GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Monthly Corporate Review February, 2015
Central Bank
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Executive Summary Economic & Financial Market Outlook US - The expectations for the next FOMC on January 28 are for NO MOVE, but every one is weighing up the wording. We expect to be able to see some focus away from the employment data towards deflation expectations. Eurozone – Since the last Committee, macro surprises in the Eurozone have started to improve and PMIs are just stabilizing. Greece: We expect Syriza to form a government coalition, to stick to the requirements of the last revision and earn (in exchange) the right to renegotiate official loan conditions and a lower level of austerity. ECB - Following the shift in the German position regarding a hypothetical QE, we must incorporate it in our hypothesis for monetary policy. Consequently, we now understand that the German authorities will NOT oppose a full-blown QE program, which means that this is going to materialize in significant quantities. EM Asia & Others – In our view, the region most favored by low commodity prices are net importers and intensive energy users: China, Taiwan, Korea, Thailand, Philippines, India and Turkey. We expect EM Asia to be a bright spot in the global economy. Well anchored inflation and low commodity prices will allow central banks to keep MP loose. China – 2015 GDP expected at 7.1%. Inflation at 2.2%. China’s leadership has a strong incentive to sustain confidence in the market (and avoid the formation of bubbles) amid ongoing structural reforms and the corruption crackdown showing no signs of letting up. A healthy equity market will help wean Chinese firms off their dependence on credit for funding. India - Modi’s use of 4 executive orders since December has added some impetus to the reform agenda (biggest strides in the areas of tax and land and foreign investment). Removal of subsidies on fuel. Increase in excise duties on retail fuel. Amendments to the maligned land acquisition law. Limits on FDI in construction and insurance have been lifted. Mexico - Low oil prices make investments in exploration and production activities less attractive now, and we are already seeing a delaying in the first bidding round (Round 1) of investments, dampening the expectations for the favorable effects of the reform process. Brazil – The first measures of the new government were announced. Expense cuts, restrictions in labor and social benefits, announcement of the new economic team, etc. The primary surplus target was set at 1.2% of GDP in 2015. The main question remains? Will these actions be enough to convince investors? Fixed Income Markets: Deflationary forces still make Fixed Income instruments attractive. Preferred vehicles in the EM world. Buy government bonds in India, Singapore, Thailand, Indonesia, Indonesia and China. Hold the US T-bond. Keep peripheral bonds. Sell the 10y Bund (entry point at 1%) Equity Markets: Expansionary volumes give the Equity markets the potential to increase in price. Most preferred: Eurozone, Spain, Mexico, Asia Pac x Japan and India. Commodities: Be careful with commodities (precious metals, industrials and mining). Avoid markets whose budgets depend a lot on the price of commodities (CARBS). Sell oil. New target range for Oil price: US$30-50.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Contents Executive Summary ……………………………………………………………………………………………………………2 The World at a Glance ………………………………………………………………………………………………………4 Market Outlook. Summary Table of Expected Performance
……………………………………5
Asset Allocation Proposal …………………………………………………………………………………………………6 Country Pages
……………………………………………………………………………………………………………………7
USA: “The only thing which is clear right now is that there is no clarity” ………………7 Euro zone: “Welcome Mr. QE ”…….………………………………………………………………………………8 UK: “intractable problems lurk” …………………………………………………………………………………9 Asia: “The region most favored by low commodity prices” …….………………………………………10 China: “Towards 7%. The focus is on getting risks under control” ….……………………11 India: “Improvement in external vulnerabilities is here to stay” ……………………………12 EMEA (East Europe, Middle East and Asia)……………………………………………..…………………13 Japan: “The BoJ must stick with QQE until well into 2017” ……………………………………14 Mexico: “The slump in oil prices undermines the benefits of reforms” .…………………15 Brazil: “Dilma’s first reforms announced. Will that be enough?” …………….…………………16 Equity Markets …………………………………………………………………………………………………………………17 Short Term Assessment
…………………………………………………………………………………………17 Fundamental Assessment …………………………………………………………………………………………17 Fixed Income Markets ……………………………………………………………………………………………………18 Fixed Income, Core Countries …………………………………………………………………………………18 Fixed Income, European Peripherals ………………………………………………………………………18 Fixed Income, Emerging Markets ……………………………………………………………………………19 Fixed Income, Corporate bonds ………………………………………………………………………………19 Commodities ………………………………………………………………………………….…………………………………20 Forex …………………………………………………………………………………………………………………………………22
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
The World at a glance – Current GDP rate (%y/y) 0.0
North America
1.3
Latin America
2.6 3.9
EU28
5.2
Asia
6.5 7.8
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Market Outlook – Fundamental Expected Performance Performance YTD
Current 26/01/2015
Fundamental Target
Expected Performance
S&P 500 (USA) Euro zone - Factset Market Index United Kingdom - Factset Mkt Index Spain - Ibex 35 Asia Pac x Japan - Factset Mkt Index Japan - Nikkei 225 China - Factset Market Index India - Factset Market Index Mexico - IPC Brazil - Bovespa
-0.09% 0.87% -0.01% 4.05% 3.77% 0.10% 4.35% 7.90% -0.95% -2.86%
2,057 124 127 10,696 306 17,469 268 578 42,738 48,576
2,138 135.4 130.5 11,549 330 18,681 270 622 47,503 53,220
3.94% 9.12% 2.94% 7.97% 8.06% 6.94% 0.92% 7.62% 11.15% 9.56%
Fixed Income Core countries
US Treasury 10 year govie German Bund 10 year govie
2.94% 1.48%
1.82 0.35
2.00 0.60
0.40% -1.61%
Fixed Income Peripheral
Spain - 10 year Government bond Italy - 10 year Government bond Portugal - 10 year Government bond Ireland - 10 year Government bond Greece - 10 year Government bond
2.18% 3.20% 4.63% 2.56% 4.74%
1.35 1.48 2.11 0.93 8.91
1.15 1.25 2.15 0.85 7.50
2.92% 3.28% 1.83% 1.54% 20.23%
8.52% -3.56%
6.89 13.88
6.59 14.50
9.29% 8.89%
Asset Class
Indices
Equity
Fixed Income Turkey - 10 year Government bond EM Europe (Loc) Russia - 10 year Government bond
Fixed Income IG & HY (Swap spread)
Investment Grade USD Investment Grade EUR
-0.05% 0.36%
1.02 0.95
0.70 0.80
3.46% 1.50%
Fixed Income Asia (Local)
India - 10 year Government bond Indonesia - 10 year Gov bond China - 10 year Gov bond Philippines - 10 year Gov bond Thailand - 10 year Gov bond Malaysia - 10 year Gov bond
1.81% 5.76% 1.90% 4.72% 2.25% 2.22%
7.70 7.27 3.45 3.31 2.59 3.89
7.20 6.77 2.85 3.31 2.29 3.89
11.70% 11.27% 8.25% 3.31% 4.99% 3.89%
Fixed Income Latam (Local)
Mexico - 10 year Gov bond Brazil - 10 year Gov bond
4.63% 5.57%
5.30 11.73
6.00 12.00
-0.33% 9.60%
Commodities
CRY Oil (WTI) Gold
-6.05% -15.24% 6.96%
216 45.15 1,283
224 40 900
3.68% -11.41% -29.84%
Fx
EUR/USD JPY/USD JPY/EUR CNY/USD MXN/USD BRL/USD GBP/USD GBP/EUR ASEAN Currency Basket (Index)
-6.98% 2.39% 10.38% -0.81% 0.86% 2.32% -3.60% 3.63% -0.51%
1.1256 117.67 131.33 6.2542 14.61 2.5966 0.6644 0.7479 99.49
1.10 122.73 135.00 5.90 14.15 2.80 0.69 0.76 105.0
-2.27% -4.30% -2.79% 5.66% 3.17% -7.83% -3.99% -1.62% 5.54%
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Monthly Global Asset Allocation Proposal As an illustration we show the impact of our changes in a Moderate portfolio.
Global Asset Allocation Proposal - Global Investor Perspective 1.08
0.81
Moderate
Balanced
Growth
< 5%
5%/15%
15%/30%
30%>
Max Drawdown
Strategic Tactical (%) (%)
Asset Class
0.90
Conservative
Strategic (%)
Tactical (%)
Strategic (%)
Tactical (%)
Strategic Tactical (%) (%)
Money Market
15.0
12.2
10.0
7.5
6.0
4.0
4.0
2.4
Fixed Income Short-Term
25.0
27.0
15.0
15.0
5.0
4.5
0.0
0.0
Fixed Income OECD Government
30.0
24.3
20.0
15.0
12.0
8.1
5.0
3.0
US Treasury
6.1
3.8
German Bund
0.0
0.0
18.2
11.3
European Peripheral Risk Corporate Invest. Grade
20.0
21.6
20.0
20.0
15.0
2.0
0.8
6.1
2.3
13.5
5.0
4.0
Inv. Grade USD
16.2
15.0
10.1
3.0
Inv. Grade EUR
5.4
5.0
3.4
1.0
Fixed Income EM / HY
5.0
6.8
10.0
12.5
15.0
16.8
10.0
10.1
Fixed Income Asia
1.7
3.1
4.2
2.5
Fixed Income Latam
1.7
3.1
4.2
2.5
High Yield Equity OECD
3.4 5.0
8.1
6.3 15.0
22.5
8.4 30.0
40.4
5.0 55.0
66.5
US Equity
2.0
5.6
10.1
16.6
European Equity
6.1
16.9
30.3
49.9
Equity Emerging
0.0
0.0
5.0
6.3
10.0
11.2
12.0
12.1
Asian Equity
0.0
4.7
8.4
9.1
Latam Equity
0.0
1.6
2.8
3.0
Commodities
0.0
0.0
5.0
1.3
7.0
1.6
9.0
1.8
Total
100
100
100
100
100
100
100
100
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
US:
“The only thing which is clear right now is that there is no clarity” US - FEDERAL BUDGET (12 MONTHS CUMULATIVE, BN$)
400
400
0
0
-400
-400
-800
-800
-1200
-1200
-1600
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
-1600
(MSUM 1Y) Fe deral Government Budget (US$ Bn)
Source. US Department of Treasury
3.50
©FactSet Research Systems
US - GDP GROWTH (LONG TERM EXPECTATIONS)
Expectations
3.00
3.50 3.00
2.50
2.50
2.00
2.00
1.50
1.50
1.00
1.00
0.50
0.50
0.00 0.00 '10 '12 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '34 '36 Gdp, Real, Annual Growth - United States Andbank, Oxford Economics
12
©FactSet Research Systems
INFLATION - USA
12
10
10
8
0.66%8
6
6
4
4
2
2
0
0
-2
'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
-2
(% 1YR) CPI All Items US Department of Labor
©FactSet Research Systems
Policy Fed: The expectations for the next FOMC on January 28 are for NO MOVE, but every one is weighing up the wording. We expect to be able to see some focus away from the employment data towards deflation expectations. We would not be surprised if the USD becomes a topic of interest again given its current strength. These two factors combined could freeze expectations on aggressive shifts in rates. The new gridlock in Washington is nothing unusual (presidents opposed by both houses in 32 out of the last 70 years). For the US this does not seem a problem. The Federal budget is in good shape and there is no need for major changes in monetary policy. Additionally, the Republican party must now shift from mere opposition. Projections In general terms, both parties are eager not to do any damage to an economy that is gradually recovering. Our projection is for a more responsible attitude paving the way for the continuation of the gradual recovery. The Fed’s decision to end QE does not mean it has grown more hawkish. The step is seen by many as a quid pro quo to bring the FOMC’s dissident hawks into line. In a post-tapering era, it is important to stop hawkish dissenters, and have them on the dovish side. Financial Markets’ Outlook Equity: “BUY” Sales +4.9% vs. 2.43%, Margins 10% vs. 10%, EPS 125.3$ (+4.9%), E[PE]: 17.1
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
2057
2138
3.9%
Gov. Fixed Income: “HOLD” Credit Inv. Grade: “HOLD” Fx: “HOLD”
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Euro zone: 20,000
“No recession in 2015”
TOTAL ASSETS - MFIs EURO AREA
35,000
18,000 16,000 14,000 12,000 10,000
34,000 33,000
8,000 6,000 4,000 2,000 0
32,000 31,000 30,000
'10
'11
'12
T.Assets (Right) Loans (Left) Securities (ex-shares ) (Left) External Assets (Left)
'13
Re maining Assets (Left) Equity (Left) Fixed Assets (Left) MM Funds (Left)
Andbank, ECB
7,000
'14
©FactSet Research Systems
ASSETS, TOTAL LOANS - MFIs EURO AREA 18,800
6,000 5,000 4,000 3,000 2,000 1,000 0
18,400 18,000 17,600 17,200 16,800 '08
'09
'10
TOTAL LOANS (dreta) LOANS TO IMFs HOUSEHOLDS
'11
'12
'13
'14
NON FIN CORPS GOVERNMENTS INSURANCE COMPANIES
Andbank, European Central BanK
24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00
Economic data Since the last Committee, macro surprises in the Eurozone have started to improve, coming into positive territory at the beginning of 2015. Where? Better than expected retail sales in October and November mostly explain this improvement. Industrial production has kept declining, posting negative YoY numbers across Europe. PMIs are just stabilizing while other business surveys (such as IFO in Germany) point to a tentative recovery. Inflation expectations point to minimum levels even on a 5 year horizon.
©FactSet Research Systems
EUROZONE - NET MARGIN (%)
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
7.5 7 6.5 6 5.5 5 4.5 4 3.5 3
Tren dline: Avera ge (M O V 1Y) Eu roz one - Net Marg in (R ig ht) Euroz on e - Price to Ea rnings R a tio (Le ft) Andbank, Facts et Res earch System
©FactSet Res earch Sys tems
Policy & Reforms Greece: We expect Syriza to form a government coalition, to stick to the requirements of the last revision and earn the right to extend and renegotiate official loan conditions (where the average cost is 2.8% and average maturity is 17 years). Additionally, we expect a lower level of austerity required. ECB: Following recent developments in the political arena, and the change in the German position (at least less belligerent) regarding a hypothetical QE, we MUST adapt ourselves and incorporate this last policy shift to our hypothesis. Consequently, we now understand that the German authorities will NOT oppose a full-blown QE program, which means that this is going to materialize in significant quantities. Financial Markets’ Outlook Equity: “BUY” Sales +3.25% vs. 2.6%, Margins 4.6% vs. 4.2%, EPS €7.7 (+13.6%), E[PE]: 17.5 INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
124.0
135.4
9.1%
Gov. Fixed Income: “SELL” Credit Inv. Grade: “HOLD” Fx: “HOLD”
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
UK: 24
“Intractable problems lurk”
Manufacturing, Value Added, % Of Gdp
24
22
22
20
20
18
18
16
16
14
14
12
12
10
10
8
'04
'05
'06
'07
'08
United Kingdom United State s
'09
'11
Japan Germ any
Andbank, WB - World Development Indicators
6
'10
'12
'13
8
India ©FactSet Res earch Sys tems
UK - GDP GROWTH
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-6
(% 1 Y R ) Real G D P , U K
Andbank, UK Office for National Statistics, OECD
20.00
©FactSet Research Systems
UK - NET MARGIN (%)
18.00 16.00 14.00 12.00 10.00 8.00 6.00
'10
'11
'12
'13
'14
9.5 9 8.5 8 7.5 7 6.5 6 5.5 5
(MO V 1 Y) U nited Kingdom - Net M argin (Right) U nited Kingdom - P ric e to Earnings Ratio (Left) Andbank, Facts et Res earch Sys tem
©FactSet Res earch Sys tems
Economy Indeed, sterling has appreciated about 9% against the EUR in the last 18 months, and 25% vs. the USD in REER terms since 2009. Maybe because the UK has been the fastest-growing major advanced economy (+3.1% in 2Q14). However, the UK suffers a number of serious problems that, in our opinion, will cause the price of sterling to decline along with the pace of GDP growth. A lightweight manufacturing sector. A frothy housing market. A poor
performance of the external sector (exports have contracted over the past 12 months). Projections This is uncomfortably reminiscent of the pound’s REER appreciation between 1996 and 2000, and of how seriously this damaged British manufacturing (it stagnated between 2000 and 2008), when German or Irish manufacturing doubled output. With manufacturing in the doldrums and exports contracting, economic growth has been driven by recruitment in the financial sector. With the financial sector’s profitability constrained (by tougher EU’s regulations), and a tighter labor market, this dynamic will not last. Without a rise in manufacturing and exports, the UK’s current pace of growth is not sustainable. Financial Markets’ Outlook Equity: “HOLD” Sales +7.1% vs. 8.9%, Margins 6.9% vs. 6.9%, EPS £7.6 (+7.1%), E[PE]: 17.2 INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
126.8
130.5
2.9%
Fx: “SELL” (vs USD)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Emerging Asia:
“The region most favored by low commodity
prices” Policy & Economics The region most favored by low commodity prices are net importers and intensive energy users: China, Taiwan, Korea, Thailand, Philippines, India and Turkey. Focus: However, EM returns are largely determined by nominal GDP growth in USD terms (which is a function of Real GDP, Inflation and Fx). With deflationary pressures persisting and the USD in a structural bull market, the challenge is to find the highest Real growth. India shows lower trade dependence, lower leverage, is implementing reforms and reducing oil subsidies. The RBI has cut repo rates, but with inflation collapsing further rate cuts are more than likely. All this makes India “better able to initiate a new capital spending cycle without heavy dependence on capital inflows”. Malaysia & Indonesia will also benefit the most. Net importers (intensive in energy) can now cut subsidies ($6bn and $8bn in savings respectively) and they can reap LT rewards to channel budgetary resources into infrastructures.
6.50
EMERGING ASIA - GDP PROJECTIONS (%Y/Y )
6.50
Projections • We expect EM Asia to be a bright spot in the global economy. Well anchored inflation and low commodity prices will allow central banks to keep MP loose.
6.00
6.00
5.50
5.50
5.00
5.00
4.50
4.50
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
4.00
306
330
8.1%
4.00
'12 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '34 '36 (% 1YR) Gdp, Real - Emerging Asia Trendline : Average
Andbank, Oxford Economics
©FactSet Research Systems
Financial Markets’ Outlook Equity: “BUY” Sales +8.7% vs. 7.9%, Margins 8% vs. 7.6%, EPS $22.6 (+14.1%), E[PE]: 14.6
Gov. Fixed Income: “BUY” Credit Inv. Grade: “BUY” Fx (Diffusion Index): “BUY”
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
China:
“Towards 7%. The focus is on getting risks under control” Policy & Economics 2015 GDP expected at 7.1%. Inflation at 2.2%. On Monday 19th January the Shanghai stock index slid by 7.7%. The trigger was an order by the Regulator banning 3 large brokerage firms from opening new margin trading accounts (after they were found to have breached the rules). (The financial sub-index fell 10%. China’s leadership has a strong incentive to sustain confidence in the market (and avoid the formation of bubbles) amid ongoing structural reforms and with the corruption crackdown showing no signs of letting up. A healthy equity market will help wean Chinese firms off their dependence on credit for funding.
Capital Economics
Capital Economics
10.50
CHINA - NET MARGIN (%)
45
10.00
40
9.50
35 30
9.00
25
8.50
20
8.00
15
7.50 7.00
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
Financial Markets’ Outlook Equity: “BUY” Sales +10% vs. 12.5%, Margins 8.5% vs. 8.1%, EPS $20 (+15.5%), E[PE]: 14.5
10
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
5
268
270
0.9%
(MO V 1Y) China - Net Margin (Left) China - Price to Earnings Ratio (Right) Andbank, Factset Research System
Reforms Progress made towards curbing the rise of China's credit-to-GDP ratio. Using TSF data, outstanding credit rose in 2014 from 199% of GDP to 208%. The gap between credit growth and nominal GDP has narrowed (credit rose by 9% in 2014 vs. 16% in 2013). Why is this positive? (1) There is an established link between extended credit booms and financial crises in emerging economies. (2) Lending has cooled without any obvious impact on economic growth. The launch of private banks should improve credit (and capital) allocation. The share of credit going to smaller firms has risen.
©FactSet Research Systems
Fixed Income: “BUY” Credit Inv. Grade: “BUY” Fx: “BUY”
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
India: 35.0%
“Improvement in external vulnerabilities is here to stay”
India - Manufacturing, Value added, % of GDP
35.0%
30.0%
30.0%
25.0%
25.0%
20.0%
20.0%
15.0%
15.0%
10.0%
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 C hina
P hilippines
I ndones ia
Andbank, World Bank
4
10.0%
I ndia
©FactSet Res earch Sys tems
INDIA - EXTERNAL BALANCE (% of GDP)
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-8
Trendline: 1 Ye ar Movin g Averag e Andbank, Reserve Bank of India
11.00 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50
©FactSet Research Systems
INDIA - NET MARGIN (%)
35 30 25 20 15 10
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
5
(MOV 1Y) India - Net Margin (Left) India - Price to Earnings Ratio (Right) Andbank, Factset Research System
©FactSet Research Sys tems
Policy & Economics Modi’s use of 4 executive orders since December has added some impetus to the reform agenda (biggest strides in the areas of tax and land and foreign investment) Tax: Modi removed subsidies on fuel in October and has now increased excise duties on retail fuel (for three consecutive months). This demonstrates that fiscal reform is a priority. Land: Amendments to the maligned land acquisition law (projects focused on education, housing for the poor and defense are exempted from the law (Appetite for land reform exists). FDI: Limits in construction and insurance have been lifted to 49% since December. Areas where reforms remain underwhelming: State disinvestment and tackling the restrictive labor laws. Projections Trade deficit narrowed from US$16.9bn to $9.4bn in December). There is reason to be fairly relaxed on the outlook for the external sector as the new level in oil prices continues to feed through. Given India’s lower CA deficit, and that the reform process has gathered some momentum, we do not think that India would be among the hardest hit if turbulence turns into a rout similar to the one seen in 2013. With lower external vulnerabilities, interest rates do not need to stay high to continue attracting foreign capital. As such, and following the RBI’s decision to cut rates, we think that there is scope to further loosen monetary policy. Financial Markets’ Outlook Equity – “BUY” Sales +3% vs. 1%, Margins 7.05% vs. 7.05%, EPS $28.3 (+3%), E[PE]: 19.9
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
578
622
7.6%
Fixed Income: “BUY” Fx: “BUY”
12
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
EMEA (East Europe, Middle East and Asia): Turkey Outlook: We remain generally constructive with a Turkish growth story that should get a major boost from a more than 45% decline in oil prices since the summer. Heavy dependency on imported energy makes Turkey an obvious winner from lower oil prices. 70% of the country’s primary energy is imported and that figure rises to 90% for crude oil. Annual net energy bill is about US$50bn (or 6% of GDP) and that is a sum equal to Turkey’s external financing needs, which means that if energy is excluded the current account actually balances. Hence, a lower oil price effectively reduces Turkey’s external vulnerability. CA set to be improved significantly: Each $10 decline in the price of oil causes a -0.5% drop in the current account deficit. This implies that the current account would shrink to a five year low of -4% of GDP next year under the assumption of oil at $80/bbl. Inflation can be cut by 120-180bps: due to a fading base effect (from higher taxes in 2014), a 23% devaluation of the Lira (May13-Jan14), and cheaper crude. Russia The CBR’s rate hike to 17% will have an impact on the economy that is going to last longer. Hiking rates is an orthodox prescription in EM, but it makes little sense here. For an oil exporter, the drop in oil prices is a negative supply shock. The sanctions imposed by the EU and the US are also a combination of negative supply shock (cost of funding) and a negative demand shock (less demand from abroad). We doubt that the appropriate response to these negative shocks will be to impose another negative shock (rate hike to 17%). If the hikes in interest rates are temporary (and are merely used to prevent panic by domestic savers) then a very negative scenario will not take place. Nevertheless, we think that a normalization in official rates will take longer than many think, as the sanctions scheme will persist and oil prices could remain low for longer. Argentina The RUFO clause limiting the possibility of Argentina holdouts to offer better terms than those offered in the restructurings of 2005 and 2010 has expired. The government announced its first offering to holdouts, marginally improving the terms of the initial exchange. The Economy minister offered to pay the plaintiffs USD428M, compared to the 1,600 requested. Although it is only 25% of what they are asking, it is a first offer. External debt in USD in hands of private investors represents barely 9% of GDP. Total debt is around 37% of GDP. Solvency is not Risks: (1) The exchange market will have an additional pressure of USD15bn in 2015 (with exports expected to decline by USD7.5bn and the debt service increasing by USD7.4bn). (2) Negotiations with holdouts is coming but if this is not fixed during 2015, financial markets will remain closed. (3) Fx reserves will be the focus again. Consensus is for Fx reserves to decline to USD23bn in December 2015. Certainly a stressed level. (4) Acceleration in the Par bond frozen by judge Griesa (investors could request default in the rest of bonds). The alternatives for Argentina’s government (besides getting access to the international markets) would be to offer an exchange in order to minimize the net outflow from the payment of the 6.3bn in the Boden 15, the 1bn in Prov. of BA, and the 0.5bn in the city of BA.
13
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Japan:
“The BoJ must stick with QQE until well into 2017”
JAPAN - SALES & WAGES (%Change Y/Y)
6.00
20 15
4.00
10 2.00
5
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
6
©FactSet Res earch Systems
JAP AN - GD P & INFL AT ION (% CHANGE Y/Y)
6
4
20y Avg GDP grow th 0.80 4
2
2
0
0
-2
-2
20y Avg Inflation 0.19
-4
'95
'97
'99
'01
'03
'05
'07
'09
'11
-4
'13
(% 1Q) National Accounts, Real Gross Domestic Product (Chained 2000) SA - Japan (% 1YR) (%YoY) Real Gdp
Eurostat
30
©FactSet Research Systems
JAPAN NIKKEI - NET MARGIN & PE (LTM, REP)
6 5
25
4 3
20
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 & Economics QE does not help the bulk of companies: Big caps have hit 52% of their forecast profit for this fiscal year in the first half. As weak yen has bolstered overseas sales. Mid cap corps sat at 43.9% of fiscal year guidance at the end of 1H, while small caps reached just 41.1% of their forecasts. CDS indicate investor concern over Japanese fiscal position despite depressed JGBs. CDS insuring Japanese default are near a 1.5 year high (around 70bps) rising from 33bps in September. Japanese corps have cut their bond issuance due to lackluster investor demand caused by depressed yields. Companies are turning to different asset classes to raise money, such as convertibles. Projections Economic Minister Akira Amari expects the BoJ to extend two credit facilities and raise growth forecast while cutting the inflation forecast. IMF cuts 2015 and 2016 growth outlook for Japan from 0.8% to 0.6% (2015) and from 0.9% to 0.8% in 2016. Yamamoto (an LDP lawmaker who is credited as being one of the key figures behind Abenomics) said the BoJ is unlikely to hit its 2% inflation target by the next fiscal year. He suggests a “wait and see” approach from the BoJ, adding that the 2% would probably be reached in fiscal 2016. Yamamoto: “The BoJ must stick with QQE until well into 2017”. Financial Markets’ Outlook Equity: “BUY” Sales +10.4% vs. 10.4%, Margins 4.9% Vs. 4.9%, EPS 902 (+10.4% ), E[PE]: 20.7
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
17469
18681
6.9%
Fixed Income: “HOLD” Fx : “SELL” (vs. USD)
14
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Mexico: 10
“The slump in oil prices undermines the benefits of reforms”
Economic Activity Indicator - Mexico
10
5
5
0
0
-5
-5
-10
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-10
(MOV 3M , % 1YR) Economic Activity Indicator, Mexico Andbank, INEGI
25
©FactSet Res earch Sys tems
MEXICO - PUBLIC SECTOR OIL REVENUES (3M avg %y/y)
20 15 10 5 0 -5 -10 -15
1/13
4/13
7/13
10/13
1/14
4/14
7/14
10/14
(MOV 3M , % 1YR) Budgetary Revenues, Oil, Pemex, T otal Andbank, Factset Research Indices
24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00
©FactSet Research Systems
MEXICO IPC - NET MARGIN (%)
14 13 12 11 10 9
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
8
(MO V 1Y) Me x ico IPC - Ne t Margin (Right) Me x ico IPC - Price to Earnings Ratio (Le ft) Andbank, Bolsa Mexicana de Valores
©FactSet Research Systems
Policy & Economics We are waiting for the first bidding round (Round 1) concerning the energy reform, which is becoming relevant because of the current oil price environment. Low oil prices make investments in exploration and production activities less attractive now, and we are already seeing a delaying in the first bidding round (Round 1) of investments, dampening the expectations for the favorable effects of the reform process. The Mexican government is offering fields in cheaper shallow waters (lower in significance) to ensure investor’s attention. The ordinary sessions of both the lower house the and senate start in late February. Some laws and changes in regulations are expected in corruption, impunity and rule of law areas. Protests about political and social scandals remain. Projections The impact on Mexican assets comes from external factors (oil and Fed), but also from domestic ones (poor figures in both manufacturing and consumption). This trend will continue in the short term, following the cut in investment projections. Assets under pressure. Inflation data will be showing a significant reduction from last year due to the drop in electricity tariffs, telecommunications costs and the elimination of the effects of tax reform. Despite this, we see Banxico raising rates in July (though this will not put pressure on the long end of the curve) Financial Markets’ Outlook Equity: “BUY” Sales +8% vs. +5%, Margins 9.2% vs. 8.8%, EPS 2727 (+13.7% ), E[PE]: 18.2
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
42,738
47,503
11.15%
Fixed Income: “HOLD” Fx: “BUY”
15
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Brazil: 12 10
“Dilma’s first reforms announced. Will that be enough?”
BRAZIL - ECONOMIC ACTIVITY
2.5 2
8 6
1.5 1
4 2 0 -2 -4
0.5 0 -0.5 '10
'11
'12
'13
-1
'14
(% 1Q) GDP Growth - Brazil (Right) (% 1YR) GDP Growth - Brazi (Left) (% 1YR) BCB's Ec Indicator (%y/y) (Left) Andbank, IBGE
8
©FactSet Research Systems
INF L AT ION - BRAZ IL (YoY)
8
7
7
6
6
5
5
4
4
3
3
2
'05
'06
'07
'08
Cpi, %YoY - Brazil
'09
'11
'12
'13
©FactSet Research Systems
BRAZIL BOVESPA - NET MARGIN (%)
16.00 14.00 12.00 10.00 8.00 6.00 4.00
2
'14
(MOV 6M) Cpi, %Mo M annu alizaed - Brazil
Andbank, Central Bank of Brazil & IBGE
18.00
'10
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
15 14 13 12 11 10 9 8 7 6 5
(MOV 1Y) Brazil Bovespa - Net Margin (Right) Brazil Bovespa - Price to Earnings (Left) Andbank, Boves pa
Policy & Economics The first measures in the government´s fiscal adjustment were announced: Expense cuts and restrictions in labor and social benefits. Equivalent to a 0.7% of GDP (or some USD5bn). Ms Roussef released her 2nd term economic team: Joaquim Levy (Finance Minister), Nelson Barbosa (Planning Minister) and Alexandre Tombini (Central Bank), which were well received by international investors. The primary surplus target was set at 1.2% of GDP in 2015 (positive signal). We still think that the kind of major reforms required in these countries tend to come either after a change in government or after a big economic crisis: In 1990 the “Fujishock” in Peru following hyperinflation and economic crisis. In 1994, the “Real Plan” of Itamar Franco following hyperinflation and currency crisis. In 2002 Uribe’s “Security Crackdown” in Colombia after a change in government. In 2012, the “Pact for Mexico” following a change in Government. The big question remains. Will these actions be enough to convince investors? Will the much needed reforms in Brazil come just after a big economic crisis takes place?
©FactSet Res earch Systems
Projections With no fiscal stimulus and no rate cuts in sight (we expect a 75bps rate hike to 12.5%), the economy is poised to witness further deterioration in 2015. Financial Markets’ Outlook Equity: “HOLD” Sales +8% vs. 6.9%, Margins 7.7% vs. 7.04%, EPS 4435 (18%), E[PE]: 12
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
48576.0
53219.6
9.56%
Fixed Income: “BUY” Fx : “SELL” (vs USD)
16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -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
Previous
Current
Month
Month
5 0 10 5 2 0.2
2 1 10 7 2 -1.4
Andbank’s System of Flow & Positioning indicators. Table of Stress Assessment in Risky Assets
0
-5
-10
+5
Area of Neutrality
Market is Overbought
Sell bias
+10 Market is
Buy bias
Oversold
Reading: Our Andbank system of flow and positioning indicators shows an aggregate score of -1.4 in a range of -10/+10 (slightly worse than the +0.2 seen last month), suggesting a lack of stress in the equity markets. As such, a sudden deep and sustained risk-off shift is unlikely. Surveys: In the Global Manager Fund Survey from ML, investors see the big “tail risks” as “geopolitics” and “Eurozone deflation”. However only 9% of investors forecast recession in 2015. Resurgence in optimism for European equities this month (net % of fund managers wanting to own European equities on a 12m view rises from net 1% UW in November to net 22% OW in December). the highest percentage since May of the previous year. The confidence in European growth also rises amid consensus for ECB QE. Flows: We see that US equity is losing momentum and begins the year with significant outflows while Europe shows the opposite tendency and begins to recover from the large outflows witnessed by the end of 2014. EM are suffering the most important outflows (6 straight weeks of outflows from EM debt funds and 9 weeks for Equity funds). Skew: We have an important negative skew in the S&P equity options, which means many people hedging their portfolios. Buy signal.
FUNDAMENTAL ASSESSMENT: “BUY”
Index
2014 2015 Past Year 2015 2015 Past Year Index E[Sales] Net E[Net E[Profit] Index EPS Sales %y/y % Ch y/y Margin Margin] % Ch y/y Local*
INDEX 2015 2015 2015 PE ltm E [PE ltm] CURRENT TARGET E[Perform.] E[EPS] current (year end) PRICE PRICE % Ch Y/Y
S&P 500
2.43%
4.86%
10.03%
10.03%
4.9%
119.45
125.3
17.22
17.07
2,057
2138
3.9%
Factset Eurozone
2.60%
3.25%
4.22%
4.64%
13.6%
6.81
7.7
18.21
17.50
124
135
9.1%
Factset Uk
8.91%
7.13%
6.94%
6.94%
7.1%
7.08
7.6
17.91
17.21
127
131
2.9%
Ibex 35
-9.46%
3.75%
4.39%
5.27%
24.5%
500.33
622.9
20.60
18.54
10,696
11549
8.0%
Factset Asia P. x Japan
7.91%
8.70%
7.60%
7.98%
14.1%
19.83
22.6
15.42
14.60
306
330
8.1%
Factset China
12.52%
10.02%
8.08%
8.48%
15.5%
17.34
20.0
15.43
13.48
268
270
0.9%
Factset India
1.00%
3.00%
7.05%
7.05%
3.0%
27.45
28.3
21.06
22.00
578
622
7.6%
Nikkei 225
10.40%
10.40%
4.87%
4.87%
10.4%
817.44
902.5
21.37
20.70
17,469
18681
6.9%
Mexico IPC
5.00%
6.04%
8.79%
9.00%
8.6%
2,400
2,606
17.81
18.23
42,738
47503
11.1%
Bovespa
6.96%
8.00%
7.04%
7.74%
18.8%
3,733
4,435
13.01
12.00
48,576
53220
9.6%
* Except for the fol l owi ng ma rkets: Asi a Pac x Japa n, Chi na and Indi a, where EPS have been reported in US$.
17
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Fixed Income Markets FIXED INCOME – CORE COUNTRIES UST 10Yr BOND: “HOLD”. Entry point at 2.5% yield. 1. The swap spread remains at historical lows of 10bps (1.94-1.84). For this spread to normalize at 30-40bps, with inflation expectation (swap rate) well anchored, further declines in the US 10yr Treasury Yield (towards 1.65%) should take place. 2. The slope is now normal (129bps). With the short end in a 0.5%-0.75% range, in order to reach the LT average spread (120bsp), 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 historical highs of 91bps (1.31-0.40). For this spread to normalize at around 30-40bps, with inflation expectation (swap rate) well anchored, it is necessary to see increases in the Euro Benchmark 10yr bond towards 1.0%. 2. The slope is low (55bps). With the short end of the curve anchored at -0.15%, in order to reach the LT average spread (116bps), the 10y Bund yield should go to 1.01%. 7
USD - 10 Yr Swap Spread
1.00
4.00
6
0.80
5
0.60
3.50 3.00
4
0.40
3
0.20
2
0.00
1
-0.20
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
EUR - 10 Yr Swap Spread
1.00 0.50
2.50 2.00
0.00
1.50
-0.50
1.00 0.50 0.00
-1.00 '10
'11
Sw a p Sprea d 10Y USD (Right) USD 10Y Sw ap Rate (Left) USD 10Y Tre asry Yield (Left) Andbank, Tullet Prebon
'12
'13
-1.50
'14
Sw a p Sprea d 10Y EUR (Right) EUR 10Y Gov bond Yield (Left) EUR 10Y Swap Ra te (Left)
©FactSet Research Systems
USD YIELD CURVE SLOPE 10/2Yr - Expressed in bp
350 300 250 200 150 100 50 0 -50 -100 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
Andbank, Tullet Prebon
350 300 250 200 150 100 50 0 -50 -100
300
©FactSet Research Systems
EUR YIELD CURVE SLOPE 10/2Yr - Expressed in bp
300
250
250
200
200
150
150
100
100
50
50
0 -50
0 '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-50
10Y Yield - 2Y Y ield Trendline : Ave rag e
(10Y Yie ld - 2Y Yie ld) Tre ndline : Ave ra ge Andbank, Tullet Prebon I nformation
1.50
©FactSet Res earch Systems
Andbank, Tullet PRebon
©FactSet Research Systems
FIXED INCOME – EUROPEAN PERIPHERALS: “BUY” 35
10 Yr Govies - European Peripherals
35
30
30
25
25
20
20
15
15
10
10
5 0
5 '10
'11 Italy
Andbank, JPM Chase
Spain
'12 Portugal
'13 Ireland
'14
0
Greece
©FactSet Res earch Systems
•
Following recent developments in the political arena, and the change in the German position (at least less belligerent) regarding a hypothetical QE, we MUST adapt ourselves and incorporate this policy shift to our hypothesis. Consequently, we now understand that the German authorities will NOT oppose a QE, which means that this is going to materialize into a significant AMOUNT.
18
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Fixed Income Markets FIXED INCOME - EMERGING MARKETS (GOVIES): “BUY” CPI (y/y) Andbank's Estimate
10 Year Yield Real
2.36%
0.83%
0.83%
1.53%
Taiwan
1.52%
0.61%
0.61%
0.90%
Thailand
2.58%
0.60%
0.60%
1.98%
Malaysia
3.93%
2.66%
2.66%
1.27%
Singapore
1.89%
-0.20%
-0.20%
2.09%
Indonesia
7.42%
7.35%
5.00%
2.42%
Philippines
3.47%
2.70%
2.70%
0.76%
China
3.50%
1.51%
1.51%
1.99%
India
7.72%
5.00%
5.00%
2.72%
Turkey Russia
7.12% 13.93%
8.21% 11.35%
6.00% 13.00%
1.12% 0.93%
Brazil Mexico Colombia Peru
11.89% 5.40% 6.68% 5.46%
6.41% 4.08% 3.66% 3.22%
6.40% 4.08% 3.66% 3.22%
5.49% 1.32% 3.02% 2.23%
EM ASIA
S.Korea
EME
10 Year CPI (y/y) Yield Last Govies reading
LATAM
Historically, a good entry point in the 10Y UST has been when real yields are at or above 1.75%. Given the New Normal a good entry point in the UST could be at 0.75% in Real Yield. (today’s real yield is 1.18%) The rule of thumb for EM bonds has been “buy” when real yields were 175bps above the real yield in UST. Again, given the New Normal, a good entry point in EM bonds could be when Real EM yields are 75 bps above the real yield in the UST. Since UST real yield today is 1.18% we can conclude the following: 1. Today is, at least, a good point to hold UST. 2. Buy those EM bonds with Real yield at 1.93% (1.18% + 75bps). (See the table).
Cheap valuations
Expensive Valuations
FIXED INCOME – CORPORATE BONDS: USD CORPORATES: “HOLD” Spreads remain at 12-month highs of 108bps. (Financials at 91 from 72, industrials at 120 from 93, and utilities at 95 from 84). Maintain exposure at current levels. New entry point at 120. 3.5
USD CORPORATE BOND SPREADS (ML 1-10y Index)
2.5
3 2
2.5 2
1.5
1.5 1
1
0.5 0
0.5 '10
'11
'12
Co rpo rate s (R ight) Financials (Le ft) Andbank, Merril Lynch
'13
'14
EUR CORPORATES: “HOLD” Spreads remain at historical lows of 99bps (from 102bps). Financials stable at 108, industrials at 93 (from 96) and utilities 103 (from 116). Maintain exposure at current levels. New entry point at 120. 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5
EUR CORPORATE BOND SPREADS (ML 1-10y Index)
3.5 3 2.5 2 1.5 1 '10
'11
'12
'13
'14
0.5
Corpo ra te s (Right) (R ight) Financia ls (Le ft) Industria ls (Le ft) Utilities (Le ft)
Industrials (Le ft) Utilities (Le ft) ©FactSet Research Sys tems
4
Andbank, Merril Lynch
©FactSet Research Sys tems
19
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Commodities • METALS & MINERALS: “SELL” 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 & COMMODITIES 25 20 15 10 5 '05
'06 '07
'08 '09 '10
'11
'12 '13
'14
0
(% 1YR , INDEX) CRB Spot Index, Price growth (Left) (% 1YR) Industrial Production, China (Right) Andbank, CRB, Chinese National Bureau of Statistics ©FactSet Research Systems
225
WORLD PRODUCTION, INDUSTRIAL COMMODITIES (Index)
225
200
200
175
175
150
150
125
125
100
100
75
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Primary Aluminium Coal
Copper Crude Oil
Andbank, World Steel Association, Intl Alum Inst, EIA
75
Natural Gas Crude Steel ©FactSet Research Systems
ENERGY(OIL): “HOLD”. Target (30-50$) Negative drivers: (1) Oil price is set to remain depressed until the Saudis have injured their geopolitical competitors severely enough to regain pricing power. (2) The EIA has cut demand estimates to 700k bpd in 2014 while supply is still growing by 1.6mn bpd. (3) China is on track to miss its 7.5% growth target. (4) OPEC members are focused on competing to build market share. (5) West African crude is floating to Asia. Venezuela, Iraq and Libya respond by cutting prices. Positive drivers: (1) Countries accelerate stockpiling when oil prices decline. (2) New production with break evens at US$70 pb (Bakken, Eagle Ford, Permian Basin). Will the price be in a trading range of 50$-100$ (as it was in the 2005-2014 period), or a trading range of 25$-50$ (as it was in the 1986-2004 period)? Reasons to expect a trading range of 25$-50$ (1986-2004): Shale has made the oil market move away from the sort of monopoly pricing dominated by OPEC (2004-2014), and move towards a more competitive regime. Shale oil can be turned on off more readily. If the Saudi’s strategy (no cuts in production) is to keep production at full capacity, it will convert the US Shale into a sort of “Swing producer” that will bring global supply/demand into equilibrium. If this is how the oil market is going to work, then the marginal cost of US Shale production will set the ceiling for global prices. Reasons to expect a trading range of 50$-100$ (2005-2014): (1) Opec will prevent a return to the 86-04 regime of the competitive market. (2) Economic impact of low oil should be extremely positive and lead to a boom in economic growth. 20
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Commodities GOLD: “SELL” (Target US$ 900/oz) Negative drivers: 1. Financial liberalization in China. The higher “quotas” each month in the QFII widens the investment alternatives for Chinese investors (historically focused on gold). 2. Gold in real terms. The real price of gold remains at $1.125 (LT average is $700). Given our global deflator (base year 2009), for the gold price in real terms to stay near its historical average, the nominal price of gold should stay near US$814. 3. Gold in terms of Oil (Gold / Oil): The ratio has now jumped to 27.22 (from prior 15.02, and well above its LT average of 13.81). Given a target price for oil at $40, the nominal gold price should approach the US$552 for this ratio to be near its LT average level. 4. Gold in terms of Equity (Gold / S&P): The ratio is now at 0.64 (Slightly above its LT average of 0.59). Given a target price for the S&P at $2.138, the nominal gold price should approach the US$1.261 for this ratio to be near its LT average level. 5. Gold in terms of Equity (DJ Ind / Gold): This ratio (inverse) is now at 13.52 (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 avg. The end of the Money Stimulus means the end of the Fed’s support to financial assets. 6. Positioning in Gold (CFTC): CEI 100oz Active n.c contracts: longs 192k (from 207k last month), and shorts of 63k (vs. prior 99k) = Net of +130k (vs. +108k last month). 7. Central Banks’ Activity: 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 lift of the Indian import ban (prompting retailers to stockpile gold fearing that new bans could be applied). Positive drivers: 1. Ban in India’s imports of gold has been lifted. Many retailers have been stockpiling, fearing that a ban on gold imports will be re-applied. 2. 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).
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-20 '11 India Thailand
'12 Sing Philipp
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'14 Ch ile Ch ina
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©FactSet Res earch Systems
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Currencies • EUR/USD: ST Target (1.15) / MT Target (1.10) • JPY/EUR: MT Target (135) • JPY/USD: MT Target (123) • GBP/EUR: MT Target (0.76) • GBP/USD: MT Target (0.69) • ASIAN
CURRENCY BASKET (Vs. USD): >10% 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.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Legal Disclaimer All notes and sections in this document have been prepared by the team of financial analysts at ANDBANK. The opinions mentioned herein are based on the combined evaluation of third partiesâ&#x20AC;&#x2122; studies and reports. These reports contain technical and subjective evaluations of data and relevant economic and sociopolitical factors, from which ANDBANK analysts extract, evaluate and summarize the most objective information, agree on a consensual basis and produce reasonable opinions on the questions analyzed herein. The opinions and estimates contained herein are based on market events and conditions occurring up until the date of the documentâ&#x20AC;&#x2122;s publication, and cannot therefore be decisive in evaluating events after the documentâ&#x20AC;&#x2122;s publication date. ANDBANK may hold views and opinions on financial assets that may differ partially or totally from the market consensus. The market indices have been selected according to those unique and exclusive criteria that ANDBANK consider 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 changes in the interest rate or forex rate are factors which could alter the accuracy of the opinions 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. In this document, other major factors influencing this decision are not analyzed; therefore the investor risk profile, his financial sophistication, experience, and financial situation, the investment time horizon or the liquidity for his investment are not analyzed. 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 declines any responsibility for the accuracy and completeness of the evaluations mentioned herein, for possible mistakes or omissions which might occur during the publishing process for this document. Neither ANDBANK nor the author of this document shall be responsible for any loss that the investor may incur, either directly or indirectly, arising from any investment based on any information contained herein. The information and opinions contained herein are subject to change without notice.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW FEBRUARY -15
Principal Contributors
Alex Fusté. – Chief Global Economist – Europe & 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
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