GLOBAL. ECONOMY & FINANCIAL MARKETS
December 2014
STRATEGIC VIEW 2015 Trees should let you see the forest. … … … … …
Are you sure about betting against the US Treasury? or do you think the German Bund offers no value? Still negative in the EUR? Maybe you think that commodities are now cheap? Confident that Western Equity markets will deliver strong returns?
1
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Summary - Deflationary Bust or Deflationary Boom? Economic & Financial Market Outlook Deflation is not temporary. The capitalist world is returning to its deflationaryDECEMBER roots -14 (3.3% World CPI in 2014, vs. the 20y moving average of 6%). (See Chart 1). Deflation will persist (2.5% average in the next decade): Banking multipliers still falling in the West. The ability to incorporate robotics is unprecedented. Investments in mining and energy have placed overcapacity at historical records. The progressive internationalization of the Renminbi is enabling poor countries in the ASEAN to industrialize (cheap Chinese credit). So, a Deflationary Bust or a Deflationary Boom? In our view, we are going to have to deal with a deflationary boom during the next decade. (1) The prerequisites for the development of a deflationary bust are not given today (Deflation + Margins below cost of capital + Massive real debt). (2) In the West the service sector accounts for 60-80% of GDP and most companies are selling elastic products. (3) In a Deflationary Bust, equity returns typically do not exceed the cost of capital. This has been the case in just 3 years out of the last 10 years (See chart 2). In the US, the Fed’s decision to end QE does not mean it has grown more hawkish. The step is seen by many as a quid pro quo to bring the FOMC’s dissident hawks into line (a critical aspect in the post-Tapering era). Will the Eurozone take the long awaited unconventional measures? The Governing Council remains unanimous in the use of unconventional measures but differences will persist on the timing of the measures. (the notion of “extreme circumstances” plays a key role). This makes it hard for these measures to be displayed as the market craves. Emerging Asia looks resilient in terms of its fundamentals. Also resilient to a strong USD and weak commodities. A recovery in sync makes Asia ready to start a new growth phase linked to a US recovery. Fixed Income Markets: Deflationary forces still make Fixed Income instruments attractive. Preferred vehicles in the EM world (The west is expensive). Buy government bonds in Turkey, Mexico, Brazil, India and China. Hold the US T-bond. Reduce peripheral bonds. Equity Markets: Expansionary volumes give the Equity markets the potential to increase in price. Preferred: Mexico, China, Asia Pac x Japan and Spain. Avoid UK, Brazil. Commodities: Be careful with commodities (precious metals, industrials and mining). DEFLATIONARY BOOM OR DEFLATIONARY BUST Avoid- markets whose budget depend much on80the price of commodities (CARBS). WORLD CONSUMER PRICE INDEX 80
20
20
PROJECTION 15
15
10
10
60
60
40
40
20
20
0
5 0
5
'96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24
0
(MOV 1Y , % 1YR) Consumer Price Index - World Trendline: 10 Y ear Moving Average Andbank, Oxford Economics
©FactSet Research Syst ems
0
-20
-20
-40
-40
-60
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-60
(% 1YR) MSCI AC World - Price Index Cost of Capital (Proxy: US Treasury 20 Year - Yield) Andbank, Federal Reserve System, MSCI
©FactSet Research Systems
2
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Contents DECEMBER -14
Executive Summary ……………………………………………………………………………………………………………2 The World at a Glance ………………………………………………………………………………………………………4 Market Outlook. Summary Table of Expected Performance
……………………………………5
Asset Allocation Proposal …………………………………………………………………………………………………6 Country Pages
……………………………………………………………………………………………………………………7
USA: “Walking without the QE crutch” ………………………………………………………………………7 Euro zone: “No recession in 2015”………………………………………………………………………………8 UK: “intractable problems lurk” …………………………………………………………………………………9 Asia: “Structurally bullish view on the mid-term outlook” ………………………………………10 China: “Towards 7%. The focus is on getting risks under control”
……………………11
India: “The new narrative makes sense” …………………………………………………………………12 Japan: “Violin Concerto Op77-II Andante Kuroda’s Philharmoniker” ……………………13 Mexico: “Despite everything, we maintain a constructive view” …………………………………………………14 Brazil: “Poised towards further deterioration” …………………………………………………………15 Equity Markets …………………………………………………………………………………………………………………16 Short Term Assessment
…………………………………………………………………………………………16
Fundamental Assessment …………………………………………………………………………………………16 Fixed Income Markets ……………………………………………………………………………………………………17 Fixed Income, Core Countries …………………………………………………………………………………17 Fixed Income, European Peripherals ………………………………………………………………………17 Fixed Income, Emerging Markets ……………………………………………………………………………18 Fixed Income, Corporate bonds ………………………………………………………………………………18 Commodities ………………………………………………………………………………….…………………………………19 Forex …………………………………………………………………………………………………………………………………21
3
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
The World at a glance – Current GDP rate (%y/y) 0.0
North America
DECEMBER -14
1.3
Latin America
2.6 3.9
EU28
5.2
Asia
6.5 7.8
4
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Market Outlook – Fundamental Expected Performance Indices
Current 25/11/2014
Fundamental Target
Expected Performance
Equity
S&P 500 (USA) Euro zone - Factset Market Index United Kingdom - Factset Mkt Index Spain - Ibex 35 Asia Pac x Japan - Factset Mkt Index Japan - Nikkei 225 China - Factset Market Index India - Factset Market Index Mexico - IPC Brazil - Bovespa
2,069 127 130 10,642 292 17,358 238 552 44,621 55,406
2,138 132.6 130.5 11,549 330 18,681 270 563 49,725 53,220
3.32% 4.06% 0.77% 8.52% 13.25% 7.62% 13.25% 1.89% 11.44% -3.95%
Fixed Income Core countries
US Treasury 10 year govie German Bund 10 year govie
2.31 0.74
2.38 1.25
1.77% -3.38%
Fixed Income Peripheral
Spain - 10 year Government bond Italy - 10 year Government bond Portugal - 10 year Government bond Ireland - 10 year Government bond Greece - 10 year Government bond
1.97 2.15 2.95 1.47 7.80
2.50 2.50 3.50 2.00 7.50
-2.26% -0.63% -1.46% -2.76% 10.21%
Fixed Income Turkey - 10 year Government bond EM Europe (Loc) Russia - 10 year Government bond
8.14 9.93
7.84 9.93
10.54% 9.93%
Fixed Income IG & HY (Swap spread)
Investment Grade USD Investment Grade EUR
0.86 1.05
0.70 0.80
3.07% 1.92%
Fixed Income Asia (Local)
India - 10 year Government bond Indonesia - 10 year Gov bond China - 10 year Gov bond Philippines - 10 year Gov bond Thailand - 10 year Gov bond Malaysia - 10 year Gov bond
8.16 7.68 3.54 3.76 2.99 3.88
7.66 7.18 2.94 3.76 2.69 3.88
12.16% 11.68% 8.34% 3.76% 5.39% 3.88%
Fixed Income Latam (Local)
Mexico - 10 year Gov bond Brazil - 10 year Gov bond
5.85 12.06
5.73 12.50
6.81% 8.58%
Commodities
CRY Oil (WTI) Gold
267 75.78 1,196
251 95 900
-6.06% 25.36% -24.75%
Fx
EUR/USD JPY/USD JPY/EUR CNY/USD MXN/USD BRL/USD GBP/USD GBP/EUR ASEAN Currency Basket
1.2436 118.09 148.16 6.1417 13.63 2.5439 0.6370 0.7923
1.30 123.08 160.00 5.90 13.25 2.80 0.63 0.82
4.53% -4.22% -7.99% 3.94% 2.80% -10.07% 0.99% -3.50% 10.00%
Asset Class
DECEMBER -14
5
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Monthly Global Asset Allocation Proposal As an illustration we show the impact of our changes in a Moderate portfolio. Cash: We underweight cash in our model portfolio ( 5% vs 10% in benchmark)
DECEMBER -14
Fixed Income Short Term: We underweight this asset in our model portfolio ( 11.3% vs 15% in benchmark). Corp. Investment Grade : We overweight corporates (25% vs 20%). 75% exposure in USD and 25% exposure to European corps. Fixed Income EM and HY: We overweight EM debt & HY (15% vs 10%). 50% exposure to Asian debt, 20% exposure to Latam debt and 30% exposure to HY (primarily in USD) Equity OECD: We overweight Developed Equity markets (18.8% vs 15%). 40% exposure to US equity and 60% exposure to European Equity. Equity EM: We overweight EM Equity markets (7.5% vs 5%). 75% exposure to Asian equity markets and 25% exposure to Latam Equity. Commodities: We underweight Commodities (2.5% vs 5%). 100% exposure to Energy (oil)
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
8.6
10.0
5.0
6.0
2.7
4.0
1.7
Fixed Income Short-Term
25.0
21.4
15.0
11.3
5.0
3.3
0.0
0.0
Fixed Income OECD Government
30.0
25.7
20.0
15.0
12.0
8.0
5.0
3.2
US Treasury
7.7
4.5
German Bund
5.1
3.0
European Peripheral Risk Corporate Invest. Grade
12.9 20.0
Inv. Grade USD
7.5 20.0
21.4
Inv. Grade EUR Fixed Income EM / HY
28.6
8.6
25.0
15.0
16.6
1.6 5.0
12.4
6.3 10.0
1.0
4.0 15.0
18.8
7.1 5.0
2.4
4.0
4.1 15.0
19.9
5.3
1.3 10.0
12.7
Fixed Income Asia
4.3
7.5
10.0
Fixed Income Latam
1.7
3.0
4.0
2.5
High Yield
2.6
4.5
6.0
3.8
Equity OECD
5.0
7.1
15.0
18.8
30.0
33.2
6.3
55.0
58.1
US Equity
2.9
7.5
13.3
23.3
European Equity
4.3
11.3
19.9
34.9
Equity Emerging
0.0 Asian Equity
0.0
5.0
0.0
Latam Equity
7.5
10.0
5.6
0.0
13.3
12.0
10.0
1.9
15.2 11.4
3.3
3.8
Commodities
0.0
0.0
5.0
2.5
7.0
3.1
9.0
3.8
Total
100
100
100
100
100
100
100
100
6
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
USA:
“Walking without the QE crutch”
US - FEDERAL BUDGET (12 MONTHS CUMULATIVE, BN$)
400
400
0
0
-400
-400
-800
-800
-1200
-1200
-1600
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
-1600
(MSUM 1Y) Fe deral Government Budget (US$ Bn)
Source. US Department of Treasury
3.50
©FactSet Research Systems
US - GDP GROWTH (LONG TERM EXPECTATIONS)
Expectations
3.00
3.50 3.00
2.50
2.50
2.00
2.00
1.50
1.50
1.00
1.00
0.50
0.50
0.00 0.00 '10 '12 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '34 '36 Gdp, Real, Annual Growth - United States Andbank, Oxford Economics
26 24 22 20 18 16 14 12 10 8
©FactSet Research Systems
US - NET MARGIN & PE (LTM, Reported)
11 10 9 8 7 6 5
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
4
(MOV 1Y) S&P 500 - Net Margin (Right) S&P 500 - Price to Earnings Ratio (Left) Andbank, Standard & Poors
©FactSet Research Systems
Policy The new gridlock in Washington is nothing unusual (presidents opposed by both houses in 32 out of the DECEMBER last 70 -14 years). Political paralysis is becoming the norm in many democracies. How each one can cope with this depends on whether public policy is well positioned or big reforms are still needed. For the US this does not seem a problem: The Federal budget is in good shape and there is no need for major changes in monetary policy; and in case a monetary response is necessary, the Fed has been guaranteed the necessary level of independence. Projections The Republican party is in full control and must now shift from mere opposition, to show their ability to govern (the 2016 presidential election is approaching). In general terms, both parties are eager not to do any damage to an economy that is gradually recovering. Our projection is for a more responsible attitude paving the way for the continuation of the gradual recovery. The Fed’s decision to end QE does not mean it has grown more hawkish. The step is seen by many as a quid pro quo to bring the FOMC’s dissident hawks into line. In a post-tapering era, it is important to stop hawkish dissenters, and have them on the dovish side. Financial Markets’ Outlook Equity: “HOLD” Sales +4.9% vs. 2.43%, Margins 10% vs. 10%, EPS 125.3$ (+4.9%), E[PE]: 17.1
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
2069
2138
3.3%
Gov. Fixed Income: “HOLD” Credit Inv. Grade: “BUY” Fx: “HOLD”
7
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Euro zone: 20,000
“No recession in 2015”
TOTAL ASSETS - MFIs EURO AREA
35,000
18,000 16,000 14,000 12,000 10,000
34,000 33,000
8,000 6,000 4,000 2,000 0
32,000 31,000 30,000
'10
'11
'12
T.Assets (Right) Loans (Left) Securities (ex-shares ) (Left) External Assets (Left)
'13
Re maining Assets (Left) Equity (Left) Fixed Assets (Left) MM Funds (Left)
Andbank, ECB
7,000
'14
©FactSet Research Systems
ASSETS, TOTAL LOANS - MFIs EURO AREA 18,800
6,000 5,000 4,000 3,000 2,000 1,000 0
18,400 18,000 17,600 17,200 16,800 '08
'09
'10
TOTAL LOANS (dreta) LOANS TO IMFs HOUSEHOLDS
'11
'13
'14
NON FIN CORPS GOVERNMENTS INSURANCE COMPANIES
Andbank, European Central BanK
24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00
'12
©FactSet Research Systems
EUROZONE - NET MARGIN (%)
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
7.5 7 6.5 6 5.5 5 4.5 4 3.5 3
Tren dline: Avera ge (M O V 1Y) Eu roz one - Net Marg in (R ig ht) Euroz on e - Price to Ea rnings R a tio (Le ft) Andbank, Facts et Res earch System
©FactSet Res earch Sys tems
ECB Unconventional measures? Not yet. The Governing Council remains DECEMBER -14 unanimous in the use of unconventional measures but differences will persist in the timing of the measures (the notion of “extreme circumstances” plays a key role). Germany’s Bundesbank is to block sovereign QE in accordance with articles 10.3 and 32 of the ECB statutes. Is QE the sole decision of the 18 national central bank governors? First there are the statutes, but in any case, with 26% of the votes the Bundesbank would easily be able to secure the 1/3 blocking majority needed. Economic data ECB’s AQR: Thousands of inspectors reviewing the books of 130 banks. At the end of 2013 assets were overvalued by €48bn, non performing loans underestimated by €136bn. Since summer 2013 bank balance sheets have been strengthened by €203bn (equity, CoCos, earnings and asset sales). Under adverse economic conditions capital ratios would decline from 12.4% to 8.3% The Eurozone’s banking sector is solid: with just €10bn capital needs. While this does not point to a normalization of credit supply, the AQR marks the start of Europe’s banking union project (de-nationalization and harmonization). The Eurozone October’s composite PMI stable at 52.1 (vs. prior 52). Services at 52.3 and manufacturing at 50.6. Financial Markets’ Outlook Equity: “BUY” Sales +3.25% vs. 2.6%, Margins 4.6% vs. 4.2%, EPS €7.7 (+13.6%), E[PE]: 17.1 INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
127.4
132.6
4.1%
Gov. Fixed Income: “SELL” Credit Inv. Grade: : “HOLD” Fx: “HOLD”
8
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
UK: 24
“intractable problems lurk”
Manufacturing, Value Added, % Of Gdp
24
22
22
20
20
18
18
16
16
14
14
12
12
10
10
8
'04
'05
'06
'07
'08
United Kingdom United State s
'09
'11
Japan Germ any
Andbank, WB - World Development Indicators
6
'10
'12
'13
8
India ©FactSet Res earch Sys tems
UK - GDP GROWTH
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-6
(% 1 Y R ) Real G D P , U K
Andbank, UK Office for National Statistics, OECD
20.00
©FactSet Research Systems
UK - NET MARGIN (%)
18.00 16.00 14.00 12.00 10.00 8.00 6.00
'10
'11
'12
'13
'14
9.5 9 8.5 8 7.5 7 6.5 6 5.5 5
(MO V 1 Y) U nited Kingdom - Net M argin (Right) U nited Kingdom - P ric e to Earnings Ratio (Left) Andbank, Facts et Res earch Sys tem
©FactSet Res earch Sys tems
Economy Indeed, sterling has appreciated about 9% against the EUR in the last 18 months, and a 25% vs. the USD DECEMBER in REER -14 terms since 2009. Maybe because the UK has been the fastest-growing major advanced economy (+3.1% in 2Q14). However, the UK suffers a number of serious problems that, in our opinion, will cause the price of sterling to decline along with the pace of GDP growth. A lightweight manufacturing sector. A frothy housing market. A poor
performance of the external sector (exports have contracted over the past 12 months). Projections This is uncomfortably reminiscent of the pound’s REER appreciation between 1996 and 2000, and of how seriously this damaged British manufacturing (it stagnated between 2000 and 2008), when German or Irish manufacturing doubled output. With manufacturing in the doldrums and exports contracting, economic growth has been driven by recruitment in the financial sector. With the financial sector’s profitability constrained (by tougher EU’s regulations), and a tighter labor market, this dynamic will not last. Without a rise in manufacturing and exports, the UK’s current pace of growth is not sustainable. Financial Markets’ Outlook Equity: “SELL” Sales +7.1% vs 8.9%, Margins 6.9% vs. 6.9%, EPS £7.6 (+7.1%), E[PE]: 17.2
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
129.5
130.5
0.8%
Fx: “SELL”
9
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Emerging Asia:
“Structurally bullish view on the mid-term outlook for EM Asian growth” Policy & Economics Emerging Asia looks resilient in terms -14 DECEMBER of its fundamentals. Public and private balance sheets in decent shape. Also resilient to a strong USD and weak commodities: (Sept. turmoil: Asia -5%, Europe-10%, also less than the -15% in May 2013). Macro risks have profoundly shifted as a result of mercantilist policies (less external debt and better CA balances) since the late 1990s.
6.50
EMERGING ASIA - GDP PROJECTIONS (%Y/Y )
6.50
6.00
6.00
5.50
5.50
5.00
5.00
4.50
4.50
4.00
'12 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '34 '36
4.00
(% 1YR) Gdp, Real - Emerging Asia Trendline : Average Andbank, Oxford Economics
10.5 10 9.5 9 8.5 8 7.5 7 6.5 6 5.5
©FactSet Research Systems
ASIA PACIFIC x JAPAN - NET MARGIN (%)
30
Financial Markets’ Outlook
25
Equity: “BUY” Sales +8.7% vs. 7.9%, Margins 8% vs. 7.6%, EPS $22.6 (+14.1%), E[PE]: 14.6
20 15 10 '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
5
(MO V 1Y) Asia Pacific x Japan - Net Margin (LTM reported by companies) Asia Pacific x Japan - Price to Earnings R atio (Right) Andbank, Deutsche Bundesbank
Projections New growth phase: A recovery in sync makes Asia ready to start a new growth phase linked to a US recovery. How? This tends to trigger capital spending and an income growth pick-up. Falling commodities also help to ease conditions. How long? GDP growth has been broadly stable in the last 2 years and is expected to spike until 2017. Normalization is seen at a healthy average of 5.50% thereafter. The risks: The traditional risk for Asia is global bond yields rising steeply with no pick-up in growth outlook. This would now be discarded.
©FactSet Research Systems
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
292
330
13.3%
Gov. Fixed Income: “BUY” Credit Inv. Grade: “BUY” (Left) Fx (Diffusion Index): “BUY”
10
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
China:
“Towards 7%. The focus is on getting risks under control” Policy & Economics Snapshot: Chinese 3QGDP at 7.3% y/y. DECEMBER -14 Hardly unexpected given the hands-off policy from Beijing. Behind the figures: Fixed Investment at 2004 lows (but still at 14.8%y/y). External sector (ex suspicious shipments) at 12%y/y low (but Q3 trade surplus at a record US$118bn). Consumption at +4.5%y/y (but still resilient). Property sales stabilizing. Job growth meets Beijing’s targets (10mn urban posts achieved in October). Outlook: Deceleration will continue. The PBOC will avoid substantial easing, accepting the slowdown and focusing on getting financial risks under control. Reforms Capital Account: Foreign investment allowed to participate in domestic M&A. Relax restrictions for Chinese investing overseas. Funds to enter / leave borders. Interbank market: China opens its $4.3tn interbank market to non-financial firms after tightening trading rules. Shadow Finance: Q3 credit growth at 14.6%y/y after a crunch in shadow finance (trust loans and banking acceptances falling sharply). Local Government: LGFVs prohibited. Banking: 3% max deviation in deposits.
10.50
CHINA - NET MARGIN (%)
45
10.00
40
9.50
35 30
9.00
25
8.50
15
2015 TARGET PRICE
2015 E[% Change]
10
238
270
13.3%
7.50 7.00
5
'06
'07
'08
'09
'10
'11
'12
'13
'14
(MO V 1Y) China - Net Margin (Left) China - Price to Earnings Ratio (Right) Andbank, Factset Research System
Equity: “BUY” Sales +10% vs 12.5%, Margins 8.5% vs. 8.1%, EPS $20 (+15.5%), E[PE]: 13.5 INDEX CURRENT PRICE
20
8.00
'05
Financial Markets’ Outlook
©FactSet Research Systems
Fixed Income: “BUY” Credit Inv. Grade: “BUY” Fx: “BUY”
11
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
India: 35.0%
“The new narrative makes sense”
India - Manufacturing, Value added, % of GDP
35.0%
30.0%
30.0%
25.0%
25.0%
20.0%
20.0%
15.0%
15.0%
10.0%
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 C hina
P hilippines
I ndones ia
Andbank, World Bank
4
10.0%
I ndia
©FactSet Res earch Sys tems
INDIA - EXTERNAL BALANCE
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-8
Tre ndline : 1 Y ear Mo ving Averag e Andbank, Reserve Bank of I ndia
11.00 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50
©FactSet Research Sys tems
INDIA - NET MARGIN (%)
35 30 25 20 15 10
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
5
(MOV 1Y) India - Net Margin (Left) India - Price to Earnings Ratio (Right) Andbank, Factset Research System
©FactSet Research Sys tems
Policy & Economics The new narrative: “Make in India” and “Economic diplomacy vs. geopolitical DECEMBER -14 ambitions”. The first efforts are yielding gains: $35bn in Japanese investment commitment. A pending deal with the US (CSLA, DFA). America is eager to find a strong ally to offset the dominance of China. National resources retained to ensure a large manufacturing base. Rates have been liberalized. The Rupee is convertible… Demographic Dividend: 1.2bn people. 530M labor force (60% in working age). Median age 30 by 2025. Urban pop. doubling by 2030 to 600M. Skilled manpower, knowledge and English speaking population. Stable political environment. Outpacing China in 3Y. Wielded risks are unrealistic Financial repression? Policies favoring producers do not mean financial repression but a Pro-business policy (Investing vs. consumption, Statebacked banks, special economic zones…) Forging alliances may result in conflicts? This is not necessarily true. In fact, multiregional agreements are likely. Automation will limit industrialization? India does not only have to develop a low value added industry (where robotics easily penetrate). The Chinese model cannot be repeated? Not having an army of ethnic Indian entrepreneurs does not prevent other investors from coming. Just visibility, guarantees and returns are needed. Financial Markets’ Outlook Equity – “HOLD” Sales +3% vs. 1%, Margins 7.05% vs. 7.05%, EPS $28.3 (+3%), E[PE]: 19.9 INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
552
563
1.9%
Fixed Income: “BUY” Fx: “BUY”
12
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Japan:
Violin Concerto Op77-II Andante Kuroda’s Philharmoniker
JAPAN - SALES & WAGES (%Change Y/Y)
6.00
20 15
4.00
10 2.00
5
0.00
0 -5
-2.00
-10 -4.00
-15
-6.00
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
-20
(M O V 1 Y , % 1Y R) Japan - Sales (Right) (% 1 Y R)Japan, Real Wage (Left) Andbank, Factset Research System
6
©FactSet Res earch Systems
5
Projections Good driver? Since 2009 movements in currency pairs have been driven by the relative size of central Banks’ purchase programs. Thus? If history is any guide, today’s interest in Japanese assets could mark the beginning of a bull cycle (if assets go in inverted lockstep with currency). Where is the trick? The BoJ’s goals are to cement inflation but strength is also its credibility (QE is a confidence game), an aspect that makes this dangerous. The cost? Any doubts about the BoJ’s determination or the program’s success will resuscitate fears of a “liquidity trap” . Our reflection: Is the new QQE the result of recognizing this desperation or a real belief that more QE will be effective?
4
Financial Markets’ Outlook
JAP AN - GD P & INFL AT ION (% CHANGE Y/Y)
6
4
20y Avg GDP grow th 0.80 4
2
2
0
0
-2
-2
20y Avg Inflation 0.19
-4
'95
'97
'99
'01
'03
'05
'07
'09
'11
-4
'13
(% 1Q) National Accounts, Real Gross Domestic Product (Chained 2000) SA - Japan (% 1YR) (%YoY) Real Gdp
Eurostat
30
©FactSet Research Systems
JAPAN NIKKEI - NET MARGIN & PE (LTM, REP)
25
6
3
20
2 15
1 0
10 5
-1 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Equity: “BUY” Sales +10.4% vs. 10.4%, Margins 4.9% Vs. 4.9%, EPS 902 (+10.4% ), E[PE]: 20.7
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
17358
18681
7.6%
-2
(MOV 1Y) Japan Nikkei 225 - Net Margin (Right) Japan Nikkei 225 - PE (Left) Andbank, Nikkei
Policy & Economics Kuroda’s Put: With the BoJ halving the 2014 GDP outlook, Kuroda re-activated DECEMBER -14 QQE focusing on JGBs, ETFs and J-REITs. Market rally orchestrated in sync. QQE reactivation coincides with the GPIF’s regulatory change and the yearold tax-free “NISA” savings accounts. Divergence of monetary policies will magnify effects: Most central bank sizes have topped out. The BoJ’s balance sheet (double in size) does not seem close to reaching a ceiling. S-T Goal: Make the sales tax rate rise more palatable via: wealth effect, corp. earnings, capex, wages, consumption). This is proving elusive. (see the chart).
©FactSet Res earch Systems
Fixed Income: “HOLD” Fx : “SELL”
13
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Mexico: 10
“Despite everything, we maintain a constructive view”
Economic Activity Indicator - Mexico
10
5
5
0
0
-5
-5
-10
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-10
Policy & Economics The deplorable events in terms of insecurity and the lack of a DECEMBER strong -14 response form the authorities are unworthy of an economy that aims to channel the interest of investors. Change in the external perception? This situation is causing a change in the external perception, which could break the initial positive expectations. Despite all this, our view remains positive for Mexico in 2015. We still expect to see a clear shift in domestic activity in 2015.
(MOV 3M , % 1YR) Economic Activity Indicator, Mexico Andbank, INEGI
25
©FactSet Res earch Sys tems
MEXICO - PUBLIC SECTOR OIL REVENUES (3M avg %y/y)
20 15 10 5 0 -5 -10 -15
1/13
4/13
7/13
10/13
1/14
4/14
7/14
10/14
(MOV 3M , % 1YR) Budgetary Revenues, Oil, Pemex, T otal Andbank, Factset Research Indices
24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00
©FactSet Research Systems
MEXICO IPC - NET MARGIN (%)
14
Projections Indeed the economy stumbled again in 3Q, with IGAE slowing a little to 2.2% y/y in the three months to August (from 2.3% in July)… … and apparently, the slowdown had its source in the secondary and tertiary sectors. Additionally, the fall in oil prices may temper the government’s ambitions in public investments (oil accounts for 1/3 of tax receipts). Nevertheless, we assume that the impact from lower oil prices will be more than offset by faster growth in the nonoil economy. With a US ISM manufacturing index around 56.6, the Mexican manufacturing sector should perform well. And especially, we still think that reforms will be delivered at an appropriate pace.
13 12 11 10 9 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Equity: “BUY” Sales +8% vs. +5%, Margins 9.2% vs. 8.8%, EPS 2727 (+13.7% ), E[PE]: 18.2
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
44,621
49,725
11.44%
8
(MO V 1Y) Me x ico IPC - Ne t Margin (Right) Me x ico IPC - Price to Earnings Ratio (Le ft) Andbank, Bolsa Mexicana de Valores
Financial Markets’ Outlook
©FactSet Research Systems
Fixed Income: “BUY” Fx: “HOLD”
14
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Brazil:
“Poised towards further deterioration” Policy & Economics
15
BRAZIL - ECONOMIC ACTIVITY (GDP)
10 5 0 -5
'10
'11
'12
'13
'14
3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00
(% 1Q) GDP Growth - Brazil (Right) (% 1YR) GDP Growth - Brazi (Left) (% 1YR) BCB's Ec Indicator (%y/y) (Left) Andbank, IBGE
8
©FactSet Research Systems
BRAZIL - INFLATION
8
7
7
6
6
5
5
4
4
3
3
2
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
2
Cpi, Ipca, In 12 Months, % - Brazil Andbank, Central Bank of Brazil
18.00
©FactSet Research Systems
BRAZIL BOVESPA - NET MARGIN (%)
16.00 14.00 12.00 10.00 8.00 6.00 4.00
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
15 14 13 12 11 10 9 8 7 6 5
(MOV 1Y) Brazil Bovespa - Net Margin (Right) Brazil Bovespa - Price to Earnings (Left) Andbank, Boves pa
©FactSet Res earch Systems
Presidential elections delivered more of -14 DECEMBER the same. Dilma has promised action to revive the economy but 2QGDP stood at -0.9% y/y and data points to further weakness in Q3… The kind of major reforms required in these countries tend to come either after a change in government or after a big economic crisis: In 1990 the “Fujishock” in Peru following hyperinflation and economic crisis. In 1994, the “Real Plan” of Itamar Franco following hyperinflation and currency crisis. In 2002 Uribe’s “Security Crackdown” in Colombia after a change in government. In 2012, the “Pact for Mexico” following a change in Government. We worry that the much needed reforms in Brazil will come just after a big economic crisis takes place, although we do not yet contemplate this in our central scenario (of a very weak GDP growth of 1% in 2015). Projections The two short-term challenges: (1) Tightening fiscal figures following a weakening of fiscal discipline in recent years and (2) Reassuring financial markets of the Government’s commitment to bring down inflation (no rate cuts, no competitive depreciations). With no fiscal stimulus and no rate cuts in sight, the economy is poised to witness further deterioration in 2015. Financial Markets’ Outlook Equity: “SELL” Sales +8% vs. 6.9%, Margins 7.7% vs. 7.04%, EPS 4435 (18%), E[PE]: 12
INDEX CURRENT PRICE
2015 TARGET PRICE
2015 E[% Change]
55406.0
53219.6
-3.95%
Fixed Income: “HOLD” Fx : “SELL”
15
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
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
DECEMBER -14
Previous
Current
Month
Month
3 4 9 5 1 0.7
5 0 10 5 2 0.2
Andbank’s System of Flow & Positioning indicators. Table of Stress Assessment in Risky Assets
0
-5
-10
+5
Area of Neutrality
Market is Overbought
Sell bias
+10 Market is
Buy bias
Oversold
Reading: Our Andbank system of flow and positioning indicators shows an aggregate score of +0.2 (slightly worse than the +0.7 seen last month), suggesting a lack of stress in the equity markets. As such, a sudden deep and sustained risk-off shift is unlikely. New indicator: This month we have introduced the Love Panic indicator from BNP Paribas in our composite. It’s a sentiment index with a good track record in the US which can add value to our global indicator since it uses different sub indicators from ours. The current signal from this indicator is neutral in the US. Flows: We stress the boom in inflows seen in US equity confirmed by both ETFs and Funds. European Equity seems to have stabilized after the outflows seen in the second semester of 2014, but we are still not witnessing decent inflows. Commodities and TIPS continue being the most punished assets, recording important outflows. Skew: We have an important negative skew in the S&P equity options, which means many people hedging their portfolios. Buy signal. Positioning: From the Global Manager Fund Survey we extract the strong relative positioning of the investors towards Japan vs. Europe. Since 2011, Eurozone vs. Japan allocation has only reached these extremes seven times. On all seven occasions Eurozone equities went on to outperform Japanese equities. This sentiment is confirmed by the big inflows we have seen in Japan. FUNDAMENTAL ASSESSMENT: “BUY”
Index
2014 2015 Past Year 2015 2015 Past Year Index E[Sales] Net E[Net E[Profit] Index EPS Sales %y/y % Ch y/y Margin Margin] % Ch y/y Local*
INDEX 2015 2015 2015 PE ltm E [PE ltm] CURRENT TARGET E[Perform.] E[EPS] current (year end) PRICE PRICE % Ch Y/Y
S&P 500
2.43%
4.86%
10.03%
10.03%
4.9%
119.45
125.3
17.32
17.07
2,069
2138
3.3%
Factset Eurozone
2.60%
3.25%
4.22%
4.64%
13.6%
6.81
7.7
18.71
17.14
127
133
4.1%
Factset Uk
8.91%
7.13%
6.94%
6.94%
7.1%
7.08
7.6
18.30
17.21
130
131
0.8%
Ibex 35
-9.46%
3.75%
4.39%
5.27%
24.5%
500.33
622.9
20.60
18.54
10,642
11549
8.5%
Factset Asia P. x Japan
7.91%
8.70%
7.60%
7.98%
14.1%
19.83
22.6
14.71
14.60
292
330
13.3%
Factset China
12.52%
10.02%
8.08%
8.48%
15.5%
17.34
20.0
13.75
13.48
238
270
13.3%
Factset India
1.00%
3.00%
7.05%
7.05%
3.0%
27.45
28.3
20.12
19.90
552
563
1.9%
Nikkei 225
10.40%
10.40%
4.87%
4.87%
10.4%
817.44
902.5
21.23
20.70
17,358
18681
7.6%
Mexico IPC
5.00%
8.00%
8.79%
9.25%
13.7%
2,400
2,728
18.59
18.23
44,621
49725
11.4%
Bovespa
6.96%
8.00%
7.04%
7.74%
18.8%
3,733
4,435
14.84
12.00
55,406
53220
-3.9%
* Except for the fol l owi ng ma rkets : As i a Pa c x Ja pa n, Chi na a nd Indi a , where EPS ha ve been reported i n US$.
16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Fixed Income Markets FIXED INCOME – CORE COUNTRIES UST 10Yr BOND: “HOLD” DECEMBER -14 1. The swap spread remains at historical lows of 10bp (2.46-2.37). For this spread to normalize at 42bp, with inflation expectation (swap rate) well anchored, further declines in the US 10yr Treasury Yield (towards 2.04%) should take place. 2. The slope is still high (183bp). With the short end curve well anchored, in order to reach the LT average (150bp), the yield in the UST 10yr should decline (-30bp to 2.07%). EURO BENCHMARK 10Yr BOND: “SELL” 1. The swap spread remains at historical highs of 79bp (1.56-0.76). For this spread to normalize at around 45bp, with inflation expectation (swap rate) well anchored, it is necessary to see increases in the Euro Benchmark 10yr bond (+34 towards 1.1%). 2. The slope is low (83bp). With the short end of the curve well anchored, in order to reach the LT average (117bp), yield in the 10yr bond should increase (to 1.1%). 7
USD - 10 Yr Swap Spread
1.00
4.00
6
0.80
3.50
5
0.60
3.00
4
0.40
2.50
3
0.20
2
0.00
1
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
3.50
1.50 1.00 0.50 0.00
2.00
-0.50
1.50
-0.20
-1.00
1.00 0.50
Swap Spread 10Y USD (Right) USD 10Y Swap Rate (Left) USD 10Y Treasry Yield (Left) Andbank, Tullet Prebon
EUR - 10 Yr Swap Spread
'10
'11
'12
Swap Spread 10Y EUR (Right) EUR 10Y Gov bond Yield (Left) ©FactSet Research Sys tems
US YIELD CURVE - SLOPE 10-2Yr
Andbank, Tullet Prebon
EUR YIELD CURVE - SLOPE 10-2Yr
'13
'14
-1.50
EUR 10Y Swap Rate (Left) ©FactSet Research Sys tems
3.50
3.00
3.00
3.00
2.50
2.50
2.50
2.50
2.00
2.00
2.00
2.00
1.50
1.50
1.50
1.50 1.00
1.00
0.50
0.50 0.00
1.00
1.00
0.50
0.50
0.00
0.00
0.00
-0.50
-0.50
-0.50
'05
'06
Andbank, Tullet Prebon
'07 '08 '09 '10 '11 '12 '13 '14 Yie ld Differen ce - 10Y r U ST le ss 2Y r Bo nd . Tren dlin e: Averag e ©FactSet Research Sys tem s
'05
'06
3.00
-0.50
'07 '08 '09 '10 '11 '12 '13 '14 Yie ld Differen ce - 10Y r Euro bm k b on d le ss 2Y r bo nd Tren dlin e: Averag e Andbank, Tullet Prebon ©FactSet Res earch Systems
FIXED INCOME – EUROPEAN PERIPHERALS: “SELL” 18 16 14 12 10 8 6 4 2 0
10 Yr Govies - European Peripherals
Jan13
Apr13
Jul13
Oct13
Italy Spain Andbank, JPM Chase
Jan14
Portugal Ireland
Apr14
Jul14
Oct14
18 16 14 12 10 8 6 4 2 0
Greece ©FactSet Research Systems
• •
•
Sell Italy and Spain. Hold Portugal (much prefunding done) and Ireland. Italy and Spain are not going to witness a placid 2015. Redemptions will account for 22% of GDP for Italy (vs. 6% in 2014), and 18% for Spain (vs. 6% in 2014). The market incorporates the idea of a bond buying by the ECB. We think that this will not happen.
17
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Fixed Income Markets FIXED INCOME - EMERGING MARKETS (GOVIES): “BUY” CPI (y/y) Andbank's Estimate
10 Year DECEMBER -14 Yield Real
2.75%
1.15%
1.15%
1.60%
Taiwan
1.63%
1.07%
1.07%
0.56%
Thailand
3.06%
1.48%
1.48%
1.58%
Malaysia
3.83%
2.59%
2.59%
1.23%
Singapore
2.30%
0.77%
0.77%
1.53%
Indonesia
7.94%
8.36%
5.00%
2.94%
Philippines
3.94%
4.29%
4.29%
-0.35%
China
3.56%
1.60%
1.60%
1.96%
India
8.15%
5.52%
5.52%
2.63%
Turkey Russia
8.49% 9.85%
8.97% 8.29%
7.00% 7.00%
1.49% 2.85%
Brazil Mexico Colombia Peru
12.90% 5.96% 6.44% 5.49%
6.59% 4.30% 3.29% 3.09%
6.40% 4.30% 3.29% 3.09%
6.50% 1.66% 3.15% 2.40%
EM ASIA
S.Korea
EME
10 Year CPI (y/y) Yield Last Govies reading
LATAM
Historically, a good entry point in the 10Y UST has been at 1.75% in Real Yields. Given the New Normal (structural disinflation), a good entry point in the UST could be at 0.75% in Real Yield. The rule of thumb for EM bonds has been “buy” when real yields were 175bp above the real yield in UST. Again, given the New Normal, a good entry point in EM bonds could be when Real EM yields are 75 bp above the real yield in the UST. Since UST real yield today is 0.67% we can conclude the following: 1. Today is not a good entry point to buy UST. 2. Buy those EM bonds with Real yield above 1.42% (0.67% + 75bp). (See the table).
Cheap valuations
Expensive Valuations
FIXED INCOME – CORPORATE BONDS: USD CORPORATES: “BUY” Spreads remain at 8-month highs of 85bp. (Financials 72, industrials 93 and utilities 84). USD corps are historically expensive but will remain expensive. INCREASE exposure at current levels. New entry point at 120. 4.00
USD CORPORATES BOND SPREADS (ML 1-10 Yr Index)
3.50
2.50 2.00
3.00 2.50
1.00 0.00
'10
'11
'12
Corporates (Right) Financials (Left) Andbank, Merril Lynch
'13
'14
3.50 3.00
3.00
Industrials (Left) Utilities (Left) ©FactSet Research Sys tems
4.00
5.00
1.00
0.00
EMU C ORPORATES BOND SPREADS (ML 1-10 Yr Index)
6.00
4.00
0.50
0.50
7.00
1.50
2.00 1.50
EUR CORPORATES: “HOLD” Spreads remain at historical lows of 102bp. (Financials 109, industrials 96 and utilities 116). EUR corps are historically expensive but will remain expensive. Maintain exposure at current levels. New entry point at 120.
2.50 2.00 1.50
2.00
1.00
1.00
0.50
0.00
'10
'11
'12
C orporates (Right) (Right) Industrials (Left) Andbank, Merril Lynch
'13
'14
0.00
Financials (Left) Utilities (Left) ©FactSet Research Sys tems
18
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Commodities • METALS & MINERALS: “SELL” The new structural pace for heavy industry in China is consistent with a 0% growth in commodity prices. Chinese regulators also cracked down on the use of copper as collateral (State Grid Corporation) Heavy investment in the last decade has caused overcapacity to reach unprecedented levels (see chart 2)… …and the new mining projects are beginning to ramp up to full capacity: Rio Tinto’s Oyu Tolgoi (450k tons/year), Chinalco’s Toromocho (230k tons), Chinese controlled Las Bambas (400k tons in 2016). Chilean Escondida plans to expand production by 300k tons. During 2006-2012, supply growth was 1.8% y/y while demand growth was 3% y/y, but problems that kept supply subdued have now been dissipated and additional capacity is expected to be 2.7mn tons (doubling current capacity). Short-Term view: The prospects for a new bull market in commodities are dim. Long-Term view: Beyond 2016, China needs to upgrade the country’s power transmission system.
ENERGY(OIL): “HOLD”
50 40 30 20 10 0 -10 -20 -30 -40 -50
CHINA HEAVY INDUSTRIAL BOOM & COMMODITIES 25 20 DECEMBER -14
15 10 5 '05
'06 '07
'08
'09 '10
'11
'12 '13
'14
0
(% 1YR , INDEX) CRB Spot Index, Price growth (Left) (% 1YR) Industrial Production, China (Right) Andbank, CRB, Chinese National Bureau of Statistics ©FactSet Research Systems
225
WORLD PRODUCTION, INDUSTRIAL COMMODITIES (Index)
225
200
200
175
175
150
150
125
125
100
100
75
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Primary Aluminium Coal
Copper Crude Oil
Andbank, World Steel Association, Intl Alum Inst, EIA
75
Natural Gas Crude Steel ©FactSet Research Systems
Negative drivers: 1. The EIA has cut demand estimates to 700k bpd in 2014 (from 1 and 3mbpd in 2012 and 2013) while supply is growing 1.6mbpd. 2. China is on track to miss its 7.5% growth target, authorities ruled out new stimulus and oil-intensive sectors have been hit hardest. The 800k bpd belong to the past. 3. Prices will respond quickly to any suggestion made by Saudi Arabia to cut production, but this seems unlikely (OPEC members are focused on competing to build market share). 4. West African crude is floating to Asia. Venezuela, Iraq and Libya respond by cutting prices. Positive drivers: 1. Countries accelerate stockpiling when oil prices decline. China: +75mn bbl in 1H14 and will fill an additional 80mn bbl this year and 60mn bbl in 2015. 2. Intense geopolitical uncertainty in the middle east, sanctions on Iran, etc. results in 3mbpd to be taken off the market, although this has somewhat reversed (Libya). 3. The floor for oil prices will be stablished by private oil companies. Some companies may break even with oil at US$70, but there are critical exceptions (Arctic oil, biodiesel, ethanol). Break-even levels for US shale are $60/bbl in the Bakken and $80/bbl in Eagle Ford edging higher in the Permian Basin. 4. Sharp declines are possible, but in the absence of a 2008-style shock it is likely that such moves will be temporary. Our fundamental target range is US$80-100/bbl.
19
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Commodities GOLD: “SELL” (Target US$ 900/oz) Negative drivers: DECEMBER -14
1. India's restriction of Gold imports. Looking at the evident improvement in the CA balance (from -$31bn to -$13bn) the ban may be maintained. 2. Financial liberalization in China. The higher “quotas” each month in the QFII widens the investment alternatives for Chinese investors (historically focused on gold). 3. Gold in real terms. The YTD real price of gold remains at $1.139 (LT average is $700). Given our global deflator (base year 2009), for the gold price in real terms to stay near its historical average, the nominal price of gold should stay near US$814. 4. Gold in terms of Oil (Gold / Oil): The ratio is now at 15.02 (from prior 12.9, and above its LT average of 12.85. Given a target price for oil at $95, the nominal gold price should approach the US$1,220 level for this ratio to be near its LT average level. 5. Gold in terms of Equity (Dow / Gold): The ratio is now at 13.64 (from prior 14.02, and above its LT average of 20.04). Given a target price for oil at 16.870 the nominal gold price should approach the US$841 level for this ratio to be near its LT average level. 6. The end of the Money Stimulus means the end of the Fed’s support to financial assets. 7. Positioning in Gold (CFTC): CEI 100oz Active contracts: longs 207k (Up from 170k last month), and shorts of 99k (vs. prior 106k) = Net of +108k (vs +63k last month). 8. Central Banks’ Activity: Central banks continue reducing their purchases of gold or in many cases selling part of their holdings. Those that are still buying gold are cutting the pace of purchases (Singapore, China and UK). Those that were already selling gold have increased in number: Chile joins Japan, Philippines, Thailand and India. Japan has accelerated Gold sales, destocking now at a -16.5% pace y/y). Positive drivers: 1. Size of Gold in the world: The total value of gold in the world is circa US$6.9tn, a fairly small part (3.2%) of the total size of financial cash markets (212trn). The daily volume traded in the LBMA and other gold market places is near US$173bn (2.5% of global gold, and just 0.08% of total financial markets).
100
GOLD STOCK - CENTRAL BANK RESERVES (%Y/Y, MA6m) 100
80
80
60
60
40
40
20
20
0
0
- 20 - 40
- 20 '11 India Thailand
'12 Sing Philipp
Andbank, National Reserve Banks
'13 Japan UK
Ch ile Ch ina
'14
- 40
Russ ia
©FactSet Res earch Systems
20
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Currencies EUR/USD: ST Target (1.20-1.25) / MT Target (1.30) / LT Target (1.35-1.40) Negative drivers (for the EUR): • •
Sentiment in Europe remains weak: Although Eurozone October’s composite PMIDECEMBER -14 kept stable at 52.1 (vs. prior 52) pace continues to be low and fragile. Tapering, ECB’s QE and Forward Guidance work in favor of the USD.
Positive drivers (for the EUR): •
• •
•
Global accumulation in Foreign Currency Reserves is normalizing: The group of countries with higher Foreign Reserves have continued reducing their proportion of Fx reserves. They now stand at an average of 14.5 (vs. 14.9 in the past three months). ECB’s QE: The market incorporates some €1tn of bond buying by the ECB USD Flow to the world economy: The flow of USD (measured by the CA deficit) with respect to the global volume of commercial trade has reached a 15-year low. The quarterly flow of USD to the world ($97.2bn) represented just 2.23% of quarterly international commerce. For comparison purposes, in 1989 some US$100bn in CA balance accounted for 12% of quarterly international commerce. In 1995 it was 8%. In 2000, 4.5%. In 1Q14, 2.33%. And now in 2Q14, just 2.29%. (the pace of reduction in presence is 5bps per quarter or 20bp per year) Market Positioning (CFTC. ECA cur): Non-commercial long contracts in EUR are 60k (vs. previous 60k), short contracts are 219k (vs. previous 202k). The net position is 159k (vs. -141k last month).
JPY/EUR: MT Target (160) / LT Target (170) JPY/USD: MT Target (123) / LT Target (122) With BoJ halving 2014 GDP outlook, Kuroda re-activated QQE focusing on JGBs, ETFs and J-REITs. Divergence of monetary policies will magnify effects:
GBP/EUR: MT Target (0.82) / LT Target (0.85) GBP/USD: MT Target (0.63) / LT Target (0.61) •
Sterling has appreciated about 9% against the EUR in the last 18 months, and a +25% vs. the USD in REER terms since 2009. This is uncomfortably reminiscent of the pound’s REER appreciation between 1996 and 2000, and of how seriously this damaged British manufacturing (it stagnated between 2000 and 2008).
ASIAN CURRENCY BASKET (Vs USD): >10% POTENTIAL APPRECIATION According to our “Asian Currency Diffusion Index”, these currencies are still cheap compared to the USD. Emerging Asia looks resilient in terms of its fundamentals. Public and private balance sheets are in decent shape. Macro risks have profoundly shifted as a result of mercantilist policies (less external debt and better CA balances) since the late 1990s. A recovery in sync makes Asia to be ready to start a new growth phase linked to a US recovery. Preferred: CNY, IDR, PHP, MYR, INR.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
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DECEMBER -14
All notes and sections in this document have been prepared by the team of financial analysts at ANDBANK. The opinions mentioned herein are based on the combined evaluation of third partiesâ&#x20AC;&#x2122; studies and reports. These reports contain technical and subjective evaluations of data and relevant economic and sociopolitical factors, from which ANDBANK analysts extract, evaluate and summarize the most objective information, agree on a consensual basis and produce reasonable opinions on the questions analyzed herein. The opinions and estimates contained herein are based on market events and conditions occurring up until the date of the documentâ&#x20AC;&#x2122;s publication, and therefore cannot be decisive in evaluating events after the documentâ&#x20AC;&#x2122;s publication date. ANDBANK may hold views and opinions on financial assets that may differ partially or totally from the market consensus. The market indices have been selected according to those unique and exclusive criteria that ANDBANK consider to be most suitable. ANDBANK does not guarantee in any way that the forecasts and facts contained herein will be confirmed, and expressly warns that past performance is no guide to future performance, that analyzed investments could be unsuitable for all investors, that investments can vary over time regarding their value and price, and changes in the interest rate or forex rate are factors which could alter the accuracy of the opinions herein. This document cannot be considered in any way as a selling proposition or offer of the products or financial assets mentioned herein, and all the information included is provided for illustrative purposes only, and cannot be considered as the only factor in the decision to make a certain investment. In this document, other major factors influencing this decision are not analyzed; therefore the investor risk profile, his financial sophistication, experience, and financial situation, the investment time horizon or the liquidity for his investment are not analyzed. As a consequence, the investor is responsible for seeking and obtaining the appropriate financial advice to help him assess the risks, costs and other characteristics of the investment that he is willing to undertake. ANDBANK expressly declines any responsibility for the accuracy and completeness of the evaluations mentioned herein, for possible mistakes or omissions which might occur during the publishing process for this document. Neither ANDBANK nor the author of this document shall be responsible for any loss that the investor may incur, either directly or indirectly, arising from any investment based on any information contained herein. The information and opinions contained herein are subject to change without notice.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW DECEMBER -14
Principal Contributors DECEMBER -14
Alex Fusté. – Chief Global Economist – Europe & Asia. +376 881 248 Giuseppe Mazzeo. – CIO Andbank US - North America. +1 786 471 2426 J.A Cerdan. – Equity strategist Europe – European Equity. +376 874 363 Ignacio Pomar. – Head of A. Management Lux – Volatility. +352 26 19 39 22 Andrés Davila. – Head of A. Management Panama – Latam. +507 2975800 Gabriela Andrade. – Portf. Manager Mexico – Fixed Income & Fx Mex. +52 55 53772810 Claudia Anaya. – Portfolio Manager Mexico – Equity Mexico. +52 55 53772810 Renzo Nuzzachi, CFA. – Product Manager Uruguay – Rates, Fx Latam + 5982-626-2333 Antoni Melero. – Fund Manager Europe - Equity Spain & Europe. +376 874 366 Albert Garrido. – Portfolio Manager Luxembourg – Volatility. +352 26 19 39 25 Luiz Secco. – Portfolio Manager Brazil – Equity Brazil. + 55 11 3095 7042 Gabriel Lopes. – Product Analyst Brazil - Products +55 11 3095 7075 Ricardo Braga. – Portfolio Manager Brazil - Fixed Income Brazil. + 55 11 3095 7042
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