GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Monthly Corporate Review July 2015
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -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: Stable backdrop for financial market ………………………………………………………………7 Euro zone: Not flee the market despite Greece …………………………………………………………8 Asia: The region with the best prospects for financial markets ………………………………9 China: More evidence that it is moving up the value chain ……………………………………10 India: Fixing the causes of India’s economic sclerosis ……………………………………………11 Japan: BoJ set to expand stimulus at some point
………………………………………………12
Brazil: Weaker activity due to a very strong fiscal consolidation ……………………………13 Mexico: Mexico is well positioned to face turbulence risk ………………………………………14 Other Markets: EMEA & 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
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Executive Summary -
Economic & Financial Market Outlook
USA – Stable backdrop for financial market. The Fed: We believe that a first hike at the September FOMC is the most likely timeframe. Following the first rate hike, the trajectory of Fed hikes is likely to be slower and more gradual than previous rate cycles, since inflation forecasts for both 2015 (+1.5%) and 2016 (+1.7%) remain well below the Fed target of 2%. Targets: FY2015 GDP growth at 2.5%, 2015 CPI at 1%, 10yr Treasury at 2.25%, S&P’s target at 2,204. Eurozone – Not flee the market despite Greece. The economic recovery could slow but we do not see this process being derailed. Very different situation from 2011-2012. Paradoxically, the fact that exposure to Greece is for the institutions (taxpayers) and not the banks is “beneficial”. New and more powerful mechanisms are in place. We are talking about a combined flow of 1.5 to 2.0 trillion euro, which should stifle any doubt about a possible contagion effect. ECB - committed to the total accomplishment of its QE. Targets: FY2015 GDP EZ growth at 1.75%. CPI 2015 at 0.75%. 10yr Bund at 1% (strategic view) and Spanish & Italian bond yields at 1.5%. Portuguese bond at 1.8%. MSCI EMU with >6.4% upside potential. Target for the EUR/USD at 1.00. EM Asia – The region with the best prospects for financial markets. The OBOR initiative represents an important potential boost to activity in the region. The completion of this project, through the development of the new AIIB regional bank and the configuration of the “Silk Road Fund”, provides the potential benefits with much visibility. The region is well positioned: (1) No big external imbalances. (2) Well-placed to benefit from US growth. (3) Big winners from the lower oil prices. (4) Well-anchored inflation means that monetary policy is set to remain loose. (4) And the risks remain well anchored. Targets: FY2015-2016 Regional GDP >6%. Government bond yields (10yr): -80 bps average decline to target. Equity MSCI Asia Em ex Japan with >11% upside potential. Fx Asia EM basket with >5% upside potential (vs the USD). China – More evidence that China is moving up the value chain. Chinese exports already overlap with exports from Japan in many more categories than from other Asian countries. Furthermore, the break between China’s exports and imports from EM Asia suggests that China is importing fewer complex components because it is making them itself. Andbank’s main targets: FY2015 GDP at 7%. Government bond yield (10yr): -100 bps to target in yields. Equity China 14% upside potential. Target for the CNY/USD at 5.90 India – India is fixing the cause of India’s economic sclerosis by transferring more powers to state governments in a broad platform dubbed “competitive and cooperative federalism”. Modi’s idea is for the states to engage in a process of competition in a race to the top. Targets: 2015 GDP at 5.5%, Government bond yield (10yr): -75 bps to target in yields. Equity India: >10% upside potential. Japan - 12 of 19 analysts see the BoJ expanding QQE 30-Oct., but the strong division within the BoJ threatens QQE continuation. Targets: Government bond yield (10yr): +10 bps to target in yields. Nikkei: 20,178. JPY/USD target at 130. LatAm – Brazil: Central Bank raised Selic rate by 0.50% (to 13.75% per year), maintaining its hawkish position. The economy is expected to shrink by 1.5%-2.0% this year, primarily due to the heavy fiscal adjustments. Targets: Bovespa at 53,220. Yield in the 10yr Gov bond: 12% (loc) and 4% (USD). BRL-USD: 3.00. Mexico - The decline in manufacturing is related to the soft patch in the US economy, but we consider this a temporary factor. We consider that Mexico is well positioned to face turbulence risk amidst an eventual flow reversion, due to its tight relationship with the U.S. economy. Targets: Equity IPC: 47,500. 10yr Gov. Bond: 5.75% (loc) and 3% (USD). MXN: 15.00 3
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
The World at a glance North A me rica
-2.0
Figures correspond to the last official quarterly report. (Annualized growth rate)
– Last quarterly report. GDP rate (%y/y)
2.6%
2.4%
2.6%
0.0
Sou th Ame ri ca
-2.3% 3.5% 3.5% 1.0%
-0.2%
1.9%
2.0
6% 5.8% 3.2%
0.1%
EU28 -0.2%
2.6%
4.1%
1.3% 0.2%
0.7%
2%
3.2%
4.0
2.4%
2.3% 2.4% 2.7%
1.5% -0.2% 3.4% -0.5%
2.6% 1.3%
1.2%
6.0
Asi a 4.4% -0.7 % 7.0% 5.4%
6.1% 7.5% 2.2%
6.9%
8.0
5.8% 5.0%
2.5%
NZ 3.7%
4
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Market Outlook – Fundamental Expected Performance Performance Performance Current Fundamental Expected Last month YTD 01/07/2015 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
-1,5% -1,9% -4,7% -3,2% -11,0% -1,0% -20,8% 2,6% 0,0% -2,7%
0,9% 13,2% 0,3% 6,1% 18,3% 16,5% 33,9% 7,0% 4,1% 5,5%
2.077 211 1.938 10.912 347 20.329 342 550 44.929 52.757
2204 232 2012 12505 397 20178 414 601 47503 53220
6,1% 9,8% 3,8% 14,6% 14,4% -0,7% 21,1% 9,3% 5,7% 0,9%
Fixed Income Core countries
US Treasury 10 year govie German Bund 10 year govie
-1,1% -0,7%
-0,9% -1,9%
2,42 0,81
2,25 1,00
3,78% -0,73%
Fixed Income Peripheral
Spain - 10yr Gov bond Italy - 10yr Gov bond Portugal - 10yr Gov bond Ireland - 10yr Gov bond
-1,6% -1,2% -0,6% -1,8%
-4,4% -2,5% -0,5% -2,4%
2,26 2,28 2,90 1,61
1,50 1,50 1,80 1,25
8,35% 8,53% 11,74% 4,49%
-1,1% -2,8%
-6,6% 27,5%
9,21 10,70
8,00 14,50
18,85% -19,67%
0,0% -0,4%
1,3% 0,4%
0,98 1,12
0,70 0,80
3,59% 2,35%
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
2,0% -0,1% 0,4% 0,6% -1,2% 0,2%
4,3% 1,0% 1,9% -1,9% 0,5% 3,6%
7,81 8,30 3,64 4,34 2,96 3,93
7,25 7,00 2,50 4,00 2,50 3,50
12,25% 18,67% 12,76% 7,06% 6,67% 7,40%
Fixed Income Latam
Mexico Mexico Brazil Brazil -
0,1% -3,1% -1,4% -0,2%
0,5% -1,6% 3,4% -1,7%
6,13 3,75 12,67 4,68
5,75 3,00 12,00 4,00
9,14% 9,75% 18,01% 10,12%
Commodities
Oil (WTI) Gold
-7,1% -1,4%
6,4% -2,3%
56,94 1.172
40,00 900
-29,75% -23,19%
Fx
EUR/USD -0,2% JPY/USD 1,7% JPY/EUR -0,1% CNY/USD 0,0% MXN/USD -2,3% BRL/USD 0,6% GBP/USD 2,0% GBP/EUR 2,2% ASEAN Currency Basket (Index) #N/A
-8,3% -1,7% 6,9% 0,0% -7,0% -17,3% 0,3% 8,5% -2,5%
1,11 122,60 136,45 6,20 15,77 3,12 0,64 0,71 97,48
1,00 130,00 130,00 5,90 15,00 3,00 0,68 0,68 105,00
-9,93% -6,04% 4,73% 4,86% 4,89% 3,77% -6,30% 4,25% 7,71%
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
Upward revision
Downward revision
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Monthly Global Asset Allocation Proposal Conservative
Moderate
Balanced
Growth
< 5%
5%/15%
15%/30%
30%>
Max Drawdown
Strategic Tactical (%) (%)
Asset Class
Strategic (%)
Tactical (%)
Strategic (%)
Tactical (%)
Strategic Tactical (%) (%)
Money Market
15,0
16,5
10,0
10,0
5,0
4,7
5,0
4,5
Fixed Income Short-Term
25,0
13,8
15,0
7,5
5,0
2,4
0,0
0,0
Fixed Income (L.T) OECD
30,0
33,1
20,0
20,0
15,0
14,2
5,0
4,5
US Gov & Municipals & Agencies
10,9
EU Gov & Municipals & Agencies European Peripheral Risk Credit (OCDE)
20,0
6,6
4,7
1,5
0,0
0,0
0,0
0,0
21,8
13,2
9,4
2,9
22,0
20,0
20,0
15,0
14,2
5,0
4,5
Investment Grade USD
4,4
4,0
2,8
0,9
High Yield USD
8,8
8,0
5,7
1,8
Investment Grade EUR
2,2
2,0
1,4
0,4
High Yield EUR
6,6
6,0
4,3
1,3
Fixed Income Eerging Markets
5,0
7,7
7,5
10,5
10,0
13,2
15,0
18,7
Latam Sovereign
3,1
4,2
5,3
7,5
Latam Credit
1,5
2,1
2,6
3,7
Asia Sovereign
1,5
2,1
2,6
3,7
Asia Credit
1,5
2,1
2,6
3,7
Equity OECD
5,0
6,9
20,0
25,0
32,5
38,4
50,0
55,7
US Equity
1,7
6,3
9,6
13,9
European Equity
5,2
18,8
28,8
41,8
Equity Emerging
0,0
0,0
5,0
6,3
10,0
11,8
10,0
11,1
Asian Equity
0,0
4,7
8,9
8,4
Latam Equity
0,0
1,6
3,0
2,8
Commodities
0,0
0,0
2,5
0,6
5,0
1,2
5,0
1,1
Energy
0,0
0,00
0,0
0,00
Minerals & Metals
0,0
0,00
0,0
0,00
Precious
0,0
0,16
0,3
0,28
Agriculture
0,0
0,5
0,9
0,8
REITS
0,0
0,0
0,0
0,0
2,5
0,0
5,0
0,0
Total
100
100
100
100
100
100
100
100
This table of recommended asset allocation has been prepared by the Asset Allocation Committee (AAC), comprised of the directors of the portfolio management departments and the directors of products 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), which 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.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
USA:
10
Stable backdrop for financial market.
US - INFLATION & FED RATES
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4 -4 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 (% 1YR) CPI All Items US Federal Funds Target Rate - Yield Andbank, US dept. of Labor
7
©FactSet Research Systems
US - CPI (% Ch Y/Y)
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
(% 1YR) CPI, Urban Consumers, US, 1982-84=100, Index - United States Andbank, US Department of Labor
©FactSet Research Systems
Economy & Policy The Fed, When?: We believe that a hike at the September FOMC is the most likely timeframe for the first Fed rate hike: (1) We expect better economic growth and the recent improvement in employment (jobless claims at the lowest level since 2000 and 12-month rolling job gains near record highs). (2) While the FOMC acknowledged in their statement that current economic conditions do not “yet” warrant a rate hike, “moderate” expectations that inflation will “move gradually back” towards the FOMC’s target imply that a rate hike is likely in 2015. (15 out of 17 governors expect at least one rate hike in 2015.) And after the first rate hike? We agree with the Fed Chair that the trajectory of Fed hikes is likely to be slower and more gradual than previous rate cycles for two reasons: (1) First, the inflation environment is less clear, as inflation forecasts for both 2015 (+1.5%) and 2016 (+1.7%) remain well below the Fed target of 2%. (2) Current economic growth remains muted in comparison to periods when the Fed has previously hiked rates. In fact, out of 95 rate hikes since 1971, the Fed has only hiked interest rates at the current level of nominal GDP (+3.9% YoY) on one occasion. Forecasts: Macro & Markets Fed rates: First hike in Sept. 15. GDP forecast 2.5%. CPI y/y at 1%. Unemployment forecast: 5.3%. 10Yr Treasury: 2.25%. Equities: S&P Target raised to 2,204 (from 2,138). We keep sales growth stable at 4.86% and margins at 10.03%, but we have decided to raise the PE ltm at year-end to 17.6 (from 17) on the back of an uptick in the rate of upward revisions for most indices and industries. With supportive monetary policy and the earnings revision already initiated and assuming that economic growth increases in line with expectations, we believe that the conditions are in place for equity markets to rise higher in the US. Preferred sectors: Industrial, Texh HW, Semis and Semis equipment, Energy, Utilities, Banks, Diversified Financials, Software & Services. Recommendations for Financial Markets Equity: “HOLD” (Tactically & Strategically) Gov. Fixed Income: “HOLD” (Tact & Strat.) Inv. Grade Credit: “SELL” HY: “HOLD” (BBs)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Euro zone:
2.000
20-mar
0
abr-15
mar-15
feb-15
ene-15
dic-14
oct-14
nov-14
sep-14
jul-14
ago-14
jun-14
may-15
5-jun
4.000
29-may
6.000
22-may
8.000
15-may
10.000
8-may
12.000
1-may
14.000
24-abr
16.000
17-abr
18.000
may-14
feb-14
0,3
10-abr
0,8
abr-14
1,3
3-abr
1,8
27-mar
2,3
Greece Impact on activity: Very limited effect on economic activity in the euro group. The GDP ESTIMATES FY2016 (ECB estimates) economic recovery could slow but we do not see SP this process being derailed. This is not 2011: Very different situation from GE 2011-2012. Paradoxically, the fact that exposure EZ to Greece is for the institutions (taxpayers) and FR not the banks (which have reduced their exposure from EUR 200bn in 2010 to USD 35bn today) is IT beneficial. This (immoral) act to socialize the losses and prevent a new banking crisis resulting from the doubtful loans on the banks’ books should help to restore the normal functioning of the European financial system. New and more powerful mechanisms: We have new (anti-contagion) mechanisms that should be more than sufficient to offset the negative effects of Greece. These mechanisms are: EFSM (+13bn eur), ESM (+453 bn), OMT (350bn), APP (900bn), TLTRO (700bn). We are ECB PURCHASES talking about a combined flow of 1.5 to 2.0 trillion euro, which should stifle any doubt about a possible contagion effect. Economics Macro At the last ECB Committee, the cyclical recovery in Europe was confirmed, along with some loss of momentum due to weaker external data. Retail sales picked up in May, while the industrial momentum remains uneven: improving in Italy and Spain but stable in Germany. Growth: GDP forecasts have kept an upward trend for 2015, as well as for the coming year. Inflation: Better readings have been registered at the core price index levels (0.9% YoY vs. 0.6% prior). All items at 0.3% y/y. Though general inflation could continue on the upside, mainly due to the energy component, core prices may have BoJ little room for improvement. Deflation fears seem CENTRAL BANK’S to recede but inflation may stay low. 91% BALANCE SHEETS The ECB remains committed to the total (as a % of GDP) accomplishment of its QE, running linear weekly purchases, with no signs of front loading before the summer or taking advantage of the higher yields. Draghi downplayed the volatility spikes ECB suffered in the bond markets, considering them 30% as natural in a low rate environment. Recommendations for Financial Markets Equity (MSCI EMU): “BUY” FED Core Gov Fixed Income: “SELL” Peripheral bonds “BUY” 20% Inv. Grade Credit:“HOLD” 8 HY: “BUY” mar-14
2,8
Not flee the market despite Greece
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Emerging Asia:
The region with the best prospects for financial markets.
Capital Economics, Thomson Datastream
Capital Economics, Thomson Datastream
In France is 3% of GDP
Risks are low Loan growth remains below the risky threshold: Increases of more than 30 percentage points in private sector debt as a percentage of GDP within a decade has tended to be a signal of problems further ahead. In that regard Credit growth has been slowing across most of the region in recent months (including in the economies identified as most at risk). Why? (1) Although nominal rates have been cut by most central banks, real rates have been rising due to the collapse in inflation. (2) Given the surge in lending over the past years, the prospect of a rise in bad debt (NPLs) has made banks reluctant to lend. So far, there has been no sign of a deterioration in asset quality in these economies (specially in those where credit risk is higher, where NPLs average 1% of total loans). The historical relationship between interest rates in the US and Asia is much weaker now. Economics & Outlook Growth in EM Asia eased slightly in Q1 (at 4%, excluding China and India). The simplest reason was that the global economy hit a soft patch and Asia’s exports felt the impact. Domestic factors actually picked up strongly. Decent growth expected over the next couple of years (at around 6%). The region is well positioned: (1) These countries have no big external imbalances. (2) they are well-placed to benefit from US growth. (3) They are big winners from the lower oil prices. (4) Well-anchored inflation means that monetary policy is set to remain loose. Main Estimates: 2015 GDP: EM Asia 6%, China 7%; India 5.5%, Indonesia 5%, Philippines 6.5%, Thailand 3.5%. (2016 GDP: 6% EM Asia.) Financial Markets Asian equities should remain supported on the back of decent growth prospects. Bonds should outperform, given the backdrop of low policy rates and healthy fiscal positions. Currencies: With central banks ending rate cuts, this could prove to be a supportive factor for these currencies and will partially offset the start of rate hikes from the Fed. Recommendations for Financial Markets Equity: “BUY” Gov. Fixed Income: “BUY” Inv. Grade Credit:“BUY” Fx (Diffusion Index): “BUY”
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
China:
More evidence that China is moving up the value chain
New Urban Jobs (millions) Capital Economics
Key Forecasts
Capital Economics
Reforms Chinese exports already overlap with exports from Japan in many more categories than from other Asian countries (see chart 1). CNY: PBoC will allow foreign central banks to choose their interbank agent. This will support foreign banks adding Yuan to their reserves and push for the CNY’s inclusion in the IMF’s SDR. Liberalization: Authorities to remove $50k cap on Fx purchases in Shanghai FTZ. Fine-Tuning: Fiscal spending is up just 2.6% y/y in May, while PBoC keeps a net neutral position for the seventh consecutive week. (There is no such QE, as some suggested.) New restrictions on Margin Trading: The CSRC is considering restricting margin trading to those holding more than CNY 500k in trading accounts for the last 20 days (as well as limiting lending to 4x the brokerage net capital and imposing limits on lending to buy stocks with high PEs or stocks posting losses). Brokerage firms still have room to boost margin lending under the new rules. GF Securities says it has still room to more than double its margin lending. 49 new laws set for FTZs state that (1) households are be allowed to invest overseas in Shanghai FTZ, and (2) a deregulation of the capital account , with free convertibility of Yuan. Economy (not as bad as many suggest) MNI China business indicator 53.5 vs 49.7 in May, Loan growth: +14.0% y/y (vs +14.1% in April), Deposits: +11% (9.7% in April); M1 (+4.7% y/y), M2 (+10.8% y/y); Ind. Prod.: +6.1% y/y (up from +5.9%); Retail Sales: +10.1% y/y (up from +10%); New home sales: +30% y/y in May, after gov’s move to ease down-payment requirement. NDRC forecasts China will overtake US as largest economy between 2020-2025 and says fundamentals support 7% annual growth through 2020. Markets MSCI survey: investors expect the MSCI China Index to rise 1.4% over the next 12 months, vs the 10-20% increase expected in May. The Yuan’s stability has made it a solid candidate to be a carry trade; it hasn’t deviated more than 0.4% from CNY 6.2 vs the USD since 19 Mar. Recommendations for Financial Markets Equity: “BUY” Fixed Income: “BUY” Inv. Grade Credit:“BUY” 10 Fx: “BUY”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
India:
Fixing the causes of India’s economic sclerosis
INDIA - SALES (% Change Y/Y)
70
70
60 50
60 50
40 30
40 30
20 10
20 10
0 -10
0 -10
-20
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-20
(% 1YR) India - Sales Andbank, Factset Research System
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
India - Net Margin (Le ft) India - Price to Earnings Ratio (Right) Andbank, Factset Research System
34 32 30 28 26 24 22 20 18 16 14
©FactSet Research Systems
INDIA - EPS (LOC)
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
34 32 30 28 26 24 22 20 18 16 14
India - Earnings p er Sha re Andbank, Factset Research System
©FactSet Research Systems
Recent developments India is fixing the cause of India’s economic sclerosis in recent years: Delhi sets policy and dictates the terms of big projects, while state governments do the implementation, though they have traditionally lacked the resources to deliver the planned projects, and the political incentive for local governments has been to create bureaucratic hindrances that ensure projects never get built. A key plank of Modi’s strategy to remedy this dysfunction: Transfer more powers to state governments in a broad platform dubbed “competitive and cooperative federalism”. Modi’s idea is (1) for states to have the capacity to deliver rather than be incentivized to look for excuses. (2) Having been given the power and funds to do the job, a process of competition would hopefully ensure that states engage in a race to the top, rather than the bottom. (3) Not only will state governments get more money, but the proposal is to increase their borrowing capacity by 0.5% of GDP on the qualifying proviso that debt levels are less than 25% of GDP. States are legally mandated to keep their fiscal deficits below 3%. The current average level stands at 2.4% Fiscal consequences: This fiscal rebalancing between Delhi and the states pave the way for a simplification of the tax code (with the adoption of a single tax for national goods and services, in place of multiple local levies). Business consequences: This should improve the business climate and hopefully spur private sector investment. Final Assessment: India has initiated powerful reforms, which should have the cumulative effect of signaling to business that a substantially changed business environment is right around the corner. India is headed in the right direction, but a number of pieces still need to fall in place. China is making friendly noises about advancing a “strategic cooperative partnership” with India: (1) Beijing has invited Delhi to join the “One Belt One Road” initiative and India has agreed to be a founding member of the AIIB bank. (2) India has given the green light to the construction of a new highway linking the two economies. Recommendations for Financial Markets Equity – “BUY” Fixed Income: “BUY” 11 Fx: “BUY”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Japan:
BoJ set to expand stimulus at some point
NIKKEI - SALES (% Change Y/Y)
20
20
15 10
15 10
5
5
0 -5 -10
0 -5 -10
-15
-15
-20 -25
-20 -25
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
(% 1YR) Japan Nikkei 225 - Sale s Andbank, Factset Research Systems
5.50
©FactSet Research Systems
NIKKEI - NET MARGIN (%)
28
5.00
26
4.50
24 22
4.00
20
3.50
18
3.00
16
2.50
14
2.00
'11
'12
'13
12
'14
Japan Nikkei 225 - Net Margin (Left) Japan Nikkei 225 - Price to Earnings R atio (R ight) Andbank, Factset Research Systems
1.000
©FactSet Research Systems
NIKKEI - EPS (LOC)
1.000
800
800
600
600
400
400
200
200
0
0
-200 -400
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'06 '07
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Japan Nikkei 225 - Earnings per Share Andbank, Factset Research Systems
©FactSet Research Systems
Policy QQE: October remains target for next QQE expansion. 12 of 19 analysts see the BoJ expanding QQE on 30 Oct. All 19 are expecting the BoJ to expand stimulus at some point. Division within the BoJ threatens QQE continuation: Several board members (Sato, Shirai and Kuichi) expressed various concerns over QQE. The BoJ governor Kuroda remains committed to continuing QQE. Yutaka Harada: “Additional stimulus was more contingent on trend inflation rather than individual data points”. (Everything points to more QQE?) Disagreement over spending caps is causing market jitters. (1) Top officials urge fiscal consolidation (FM Taro Aso highlighted the need for a credible fiscal plan). (2) LDP lawmakers urged to cap spending from fiscal 2018 onwards. (3) Aso also advocates revisiting the issue of the sales tax hikes. (Everything points to more QQE?) GPIF signals more flexibility with asset allocations: Public funds will be able to invest up to 5% of total assets in alternative assets such as real estate, infrastructure and unlisted stocks. Domestic Equity allocation could diverge up to 9% from the 25% benchmark. Expectations for fast-track TPP deal dim after US House Dems vote against a key component of the deal. Outlook BoJ’s six-monthly forecasts: broadly speaking, the BoJ lowered its growth and inflation forecasts. Risks: the BoJ assesses the risk to the broader economy as balanced, but the risks to prices tend towards the downside. Economics Domestic demand falls 1.6% short of potential supply in Q1 (Cabinet Office). 1Q GDP at 0.6% q/q driven by inventory investment. Nominal private consumption contracted. Exports +2.4% y/y in May (vs 3% expected and 8% in April), due to global slowdown (US). Markets Insurers are moving out from JGBs and into EM bonds in a hunt for yield and a rising pressure to deliver return on their portfolio given demographics. Recommendations for Financial Markets Equity: “HOLD” Fixed Income: “SELL” Fx : “SELL” (vs. USD)
12
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Brazil:
Weaker activity due to a very strong fiscal consolidation Policy & Reforms Central Bank raised Selic rate by 0.50% (to 13.75% per year), maintaining its hawkish position, without bias. External accounts are better. Lower imports led to a USD 2.8bn trade surplus this month. Social benefits: MP 664 was sanctioned by the president (further limitations on social benefits), but the retirement benefits amendment was rejected. The government will deliver, in our view, 1.2% of GDP primary fiscal surplus in 2015 and 2% in 2016: (1) a % of expenses are linked to fiscal revenues. (2) 82.4% of measures do not depend on Congress.
Capital Economics, World Bank
Fx Reserves (% of GDP) (Capital Economics, Thomson Datastream)
Public Finance & fruits coming from measures (1) High nominal GDP helped to cut Debt/GDP in 2014 to 60%. (2) Net debt is just 34.1% of GDP (3) External debt is low (20% of GDP). (4) The structure of the external debt is less of a concern (90% of this debt has a long maturity). (5) They can use their Fx reserves, built up over the past decade (USD 365bn or 17% of GDP) Rating: S&P kept the Investment Grade at Stable Outlook Social & Political unrest is now much calmer: The protests on April 12 were far smaller in scale than the ones last March Economics The economy is expected to shrink by 1.5%-2.0% this year. The weaker activity does not help government revenues and makes the fiscal adjustment more difficult. IPCA inflation rose to 8.5% y/y in May (from 8.2% in April) and is running at a 11-year high. A big part of the increase can be explained by regulated price increases. Housing inflation rose to 17.6% y/y, reflecting the increases in regulated utility bills as a result of the government’s austerity package. COPOM’s last decision of raise the Selic rate by 50bps (to 13.75%) will help to tame inflation and it is likely that inflation has now peaked. Even so, today’s data tip the balance towards an additional increase in the rate (maybe to 14.0%).
Capital Economics
Recommendations for Financial Markets Equity: “HOLD” Fixed Income (Loc): “BUY” Fixed Income (USD): “BUY” Fx: “BUY”
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Mexico: 6
Mexico is well positioned to face turbulence risk
GDP GROWTH - US vs MEXICO
8 6
4
4 2
2 0
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 - Economic Activity Indicator (as a Proxy for GDP) (Right) (% 1YR) US - GDP (Left) Andbank, INEGI, US Bureau of Economic Analysis
12 11
©FactSet Research Systems
MEXICO - CAPITAL FLOWS (Quarterly, bn$US)
20
10 9 8 7 6
15
5 4 3
0
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'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
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(MOV 12M) FDI Mexico ($bn) (Left) (MOV 1Y) Foreign Investment Portfolio, Mexico ($bn) (Right) Andbank,Bank of Mexico
©FactSet Research Systems
MEXICO IPC - NET MARGIN (%)
24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 '05
14 13 12 11 10 9
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(MO V 1Y) Mexico IPC - Net Margin (Right) Mexico IPC - Price to Earnings Ratio (Left) Andbank, Bolsa Mexicana de Valores
©FactSet Research Systems
Economics GDP slowdown: The slowdown in growth during 1Q15 (0.4% q/q, below the 0.7% recorded in 4Q14), was due almost entirely to weakness in industry (-0.2% q/q). The decline in manufacturing is related to the soft patch in the US economy, and mining also contracted (-0.3% q/q), as oil output was cut back following the drop in prices. Encouraging news came from (1) the service sector, which held up well in Q1 (+0.5% q/q), although the pace slowed in May; (2) the own mining sector, where dynamics are starting to stabilize; (3) the US, where we expect a recovery during 2H2015; and (4) the general price level, which continued its downward trend, as reported in the May figure. 1Q is the low point: With fiscal policy set to tighten over the course of this year, Mexico’s economy will not take off aggressively. Nonetheless, Q1 should be the low point for q/q growth. Policy & Markets Elections: In midterm elections Mexico’s ruling PRI party alliance is set to extend its slim majority in the lower house. Energy reform: Round 1 results will be known in July. Round 2 and 3 will be held in December. Investments are not expected to meet initial projections. Equity: We keep our IPC 2015 target at 47,500, supported by gradual recovery in consumption auto industry growth and remittances, the correlation with the US economy and favorable comparative corporate results. We consider that Mexico is well positioned to face turbulence risk amidst an eventual flow reversion, due to its tight relationship with the U.S. economy. Preferred sectors: retail, auto parts, construction, industrial. Fx: expectations about the FED’s first movement and the actual peso level made us keep our fx forecast for the end of 2015 at 15.00. Bonds: 10-year yield target at 5.75% (local) and 3.00% (USD). Recommendations for Financial Markets Equity: “BUY” Fixed Income (Loc): “BUY” Fixed Income (USD): “BUY” Fx: “BUY”
14
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Others: EMEA & LatAm West – Russia Conflict: Monthly News Flow to June 22: (30 negatives, 0 Neutral, 2 positives) Andbank’s Assessment for Russian Assets: A DEEPLY NEGATIVE MOOD.
News coming from Russia: (-) Lavrov says increased NATO presence near Russian borders may have “dangerous consequences” (Reuters) (-) Putin says that Russia will be forced to aim its armed forces at those countries that threaten Russia (Reuters) (-) Putin says Russia represented an alternative point of view in G8, but has no relation with G7 since its views are not needed any more (Reuters, 10 June) (-) Russia to extend sanctions after G7’s decisions (Interfax, June 10) (-) Russia bans transit of US poultry due to bird flu outbreak (Sputnik, June 9) (-) Kremlin spokesman blames latest fighting in East Ukraine on “provocations” by Ukrainian armed forces (Reuters, June3) (-) State Duma speaker says that Russia will give adequate response if Ukraine joins NATO (Tass agency, June1) (-) Russia blacklists dozens of EU officials from entering Russia in response to EU sanctions (Breaking News) (-) PM Medvedev says Russia will adopt toughest position if Ukraine defaults on previous debts (Reuters) (-) Lavrov says preparations underway for shipment of S-300 missile system to Iran. Will happen soon (Interfax, June 3) (+) Russia is not entering an arms race with the West since it could harm the economy (Reuters)
News coming from Ukraine: (-) 28 Ukrainian servicemen have been killed in the past month (as of 22nd June). A further 97 have been wounded, making this month even more violent than the previous one (Reuters) (-) Separatists report at least 19 people dead in battles around Donetsk (June 3) and 15 fighters killed near Maryinka (Service DAN report) (-) Ukrainian military must be ready to defend the country against a “full-scale invasion by Russia” (Reuters, June 3)
News coming from EU, Germany & OSCE (-) Belgium has frozen accounts of Russian diplomatic missions and some Russian organizations. Russian government protests to Belgium ambassador over this seizure of assets and the Belgian government unblocks seized Russian accounts in just 24h (BBC) (-) Senior diplomat says that the EU is likely to extend sanctions on Russia by 6 months to help force success of ceasefire immediate threat to NATO states (Reuters, June 4) (-) EU agrees to extend economic sanctions on Russia by 6 month to the end of Jan 2016 (-) G7 reiterates its condemnation of the illegal annexation of the Crimean peninsula by Russia and reaffirms its non-recognition. (-) European Council president D. Tusk says Russia won’t be invited to G8. (-) Russians captured in Ukraine admit serving in army. They claim to be on reconnaissance mission (AFP) (-) Merkel says sanctions to Russia must remain until ceasefire holds (AP, June 8) (--) Senior German Official says security situation in Ukraine is worrying. He sees heavy violations of Minsk ceasefire (BBC, June 4)
15
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Others: EMEA & LatAm West – Russia Conflict: Monthly News Flow to June 22: (30 negatives, 0 Neutral, 2 positives) Andbank’s Assessment for Russian Assets: A DEEPLY NEGATIVE MOOD.
News coming from the UK (-) Cameron says that existing sanctions must remain in place (Breaking news, June 8)
News coming from the USA (-) US ambassador to the UN Samantha Power says Russia is “arming, bankrolling and fighting alongside separatist in eastern Ukraine” (AFP). (-) Obama says Putin must decide if he wants to wreck his country’s economy in an effort to recreate the glories of the Soviet Empire (Reuters, June 9) (-) Obama says G7 is ready to implement additional sanctions (Breaking news, June 8) (-) US State Department describes new wave of fighting in East Ukraine as “combined RussianSeparatist attacks” (BBC, June 2) (-) Vice president Joe Biden: “Debate on providing lethal defensive weapons to Ukraine worth having” (USA Today, May27)
News coming from NATO (-) NATO secretary general condemns Russia’s destabilizing sabre rattling with announcement of 40 new ICBMs, missiles capable of countering missile defense systems (Interfax). (-) Chief Stoltenberg says both sides must withdraw heavy weapons from Ukraine frontline (Reuters, June 3) (+) Stoltenberg says: Russia not an immediate threat to NATO states (Reuters, June 4)
16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Others: EMEA & LatAm Argentina Economic Activity: First available May data confirmed the recovery in economic activity. May retail sales (expressed in volumes) edged up by 1.7% on a yearly basis (+2% YTD), but new auto sales remained weak (–16.5% YoY in May and –21.9% YTD). Auto production has continued weighing on the GDP due to the weak economic growth in Brazil, while construction activity has kept counteracting the negative impact from the auto sector. To sum up, although incomes are depressed due to lower agricultural prices, in 2Q15 the economy is enjoying a breather. Fiscal / Monetary Policy: The monetary base has grown significantly in June, which lowered interest rates. Money printing to finance the treasury has increased vs 2014, despite the fact that the Govt. has sold ARS 38.5bn of bonds YTD. Inflation: We expect official inflation to decelerate this year to +12.0% (from +23.9% in 2014), amid a lower depreciation of the official FX. We also expect CPI Congress (index built by opposition law-makers based on private estimations) to show a slowdown in 2015 to +28.0% (from +38.5% in 2014). Despite the acceleration of the money base in the most recent months (to around 32.8% YoY), inflation has remained stable overall. May figures show that inflation is running at 2.0% MoM according to the Congress CPI and at 1.0% MoM according to INDEC’s IPCNu. FX: Official @ 9.08, Blue 13.02. Target year-end (official): 10 pesos per USD. Continued Central Bank’s FX policy of depreciating the Peso at a 1% MoM pace. Fx Reserves: Current at 34bn (vs year end level of just 26bn). Before the end of this month Telcom companies must pay USD 1.1 billion for their 3G/4G spectrum licenses, which should positively affect the stock of reserves. As for the agro settlements, proceeds in the last two weeks have been up 22.6% YoY, turning this indicator positive for the first time since February. Politics: Cristina Kirchner will support Scioli in the primaries of the FpV, but with Carlos Zanini. The latter is known as the right-hand man of President Cristina Kirchner. The candidates list shows a strong presence of “Cristinismo” in the FpV offer. Most of the candidates for Congress in the first places for the major districts are either current members of CFK’s cabinet or from the youth political movement “La Cámpora”. Recommended Strategy: We recommend caution at current bond prices. Argy debt has strongly outperformed its peers recently, because (1) it became increasingly clear that international reserves would remain at comfortable levels by December 2015, after the payment of the Boden 15s, and (2) liquidity issues are being addressed, i.e., The City of Buenos Aires started the cycle of rollovers needed for 2015, the Government issued 1.5bn and plans to issue more, and the Province of Buenos Aires issued 875m. HY: Hold the new YPF 25 bond YPFDAR 8.5 7/2825, YTM:8.41% (good liquidity and no Griesa risk)
Venezuela International pressures: (1) The World Bank’s International Center for Settlement of Investment Disputes rejected Venezuela’s request to review an order to pay Exxon Mobil USD 1.6 billion in compensation for the nationalization of its assets in the country and urged Venezuela to settle the award. (2) Airline Alitalia decided to cancel its Caracas-Rome flights because of the debt the government of Nicolas Maduro has with the air carriers, amounting to USD 250 million. Domestic: (1) The scarcity rate of essential products is around 55% in Caracas and apparently even worse in other regions. (2) Bank loans up 92.8% in one year. (3) Expected inflation well above 125% for 2015 and consumers intending to protect themselves by adding assets (USD or any kind of asset that can be traded later at a higher price, such as cars, houses, refrigerators etc.) and financing those assets with bank loans, specially if interest rates are way below inflation. Fx: The USD is trading in the black market at USD/VEF 459.00, which is 131% above the higher official FX rate. International reserves have decreased YTD 25.77%. PDVSA is negotiating a USD 5 billion loan with Russian oil company Rosneft. In return, the company wants to increase its stake in the Petromonagas joint venture. PDVSA is looking to launch a new 17 bond in Renminbi. Venezuelan international bonds are stable.
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -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
Andbank’s System of Flow & Positioning indicators.
Previous
Current
Month
Month
0 3 9 8 2 -2,0
2 0 13 0 1 0,6
Table of Stress Assessment in Risky Assets
0
-5
-10 Overbought
+5
Area of Neutrality
Market is
Sell bias
Buy bias
+10 Market is Oversold
Reading: Andbank’s system of flow and positioning indicators for this month changes to a complete neutral level, with an aggregate score of –0 in a range of -10/+10 (even less stress than last month’s reading of -2.0). The current level suggests a lack of any stress in the equity markets. We therefore consider that a sudden, deep and sustained risk-off shift is unlikely. If a correction takes place, it should prove to be short-lived. Positioning: From the GFMS of Merrill, investors have been selling stocks, reducing risk and raising cash in the last month (cash at maximum since January). Investors not positioned for Greek “worst case”: 43% expect good resolution; 42% say default but no GREXIT; only 15% expect GREXIT. Reduction in EM, which is at historically low levels (contrarian “long”). On the other hand, contrarian shorts are discretionary, banks, Eurozone (despite Greek turmoil) and Japan, given the current weighting relative to history. Net 80% of investors expect higher short rates; just 4% think bond yields will be lower in 12 months’ time. Global inflation expectations rise to four-year highs (net 74%). Equity allocation remains above the historical average but falls to 8-month lows (net 38% OW), and relative positioning of equities vs. commodities has fallen to lowest level since Dec’ 12. US allocation improves, while Eurozone and Japan decrease marginally but remain at very high levels. Flows: We saw the largest outflows in FI for the last 2 years. Most aggressively in IG, HY and govies (developed), and to a lesser extent in EM bonds and equities. EM as a region has accumulated significant outflows in the last weeks. Important flows into US Equity; the trend has changed compared to the beginning of the year. Japanese equities remain strong and Europe has been receiving decent monies in the last few weeks, regaining momentum. FUNDAMENTAL ASSESSMENT: “HOLD” 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 (USA) 2,43% 4,86% 10,03% 10,03% 4,9% 119,45 125,3 MSCI EMU 0,52% 2,50% 4,77% 5,25% 12,8% 10,28 11,6 MSCI UK 1,68% 0,00% 6,57% 5,91% -10,0% 117,65 105,9 Spain - Ibex 35 -8,10% 5,50% 4,39% 6,50% 56,2% 500,33 781,6 Asia Pac x Japan - Factset 7,91% 8,70% 7,60% 7,98% 14,1% 19,34 22,1 Japan - Nikkei 225 10,73% 10,73% 4,87% 4,87% 10,7% 828,30 917,2 China - Factset Mkt Index 8,38% 7,54% 7,95% 8,35% 12,9% 17,47 19,7 India - Factset Mkt Index 3,80% 8,00% 7,05% 7,05% 8,0% 26,52 28,6 Mexico - IPC 5,00% 6,04% 8,79% 9,00% 8,6% 2400,00 2605,8 Brazil - 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 17,22 17,60 2.077 18,21 20,00 211 16,54 19,00 1.938 20,60 16,00 10.912 20,90 18,00 347 22,34 22,00 20.329 24,22 21,00 342 20,93 21,00 550 18,59 18,23 44.929 14,84 12,00 52.757
* Except for the fol l owi ng ma rkets : As i a Pa c x Japan, Chi na and Indi a, where EPS ha ve been reported in US$.
Upward revision
Downward revision
2015 2015 TARGET E[Perform.] PRICE % Ch Y/Y 2204 6,1% 232 9,8% 2012 3,8% 12505 14,6% 397 14,4% 20178 -0,7% 414 21,1% 601 9,3% 47503 5,7% 53220 0,9%
18
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Fixed Income Markets FIXED INCOME – CORE COUNTRIES UST 10Yr BOND: “HOLD”. Entry point above 2.25% yield. 1. Treasury yields have increased (+22bp) to 2.41% and Swap rates went up in similar fashion (+21bp) to 2.51%. Swap spread has risen to 14bp. For this spread to normalize at 30-40bp, with inflation expectations (swap rate) anchored in the 2%-2.25% area, the 10T yield should move to 1.80%. 2. The curve has become steeper (now at 172bp vs. 161 previously). With the short end in the 0.75% area, to reach the LT average spread (120bp), the 10T yield should go to 1.95%). 3. Given the “new normal” (ZIRPs globally), a good entry point in the US 10yT could be when Real Yield is at 0.75% (real yield is currently 2.41%, therefore Treasuries are cheap). EURO BENCHMARK 10Yr BOND: “SELL”. Entry point at 1.0% yield. 1. Bund yields have increased (+22bp) to 0.86% and Swap rates were up 9bps at1.66%. Swap spread has decreased and now stands at 80bp. For this spread to normalize at 30-40bp, with inflation expectations (swap rate) well anchored in the 1.5% area, the 10T yield should go to 1.15%. 2. The curve has become steeper (now at 106bp vs. 86 previously). With the short end in the -0.2%0.0% range, to reach the LT average spread (116bp), the 10T yield should move to 1.06%). 7
US D - 10 Y r GOVIE Vs SWAP
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EUR 10Y Swa p R a te (Le ft) Swa p Spre a d 10Y EU R EUR 10Y G o v bo nd Y ie ld ( Le ft)
©FactSet Research Sys tems
USD YIELD CURVE SLOPE 10/2 Yr (bps)
- 0.5
1.0
Swap Sp re ad 10 Y USD (Rig ht)
Andbank, Tullet Prebon
350
'12
3.0
Andbank, Tullet Prebon
(R ight)
©FactSet Res earch Sys tem s
EUR YIELD CURVE SLOPE 10/2 Yr (bps)
350
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(10Y Y ie ld - 2Y Y ie ld) T re ndlin e : A ve ra ge Andbank,Tullet Prebon
300
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10Y Yield - 2Y Yield Trendline: Average Andbank, Tullet Prebon
©FactSet Research Systems
©FactSet Res earch Sys tems
FIXED INCOME – EUROPEAN PERIPHERALS: “BUY” • We see the recent jumps in yields as a buy 10 Yr Govies - European Peripherals 14 14 opportunity, since we continue to bank on 12 12 further declines in yields (at the mercy of 10 10 Draghi’s QE). We expect the 10Yr yield to fall 8 8 to 1.5% in the Spanish and Italian bonds, to 1.8% in the Portuguese bond and to 1.25% in 6 6 the Irish bond. 4 4 • Greece: A deal seems close and may allow for 2 2 short-term relief. The Euro Summit did not 0 0 Jul1 Oct1 Jan1 Apr1 Jul1 Oct1 Jan1 Apr1 bring an agreement but signaled progress, though also the need for further work on the Italy Portugal Gre ece Spain Ire land Greek side. 19 Andbank, JPM Chase
©FactSet Research Systems
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Fixed Income Markets FIXED INCOME – CORPORATE BONDS: EUR CORPs: IG: HOLD. European credit has followed the sell-off in Government bonds. -10 bps potential tightening.
USD CORPs IG: SELL. We expect volatility to remain. Retail investors will continue to withdraw money from ETFs and Mutual. Liquidity risk has increased as banks have reduced their bond inventories. We like Insurance and Financials. OW BBB. Enter at 105bps spread (current at 91bps) HY: HOLD. Defaults have picked to 1.88% from 1.58% but are expected to remain below 3% in 2016. We like Media, Materials and Retail. And OW BB vs CCC. -125 bps potential tightening. 3
USD CORPORATE BOND SPREAD (ML 1-10 YR INDEX)
2 1,8
2,5
1,6 2 1,5
0
'13 Co rpo ra te s (R ight) Financia ls (Le ft)
Andbank, Merril Lynch
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EUR CORPORATE BOND SPREAD (ML 1-10 YR INDEX)
3.0
3.0
1,4 1,2
2.0
0,8 0,5
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2.5
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HY: BUY. More resilient due to its shorter duration and ample spread cushion, it ended by widening in June as the risk-off mode escalated. -33 bps potential tightening.
2.5 2.0 1.5
1.5
0,6
1.0
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Industria ls (Le ft) Utilities (Le ft)
0.5
14
C o rpo ra te s (Right) (R ight) Industria ls (Le ft) Financia ls (Le ft) Utilities (Le ft)
©FactSet Research Sys tems
Andbank, Merril Lynch
©FactSet Research Sys tems
FIXED INCOME - EMERGING MARKETS (GOVIES): “SELECTIVE BUY” CPI (y/y) Andbank's Estimate
10 Year Yield Real
2,50%
0,53%
0,53%
1,96%
Taiwan
1,50%
-0,73%
-0,73%
2,23%
Thailand
2,97%
-1,27%
-1,27%
4,24%
Malaysia
4,03%
2,09%
2,09%
1,94%
Singapore
2,60%
-0,29%
-0,29%
2,89%
Indonesia
8,23%
3,34%
5,00%
3,23%
Philippines
4,38%
1,58%
1,58%
2,80%
China
3,63%
1,23%
1,23%
2,40%
India
8,00%
5,01%
5,01%
2,99%
Turkey Russia
9,12% 10,60%
8,30% 15,78%
6,00% 13,00%
Brazil Mexico Colombia Peru
12,70% 6,11% 7,22% 6,42%
8,47% 2,88% 4,41% 3,37%
7,00% 2,88% 4,41% 3,37%
EM ASIA
S.Korea
EME
10 Year CPI (y/y) Yield Last Govies reading
LATAM
Our rule of thumb for EM bonds has been “buy” when (1) US Treasuries are cheap or at fair value and (2) real yields in EM bonds are 175bp above the real yield in UST. Is the UST cheap or at fair value? Historically, a good entry point in the 10Y UST has been when real yields are at or above 1.75%. However, given the “new normal” (ZIRPs globally), a good entry point in the US 10yT could be when the real yield is at 0.75% (today’s real yield is 2.41%, thus Treasuries are cheap). Do Real Yields in EM bonds provide sufficient 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 the UST real yield is currently 2.41%, we should buy EM bonds that have a real yield of 3.1% (see table).
Cheap valuations
3,12% -2,40% 5,70% 3,23% 2,81% 3,05%
Expensive Valuations
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Commodities • ENERGY(OIL): “SELL” Andbank’s Target range ($30-50). Fundam. Target Price : US$40. Three broad reasons are usually given for the rebound in the oil price from US$45 to US$65 and we stick with those saying that none of them is very convincing. 1. Demand for oil is said to have risen in response to falling prices. This claim seems like wishful thinking. Falling prices can support oil demand by boosting activity or by encouraging substitution of other fuels for oil, but the truth is that: Global GDP has actually been weaker than expected since last winter’s oil shock, specially in China and the US, the two biggest oil-consuming countries. The fact that global demand for oil has proved to be stronger cannot be attributed to a macroeconomic boost. A more plausible explanation is China’s decision to increase its strategic reserves (making Chinese imports soar to record levels in 1Q15, even as industrial activity has plunged). This increase in imports is a temporary factor that is going to reverse, leaving supply as the dominant force. Energy substitution is a very long-term phenomenon and it is unconceivable that such behavior could have already responded to cheaper oil. 2. Oil supply in the US is being cut and revised downwards, stirring optimism in futures markets. The US Energy Information Administration predicted that US production would fall by 160k bpd in 2016. However, an increase of 720k bpd is projected for 2015. Forecasts of weaker US supply growth are based on low prices that make shale unprofitable, but at $60 many of the wells become attractive again (specially now that rents for drilling rigs and oil industry wages have fallen steeply). Even if US production is cut, this reduction could be dwarfed by increases in Saudi’s output of 1m bpd this year and its announcement of further developments that could add another 1m bpd in 2016. Iran is likely to add 500k bpd this year and as much as 1m bpd in 2016 if sanctions are lifted. Iraq could well do the same, etc. An increase of 2m bpd in OPEC production would not require a geopolitical or geological miracle (as recently as 2012, Iran, Iraq, Libya and Nigeria were producing 2m bpd more than they did last year). All that is required would be a normalization in the political arena. 3. Oil bulls argue that prices could jump to US$100/pb if the political situation in the Middle East deteriorates. Considering the dreadful security conditions already prevailing in Iraq, Syria, Libya and Nigeria, the sanctions against Russia and Iran and the wars on the borders of Saudi Arabia, etc., how much worse could geopolitics get? Given today’s extreme turbulence in so many oil-producing countries simultaneously, significant probabilities exist of conditions improving. Even in the worst case that ISIS continues to expand, it will have to sell huge quantities of oil. A long-term bear market?: According to the experts, the oil market has shifted from monopoly price setting by OPEC to the sort of competitive pricing that prevails in other commodity markets. In normal competitive markets the price is set by the marginal cost of production of the highest-cost producers. In the case of oil these are the US frackers. Anatole Kaletsky (Gavekal) proposes that their marginal production costs seem to be US$50-US$60/bbl and are falling rapidly as drilling costs are reduced (let’s say that the marginal cost could reach US$50 in the foreseeable future). This is the main reason to expect that US$50 could be a ceiling, rather than a floor, for the price of oil in a competitive pricing system.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Commodities • GOLD: “SELL” (Target US$ 900/oz) Negative drivers: 1. Gold in real terms. Gold at constant 2009 prices is now at $1,081 (-$32 in the month and above its LT average of $700). Given our global deflator (base year 2009) at 1.08, for the price of gold in real terms to stay near its historical average, the nominal price of gold must remain near US$756. 2. Gold in terms of Oil (Gold / Oil): The ratio has fallen to 19.62 (from 19.85 previously) and remains above its LT average of 13.87. If the oil price stays at $50, the nominal price of gold must approach US$700 for this ratio to be near its LT average level. 3. Gold in terms of Equity (Gold / S&P): The ratio has moved to 0.56 (from 0.57 previously) and is near its LT average of 0.58. Given a target price for the S&P of $2,204, the nominal price of gold must approach US$1,278 for this ratio to be near its LT average level. 4. Gold in terms of Equity (Dow Jones / Gold): This ratio (inverse) has moved to 15.3 (from 15.1 previously), still below its LT average of 20.3. Given our target price for the DJI ($18,825), the price of gold must approach US$927 for this ratio to be near its LT average. 5. Positioning in Gold points to further falls: CEI 100oz Active Future non comm. contracts: longs 203k from prior 179k. Shorts 107k from 101k => Net of +95k (from +77k). (Speculators are still long.) 6. Financial liberalization in China. Higher “quotas” each month in the QFII are widening the investment alternatives for Chinese investors (historically focused on gold). Positive drivers: 1. Central Bank Activity: Every single central bank has been increasing gold stocks recently. 2. The Money Stimulus is continuing (now from the ECB and BOJ). 3. The Ban on India’s imports of gold has been lifted. Many retailers have been stockpiling, fearing that the ban on gold imports would be re-applied. 4. Amount of Gold in the world: The total value of gold in the world is circa US$6.9tn, a fairly small percentage (3.2%) of the total size of the financial cash markets (212tn). The daily volume traded in the LBMA and other gold marketplaces is around US$173bn (2.5% of the world’s gold and just 0.08% of the total in the financial markets).
40
GOLD STOCK IN CENTRAL BA NK RESERVES (% Q/Q)
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
-40
-40
-50
'12
'13 India Thailand
Sing Philip p
Andbank, National Reserv Banks
-50
'14 Japa n UK
Chile China
Russia
©FactSet Research Systems
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Currencies • EUR/USD: MT Target (1.00) The USD 3-yr Z-score rose to +0.6 on Jun 26 (from 0.3 the previous week), making the positioning of the USD the least stretched it has been since June 2014. The current Z-score is far below the extremely stretched +2.3 seen in late 2014. The EUR 3-yr Z-score of -0.4 means that speculators have scaled back their EUR shorts and is now far longer than the stretched -2.0 we saw six weeks ago. There is now a lot of room for speculators to open new short positions intensively (negative long-term view for the EUR). In the meantime, as short contracts are removed, some pull-back in the EUR is possible, but this should prove short-lived. 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) the positioning is from “normal” (the 3-yr mean). o A Z-score in the -1.0 to +1.0 range implies that positioning is not a barrier to underlying price trends. o A Z-score in the 1.0 to 1.5 range suggests increasingly stretched positioning. o A Z-score absolute value of 1.5 to 2.0 implies that the elastic band has become extremely stretched and may be on the verge of snapping back. o 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): >5% POTENTIAL APPRECIATION According to our Asian Currency Diffusion Index, these currencies are still cheap compared to the USD. Macro risks have profoundly shifted since the late 1990s as a result of mercantilist policies (less external debt and better CA balances). A recovery in sync means that Asia is ready to start a new phase of growth linked to a US recovery. Preferred: CNY, IDR, PHP, MYR, INR.
Asian Currency Diffusion Index
Diffusion Index 3mth smoothed (lhs) Asian curr Index (rhs)
1,150
0,40
STRONG BUY
0,30
1,100
Factors considered in the Asian Currency Diffusion Index: •
0,20 BUY
SELL
1,050 0,10 1,000
0,00
0,950
-0,10
• •
-0,20 0,900 -0,30
STRONG SELL 0,850
• •
-0,40
Feb-15
May-15
Nov-14
Aug-14
Feb-14
May-14
Nov-13
Aug-13
Feb-13
May-13
Nov-12
Aug-12
Feb-12
May-12
Nov-11
Aug-11
Feb-11
May-11
Nov-10
Aug-10
Feb-10
-0,50
May-10
0,800
•
S&P Vola (stability in the global system. Asian assets are the first on the auction block. Asia is very much linked to the global USD funding market. Reading >25 turns negative). Kospi Vola (Captures concerns specific to Asia. Reading > 23 is negative). RMB Trend (When appreciates less than 80 pips in 2 months turns negative. Strong Peg with RMB) JPY Trend (If depreciates >300 in 2m it turns neg.) Global Velocity (Asian ec. see an increase in demand for their products and currencies.) OECD Asian LEI (When falls in the 5 big it turns negative, CBs use exchange rate policies to counter short term dynamics)
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Principal Contributors
Alex Fusté. – Chief Global Economist – Global & Asia: Macro, Rates & Fx. +376 881 248 Giuseppe Mazzeo. – CIO Andbank US – U.S. Rates & Equity. +1 786 471 2426 Eduardo Anton. – Portf. Manager US – Credit & Quasi governments. +1 305 702 0601 J.A Cerdan. – Equity strategist Europe – European Equity. +376 874 363 Antoni Melero. – Fund Manager Europe – European Equity. +376 874 366 Renzo Nuzzachi, CFA. – Product Manager LatAm – Rates & Fx. +5982-626-2333 Jonathan Zuloaga. – Analyst, Mexico – Macro, bonds & Fx. +52 55 53772810 Albert Garrido. – Portfolio Manager Luxembourg – Volatility. +352 26 19 39 25 Luiz Secco. – Product Analyst Brazil – Equity. + 55 11 3095 7042 Gabriel Lopes. – Product Analyst Brazil – Products. +55 11 3095 7075 Andrés Davila. – Head of A. Management Panama – Venezuela. +507 2975800 Mª Angeles Fernández. – Product Manager, Europe – Macro & Rates. +34 639 30 43 61 David Tomas. – Wealth Management, Spain – Spanish Equity. +34 647 44 10 07
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JULY -15
Legal Disclaimer All notes and sections in this document have been prepared by the team of financial analysts at ANDBANK. The opinions stated herein are based on a combined assessment of studies and reports drawn up by third parties. These reports contain technical and subjective assessments of data and relevant economic and sociopolitical factors, from which ANDBANK analysts extract, evaluate and summarize the most objective information, agree on a consensual basis and produce reasonable opinions on the questions analyzed herein. The opinions and estimates contained herein are based on market events and conditions occurring up until the date of the documentâ&#x20AC;&#x2122;s publication and cannot therefore be decisive in evaluating events after the documentâ&#x20AC;&#x2122;s publication date. ANDBANK may hold views and opinions on financial assets that may differ partially or totally from the market consensus. The market indices have been selected according to those unique and exclusive criteria that ANDBANK considers to be most suitable. ANDBANK does not guarantee in any way that the forecasts and facts contained herein will be confirmed and expressly warns that past performance is no guide to future performance, that analyzed investments could be unsuitable for all investors, that investments can vary over time regarding their value and price, and that changes in the interest rate or forex rate are factors which could alter the accuracy of the opinions 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 investorâ&#x20AC;&#x2122;s risk profile, his financial expertise and experience, his financial situation, the investment time horizon and 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 denies any liability for the accuracy and completeness of the evaluations mentioned herein or for any 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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