Andbank corporate review october 2015 by Andbank

GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS

Monthly Corporate Review October 2015

“The unintended consequences of the Yuan’s liberalization”

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Contents Executive Summary ……………………………………………………………………………………………………………3 The World at a Glance

………………………………………………………………………………………………………4

Market Outlook. Summary Table of Expected Performance ………………………………………5 Tactical Asset Allocation Proposal ……………………………………………………………………………………6 Country Pages USA: Financial stability issues still weigh on the Fed …………………………………………………7 Euro zone: Flexible stance on QE points to continuing support…………………………………8 Asia: Another 2013 Taper Tantrum is fundamentally unjustified………………………………9 China: The economy shows glimmers of a cyclical upturn ………………………………………10 Japan: Has Abenomics failed? ……………………………………………………………………………………11 Latam: China and Commodities explain most of the fall in Latam …………………………12 Brazil: Brazil’s vulnerabilities brought into sharper focus after the slump………………13 Mexico: Mexico remains 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, Corporate bonds ………………………………………………………………………………19 Fixed Income, Emerging Markets ………………………………………………………………………………19 Commodities ……………………………………………………………………………………….……………………………20 Forex ……………………………………………………………………………………………………………………………………22 Appendix………………………………………………………………………………………………………………………………23

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Executive Summary The unintended consequences of the Yuan’s liberalization - The Yuan liberalization by the PBoC has caused a number of sizeable effects in financial market last summer. When an economy like China maintains a peg to the USD but interest rates are different (higher in China), an economic effect called "leads & lags" takes place, whereby importers delay payments (to benefit from higher interest rates) and exporters accelerate revenues. When the central bank of China decided to liberalize the exchange rate (as it happened in early August), importers no longer delayed payments, instead they accelerate them causing strong withdrawals of foreign reserves from the PBoC to regularize such payments abroad (just recall that reserves actually belong to the private agents). China's central bank, which in turn had those reserves deposited at the Fed (in order to make them profitable), had to undo those deposits. As liquidity in the world can be measured by the US money base plus the money base from the rest of countries (that in turn can be measured by the “external central bank deposits held at the Fed”), the regularization by Chinese importers of their pending payments, caused a sharp drop in this account in the Fed, which resulted in a sharp drop in global liquidity, leading to a scenario conducive for market downturns. The global liquidity reached a 0% rate of expansion in summer due to the Yuan’s liberalization, a situation seen only 6 times in the last 20 years. The good news is that global liquidity has always normalized in a relatively short period of time (2-3 months). We believe that once the "leads & lags" effect normalizes, the global liquidity will recover normal rates of growth (around 5% - 10% yoy), and this should prove to be enough for a normalization of financial markets. Checking our targets - In this document we have checked our targets for most indices after a thorough review of our estimates for sales, margins and multiples. We have compared our initial estimates with the actual data released by companies, and then we have made the necessary adjustments in those cases where our projections deviated substantially from the actual data. Although our forecasts for sales and margins have suffered few deviations, the cut in our price targets comes after the recent plunge in the market multiples, forcing us to adjust our estimates for PE. See the details on the appendix on page 23. USA – We forecast that the first rate hike will occur in December on the back of a more than decent job market and financial assets growing quicker than private debt (pushing up net wealth). The preconditions for a structural equity bear market are not in place (a major credit crisis or extreme overvaluations are not on the radar). Although we are cutting our year-end target for the S&P, we remain constructive for the 4Q15. Eurozone – Greece fears have been left behind. We feel comfortable with regional financial markets despite the recent turmoil. Missed targets in inflation and GDP make the realization of a Taper Tantrum unlikely. Instead, the ECB even shows greater flexibility by raising the purchase limit per ISIN. EM – Asia: Monetary Policy will remain supportive in most countries once the Fed starts to tighten. Activity in the region relaxed in 2Q15 but still remains at a healthy pace of 4%, and our outlook is constructive on the back of the falls in Fx and the impulse in real income after the fall in oil. China – We expect a stabilization first and then an acceleration of data in the following quarters. ALIBABA and BIDU indexes suggest that the slowdown in China is more modest than reported. We downplay the criticism about the accuracy of the Chinese macro figures. LatAm – The key driver behind the regional slowdown (0,7% y/y in Q1) has been a drop in revenues from commodity exports as global prices have fallen and demand in China has cooled. But it’s not all bad news. 3

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

The World at a glance 2020 estimations: Countries with an estimated Debt to GDP > 110% Sources: Oxford Economics, World Bank, Thomson Reuters

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Market Outlook â&#x20AC;&#x201C; Fundamental Expected Performance Performance Performance Current Fundamental Expected Last month YTD 30/09/2015 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 Mexic o - IPC Brazil - Bovespa

-2,6% -4,7% -3,1% -6,8% -3,1% -8,0% -5,3% 0,7% -2,5% -3,4%

-6,7% 1,3% -8,4% -7,0% -7,9% -0,4% 6,8% -1,5% -1,2% -9,9%

1.920 189 1.769 9.560 270 17.388 306 506 42.633 45.059

2100 209 1906 11000 323 19109 355 544 46078 47214

9,4% 10,4% 7,7% 15,1% 19,4% 9,9% 15,9% 7,5% 8,1% 4,8%

Fixed Income Core countries

US Treasury 10 year govie German Bund 10 year govie

1,6% 1,2%

2,7% 0,0%

2,04 0,59

2,25 0,80

0,36% -1,14%

Fixed Income Peripheral

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

1,5% 1,8% 1,7% 1,7%

-1,1% 2,5% 3,9% 1,0%

1,89 1,72 2,43 1,22

1,70 1,50 2,00 1,25

3,39% 3,44% 5,86% 1,02%

-5,7% 5,5%

-17,2% 30,4%

10,78 10,76

10,00 12,00

17,01% 0,85%

-0,1% -0,6%

0,4% -0,2%

1,42 1,39

1,30 1,25

3,20% 1,92%

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

2,2% -6,2% 0,8% 4,8% 0,1% 0,6%

5,6% -9,2% 5,6% 3,4% 2,2% 1,4%

7,89 9,81 3,29 3,80 2,84 4,34

7,25 8,50 2,50 4,00 2,50 3,50

13,01% 20,31% 9,63% 2,20% 5,52% 11,10%

Fixed Income Latam

Mexic o Mexic o Brazil Brazil -

0,5% -2,5% -18,8% -14,4%

2,5% -3,4% -26,2% -15,4%

6,06 4,08 16,75 6,53

5,90 3,50 14,50 5,50

7,34% 8,72% 34,75% 14,77%

Commodities

Oil (WTI) Gold

-8,2% -0,3%

-15,6% -6,4%

45,15 1.123

40,00 900

-11,41% -19,82%

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

-0,4% 1,0% 0,8% 0,3% -1,0% -9,3% -1,5% -1,1% -1,8%

-7,8% 0,5% 7,9% -2,5% -15,0% -49,8% -2,9% 5,0% -10,4%

1,12 119,96 134,97 6,36 16,95 3,98 0,66 0,74 89,60

1,00 130,00 130,00 6,30 16,00 4,00 0,68 0,68 95,00

-10,41% -8,37% 3,68% 0,90% 5,59% -0,45% -3,00% 7,72% 6,02%

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 Inc ome instruments, the expec ted performance refers to a 12 month period

Upward revision

Downward revision

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Monthly Tactical Global Asset Allocation Proposal Conservative

Moderate

Balanced

Growth

< 5%

5%/15%

15%/30%

30%>

Max Drawdown

Strategic Tactical (%) (%)

Asset Class

Strategic (%)

Tactical (%)

Strategic (%)

Tactical (%)

Strategic Tactical (%) (%)

Money Market

15,0

19,1

10,0

12,0

5,0

5,9

5,0

5,7

Fixed Income Short-Term

25,0

15,9

15,0

9,0

5,0

2,9

0,0

Fixed Income (L.T) OECD

30,0

31,8

20,0

15,0

14,7

5,0

4,7

US Gov & Municipals & Agencies

8,0

5,0

3,7

1,2

EU Gov & Municipals & Agencies

0,0

23,9

15,0

11,0

3,5

European Peripheral Risk Credit (OCDE)

20,0

Investment Grade USD

21,2

20,0

2,1

20,0

15,0

2,0

14,7

5,0

1,5

4,7 0,5

High Yield USD

6,4

6,0

4,4

1,4

Investment Grade EUR

2,1

2,0

1,5

0,5

10,6

10,0

7,3

2,4

High Yield EUR Fixed Income Eerging Markets

5,0

5,3

7,5

10,0

9,8

15,0

14,2

Latam Sovereign

1,3

1,9

2,4

3,5

Latam Credit

0,8

1,1

1,5

2,1

Asia Sovereign

2,1

3,0

3,9

5,7

Asia Credit

1,1

1,5

2,0

2,8

Equity OECD

5,0

6,6

20,0

25,0

32,5

39,8

50,0

59,0

US Equity

1,7

6,3

9,9

14,7

European Equity

5,0

18,8

29,8

44,2

Equity Emerging

0,0

5,0

10,0

9,8

10,0

9,4

Asian Equity

0,0

3,8

7,3

7,1

Latam Equity

0,0

1,3

2,4

Commodities

0,0

2,5

1,3

5,0

2,4

5,0

2,4

Energy

0,0

0,50

1,0

0,94

Minerals & Metals

0,0

0,00

0,0

0,00

Precious

0,0

0,63

1,2

1,18

Agriculture

0,0

0,1

0,2

REITS

0,0

2,5

0,0

5,0

0,0

Total

100

This recommended asset allocation table has been prepared by the Asset Allocation Committee (AAC), made up 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 customer profile meets the risk control requirements established by regulations.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

USA:

Financial stability issues still weigh on the Fed FED Tightening still requires reasonable confidence that inflation will trend back toward 2%, but prices have been running below the Fedâ&#x20AC;&#x2122;s 2% target since 2012. Additionally, global considerations about financial stability are weighing on the committee. We forecast that the first rate hike will occur in December on the back of decent job figures (with unemployment at NAIRU levels) and financial assets growing quicker than private debt (giving rise to a surge in net wealth). Nevertheless, doubts about the stability of financial conditions would probably push the move into 2016. Forecasts Fed first hike: December 2015 GDP FY2015: +2.5% y/y Core CPI: 1.8% (with headline inflation around 0% 10 Year Treasury yield: 2.25% Equities Outlook: We are cutting our year-end target for the S&P to 2,100, although we remain constructive for the 4Q15 for the following reasons: 1) 70% of the time following a sell-off, markets made a new high within a year. 2) The inconsistency of the recent market moves suggest panic rather than a clear and fundamental view. 3) Too much of a slowdown in growth is being priced in. Despite this, the IMF see global growth modestly accelerating from 3.8% to 4% in the next 3 years. 4) The pre-conditions for a structural equity bear market are not in place: A major credit crisis or extreme overvaluation. 5) Liquidity is consistent with well-supported markets. Corporates and Private Equity firms have fire-power to buy 14% of global market cap. 6) ZERO or near Zero interest rate policies will continue, thus, easing financial conditions. Earnings: We do not see the conditions as being in place for a large fall in US margins: 1) Wage growth needs to be above 3% y/y for margins to fall. Margins normally peak with wages growing at 3.5%. Wages are growing at a 1.9% y/y pace. Sectors: Industrials, Tech, Semis and Semis equipment, Telecom, Services, Personal products, Utilities, Banks, Software & Services. Recommended Strategy for Financial Markets Equity: NEUTRAL - UW Gov. Fixed Income: NEUTRAL High Grade: UW (BBs, Materials, Insurance) 7 HY: NEUTRAL (Media, Retailers)

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Euro zone: ECB Projections IPC

CPI

PIB real

GDP

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

Flexible stance on QE points to continuing support

2015E 0,1% 0,3% 0,0% 0,7% 1,1% 1,1% 1,3% 1,4% 1,5% 1,5% 1,0% 1,6% 1,7% 1,5%

2016E 1,1% 1,5% 1,5% 1,3% 1,4% 1,4% 1,5% 1,7% 1,9% 1,9% 1,5% 1,9% 1,8% 1,8%

2017E 1,7% 1,8% 1,8%

1,8% 2,0% 2,1%

Political front As expected, Greece fears have been left behind. Stability and the quick formation of a government will be positive for markets. Focus will now shift on reforms. The Political agenda in the rest of the region will remain busy in the coming quarter with elections being held both in Portugal (4th October) and Spain (Catalonia in September and General elections in December). Economics GDP forecasts have been revised slightly downwards in the latest ECB projections, due to the slowdown in emerging countries and a stronger euro. Inflation estimates were also cut, especially for 2016 (from 1.5% to just 1.1%) The ECB and the Markets Equities: We feel comfortable with this asset class due to 1) A missed inflation target (both in 2015 and 2016), and the cut in GDP projections, makes an extension of the QE program likely. 2) The ECB also raised the limit of purchases per ISIN from 25% to 33%, marking a more flexible stance on the QE, 3) Draghi’s wording is also conducive to more support when acknowledging that financial conditions had tightened during the last two months, and assessing this as “an undesirable outcome at this stage of the recovery”, with Draghi insisting on ECB willingness and capacity to act if necessary. 4) This more flexible stance on QE will maintain the associated scarcity of paper derived from the use of QE. Fixed Income: Additionally, a benign auction calendar (with negative net issuance adjusted by QE during the rest of the year), along with the prospects of an increasing QE should support government bonds. Credit: Both investment grade and HY spreads have widened, but the origin of recent turmoil is not generally to be found within the asset class itself. Given our global scenario, we recommend OW High Yield, while we remain Neutral in IG. Recommended Strategy for Financial Markets Equity (MSCI EMU): OW Core Gov. Fixed Income: UW Peripheral bonds OW Inv. Grade Credit: NEUTRAL 8 HY: OW

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Emerging Asia:

Another 2013 Taper Tantrum is fundamentally unjustified

3,8% 4%

Monetary Policy to remain supportive Local factors, not the actions of the US Federal Reserve, will determine the next moves by Asia’s central banks. Once the Fed starts to tighten, only Hong Kong and Singapore will have to raise rates (due to their exchange rate regimes, and the rapid buildup of debt and surge in property prices). There is little reason to think that central banks need to tighten. (1) Floating exchange rates leave these banks free to set rates as they see fit. (2) Since 2008, Asian central banks have been through their own rate cycles. In June 2004, the Fed started to tighten, Korea actually cut rates. Low inflation across the region means that central banks are unlikely to panic about currency depreciation if the Fed hikes rates. Some may even welcome some currency weakness. Economics Activity in the region relaxed to a 4% pace in the 2Q (+4.1% in Q1). Our outlook is constructive: 1) The falls in Fx will help to further develop external surpluses. 2) The big falls in the price of commodities generate a big impulse in real income. 3) We expect a stabilization first, and then an acceleration in China. 4) Loose monetary policies will be conducive to keeping credit growth stable. Investment is set to rise: After the opening of the AIIB and the OBOR initiative, China and Japan will fight even more intensively in the race to gain economic influence in the region. This will lead to an investment boom in the region. Risks: Another Taper Tantrum? The 2013 “Taper Tantrum” happened because the prospect of tapering came as a surprise to the markets. Fed hikes have been well signaled. A repeat of 1997? The bigger risk is not that the Fed starts to raise rates, but whether it tightens aggressively. The most affected would be those markets with bigger current account deficits, but all except Indonesia show big current account surpluses. Foreign currency debt is low in most countries in the region (except in Malaysia). Loan growth below the risky threshold (>30 pp of GDP within a decade), due to high real rates. Recommended Strategy for Financial Markets Equity (MSCI Asia x-Japan): OW Core Gov. Fixed Income: OW Inv. Grade Credit: OW Fx: NEUTRAL

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

China:

Key Forecasts

The economy shows glimmers of a cyclical upturn Economy We expect a stabilization first and then an acceleration of data. Temporal and disruptive factors caused the macro figures released to show a slowdown (12,000 factories closed, construction halted and restrictions on the use of vehicles, due to the WWII commemoration events, World Athletics Championships), but also due to disruptions caused by the Tianjin explosion. Loans still have room to grow. ALIBABA and BIDU indexes suggest that the slowdown in China is more modest than reported. Capital Economicsâ&#x20AC;&#x2122; activity proxy suggests that data have stabilized and could be accelerating now. Accuracy of the official data: When estimating price changes in the value-added portion of industrial output, the Statistics Bureau uses producer prices (heavily influenced by import prices). Falls in commodity prices assume that prices in the entire value-added process of the industrial output fell more than they really did, leading to an understatement of the inflation rate and thus, an overstatement of the real GDP. This methodology overstates real GDP when commodity prices fall sharply (as has happened from 2014). But it overstates inflation and understates real GDP when commodity prices grow (as in the 1999-2008 period). In the last 20 years, commodity prices have grown 2.2% per year, meaning that real GDP in China could actually be understated. The Center for Strategic and International Studies speculates that China's economy may be bigger than reported by the authorities (due to its method of calculating GDP), adding that if they use the same methodology as the US and the EU, GDP in 2014 should be revised up from $10T to $11.5T. Reforms National GDP will now be compiled on a QoQ and YoY (from YTD) basis. This will improve the precision and comparability of the data. State-owned enterprises are a major drag on Chinaâ&#x20AC;&#x2122;s economy (locking-up resources and bank credit and keeping prices highly protected). A new reform will 1) Allow mixed ownership to improve corporate governance and overcome problems of market discipline, and 2) From SASAC to SCMC to remove the government from the day-to-day management, like in Singapore. Recommended Strategy for Financial Markets Equity: NEUTRAL Fixed Income: OW Inv. Grade Credit: OW 10 Fx: NEUTRAL

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Japan:

Has Abenomics failed? Economy The government is likely to maintain its assessment of the economy in the monthly report due on 25 Sep, describing the economy to be in "a moderate recovery", but the truth is that the economy does not show signs of improvement (real GDP remains at a sluggish 0,.8% yoy and the Tankan sentiment index for manufacturers dropped to 9 in September from 17 in August to mark the largest decline in a year and projection points to further deterioration to 7. July industrial production revised to 0.8% m/m vs. 0.6% previously. BoJ The Monetary Policy Meeting concluded with the Board leaving policy unchanged as expected with a 8-1 vote. The lone dissenter was again Kuichi, who reiterated his preference to cut annual JGB buying to ¥45T. Policymakers are not inclined to expand stimulus despite subdued inflation. The sources say there is increased concern about QQE sideeffects including tighter liquidity in the JGB market. Senior BoJ officials say that QQE remains the goto option, but the central bank is not ruling out breaking away with the program given the limited success it has had in accelerating inflation since April 2013. Concerns exist that the BoJ has few options left in its toolbox and, expanding QQE when borrowing costs are at 0% raises worries that the central bank might eventually run out of sellers. Markets Japan's GPIF reduces equity holdings in Q2: The BoJ’s flow of funds data notes that Japan’s Government Pension Investment Fund sold ¥957.7B of domestic equities in Q2, marking the first decline in holdings following five quarters of purchases that totaled ¥4.5T. The figures suggest that GPIF’s domestic stock purchases are nearing an end. The Fund purchased ¥2.1T of foreign assets. The Japanese do not believe in the JPY: Investors turned to insurance policies denominated in US dollars, Australian dollars and even New Zealand dollars. Dai-ichi Front Life Insurance reported $10.3B in fixed premium, foreign-currency life-insurance products - an increase of 152%. In an industry where rock-bottom rates have discouraged people from life-insurance plans, foreign currency products offer a growth opportunity. Recommended Strategy for Financial Markets Equity: NEUTRAL Fixed Income: UW 11 Fx : UW (vs. USD)

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

LatAm:

China and Commodities explain most of the fall in Latam Economics The key driver behind the regional slowdown (0,7% y/y in Q1) has been a drop in revenues from commodity exports as 1) global prices have fallen and 2) demand in China has cooled. LatAm commodity exports peaked in 2001 (at $550bn), but they have fallen to $480bn, representing a loss of income equivalent to about 1.5% of regional GDP. Outlook Next decade: The inter-related forces of more modest growth in China and lower income from commodities mean that LatAm will grow at a slower pace over the next decade than it did over the past one. But itâ&#x20AC;&#x2122;s not all bad news. 1) The big falls in global commodity prices are probably behind us (we expect energy and agricultural prices to level out, and even some rebound in some cases). If true, then the big drop in income has already happened. 2) Additionally, many of these countries have been adjusting to the new norm, making it hard work to close current account deficits. One example is Chile, where the Current Account Balance position has continued to improve (+2 of GDP). Another country where we remain constructive is Mexico (+0.5% q/q in 2Q and consistent with a 2.2% FY15). Contraction in the mining sector was offset by growth in the service sector. While a drop in oil revenues will force Mexicoâ&#x20AC;&#x2122;s government to tighten its belt, three factors could make the economy pull through the fiscal squeeze in good shape: 1) Its particularly strong ties with the US (exports to the US account for 24% of Mexican GDP vs. 9% in Venezuela, and 5% in Brazil). 2) Inflation remains under control, meaning that monetary policy will remain loose. Rates are currently at 3%. 3) The wide-ranging reform program should start to bear fruit over the next year. Competition laws are starting to lower prices in areas such as telecoms. Auctions will open the energy sector up to much-needed private investment. Analysts estimate that this reform package could raise potential growth from 2.5% currently to as much as 4%. The drop in the currency has boosted trade volumes (+11%y/y) while there are no signs of price pressures (2.6% y/y)

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Brazil:

Brazil’s vulnerabilities brought into sharper focus after the slump in financial markets Policy & Reforms While the near-term outlook is pretty grim, there are some glimmers of hope on the horizon. The trigger for the slump in Brazil’s economy and local assets: 1) The intense fall in commodity prices, but also 2) the lax policy and overspending, and 3) the lack of an economic agenda. Outlook For the next year, the outlook is pretty dire. Weaker terms of trade, domestic spending under pressure, business investment contracting, etc… The best that can be expected is something approximating stagnation. Could a weaker BRL help the economy? It will provide a boost to exporters (as we are already seeing), but this won’t be sufficient to compensate other domestic factors in the short run. Glimmers of hope 1. The recent focus is on the threat of a hard landing in China, but we think that these fears are overdone. We expect a stabilization first, and then an acceleration in activity in China. 2. The big falls in global commodity prices are probably behind us. 3. Brazil’s private credit bubble seems to be deflating gradually, without causing too much pain in the banking sector. 4. Net debt, although still growing, remains at a reassuring level (see chart 1). 5. External debt amounts to $346bn, and the Fx reserves are 368bn, resulting in a healthy Coverage Ratio. (see chart 2) 6. A weak Real is part of the solution (rather than a problem) since it is helping to close the current account deficit (see chart 3), and balance sheets in Brazil are now better insulated from currency swings. 7. Inflation is near 0% on a MoM basis, meaning that we are near to seeing reductions in the YoY readings. Risks (that could cause a 2nd year of recession) 1. The bigger risks stem from Brazil’s gaping budget deficit. If the Planalto fails to unlock the political deadlock, this risk will materialize. 2. A big and disorderly fall in BRL continues, and could trigger a sharper rise in losses of companies with debt in USD. Recommended Strategy for Financial Markets Equity: NEUTRAL Fixed Income (Loc): OW Fixed Income (USD): OW Fx: NEUTRAL

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Mexico:

Mexico remains well positioned to face turbulence risk Economics The IGAE Activity Index grew by 0.1% m/m in July (vs. 0.4% in June), and growth slowed to 2.0% y/y, down from 3.2% y/y in June. Both the industrial and services sectors weakened. This suggests that Q3 could be weaker than Q2’s lackluster expansion of 2.2% y/y. Expectations are still for 2.5% growth in 2015, but risks are building. Better news from the inflation front. Inflation fell to 2.5% y/y in 1H of September. This will help to keep a loose monetary policy (that is supportive for private activity). Reforms Hacienda sent its Economic budget for 2016 to Congress (Zero-base budget). The proposal focussed on 1) a cut in expenditure. 2) There aren’t going to be any new or increased taxes. At the end of the month the second bidding process for hydrocarbons (Round 1.2) is going to take place. Energy and finance authorities changed the contract framework to guarantee a better private sector participation. Policy & Markets Equity: Positive corporate results in 2Q15. Sales +7.4% y/y. Net profit +3,8%. Positive figures on the back of a more favorable dynamics in domestic consumption (that we believe will remain strong as suggested by recent data from remittances). Although we expect continued volatility in EM, we believe that Mexico is well positioned to face the risk of turbulence from a possible reversal of flows, since the country has solid fundamentals. Our last IPC goal for 2015 of 47,500 became the upper range of our estimates. We are now reviewing this target to the lower band of our range and we consider the index could reach the 46,000 mark at year end. Fx: Mexico’s currency has been falling to record levels vs. the dollar. Target at 16.5 at year-end. Bonds: The trading range for the 10yr Gov bond is between 5.95%-6.20%. We think that the Mexican central bank wishes to keep the spread range between MBonos and UST at current levels to avoid a disorderly outflow of capital from Mexican financial markets. Targets: 10yr Gov bond yield 5.9% in local currency. And 3.5% in USD. Recommended Strategy for Financial Markets Equity: NEUTRAL Fixed Income (Loc): OW Fixed Income (USD): OW 14 Fx: OW

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Others: LatAm & EMEA Argentina – Caution in the Bond Market. Neutral in Equities •

•

• •

•

Activity: Q2 Real GDP growth +2.3% YoY, mainly driven by public spending (+10.3%) with private consumption flat (+0.7%) and capital formation (+4.6%). Private estimations show no growth for the same period. Expected: FY15 real GDP at 0%. Fiscal & Monetary policy: Money printing still aimed at financing fiscal needs (a recourse exacerbated in 2014: Debt issuance of 80bn ARS, and new Money Base of 70bn ARS. In 2015, the ratio is ARS 160bn in debt issuance, against 80bn in new money base. Inflation: Offitial figures decelerate to 14% yoy (from 23,9% in 2014). Congress estimations for CPI (opposition lawmakers projections based on private estimations) stand at 27% yoy (from 38% in 2014). Fx: Offitial at 9,39. Blue at 15. Target at year end (official) at 10,00. The Central Bank accelerated pace of depreciation. External imbalances & Reserves: • Current Account balance continues to deteriorate (currently at -1% of GDP). • Fx Reserves keep its recent upward trend (now at US$ 28,4bn). Net Fx reserves stand now at 9.6bln. (Net reserves = Gross Reserves – BCRA´s FX liabilities -deposits of private banks in BCRA (8.2), ccy swap with China (9.1), Lebacs and Cedins issued (2.4) and PDI Exchange Bonds (2.1). External debt (public & private) at US$145bn. • Oct 3 Argentina must make final payment of Boden 15 and Provincia de Buenos Aires 15 for a total of aprox USD6.6bln. If there is no issue to finance this, China swap will represent aprox 40% of gross reserves. There are some rumors that Argentina could offer a new 2020 to finance this maturity. Politics: As per primaries held August 9th: FPV (Scioli) leads with 38.4% of the Votes, Cambiemos (Macri) with 30.1% and UNA (Massa) with 20.6%. Spread Scioli-Macri 8.4%. First round victory with this figures will not happen, but is not so far. For a win in 1st round Scioli needs 45% or 40% with 10% spread vs the second candidate. “Cambiemos” candidate steps down forced by corruption allegations. Last week events increase chances of a 1st round victory of Scioli. There is a consensus in the market that regardless the candidate that wins there will be a shift in the economic policies (capital controls, holdouts, fiscal deficit, inflation, economic growth). Financial Markets: Argentina bonds were great outperformers in the EM space with positive returns in August and September so far. This could be explained by: (1) Some positive comments from international investors about the future economic policies Argentina could attempt. (2) Relief in NY Courts, as Griesa was denied by the Appeals Court to pass-though his ruling on current applicants into mee toos. Appeals Court demands case by case analysis. (4) No news about Bonar 24 possible blocking. Strategy: We recommend caution at current bond prices. Argy debt has strongly outperformed its peers recently. In order to play Argentina high yields we prefer the New YPF 25 Bond YPFDAR 8 ½ 07/28/25 @ 95.5 YTM: 9.19%. With this issue you have good liquidity, elevated yield and no legal risk (risk judge Griesa can not freeze payments). Equity ADRs HOLD: Favor lagers as YPF. Big volatility expected for the coming months.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Others: LatAm & EMEA Russia - Monthly News Flow: (4 negatives, 4 neutral, 12 positives) Andbank’s Assessment for Russian Assets: A MORE CONSTRUCTIVE ENVIRONMENT? The tensions between the West and Russia in relation to the conflict in Ukraine have relaxed markedly since the new cease-fire in East Ukraine started on 1 Sept. Additionally, the involvement of Russia in the Syrian conflict (backing the Al-Assad regime in its fight against ISIS) is viewed by some as a means that could fix that conflict, something that the EU could see favorably as long as it can alleviate the exodus of refugees. All this seems conducive to stability in Russian assets. Russia (information is displayed according to its date of publication, the most recent first) (=)Russia has deployed combat aircraft in Syria, according to US officials (not just drone surveillance missions as initially suggested). US and regional officials eyeing a series of contacts in recent months between Russia and Iran over the defense of Assad regime in Syria. Russia’s Putin says that Russian action in Middle East will always be responsible - @WSJ breakingnews (=)Russian Foreign Ministry says Moscow is not supporting Assad regime but trying to safeguard Syrian statehood - @Reuters (=) Kremlin calls on Washington to start dialogue on solving Syrian conflict. Peskov says no agreement on Putin-Obama meeting yet - Interfax (-) Russian embassy in Damascus comes under fire, foreign ministry says - @tassagency (=) Greece and Iran have granted Russia right to use their airspace for Syria flights. Bulgaria refused to. The US asks Greece to deny permission to use its airspace - @Reuters (+)Kremlin: Russian, Egyptian presidents to hold negotiations in Moscow on Aug. 26 – Interfax (+)Russian source confirms S-300 missiles to be delivered to Iran this year - @Jerusaelm_Post (+) White House spokesperson says any efforts by Russia “geared toward doubling-down on their relationship for Assad regime would be counter-productive, but their support for coalition fighting Islamic State is welcome” (+) Defense Secretary Ash Carter had 'constructive' talk with Russia's 'deconfliction' of Syria. Russia has proposed military-to-military talks with US on Syria - @CNBCnow (+) Israeli PM Benjamin Netanyahu says he has agreed with Russian President Putin to set up means of coordinating Israeli and Russian forces on Syria - @Reuters (+)Russia considering military assistance to Afghanistan, including delivery of helicopters, special representative of President Putin says - Interfax

Other Nations (-) German government spokesman says it's 'regrettable' that Russia has not distanced itself from east Ukraine election plans - @Reuters (+) Germany says 'significant progress' has been made towards resolution of conflict between Ukraine and Russia. A new ceasefire has held for more than 10 days (from Sept 1) @Reuters (+)NATO Secretary-General Stoltenberg says it appears the Ukraine ceasefire is being more respected than it has been in some time - @Reuters (+) MPs gave initial backing to reforms for more autonomy in the rebel-held east. The reforms are part of a peace plan to end fighting in eastern Ukraine. - BBCBreaking (+)Russia's Putin and Ukrainian President Poroshenko will meet with French, German leaders in Paris in October to discuss the Ukrainian conflict - @Reuters (+) Russian foreign ministry says it has received no indications from Brussels that the EU is prepared for gradual lifting of sanctions – Interfax. (-) USA is developing new war plans to counter Russian aggression in the Baltics@ForeignPolicy. (-) Security group links Russian hackers to state-sponsored attacks on Western and US targets @ZDNet (+) Chinese Foreign Minister Wang Yi said the multilateral talks involving China, USA, Russia, Japan, South Korea and North Korea are still the best way to address the nuclear issue on the Korean Peninsula. abcNEWS

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Equity Markets SHORT-TERM ASSESSMENT. RISK-OFF PROBABILITY: LOW

Andbank's Global Equity Market Composite Indicator (Breakdown)

Buy signals Positive Bias Neutral Negative Bias Sell signals FINAL VALUATION

Current

Month

2 0 12 0 2 0,0

7 5 8 1 1 3,6

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

-5

-10 Market is Overbought

Area of Neutrality Sell bias

Buy bias

+10 Market is Oversold

Reading: The current score of our Andbank’s GEM composite indicator shifts to 3.6 in a +10/-10 range (from 0.0 prior). While the current level suggests an absence of stress in the equity markets, both flows, positioning and liquidity indicators suggest that equity indices could be oversold at current prices. We therefore consider that 1) The market IS NOT EXPENSIVE, and 2) A continuation of the Risk-off shift in the equity markets is unlikely. If a correction in the indices continues, the market would be heavily oversold.

FUNDAMENTAL ASSESSMENT: “NEUTRAL” 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% 4,00% 10,03% 9,42% -2,3% 119,45 116,7 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% 3,90% 4,39% 6,19% 46,6% 500,33 733,3 Asia Pac x Japan - Factset 7,91% 6,00% 7,60% 7,98% 11,3% 19,34 21,5 Japan - Nikkei 225 10,73% 7,00% 4,87% 5,00% 9,9% 828,30 909,9 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% 8,73% 5,3% 2400,00 2527,6 Brazil - Bovespa 6,96% 6,00% 7,04% 7,00% 5,4% 3733,00 3934,5

2014 2015 INDEX PE ltm E [PE ltm] CURRENT PRICE 18,20 18,00 1.920 18,21 18,00 189 16,54 18,00 1.769 20,60 15,00 9.560 20,90 15,00 270 22,50 21,00 17.388 24,22 18,00 306 21,70 19,00 506 18,59 18,23 42.633 14,84 12,00 45.059

2015 2015 TARGET E[Perform.] PRICE % Ch Y/Y 2100 9,4% 209 10,4% 1906 7,7% 11000 15,1% 323 19,4% 19109 9,9% 355 15,9% 544 7,5% 46078 8,1% 47214 4,8%

* 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

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Fixed Income – Core Country Bonds:

MIXED

UST 10Yr BOND: “OW”. Entry point above 2.25% yield. 1. Swap Spread: Swap rates fell (from 2.39% to 2.16%), and 10yr Treasury yields fell (from 2.27% to 2.19%). Swap spread fell to -3bp, thus, to normalize towards the 20bp area, with inflation expectations (swap rate) anchored in the 2%-2.25% area, the 10T yield should move to 1.92%. 2. Slope: The entire yield curve has flattened again (from 157bp to 148bp). With the short end stable in the 0.75% area, to reach the 10yr average slope (157bp), the 10T yield should go to 2.3%. 3. Given the “new normal” (ZIRPs globally), a good entry point in the US 10yT could be when Real Yield is at 0.75%-1% (real yield is currently 2.16%). Therefore, Treasuries are cheap.

EURO BENCHMARK 10Yr BOND: “UW”. Entry point at 1.0% yield. 1. Swap Spread: Swap rates fell to 1.014%, and Bund yield fell (from 0.7% to 0.65%). Swap spread remains at 0.36%. For the Swap spread to normalize towards the 30-40bp area, with inflation expectations (swap rate) anchored in the 1%-1.5% area, the Bund yield should move towards 0.9%. 2. Slope: The entire yield curve has flattened again (from 93bp to 88bp). With the short end stable in the 0.00% area, to reach the 10yr average slope (112bp), the Bund yield should go to 1.1%.

Fixed Income – Peripheral Bonds: •

•

Greece fears have been left behind. Inflation estimates for the region have been revised downwards, especially for 2016 (from 1.5% to just 1.1%). Missed inflation targets, and the reduction in GDP projections, makes an extension of the QE program likely. Draghi’s wording is also conducive to more support when acknowledging that financial conditions had tightened. This more flexible stance on QE will maintain the associated scarcity of paper derived from QE. Additionally, a benign auction calendar (with negative net issuance adjusted by QE during the rest of the year) should be supportive for these government bonds. 18

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Fixed Income – Corporate Bonds USD CREDIT

EUR CREDIT

IG: UW (preferred: Materials, Media & Insurance) High Grade Credit has been unchanged but with increasing volatility, which could continue. The uncertainty about the Fed will weigh. Issuance has been active, on expectations of a rate hike in September. Now with the decision delayed, the primary market will continue active. However, US Corporates starting to issue in EUR and seasonal trends also suggest less supply after June. Dealer inventories were drastically reduced (higher liquidity risk) on expectations of a FED lift up). Outflows have continued in Sept. (building cash positions ahead of the Fed decision). Potential: -15bp HY: NEUTRAL (Preferred: Materials, Retail, BBs) September has been a difficult month for High Yield as the Energy sector lagged given the drop in Energy Prices and the recent downgrade (two notches) from Moody’s to the telecommunication sector. Potential: -100bp

IG: NEUTRAL Credit has performed negatively since the last Committee (more evident in HY). When broken down into sectors, cyclicals and materials are on the negative side, with defensive names (utilities) and financials proving more resilient. Headwinds for spreads will probably remain but, for now, their origin is mostly found not within the asset class itself, but from a Risk-off shift. Credit new issues have picked up since the beginning of September, particularly ahead of the FED meeting, after having remained far below their annual trend for months. New issuance should increase given the substantial backlog of supply. Potential: -15bp HY: OW (-50bp potential) Underperformance has been more evident within the HY space despite shorter durations and higher coupons. HY has suffered from the risk-off mode witnessed. Potential: -50bp

FIXED INCOME - EMERGING MARKETS (GOVIES): “SELECTIVE BUY” CPI (y/y) Andbank's Estimate

10 Year Yield Real

2,13%

0,70%

1,43%

Taiwan

1,13%

-0,45%

1,58%

Thailand

2,81%

-1,19%

4,00%

Malaysia

4,35%

3,08%

1,27%

Singapore

2,70%

-0,83%

3,54%

Indonesia

9,55%

4,14%

5,00%

4,55%

Philippines

3,74%

0,64%

3,10%

China

3,35%

1,96%

1,40%

India

7,93%

3,66%

4,27%

Turkey Russia

10,54% 10,77%

7,07% 15,77%

6,00% 13,00%

4,54% -2,23%

Brazil Mexico Colombia Peru

15,75% 6,07% 8,32% 7,62%

9,53% 2,59% 4,74% 4,04%

7,00% 2,59% 4,74% 4,04%

8,75% 3,48% 3,58% 3,57%

EM ASIA

S.Korea

EME

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

LATAM

Our rule of thumb for EM bonds so far 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%-1% (today’s real yield is 2.16%). Thus, Treasuries are cheap. Do Real Yields in EM bonds provide sufficient spread? Given the “new normal” (ZIRP), a good entry point in EM bonds could be when EM real yields are 75-100bp above the real yield in the UST. Since the UST real yield is currently 2.16%, we should buy EM bonds that have a real yield of 3.03% (see table).

Cheap valuations

Expensive Valuations

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Commodities ENERGY (OIL): “HOLD”. Fundamental Target range ($30-50). Iran will be able to ramp up its crude output from the current 2.8mn barrels daily to the 3.6mbd it produced until the latest tightening of sanctions in 2012, and ultimately to its peak production of 6mbd attained in the 1970s, when Iran’s oil industry enjoyed the benefits of Western technology, know-how and finance. More importantly, the advances in production technology since the 1970s suggest that “Iran should be quite capable of producing more oil in the long run than it did 40 years ago”. Given that Iran has the fourth largest proven oil reserves and that those reserves are geographically as accessible as Saudi Arabia’s, restoring (or exceeding) 1970 production levels seems a very modest long-term objective, according to some sources. Short-term Outlook 1. In order to make room in the market for all this extra oil, Iran must compete fiercely not only with the burgeoning production from Saudi Arabia, Kurdistan (both producers pumping at record rates), Libya and Nigeria, but also with the Iraqi production capacity (which keeps improving, according to the EIA). 2. The price war among OPEC producers, which adds to the war between OPEC and US shale oil, is bound to intensify as Iran rejoins the global economy. This will keep the oil price at very moderate levels, hovering around $50 per barrel. Long-term Outlook 1. If Iran reaches its 1970 production level in the mid to long-term, Iran will add about as much to global oil output in the second half of this decade as the US shale revolution did in the first half. 2. The oil market has definitely shifted from monopoly price setting by OPEC to competitive pricing, and in normal competitive markets the price is set by the marginal cost of production of the highest cost producers (in this case, the US frackers, whose marginal costs seem to be in the region of $50-$60 per barrel but are falling rapidly as the cost of drilling falls). 3. If the marginal cost is set at around $50, we could expect this level to be a ceiling rather than a floor for the price of oil in a competitive pricing system. 4. Therefore, in this new and competitive oil market, oil prices will fluctuate between a ceiling (determined by the break-even point of the high-cost swing producers, i.e. US frackers and Canadian tar sands) and a floor (determined by the lowest-cost producers among the Middle East OPEC members, Azerbaijan, Kurdistan, Russia, etc.). 5. I share the view of some old rockers in the sector, according to which the oil market is reentering a competitive pricing period similar to 1986-2004, where $50 per barrel could perfectly well be a ceiling. 6. Some still believe that OPEC countries (or Saudi Arabia) can set oil prices at whatever level they wish (as they did during the “monopoly periods” of 1974-85 and 2005-14). In a world where oil demand is constrained by advances in non-fossil fuel technologies and oil supplies keep expanding as a result of new production techniques, such monopoly power is now a mirage. 7. Energy substitution (higher demand for oil at current cheap prices) is a very long-term phenomenon and it is inconceivable that such behavior could have already responded to cheaper oil. 8. Optimism based on possible cuts in oil supply in the US (shale) is not well founded. The US Energy Information Administration predicted that US production would fall by 160k bpd in 2016 (due to cuts in investment), but a global increase of 720k bpd is projected for 2015. Even if US production is cut, this reduction could be dwarfed by increases in Saudi’s output of 1m bpd this year, its announcement of further developments that could add another 1m bpd in 2016, or the additional 1-3m bpd that Iran is likely to add.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Commodities GOLD: “SELL” (Target US$ 900/oz) Negative drivers: 1. Gold in real terms. Gold at constant 2009 prices is now at $1,025 (from $1,014 in the prior month and still 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 increased to 25,02 (from 22.65 previously) and remains above its LT average of 13.9. 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 the DJI (Dow Jones / Gold): This ratio (inverse) has moved to 14,27 (from 16,1 previously), still below its LT average of 20.3. Given our target price for the DJI ($17,800), the price of gold must approach US$900 for this ratio to be near its LT average. 4. Gold in terms of the S&P (Gold / S&P): The ratio has moved to 0.60 (from 0.52 previously) and is now near its LT average of 0.58. Given a target price for the S&P of $2,100, the nominal price of gold must approach US$1,218 for this ratio to be near its LT average level. 5. Positioning in Gold points to further falls: CEI 100oz Active Future non comm. contracts: longs 182k from prior 191k. Shorts 121k from 143k => Net of +61k (from +48k). (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). 7. Central Bank Activity: Central banks are gradually cutting their stocks of gold after 7 years of heavy build up of stocks (see the chart below). 8. The Money Stimulus is continuing from the ECB and BOJ, but not from the Fed (just recall that the Price of Gold is in USD). This points to the following dynamics: Gold stable or downward in terms of USD. Gold price in an upward trend in terms of EUR and JPY. Which means that the USD must rise vs. the EUR and the JPY. Positive drivers: 1. 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).

100

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

100

-20 -40

-20 '06

'07

'08

India Thailand

'09 Sing Philipp

Andbank, National Reserve Banks

'10

'11

Japan UK

'12 C hile C hina

'13

'14

'15

-40

Russia

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Currencies • EUR/USD: MT Target (1.00 – 1.05) This week speculators remained virtually static in their future operations at this exchange rate. They dumped some marginally short positions (passing from US$ -11.8bn contracts to US$-11.26bn), on the back of a hesitant Fed (which caused investors to cut some USD, increasing exposure in the rest). Today, net short positions show a 3y Z-score of -0.16 SD below their 1Y average, being even less short than in the previous week, when investors were at -0.27SD. This remains one of the least short positions seen in the last year, and puts the market almost into a neutral position today. If the pattern of investors remains unchanged (being structurally short in the US) on the back of a difference in the momentum of the monetary cycle in the ECB in the coming quarters, or because the markets stabilize and that makes the Fed feel more comfortable, normalizing rates in 2015, then we have all the free space to build new short positions in the EUR (bearish view against the USD).

• JPY/USD: MT Target (130) • JPY/EUR: MT Target (130) • GBP/USD: MT Target (0.68) • GBP/EUR: MT Target (0.68) • EM Fx / USD: NEUTRAL-BEARISH Speculators have continued to buy emerging currency this week (a process that timidly began last week) as evidenced by the fact that net contracts are valued at about US$ -0.59bn (much higher than the US$ -1.82bn seen last week). We said then that the macro factors (global liquidity growing at 0%) made us think that the drop in these currencies should be close to an end. Viewing the current level of stress in Z-score, at -0.63SD (vs. -1.0SD previously), we would say that we are now at the top of the range; which means that speculators have been much shorter in the last 12 months, but after sharp falls in the value of these currencies they seem more receptive now. Perhaps it is too early to announce a change in the pattern of investors seen over the past year, but when this happens (and it will happen when fears about the effects of a Fed tightening are neutralized, either because EM companies have managed to fix risks in their USD debts, or carry trades have been settled, etc.), then we can say that there is more space to build long positions in these currencies. Today, it is still too early.

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-15

Appendix â&#x20AC;&#x201C; Checking our price targets Date oct-15

Asset Equity

Index S&P MSCI EMU MSCI UK IBEX MSCI ASIA Nikkei MSCI China MSCI India Mexico IPC Ibovespa

Revised Figures Target from 2204 a 2100. Cut in Sales from 4,8% to 4% y/y // Cut Margins from 10% to 9,4% Target from 232 to 209. Cut PE from 20 to 18 Target from 2012 to 1906. Cut PE from 19 to 18 Target from 12,500 to 11,000. Cut PE from 16 to 15 // Cut Sales from 5,5% to 3,9% y/y // Cut Margins from 6,5% to 6,19% Target from 397 to 323. Cut PE from 18 to 15 // Cut Sales from 8,7% to 6% y/y Target from 20,019 to 19109. Cut PE from 22 to 21 Target from 441 to 355. Cut PE from 21 to 18 Target from 601 to 544. Cut PE from 21 to 19 Target from 47,500 to 46,078. Cut Margins from 9% to 8,7% Target from 53,220 a 47,214. Cut Sales from 8% to 6% y/y // Cut Margins from 7,7% to 7%

Bonds

German Bund Spanish Bono Portugal bond Turkey bond Indonesia bond Mexico Bond (USD) Brazil Bond (USD)

From 1% a 0,8% (Currently at 0,6%, will not reach the 1% in 2015) // More QE at sight From 1,5% to 1,7% (Catalonia, and unstability in Latam affects Spanish companies) From 1,8% to 2% (Currently at 2,5%, will not reach the 1,8% in 2015) // More QE at sight From 8% to 10% (elections after the AKP failded to form a coalition, and the crisis with the PKK) From 7% to 8,5% (afected by China) In USD from 3% to 3,5% In USD from 4% to 5,5% (current at 6,55%) // In local from 12 to 14,5% (current at 16,8)

Yuan MXN BRL Asian Fx

From 6,1 to 6,3 From 15,4 to 16 From 3,3 to 4 From 105 to 95

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-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 Renzo Nuzzachi, CFA. – Product Manager LatAm – Rates & Fx. +5982-626-2333 Jonathan Zuloaga. – Analyst, Mexico – Macro, bonds & Fx. +52 55 53772810 Albert Garrido. – Portfolio Manager Andorra – European Equity. +376 874 363 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 Andrés Pomar. – Portfolio Manager Luxembourg – Volatility. +352 26 19 39 25

ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW OCTOBER-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 expressed herein. This document cannot be considered in any way as a selling proposition or offer of the products or financial assets mentioned herein, and all the information included is provided for illustrative purposes only and cannot be considered as the only factor in the decision to make a certain investment. 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 disclaims any liability for the accuracy and completeness of the evaluations mentioned herein or for any mistakes or omissions which might occur during the publishing process 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 made based on information contained herein. The information and opinions contained herein are subject to change without notice.