not seen as a head-wind. 3.5

USD CORPORATE BOND SPREAD (ML 1-10 YR INDEX)

2.5

3.0 2.0

2.5 2.0

1.5

1.5 1.0

1.0

0.5 0.0

0.5 '10

'11

'12

C o rpo ra te s (R ight) Financia ls (Le ft) Andbank, Merril Lynch

'13

'14

EUR CORPORATES: “HOLD” Spreads have been stable to 94bp (from 90). Financials at 101 from 97, industrials at 88 from 85 and utilities at 101 from 97. Maintain exposure at current levels. New entry point at 100. 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5

EUR CORPORATE BOND SPREAD (ML 1-10 YR INDEX)

3.5 3.0 2.5 2.0 1.5 1.0 '10

4.0

'11

'12

'13

'14

0.5

Co rp o ra te s (Rig ht) (R igh t) Industria ls (Le ft) Finan cia ls (Le ft) Utilities (Le ft) Andbank, Merril Lynch

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Commodities • METALS & MINERALS: “HOLD” Following the sharp declines in commodities seen during the 2H2014, we believe that a normalization around current levels could take place. The new structural pace for heavy industry in China is consistent with a 0% growth in commodity prices. Chinese regulators also cracked down on the use of copper as collateral (State Grid Corporation). Heavy investment in the last decade has caused overcapacity to reach unprecedented levels (see chart 2)… …and the new mining projects are beginning to ramp up to full capacity: Rio Tinto’s Oyu Tolgoi (450k tons/year), Chinalco’s Toromocho (230k tons), Chinese controlled Las Bambas (400k tons in 2016). Chilean Escondida plans to expand production by 300k tons. During 2006-2012, supply growth was 1.8% y/y while demand growth was 3% y/y, but problems that kept supply subdued have now been dissipated and additional capacity is expected to be 2.7mn tons (doubling current capacity). Short-Term view: The prospects for a new bull market in commodities are dim. Long-Term view: Beyond 2016, China needs to upgrade the country’s power transmission system.

50 40 30 20 10 0 -10 -20 -30 -40 -50

CHINA HEAVY INDUSTRIAL BOOM & COMMODITY PRICES

25 20 15 10 5

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

(% 1YR , INDEX) CRB Spot Index, Price growth (Left) (% 1YR) Industrial Production, China (Right) Andbank, CRB, Chines e National Bureau of Statistics

750

Baltic Dry Index Vs Commodity Prices (daily)

14.000

700

12.000

650 10.000

600 550

8.000

500 450

6.000

400

4.000

350 2.000

300 250

0 '05

'06

'07

'08

'09

'10

'11

'12

'13

'14

Baltic Dry Index - Price (Right) CRB Continuous Commodity Index - Price (Left) CRB Spot Commodity Index - Price (Left) Andbank, BIFFEX, CRB

• ENERGY(OIL): “SELL” Andbank’s Target range ($30-50). Target Price of US$40. (1) Saudi king's message on oil in talks with President Obama was one of continuity on Saudi policy. (2) Current political winds in China favor a consolidation of State Owned Enterprises (which means a low probability of SOEs expanding their activity through new energy deals). (3) Chinese energy imports are at record highs (meaning that oil prices paid will continue being closely monitored and anti-corruption campaign will continue). (4) Russia will continue internationally isolated, allowing Xi Jinping to capitalize this and keep China acting as a “pricesetter” (instead of a “price-maker”). (5) US oil inventories are at record highs. (6) Every single economy has been using recent lows in oil prices to stock up and build inventories (OECD economies’ stocks are at record highs). (7) Global production continues to make new highs, raising the question of where the excess will go once the ability to store oil is filled up. (8) Speculation of a nuclear deal that could lift Iran's sanctions (and boost its oil exports) raises worries about high supplies back to the market (raising exports by up to 1 million bpd). Iran pumped a total of around 2.8 million bpd in February. (9) Illicit oil trade jumps. Libya needs international maritime force to help stop illicit oil trade. In summary, no changes for now in our outlook for oil price. USD50 in the WTI could represent the upper band of the range for the next quarters or years. 20

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Commodities • GOLD: “SELL” (Target US$ 900/oz) Negative drivers: 1. Gold in real terms. Gold at constant prices of 2009 is at $1.079 (LT average is $700). Given our global deflator (base year 2009) at 1.08, for the gold price in real terms to stay near its historical average, the nominal price of gold should stay near US$756. 2. Gold in terms of Oil (Gold / Oil): The ratio has gone to 25.4 (from prior 23.15), and is above its LT average of 13.81. Given a target price for oil at $40, the nominal gold price should approach US$552 for this ratio to be near its LT average level. 3. Gold in terms of Equity (Gold / S&P): The ratio has gone to 0.56 (from prior 0.57), and is near its LT average of 0.59). Given a target price for the S&P at $2.138, the nominal gold price should approach US$1.261 for this ratio to be near its LT average level. 4. Gold in terms of Equity (DJ Ind / Gold): This ratio (inverse) has gone to 15.47 (from prior 14.94), still below its LT average of 20.2. Given our target price for the DJI (around $18.500), the nominal gold price should approach US$915 for this ratio to be near its LT average. 5. Positioning in Gold (CFTC) points to further falls: CEI 100oz Active Future non comm. contracts: longs 162k from 199k. Shorts 109k from 44k => Net of +53k from +155k. 6. Central Banks’ Activity: Except India, the rest of central banks continue reducing their purchases of gold or in many cases selling part of their holdings. Recent gains in gold prices have been due to the recent lifting of the Indian import ban (prompting retailers to stockpile gold fearing that new bans could be applied). 7. Financial liberalization in China. Higher “quotas” each month in the QFII widens the investment alternatives for Chinese investors (historically focused on gold). Positive drivers: 1. Money Stimulus continues (now from the ECB and BOJ) 2. Ban on India’s imports of gold has been lifted. Many retailers have been stockpiling fearing that the ban on gold imports will be re-applied. 3. Size of Gold in the world: The total value of gold in the world is circa US$6.9tn, a fairly small part (3.2%) of the total size of financial cash markets (212trn). The daily volume traded in the LBMA and other gold market places is near US$173bn (2.5% of global gold, and just 0.08% of total financial markets). 100

GOLD STOCK - CENTRAL BANK RESERVES (%Y/Y, MA6m) 100

- 20 - 40

- 20 '11

'12 India Thailand

Sing Philipp

Andbank, National Res erve Banks

'13 Japan UK

'14 Ch ile Ch ina

- 40

Rus s ia

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Currencies • EUR/USD: MT Target (1.00) According to JPM’s Weekly IMM report of March 21, USD longs decreased significantly (again) last week, with the 3-yr Z-score declining to 1.3. This is the least long specs have been since August 2014. The Z-score is down almost 50% from the dangerously stretched 2.4 of three months ago, while the notional value is down 21% from its peak. This means that according to these figures the USD is only modestly overvalued against several currencies. On the other hand, the EUR is close to a record short. With a Z-score of -1.7, specs have only been shorter two weeks since mid-2012 and six weeks since the currency’s inception. The combination of extremely stretched short positioning and undervaluation against a range of currencies does much to explain the EUR’s post-FOMC outperformance Interpreting 3-yr Z-scores in JPM’s report: The 3-yr Z-score is a summary statistic telling us how far (measured in standard deviations) positioning is away from “normal” (the 3-yr mean). A Z-score in the -1.0 to +1.0 range implies positioning is not a barrier to underlying price trends. A Z-score in the 1.0 to 1.5 range suggests increasingly stretched positioning. A Z-score absolute value of 1.5 to 2.0 implies the elastic band has become extremely stretched, possibly on the verge of snapping back. At a Z-score of 2.0 “everyone” has the position on, creating a dauntingly high hurdle to continued price momentum (at that point it takes an exceptional policy event or data release to surprise the market so that the trend is maintained).

• JPY/USD: MT Target (130) • JPY/EUR: MT Target (130) Specs have thrown in the towel on Abenomics. Specs have closed all the shorts they put on since Abe became PM at end-2012. The Z-score is +0.5 (vs. -1.1 in December).

• GBP/USD: MT Target (0.68) • GBP/EUR: MT Target (0.68) • ASIAN CURRENCY BASKET (Vs. USD): 6.8% POTENTIAL APPRECIATION According to our “Asian Currency Diffusion Index”, these currencies are still cheap compared to the USD. Emerging Asia looks resilient in terms of its fundamentals. Public and private balance sheets are in decent shape. Macro risks have profoundly shifted as a result of mercantilist policies (less external debt and better CA balances) since the late 1990s. A recovery in sync makes Asia ready to start a new growth phase linked to a US recovery. Preferred: CNY, IDR, PHP, MYR, INR.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

Principal Contributors

Alex Fusté. – Chief Global Economist – Global & Asia. +376 881 248 Giuseppe Mazzeo. – CIO Andbank US - North America. +1 786 471 2426 J.A Cerdan. – Equity strategist Europe – European Equity. +376 874 363 Ignacio Pomar. – Head of A. Management Lux – Volatility. +352 26 19 39 22 Andrés Davila. – Head of A. Management Panama – Latam. +507 2975800 Gabriela Andrade. – Portf. Manager Mexico – Fixed Income & Fx Mex. +52 55 53772810 Claudia Anaya. – Portfolio Manager Mexico – Equity Mexico. +52 55 53772810 Renzo Nuzzachi, CFA. – Product Manager Uruguay – Rates, Fx Latam + 5982-626-2333 Antoni Melero. – Fund Manager Europe - Equity Spain & Europe. +376 874 366 Albert Garrido. – Portfolio Manager Luxembourg – Volatility. +352 26 19 39 25 Luiz Secco. – Product Analyst Brazil – Equity Brazil. + 55 11 3095 7042 Gabriel Lopes. – Product Analyst Brazil - Products +55 11 3095 7075 Ricardo Braga. – Portfolio Manager Brazil - Fixed Income Brazil. + 55 11 3095 7042

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW APRIL -15

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