Corporate review april 2014 by Andbank

ANDBANK RESEARCH Global Economics & Markets

Alex FustĂŠ Chief Economist alex.fuste@andbank.com +376 881 248

Monthly Corporate Review Outlook for the Global Economy & Financial Markets April, 2014

Corporate Review

Table of Contents Executive Summary Overall Economic Environment China - The first defaults. RMB depreciation. Widening of the RMB’s bands. About the fears, the real situation and also our projections. Ukraine crisis – Q&A. Potential effects of sanctions. Andbank’s central scenario. Japan - All data points towards a continuation of Abenomics Global – Reflections about the maniacal customs of investors Global trends – Deflationary forces united. The implications

Market Snapshot. Performance and Volatility Market Outlook Equity. Short-Term Outlook & Fundamental Outlook (Fundamental Analysis) Interest Rates. Core Global Fixed Income Sovereign Risk (European Periphery) Corporate Credit Commodities & Precious Metals Forex

Summary Table for financial market prospects & Asset Allocation Proposal

Executive Summary

Corporate Review

Economy & Markets China – The market participants (imitating each other) seem to collectively focus only on the negatives of this economy. Default of Chaori Solar bonds or Zhejiang Real Estate; limits to the Chinese credit markets; limits to shadow banking, etc. When, in fact, some of these decisions may be intended to generate a potential benefit. Limits on credit mean sustainability and thus credibility for the currency, a credibility that will help sustain the RMB’s internationalization, allowing the developing economies to continue to industrialize on the cheap with Chinese credit. The real situation has more to do with a final full 2013 GDP of 7.7% and a GDP pace of 7.8% y/y in 4Q13; a public debt of around 10% of GDP, with a fiscal surplus; an external public debt of around 4.1% of GDP, meaning that the USD 3.34 trn represents a coverage coefficient of around 10 times, which dissipates fears of potential tensions in the balance of payments. The economy is running at full employment (4.1% unemployment rate). And the surplus in the current account balance provides assurance that China will not enter the group of “Fragile” economies.

Equities – S&P: Short-term view. Today, our indicators show an aggregate score of -2 (up from the -3 seen last month), showing that the market is slightly overbought, although there is no significant stress in the equity market. That said, margin debt dynamics are near record highs, although admittedly they could go higher, leading the S&P above current levels. S&P: Fundamental Term view. Our 2014 projections are: Sales +6.2%, margins +9.5%, EPS +6.2%, target PE 15.9, target price 1849, potential appreciation from current is -1.2%. Europe (Stoxx600) Fundamental Term view. Our 2014 projections are: Sales +3.4%, margins +6.5%, EPS +22.7%, PE 14.5, target price 370, potential appreciation +13%. Asia EM ex Japan Fundamental Term view. Our 2014 projections are : Sales +9%, margins +7.7%, EPS +15.3%, PE 13.7, potential appreciation +20%. Mexbol’s target price is 47,500 (potential appreciation +20%). Brazil’s Bovespa target price is 52,000 (potential appreciation +9%).

Europe – Ukraine crisis: With the vox populi confirming the ‘way of the strong’, the whole Ukraine problem is now more likely to be resolved without much further confrontation. The suggestion that Putin will invade eastern Ukraine now that his appetite has been whetted by Crimea is ludicrous. After all, Russia does not really have any ‘permanent interests’ in eastern Ukraine. Although financial markets in Russia have tumbled, the fallout and sanctions related to the Ukraine crisis for Russia’s economy might well be less severe than many fear.

Sovereign Risk (European periphery): Spain leaves our list of recommended issuers. In our Buy list are only Portugal and Italy, both now with just single-digit potential performance (around 6%).

Japan – All data points towards a continuation of Abenomics and, therefore, further declines in the JPY. Global - We predict an extremely low inflation environment for the coming years, based on the fact that all deflationary forces are in place. Price monetizers are doing badly. ZIRP policies prevent the automatic adjustment mechanism from operating (and thus the start of a new economic cycle). The current ability to replace labor with robotics is at record highs. The massive investment made over the past decade in the commodity space has ensured that the prices of most raw materials, energy, etc. will most likely be stable or even decline further.

Core Fixed Income – Bund: Start buying at 2%-2.25% yield, sell at 1.5%. Treasury: Start buying at 3%-3.25%, sell at 2.5%.

Corporate Credit: Expensive, though the positive mood will continue. Maintain your long positions. Build new exposure with Itraxx at 100, CDX at 90, and Crossover at 400. EM Bonds Asia (local currency): We see value in these assets, especially in local currency. Volatility guaranteed. Preferred: Indonesia, India, Philippines, Korea and China. EM Bonds Latin America (local currency): Same reading as in Asian bonds. Volatility guaranteed. Most preferred: Chile, Mexico and Peru. Commodities: We have raised our fundamental target for WTI (from 85 to 95). Buy below $90s and sell above $100. CRY index could fall further (-8%). Preferred: Gas, Corn, Cotton, Soybean and some minerals such as Nickel. Avoid precious metals. Fx: Fundamental target for the USD/EUR at 1.40. Short-term view at 1.35. Asian currencies are very attractive under fundamental point of view. Avoid JPY (vs. EUR and USD). GBP range-bound vs EUR in the 0.82-0.86 area). Neutral MXN (target at 12.75). Short BRL (2.6).

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

The first default on publicly traded debt in China since the PBoC began regulating the market in the late 1990s A Chinese maker of solar panels failed to pay full interest on its CNY 1 bn (US$ 163 mn) bonds on Friday, 7 March. A real estate developer (Zheijiang) with total assets worth US$ 560 mn). Potential effects 1. (-) Discourage new issuance of such (weak) high-yield bonds and raise the funding cost by widening the credit spread 2. (-) Trigger market worries over China’s general corporate bond market 3. (-) Slow down fixed asset investment (lowering potential GDP) 4. (-) Impose pressure for further CNY depreciation (by steepening the USD-CNY NDF). Although this will discourage the “hot money” from entering the market (negative short-term impact but positive implications in the long run) 5. (-) Hurt fragile EM currencies (while benefiting safety EM currencies, typically commodity currencies: AUD, CAD, NZD, ZAR, BRL, CLP, KRN) 6. (+) Some “zombie” companies with cash shortage will fail on more efficient capital allocation 7. (+) China’s corporate bond market will improve the risk-pricing mechanism 8. (+) This could cap the far-end CNY ND IRS curve on worries over China’s growth (due to a lower potential GDP), which could boost activity in the housing sector in the short term, though also magnifying the current imbalances in the sector

Corporate Review

RMB depreciation. FAQs

What’s behind it? The recent depreciation of the Chinese currency has been engineered by the central bank, not by international investors selling the Yuan. Why? The PBC acted after January saw roughly US$73bn in net capital inflows, the biggest deluge of inward flows in 12 months ever seen. The aim of the PBC has therefore not been a competitive devaluation, but rather to rout speculators making one-way bets on RMB appreciation. How? Until recently, the RMB was allowed to trade 1% above/below the “central parity rate” (CPR), which the PBC sets every day. For one year and a half the RMB traded continuously above this central parity rate (usually quite close to the 1% limit), reflecting the view that the RMB is a one-way appreciation bet. Then, at the end of February, the PBC made an unusual downward adjustment in its central parity rate, forcing the RMB to experience a depreciation (-1.4% in just 10 days) … because thousands of leveraged speculators had been caught off guard, receiving margin calls and being forced to unwind positions. The power of the PBC. The weakening of the PBC’s central parity rate was 183 pips (from 6.1053 to 6.126), while the spot market adjustment was 850 pips (from 6.0645 to 6.1495 or -1.4%), due precisely to the leveraged positions. This outlines the substantial firepower retained by the PBC. How far will the PBC go to prove its point? In our view, not much farther, because: • Beijing recognizes the risk of sparking a broader loss of confidence, and speculators have already been punished. • Maybe as far as 6.24, although, admittedly, this level might not be reached.

Corporate Review

RMB depreciation. Whatâ&#x20AC;&#x2122;s behind it? How & Why?

1. What next? Remember that from 2005 the PBC allowed the RMB to gradually appreciate against the USD at an annual rate of 5% a year. Since 2012 this rate of appreciation has slowed to 2%-3% per year. This is, in our view, the target pace of appreciation that we all should expect and whenever the market (through massive inflows) forces the rate of appreciation above this pace of 2%-3% per year, it is legitimate to think that the PBOC will act again. 2. Bottom line? Maybe the most important idea of this note is that the recent RMB depreciation may not be due to a massive sell-off by investors. Instead, it may have been engineered by the central bank. This refutes the idea of a sell-off in the RMB due to fears about the Chinese economy.

Corporate Review

A wider band for the RMB. More freedom for the Renminbi? What does a wider band mean? China has announced that it will double the permitted daily trading range of the renminbi, to plus or minus 2% around the daily fixing (or the central parity rate). What does this suggest? This decision suggest two important points: 1. That market forces will start playing a greater role in the nation’s economy; 2. That there is no basis to the incorrect but widespread view that China has begun a steady devaluation in a desperate attempt to regain export competitiveness. Is the government relinquishing control over the RMB? 1. No, since the PBC still effectively controls the daily fixing or “central parity rate”; but… 2. … the People’s Bank of China (PBC) has made it clear that it wants the renminbi to grow up and become a real currency one day. 3. The PBC is quoted as saying: “In the future, as reform of the renminbi’s market mechanism progresses, the renminbi will be the same as other international currencies, with full flexibility and two-way fluctuations becoming its normal state”. 4. It does mean that the abnormally low volatility of the renminbi will get a bit higher, as market forces are allowed more sway on a day-to-day basis. (It should be borne in mind that the RMB’s volatility has not increased very much since the last time the trading band was widened, to 1% from 0.5% in April 2012.)

Corporate Review

What are the implications for the RMB’s long-term value? Does this wider band imply a higher/lower RMB? A wider daily trading band tells us nothing about the pace at which the PBC can move the exchange “central parity rate” up or down, since there is no limit to how much the PBC can change the daily fixing from one day to the next. (If the PBC wants to depreciate the RMB, it does not need a wider trading band.) Do we expect further depreciation? There are several reasons to expect less downward pressure on the RMB: 1. China has no tradition of depreciating its nominal exchange rate to gain export advantages in the last 20 years (it held the rate steady during the crises of 1997 and 2008). 2. Our sources in the region indicate that China wants to avoid the criticism that would come from adopting such a policy. 3. Currency depreciation (by selling RMB and buying USD) “creates unwanted growth in the huge official Fx reserves, which the PBC has already made clear have gotten too large to easily manage. 4. Beijing recognizes the risk of sparking a broader loss of confidence by creating expectations of currency devaluation, which could result in a spiral of capital outflows and hurt the real economy, at a time when growth is slowing. 5. China’s trade balance is likely to start favoring appreciation. The unexpected trade deficit in February helped push down the RMB. But China has run trade deficits in the months following Chinese new year since 2010, before returning to a trade surplus. 6. The recent depreciation has been largely managed by the PBC, and the PBC has kept its pledge to reduce its routine intervention in the Fx market. What could cause further depreciation? 1. If over-indebted Chinese companies continue to default on bonds. 2. If the Fed tapering intensifies, this is generally tough on EM currencies.

Corporate Review

About the real situation Final full 2013 GDP was 7.7%. GDP pace 7.8% y/y in 4Q13 Public debt circa 10% of GDP, with fiscal surplus (+4.2% 1Q, +3.5% 2Q, -1.5% 3Q, -2% 4Q) External debt (public) around 4.1% of GDP (The World Factbook). Meaning that the USD 3.34 trn represents a coverage coefficient of circa 10 times, which dissipates fears of potential tensions in the balance of payments. The economy is running at full employment (4.1% unemployment rate) The surplus in the current account balance provides assurance that China will not become one of the “Fragile” economies. This economy’s mercantilist approach continues to be the instrument for buying protection (ensuring current account surpluses and thus reducing the dependence on capital inflows), while the hardest hit economies have been (and presumably will continue to be) those experiencing current account deficits. Foreign direct investments circa USD 250bn (on a yearly basis), representing a healthy 3% of GDP. Industrial production expanding at a more sustainable pace of 10%.

In our humble opinion, fears of a “hard landing” are overdone. In other words, the current economic structure in this country seems strong enough to absorb a potential economic shock.

Corporate Review

About the Fears Regarding China, market participants (imitating each other) seem to collectively focus only on the negatives: •

Default of Chaori Solar bonds or Zhejiang Real Estate (with US$160 and US$560 million in total assets)

•

Limits to the Chinese credit markets

•

Limits to shadow banking

•

A 2014 GDP target of 7.5%, which, rather than instilling confidence, no one believes for a second

When, in fact, all these decisions may be intended to generate a potential benefit • Limits on credit mean sustainability and thus credibility for the currency • A credibility that will help continue the RMB’s internationalization • Allowing the developing economies to continue to industrialize on the cheap with Chinese credit (textile factories in Vietnam, paper plants in Cambodia, shoe factories in Bangladesh) • China is not throwing good money after bad because banks are not allowed to grow uncontrollably in credits • All this means that China is not ignoring moral hazard (as is the West)

Corporate Review

About our prospects: Beyond the strong structure of the economy, the reforms will continue to help. Thus, China will likely hit 7.5% GDP 1.

The document released after the 3rd Plenum actually represents the “Master Plan” that President Xi promised. The reform is clear and wide-ranging. “Aimed at a broad reform of Chinese governance. Not just narrow economic changes.”

The central emphasis is on granting markets a decisive role in resource allocation. Prices of water, oil, natural gas, electricity, transport and telecommunications will be more market determined to open up more of the economy to private and foreign firms.

Local policy-makers will step back from micro-level intervention. Xi is a strong leader who is centralizing power to overcome the limits that Hu and Wen (and the rest of the reformers) faced.

Private banks will be allowed for the first time. These steps should significantly improve the ability of private firms to compete with State-Owned Enterprises (SOE).

Interest rate and capital account liberalization will continue.

Fiscal reform is another key area. Clean-up of local government debt and finances. Greater transparency of the budget by shifting responsibility for spending from local to central government. Both local and central government debt will be monitored more closely. These moves should help rein in risks, which have certainly been growing.

Social welfare & residential reforms are also important: Hukou requirements for access to social welfare and affordable housing will be abolished in small cities and eased in medium-sized cities (they will remain in place for large cities). This should help to support more sustained development. (Under the Hukou system people who worked outside their authorized home or geographical area would not qualify for grain rations, employer-provided housing, or health care.) Restrictions on the sale of rural land will be lifted. This will help poor rural households by allowing them to capitalize on the value of land, also giving a leg-up to urbanization.

The document included an important wording: “growth is unbalanced, uncoordinated and unsustainable”. In our view, whether or not the Plenum becomes a turning point in China’s development will depend on how well the reform is implemented. The first step, which is a correct assessment of the situation and a definition of the necessary reforms, has been taken.

Corporate Review

Sceptics may think that this is just a bundle of good ideas… 1.

There are many who think that Xi may not have the power to push the plan through and overcome the fierce resistance from SOE tycoons and local government officials.

2. This pessimism will soon be proved wrong. Xi has already shown his power: i.

By a robust anti-corruption campaign over the last year, neutralizing many political rivals (all of them beneficiaries of the old system)

ii.

Jailing the head of the SOE administrative agency

iii. Jailing senior executives at the most powerful SOE, The Chinese National Petroleum Company (CNPC) iv. Taking action against a big-city mayor who was a poster boy … v.

… and directly sentencing to death the Deputy Mayor of two districts in Shanghai (the economic capital of China), for accepting bribes from companies.

The Reform Plan establishes two new Centralized Party Bodies (State Security Committee and Leading Group on Reforms), both tightly under Xi’s control. The purpose of these agencies is to solve the two big problems reformers faced under the previous government: (1) the ability of bureaucrats to block reforms, and (2) the inability of top leaders to overcome bureaucratic battles. How? i.

By changing China’s top priority from “Security concerns” to “Economic growth” (as the new Reform Plan makes clear)

ii.

In this way, Xi has positioned himself to be the final arbiter of all disputes, having the ability to decree when security concerns should take a back seat to economic growth.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Crisis in Ukraine after Crimea’s referendum. Questions & answers Are we far from a solution or have we passed the climax of the conflict? With the vox populi confirming the ‘way of the strong’, the whole Ukraine problem is now more likely to be resolved without much further confrontation. Everyone has had to acknowledge that, having made his move, Vladimir Putin was never going to back out of Crimea. Now, following the vote in Crimea, leaders in the US, European Union and also Kiev will have little choice but to accept this reality. Will Putin now try to take over other parts of Ukraine? No, unless there is serious provocation from the Ukrainian government (e.g. degrading the use of the Russian language) or the US and Europe (e.g. suggestions that Ukraine might join NATO). The suggestion that Putin will invade eastern Ukraine now that his appetite has been whetted by Crimea is ludicrous. After all, Russia does not really have any ‘permanent interests’ in eastern Ukraine. It does not need to incorporate a bunch of economically backward provinces with lousy infrastructure. Russia already has plenty of those! Will the Ukrainian government try to retaliate? No. The leaders in Kiev surely know that any action against Russians in the east will expose them to overwhelming military attack, as well as enormous economic costs. Does it make more sense for Ukraine to attack Russia over the Crimean vote? Or will Ukraine’s new leaders instead try to negotiate a constitutional compromise that will allow them to continue ruling an independent and increasingly Western-oriented Ukraine while reassuring Russian speakers and restoring economic ties with Russia? The current leadership in Kiev clearly believes that Ukraine’s longterm interest is to integrate the country further into the greater EU. How will that interest be served by declaring war on Russia? Hence, there is a high chance that Ukraine will soon propose a new constitutional settlement acceptable to Putin, perhaps including a second “legitimate” and internationally recognized referendum to confirm the transfer of Crimea.

Corporate Review

Crisis in Ukraine after Crimea’s referendum. Questions & answers Will the US and EU feel they have to intensify sanctions against Russia to uphold international law? Western politicians claim that Russia will be excluded from the community of nations. This claim is nonsense. Russia controls territories such as South Ossetia, but the clearest counter-example is Israel, which has maintained an “occupation” that has never been recognized by the United Nations. Russia’s annexation, by contrast, will never be deemed illegal since Russia will veto any such resolution—and China may too, given its potential interest in one day annexing islands from Japan, Vietnam or the Philippines. And as mentioned above, Russia will easily plead that there is little difference between the carving out of the Crimea and NATO’s support for the emergence of an independent Kosovo. Can the US and EU find a formula for restoring normal relations with Russia while formally refusing to recognize the annexation of Crimea? The answer is clearly Yes. If the Ukrainian government is prepared (reluctantly) to accept the status quo, the US and EU can easily start to resolve the conflict by proposing diplomatic negotiations. The purpose would be to create a new constitution for Ukraine, perhaps based on Belgian dual-language arrangements, and with guarantees for both EU and Russian interests. A subsidiary objective would be to agree on a final settlement of the Crimea and Eastern Ukraine issue. These negotiations could, in principle, go on for years without forcing the US and Europe either to recognize Russia’s annexation of Crimea or to do anything much to oppose it.

Corporate Review

Although financial markets in Russia have tumbled, the fallout from the Ukraine crisis for Russia’s economy might well be less severe than many fear Structural problems meant that Russia’s economy was already stagnating before the crisis in Ukraine (some GDP Trackers suggests that output grew by just 0.8% y/y in January). Against this backdrop, a recession at some point over the course of this year would not be particularly remarkable. What’s more, while the impact of the crisis on Russia’s financial markets has clearly been substantial, several factors suggest that the immediate fallout for the economy could in fact be less severe than many fear. •

Concerns about the potential economic cost to Russia of any sanctions by the West may be overdone. If and when any sanctions are placed on Russia, they are likely to be targeted on key officials rather than on the wider economy. Europe is too dependent on Russian energy to countenance full-blown trade restrictions.

•

While capital flight has accelerated over the past few days, Russia has amassed nearly $500bn in foreign exchange reserves over the past decade. As such, it has a substantial buffer with which to withstand a period of capital outflows, with Fx reserves representing more than 7 times the public external debt.

•

Public debt is too low (15% of GDP), and the oil price is too high (Brent > $110pb) allowing the government to balance the budget (already in very good shape: -1% fiscal deficit).

•

In the Balance of Payments, although slowly weakening, the Current Account is in surplus (+1.5% of GDP). What’s more, this reduction in the external surplus can be considered “normal” for an economy whose per capita GDP has grown from US$9,000 in 2009 to 15,000 in 2013.

•

The economy is operating at full employment.

Corporate Review

According to expert sources in this topic, here are the only possible outcomes and the probabilities assigned to them Possible Outcome

Probability

Rationale

Putin withdraws troops from Crimea

It would mean the end of Putin’s presidency. The Russian public, not to mention the military and security apparatus, believe unanimously that Crimea belongs to Russia, since it was only administratively transferred to Ukraine (almost by accident) in 1954. In fact, many Russians would think that most of Ukraine belongs to them (the very name of the country in Russian means “at the border”, not “beyond the border”. According to A.Kaletsky, the idea that Putin will respond to Western economic sanctions by giving up his newly gained territory is pure wishful thinking.

NATO military attack on Russian forces

The West will not engage in a war over Ukraine. The reasons are (1) The opposition will hardly hold together after the elections, since the interim government comprises groups from across the political spectrum. (2) With a weak parliament the required reforms will not pass and the EU will not provide an effective anchor for change. (3) The Ukrainian economy cannot withstand the period of political transition, due to external debt financing of $80bn a year, mostly in the corporate sector.

The West and the new Ukrainian government accept the loss of Crimea

99%

Far from being a strategic blunder, Putin’s decision to back himself into this corner is actually perceived by experts as a “textbook example of realpolitik”. Putin has created a situation where the West’s only alternative to acquiescing in the Russian takeover of Crimea is all-out war. The alternative for Crimea is to retaliate against Russian speakers in Ukraine, offering Putin a pretext for invasion and precipitating an all-out civil war. The balance of probabilities in such situations is usually tilted towards a peaceful solution: in this case, Western acquiescence in the Russian annexation of Crimea and the recognition of the new government of Ukraine by Moscow.

The Western-backed Ukrainian government will fight back

The country would descend into a Yugoslav-style civil war. The alternative of a fullscale war, while far less probable according to the experts, would have much greater impact.

Probabilities are determined by Andbank according to the arguments of expert sources: Neal Shearing (Cap.Economics), Anatole Kaletsky (Gavekal)

Corporate Review

The market implications of the central scenario Looking back through history at comparable episodes of severe geopolitical confrontation, investors have usually done well to wait for the conflict to reach some kind of climax before putting on more risk. In the 1962 Cuban missile crisis, the S&P fell -6.5% between the date when the confrontation started (October 16) and the worst day of the crisis (October 23), when President Kennedy issued his nuclear ultimatum to Nikita Khrushchev. The market steadied then but rebounded four days later, when it became clear that a peaceful solution would be reached. It went on to gain 30% in the next six months. In the 1991 Gulf War, it was not until the bombing of Baghdad actually started (and a quick victory looked certain) that equities bounced back, gaining 25% by the summer. Therefore, whenever there is a perception that a â&#x20AC;&#x153;peaceful resolutionâ&#x20AC;? of the conflict seems certain (as we think will be the case, with Russia prevailing), you can expect financial assets to bounce back (especially those most affected by the confrontation, in this case, EM assets, Russian assets, etc.).

Source of data: Anatole Kaletsky (Gavekal)

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

All data points towards a continuation of Abenomics and … therefore, further declines in the JPY Q4 GDP revised to +0.2% q/q vs preliminary +0.3%. • • • • • •

Capex revised to +0.8% q/q vs preliminary +1.3% Consumption +0.2 pp vs preliminary +0.3 pp Private inventories +0.0 pp vs prelim (0.0) pp February bank lending +2.4% y/y vs +2.5% in January January current account balance ¥1.59tr deficit vs ¥0.59tr in December February economy watchers survey 53.0 vs 54.7 in January

BoJ forced to buy more bills on weak loan demand. A lack of demand for the BoJ’s cheap loans has forced the central bank to increase the amount of treasury bills that it buys. So far this year BoJ has increased its holdings of bills maturing in one year or less by ¥7.21T, vs a ¥6.09T increase from May-Dec 2013. Japanese exporters are seeing less of a lift from a weaker yen. According to recent trade data, between Oct-Dec 2013 the yen value of exports increased 13%, while the yen was 26% weaker vs the USD. There are two main reasons behind this small gain from the yen’s weakness: • An increasing proportion of trade is done between other Asian countries, where yen-denominated trade is more common. Exports to Asia hit ¥37T in 2013, about half of the value of total exports. • Japan's competitiveness is also decreasing.

Iwata reaffirms that BoJ will not hesitate to adjust policy to hit 2% inflation, an important assessment if we consider that recent data suggests that inflation is slowing in 1Q14. 30% of companies plan to hire more new graduates in 2015 vs 2014 (the largest margin since 2009) and this can be seen as a victory for Abenomics. 49% of companies expected to keep hiring unchanged, and 14% were undecided. This monetary policy seems unlikely to wane in the short term.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Which method is used by investors to learn wisdom? Confucius once stated that there are only three methods by which mankind may attain wisdom: By reflection (the noblest), by experience (the bitterest), and by imitation (the easiest). According to Will Denyer, financial markets are prone to the third method (seeking wisdom by imitation). During bull markets, investors tend collectively to focus on the positives, while in bear markets they tend to focus on the negatives (a blatant example of imitation). An obvious example of this can be seen today in the contrasting momentum in the US and Chinese equity markets. The analyst pointed out that in the US it seems as if nothing could go wrong: “If macro figures are bad, the market shrugs it off and attributes this to the extreme weather. When the weather warms, growth data will bounce back, pushing markets higher. And if it does not, that will just force the Fed to quit tapering, also carrying markets upward.” This could well be the result of imitation (collectively focus on the positives), not reflection, and this has led to a “heads I win, tails I do not lose” mentality that keeps the equity market going up. Remember that the S&P has made new highs during a week where we have witnessed the most serious event of the post-Soviet era, and the most dangerous episode since the Cuban missile crisis. New highs that have also coincided with a decline in the US-service PMI from 54 to 51.6

EQUITY MULTIPLES (PE Last 12 months) - US vs CHINA

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

S&P 500 - Price to Earnings Ratio FDSAGG China - Price to Earnings Ratio Andbank, Standard & Poors Corporation, Factset R.S

©FactSet Research Systems

Corporate Review

Which method is used by investors to learn wisdom? In China, however, sentiment is just the opposite 1. Multiples have sunk from a PE of 20x in 2009 to the current 10x (levels seen during the late 1990s crisis and the 2008 global financial crisis). 2. The Chinese equity market has been roughly flat since the last part of 2009 (see chart below).

Market participants collectively (imitating each other) focus on the negatives: (1) bailout of China Credit Trust, (2) default of Chaori Solar bonds, (3) limits to the Chinese credit markets, (4) limits to shadow banking, (5) a 2014 GDP target of 7.5%, which, rather than instilling confidence, no one believes for a second. When, in fact, all these decisions may be intended to generate a potential benefit: (1) limits on credit mean sustainability and credibility for the currency (see the second chart), (2) a credibility that will help to continue the RMBâ&#x20AC;&#x2122;s internationalization, allowing the developing economies to continue industrializing on the cheap with Chinese credit, (3) China is not throwing good money after bad because banks are not allowed to grow uncontrollably in credits, and thus (4) China is not ignoring moral hazard, and (5) China will hit 7.5% GDP. 160 140 120 100 80 60

EQ UITY MARKET - CHINA

160

Whatever the reasons behind these policies in China, market participants focus only on the negatives.

140 120 100 80 60

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

MSCI China - To ta l Re turn Index - Le ve l Andbank, MSCI

ÂŠFactSet Research Systems

Corporate Review

Is the market making a mistake by using the method of imitation to attain wisdom? Admittedly, market participants may be right in sharing an unbridled optimism for the US market while remaining cautious about China. Maybe investors are not wrong when focusing just on the positives in the US and considering only the negatives when it comes to China. Maybe they are not wrong in deciding to continue imitating. However, as the spread in relative valuations widens (and as W.Denyer suggests) “one has to consider whether it is still wise to imitate”. In that case, I guess it would be better to revert to reflection (or even experience) as methods for gaining wisdom. At the end of the day, we all should understand that “imitation” is the easiest and, as such, the least reliable means of attaining wisdom. We are not saying now is the time to completely shift our portfolio investments from the US equity market to the Chinese market. Rather, we recommend starting to consider this possibility (and for the bravest, gradually starting the transfer right now).

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Disinflation. “The new normal” As a central scenario, we predict an extremely low inflation environment for coming years. This thesis is based on the fact that all the deflationary forces are in place: 1.

The fact that “price monetizers” (exporters, commodity-related countries…) are doing badly and yields are going down undoubtedly points to a disinflationary world.

ZIRP prevents the automatic adjustment mechanism from taking effect, preventing a new economic cycle from developing

Capitalism is deflationary. Its motto sounds like “Do more with less and, where possible, do much more with much less”.

The current ability to replace labor with robotics is at record highs and this is inherently deflationary.

How else do you explain the performance of the ROBOTR? equity index (+800% in the 2003-2013 period vs +100% in the S&P) The electronics assembly giant Foxcom claims that it will be producing a new $10,000 model of robots Other examples of this are (1) Paris’s driverless metro trains, (2) Panasonic’s fully automated plants in Osaka (plasma screens)

The massive investment made over the past decade in the commodity space has ensured that the prices of most raw materials, energy, etc. will most likely be stable or even decline further (production capacity is at all-time highs).

The internationalization of the RMB basically means that China is helping developing countries to industrialize on the cheap with Chinese credit. This explains the astonishing growth of textile factories in Vietnam, paper plants in Cambodia, shoe factories in Bangladesh: more and more goods being produced for less and less money by fewer and fewer hands.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Global Financial Markets Performance

Price Performance Last Month (% ) 20-mar-2014

Price Performance YTD (% ) 20-mar-2014

1.88% -0.90% -1.74% -1.80% -6.51% 0.73%

1.75% -0.42% 0.30% -3.35% -12.37% -6.31%

-0.52% 0.18% 0.05% -0.17% -0.46%

2.08% 2.39% 1.05% 2.03% 2.13%

1.07% 1.18% 3.55% 4.61% 1.38%

5.43% 6.50% 13.99% 11.02% 2.94%

-0.40% -0.02% 2.68% -0.30% -0.04%

0.12% 0.34% 2.50% 2.56% 0.73%

-1.44% 0.08% -0.52% 3.14% 10.01%

-1.68% 0.73% -4.64% -0.64% 0.22%

Global Equity EQUITY

S&P 500 Euro STOXX 50 STOXX 600 MSCI AC Asia Pacific ex JP MSCI Japan MSCI EM Latin America

Core Government Bonds (10 year) US 10Yr Treasury Bond Euro 10Yr Benchmark Bond Japan 10Yr Benchmark Bond UK 10Yr Benchmark Bond Canada 10Yr Benchmark Bond

European Peripheral Government Bonds (10 year) FIXED INCOME INSTRUMENTS

Italy Benchmark Bond Spain Benchmark Bond Portugal Benchmark Bond Greece Benchmark Bond Ireland Benchmark Bond

Asian Government Bonds (10 year) Thailand Benchmark Bond Malaysia Benchmark Bond Indonesia Benchmark Bond India Benchmark Bond Taiwan Benchmark Bond

LatAm Government Bonds (10 year) Brazil Benchmark Bond Mexico Benchmark Bond

Andbank Data â&#x20AC;&#x201C; Powered by Factset Research Systems

Peru Benchmark Bond Colombia Benchmark Bond Argentina Benchmark Bond (Citi EMUSDGBI Argentina (USD)

Corporate Review

Global Financial Markets Powered by Andbank

ENERGY

Performance

Oil (WTI) Coal Natural Gas Average Energy Corn

CROPS

Wheat Soybean Sugar Cotton

PREC. METALS

Average Crops Palladium Platinum Gold Silver Average Precious Metals

Andbank Data â&#x20AC;&#x201C; Powered by Factset Research Systems

MINERALS

Copper Nickel Zinc Aluminum Iron Ore Average Minerals

Price Performance Last Month (% ) 20-mar-2014

Price Performance YTD (% ) 20-mar-2014

-3.76% -0.83% -26.95% -8.08%

1.03% 3.55% 1.16% 1.67%

3.87% 16.60% 2.12% 3.58% 5.04% 6.22%

13.19% 19.14% 4.27% 3.90% 7.61% 9.35%

5.01% 0.80% 0.63% -7.26% 2.22%

7.61% 4.61% 10.45% 3.44% 8.13%

-10.88% 9.91% -5.69% -3.11% -8.85% -4.97%

-12.98% 13.89% -6.16% -4.56% -17.84% -5.52%

Corporate Review

Global Financial Markets - Equity Performance – YTD. 106 104 102 100 98 96 94 92 90 88 86

Global Equity Indices (Local - Base Index 100)

06 Jan

20 Jan

03 Feb

S&P 500 Euro STOXX 50 STOXX 600 Andbank, Stoxx, S&P, MSCI

17 Feb

03 Mar

17 Mar

MSCI AC Asia Pa cific e x JP MSCI Ja pa n MSCI EM La tin America

106 104 102 100 98 96 94 92 90 88 86

Latam Equity Indices (Local - Index 100)

©FactSet Research 110 Systems

110

105

100

06 Jan

20 Jan

MSCI Argentina Andbank, MSCI, S&P Corp

03 Feb

17 Feb

MSCI Bra zil

03 Mar

MSCI Chile

17 Mar

MSCI P eru

©FactSet Research Systems

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Equity â&#x20AC;&#x201C; Short-term Outlook Positioning & Flows Assessment: Slightly Overbought Our flow indicators provide an aggregate assessment that can range from -10 (strong sell) to +10 (strong buy). Today, our indicators show an aggregate score of -2 (up from the -3 seen last month), showing that the market is slightly overbought but that there is no significant stress in the equity market.

Nature of Index

1 2 3 Positioning 4 5 Aggregate Result in our Flow & 6 7 Sentiment Indicators 8 Previous Current 9 Flow Month Month 10 Buy signal 1 1 11 Positive Bias 0 2 12 Mkt vs Data Neutral 8 9 13 Negative Bias 11 7 14 Sell signal 2 3 15 FINAL VALUATION -3.0 -2.0 16 17 Sentiment 18 19 20 0 -5 +5 +10 -10 21 Area of Neutrality Market is Market is 22 Overbought Sell bias Buy bias Oversold

Index

Put Call Ratio Positioning - Speculators (US Equities vs rates) Positioning - Hedge Funds Positioning - Strategists Option Skew Monitor Asset Allocators - Equity Asset Allocators - Cash Flows - Global Asset Class, weekly Directors Buying vs Selling Driver for markets (Profits or PE expansion) BofA ML Global Financial Stress Index (GFSI Index) Citi Economic Surprise Index Citi Macro Risk Index (MRI CITI Index) Breadth - Companies over their 200 ma level Investor Intellgence Bull/Bear Ratio (newsletter) AAII Bull & Bears Survey of Management Sentiment (NAAIM Active Managers) Market Vane Index (CTA's advisors) NDR Crowd Composite Sentiment Complacency in Market (volatility) Andbank's Equity Composite FGA's Composite Sentiment

Andbank's Assessment -0.5 -1 0 0.5 0 -0.5 1 0.5 0 -1 0 0 -0.5 0 -0.5 0 -1 -0.5 0 -0.5 0 -0.5

Corporate Review

Margin debt could irrationally go higher “It seems that the fellows using other people’s money to get rich have an uncanny ability to leverage up when shares become overvalued vs bonds… … They also seem to get most enthusiastic usually after a prolonged outperformance of equities against bonds” (Charles Gave). Why? The inventiveness of mankind is extremely generous when it comes to manufacturing good reasons why the stock market cannot change direction: “technology has created a new economy”, “we have discovered an infinite source of wealth”, etc.

Gavekal

Corporate Review

Equity â&#x20AC;&#x201C; Mid to Long-term Outlook Fundamental Approach

Corporate Review

S&P â&#x20AC;&#x201C; Estimating 2014 growth in EPS

Usd/Eur

S&P

Usa Europe Rest of the world Total world

2013 profit margin % (Factset) 2014 est profit margin % (3) *

Today

Avg 2013

1,35

1,38

% sales

2014 real GDP estimated

2014 inflation rate estimated

53,4 9,2 37,4 99,99

2,50 1,00 4,00 3,30

1,70 1,10 4,10

9,6 9,6

Sales base 2013 Sales exp 2014

100 106,18

Profit base 2013 Profit exp 2014

9,6 10,2

2014 expected profit growth %*

6,18

2,22%

Expected * Currency effect on 2014 nominal sales growth international Sales GDP estimated % 2014 in (%) USD 4,20 2,10 8,10

-1,63 1,50

4,20 3,73 9,60 6,18

EUR/USD average level 2014 USD change vs EUR USD change vs Rest of Fx % of Companies hedging Fx Risks

1,38 -2,17% -2,00% 25%

Effect of USD change vs EUR Effect of Int Fx changen vs USD

1,63% 1,50%

* Consensus estimates: Sales growth at 4.44%, Profit margin in 2014 expanding, EPS growth +10%

Corporate Review

Our fundamental value and the expected performance for the S&P 500

P = EPS2014 x PEmultiple

2013 Projected 2013 Projected 2013 EPS Growth EPS (%) EPS (US$)

2013 PE Andbank's ltm projections for 2014 PE ltm

Target Price

Current Price 20-mar-14

Expected Change (%) 2014

1.849

1.872

-1,2%

(1)

S&P

109,51

6,2

116,27

16,37

15,9

(1) Our projection for the 2014 PE (ltm) in the S&P results from the values recorded in the three approaches we have used: monetary impulse (13.4), profit cycle (17.4) and historical value (16.9). The average value is 15.9. We consider this measure conservative.

Corporate Review

Stoxx 600 Europe â&#x20AC;&#x201C; Estimating 2014 growth in EPS

Today

Avg 2013

1.35

1.38

2.22%

% sales

2014 real GDP estimated

2014 inflation rate estimated

2014 nominal GDP estimated

Currency effect on international Sales (%)

Expected sales growth % 2014 in EUR

10.8 60.2 29.1 100.00

2.50 1.00 4.00 3.30

1.70 1.10 4.10

4.20 2.10 8.10

-1.63 -0.00

2.57 2.10 8.10 3.89

USD/EUR

Stoxx 600

Usa Europe Rest of the world Total world

2013 profit margin % (Factset) 2014 est profit margin % (3) *

5.5 6.5

Sales base 2013 Sales exp 2014

100 103.89

Profit base 2013 Profit exp 2014

5.5 6.8

2014 expected profit growth %*

22.78

* Consensus estimates: Sales growth at 2%, Profit margin in 2014 at 6.3%, EPS growth +16%

EUR/USD average level 2014 USD change vs EUR EUR change vs Rest of Fx % of Companies hedging Fx Risks

1.38 -2.17% 0.00% 25%

Effect of USD change vs EUR Effect of Int Fx changen vs EUR

-1.63% 0.00%

Corporate Review

Our fundamental value and the expected performance for the Stoxx 600 Europe

P = EPS2014 x PEmultiple

2013 Projected 2013 Projected 2013 EPS Growth EPS (%) EPS (US$)

2013 PE Andbank's ltm projections for 2014 PE ltm

Target Price

Current Price 20-mar-14

Expected Change (%) 2014

370

327

13,1%

(1)

Stoxx 600 (sxxp)

20,77

22,8

25,50

15,55

14,5

(1) In the case of the PE for Europe, despite the fact that we see an acceleration in profits, the current level of PE ltm (15.55) is well above its long-term average (13.3). For this reason, we believe that PE could go towards 13.3, although we are aware that risks are on the upside for the PE actually being higher at year-end. We feel comfortable with a PE at 14.5.

Corporate Review

Asia Pacific x Japan â&#x20AC;&#x201C; Estimating EPS

Usd/Eur

MSCI Asia EM

Usa Europe Region Asia Pcific x Japan Total world

2013 profit margin % (Factset) 2014 est profit margin % (3)

Avg 2013

1.35

1.38

2.22%

% sales

2014 real GDP estimated

2014 inflation rate estimated

2014 nominal GDP estimated

Currency effect on international Sales (%)

Expected sales growth % 2014 in USD

5.0 5.0 90.0 100.00

2.50 1.00 5.80 3.30

1.70 1.10 4.00

4.20 2.10 9.80

-1.63 ---

2.57 2.10 9.80 9.05

7.33 7.75

Sales base 2013 Sales exp 2014

100 109.05

Profit base 2013 Profit exp 2014

7.33 8.5

2014 expected profit growth %

Today

15.30

EUR/USD average level 2014 USD change vs EM currencies EUR change vs EM currencies % of Companies hedging Fx Risks

1.38 -2.17% 0.00% 25%

Effect of USD change vs EUR Effect of Int Fx changen vs EUR

-1.63% 0.00%

Corporate Review

Our fundamental value and the expected performance for the Asia Pacific x Japan index is:

P = EPS2014 x PEmultiple

2013 Projected 2013 Projected 2013 EPS Growth EPS (%) EPS (US$)

FDSAG Asia Pac x Japan

58.48

15.3

67.43

2013 PE Andbank's ltm projections for 2014 PE ltm 13.18

13.7

Target Price

Current Price 21-mar-14

Expected Change (%) 2014

925

768

20.4%

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Interest rates Swaps & Govies (The underlying messages) 1.

Still a disinflationary world: Despite the increase in swap rates in the last part of 2013, looking at the current swap rates it cannot be said yet that strong implicit inflation is expected in the long term (2.9% in the US and 1.8% in the Eurozone).

A positive “swap spread” (in both currencies) means that Treasury and Bund now reflect not only inflation expectations, but something more. The higher swap spread in the EUR curves points to the existence of a relatively higher demand for bunds as a result of higher market fears. This may be a sign that global macro risks & financial fears have not disappeared. Nevertheless, these fears can be said to be historically low.

EUR swap spread is now slightly below the historical average level (24 vs 45bp). With no inflationary pressures in sight, the only way for this spread to normalize towards 40-45 bps is through a 15 bp decline in the bund yield.

The swap spread in the US clearly remains closer to historical lows (12 bps). Again, with no inflationary pressures in sight, the only way for this spread to normalize towards the 40-50 bps historical average is through a structurally low yield in the UST.

USD: SWAP10 – Govie10

EUR: SWAP10 – Govie10

Corporate Review

Core Fixed Income â&#x20AC;&#x201C; US Dollar Performance & Perspectives Strategic range for the T10 Yield: 2.5%-3% Buy above 3% Sell in the 2.5% area

Corporate Review

Core Fixed Income â&#x20AC;&#x201C; Euro Performance & Perspectives Strategic range for the Bund Yield: 1.5%-2% Buy above 2% Sell in the 1.5% area

Corporate Review

Core Fixed Income â&#x20AC;&#x201C; EUR Gov bond & USD Treasury Expected Performance Figures as of: 20/03/2014

ST Performance (2m) Change Short until Term Fundament al Target Fundamental change Target (in bp) (bp)

MT Performance (12m)

Expected Price Coupon Price Coupon Performance Performance Performance Performance Performance Short Term

Expected Performance (Fundamental)

20-Mar-2014

Short Term Target

0,21

0,00

-21

1,96

0,41%

0,03%

0,41%

0,21%

0,44%

0,62%

0,27

0,10

-17

2,86

0,49%

0,05%

0,49%

0,27%

0,53%

0,76%

0,46

0,33

-13

3,83

0,50%

0,08%

0,50%

0,46%

0,58%

0,96%

0,70

0,61

-9

4,68

0,43%

0,12%

0,43%

0,70%

0,55%

1,13%

0,81

0,76

-5

5,31

0,28%

0,14%

0,28%

0,81%

0,41%

1,09%

1,03

1,02

-1

6,09

0,08%

0,17%

0,08%

1,03%

0,25%

1,11%

1,24

1,27

6,83

-0,18%

0,21%

-0,18%

1,24%

0,03%

1,07%

1,47

1,53

7,62

-0,49%

0,25%

-0,49%

1,47%

-0,25%

0,98%

1,65

1,75

8,45

-0,88%

0,27%

-0,88%

1,65%

-0,60%

0,77%

0,43

0,35

0,25

-8

-18

1,92

0,16%

0,07%

0,35%

0,43%

0,23%

0,78%

0,91

0,83

0,74

-8

-16

2,92

0,22%

0,15%

0,48%

0,91%

0,37%

1,38%

1,35

1,28

1,20

-7

-14

3,81

0,26%

0,22%

0,55%

1,35%

0,49%

1,89%

1,72

1,66

1,60

-6

-12

4,68

0,29%

0,58%

1,72%

0,58%

2,30%

2,01

1,96

1,91

-6

-11

5,52

0,31%

0,34%

0,58%

2,01%

0,64%

2,59%

2,30

2,25

2,22

-5

-9

6,29

0,31%

0,38%

0,54%

2,30%

0,69%

2,85%

2,50

2,46

2,43

-4

-7

6,95

0,29%

0,42%

0,47%

2,50%

0,71%

2,97%

2,65

2,62

2,61

-4

-5

7,89

0,28%

0,44%

0,38%

2,65%

0,72%

3,03%

2,78

2,75

-3

8,37

0,24%

0,46%

0,24%

2,78%

0,71%

3,02%

Duration

Corporate Review

EM bonds - Asia 1. The market failure: The drop had different intensities The economies that have withstood the “crisis” best are those of the countries that “buy protection” via a mercantilist approach (which ensures current account surpluses): South Korea, Taiwan, etc… And the hardest hit countries have been those experiencing current account deficits (in most cases due to the development of their domestic currencies).

The opportunity: The mercantilist approach reduces the dependence on capital inflows, but synchronizes the domestic cycle to the Western economies. The best options to invest are in the countries that are least synchronized with the developed economies, those with the strongest domestic dynamics.

Corporate Review

EM bonds – Yes, but is now the time to stay in? These markets will “dance” to the Tapering song. Admittedly, they can get worse, but we see value in these assets. This is not a balance sheet problem, thus not a solvency problem. What could be a good entry point? •

Historically, a good entry level in Treasuries is when the real yield achieves the 1.5%-2% level. Given the new “reality” of structural low inflation (and thus low yields), it is reasonable to think of a real yield of 1%-1.5% as a good entry point for Treasuries.

•

The rule of thumb for the EM bond markets has been “buy” whenever the spread in real yields is at 150 - 200 bp vs. the real yield in Treasuries. Again, yields in EM bonds are now structurally low and this will persist, making it more reasonable to set the 100-150 bp of spread with US real yields as a good entry point.

•

This means that, given that the real yield in T10 is now near 1.5%, we recommend buying EM bonds when they offer a real yield near 2.5%.

Corporate Review

Asian bonds. Is there already some opportunity?

S.Korea Taiwan Thailand Malaysia Singapore Indonesia Philippines China India

CPI (y/y) Nominal CPI (y/y) Andbank's 10yr Yield Last reading Estimate 3.55% 1.01% 1.01% 1.59% -0.05% -0.05% 3.88% 1.96% 1.96% 4.10% 3.40% 3.40% 2.64% 1.32% 1.32% 8.03% 12.88% 4.50% 4.16% 4.08% 4.08% 4.50% 1.95% 1.95% 8.80% 8.10% 8.10%

Real Yield (10yr bond) 2.53% 1.64% 1.92% 0.70% 1.31% 3.53% 0.08% 2.55% 0.70%

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

European Sovereign Risk Trends Periphery (10 Yr Government Bond)

Good start to the year! 12 PERIPHERAL

11 10 9 8 7 6 5 4 3 2

Portugal

Spain

Ireland

Italy

Greece

Corporate Review

European Sovereign Risk Trends Core Countries (10 Yr Government Bond)

Rally also in the Tier 1 bonds!! 3 2,8

CORE COUNTRIES

2,6 2,4 2,2 2 1,8 1,6 1,4 1,2 1

Belgium

France

Germany

Austria

Corporate Review

Sovereign Risk Recommended Strategy â&#x20AC;&#x201C; Consistent with our APRI

Spain exits our list of recommended bonds

CURRENT LEVELS FOR SOVEREIGNS

Yield 10Y Spread 10Y (cash bond) (cash bond, bp)

Peripheric

20/03/2014

Recommendation Neutral - Overweight

Greece

6,96

531

Neutral

Portugal

4,38

273

Overweight

Ireland

2,81

116

Neutral

Spain

3,37

172

Neutral

Italy

3,43

178

Overweight

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Corporate credit Recent Performance & Recommendation Corporate Credit - EUR

Corporate Credit - USD

Itrax Main

150

105

140

100

130

120

110

100

Figures as of:

CDX Main

20-3-14

EUR Corporates (itraxx): At 80bp of spread, we consider euro corporates â&#x20AC;&#x153;expensiveâ&#x20AC;?. We recommend maintaining positions if you are long but not to build new exposures. Entry point above 100bp.

USD Corporates (CDX): The same reading as in EUR. Entry point above 90s.

Corporate Review

Financials EUR - Credit Performance & Recommendations FINANCIAL SPREADS - EUR 700 600

ITRXESE CBBT Curncy ITRXEUE CBBT Curncy

500 400 300 200 100 0

Specific “banking” risk premiums are disappearing. French, German and many northern bank bonds are extremely expensive. Be long only in subordinated debt of big names in troubled European countries.

Corporate Review

Credit – HY EUR Recent Performance & Recommendation Markit iTraxx Europe Crossover 900 800 700 600 500 400 300 200 100 0

HY Crossover: At 300bp of spread we consider EUR-HY “expensive”. Nevertheless, we believe that the positive mood in the market will persist during the year. The price of this asset will move to the rhythm of tapering. Start buying again above 400bp. Strong buy above 450.

Corporate Review

Corporate Credit â&#x20AC;&#x201C; EUR, USD & HY Expected Performance CDX USD - SHORT TERM OUTLOOK 3M (ex-interest rate risk)

ITRAX MAIN EUR - SHORT TERM OUTLOOK 3M (ex-interest rate risk)

Spread effec t

Change (bp)

Price effect

From

Change

19,2

-0,67%

80,8

100

19,2

Spread effec t

0,28%

Eur3m+

0,81%

0,28%

Coupon effec t

Coupon effec t Total Effect Yield effect (5yr bond)

0,32%

0,70%

0,61%

Price effect

From

Change

-10,8

0,38%

80,8

-10,8

Spread effec t

1,39%

Eur3m+

0,81%

1,39%

Coupon effec t

Total Effect Yield effect

1,77% -9

0,32%

72,1

17,9

0,24%

USLib3m+

0,72%

0,24%

1,72%

1,66%

-0,06%

-6

0,61%

Price effect

From

-7,1

0,25%

72,1

-7,1

1,28%

USLib12m+

0,72%

1,28%

-0,09%

Yield effec t

1,72%

1,60%

-0,12%

-12

Change (bp)

Price effect

From

91,3

-3,19%

308,8

400

91,3

0,83%

USLib3m+

3,09%

0,83%

0,70%

0,61%

- 0,09%

Coupon effect Total Effect Yield effect (5yr bond)

Change

-2,36% -9

0,32%

HY / CROSS OVER EUR - SHORT TERM OUTLOOK 12M (ex-interest rate risk)

Spread effec t

Change (bp)

Price effect

From

-8,8

0,31%

308,8

300

-8,8

3,65%

USLib12m+

3,09%

3,65%

0,70%

0,61%

- 0,09%

Coupon effect Total Effect Yield effect

Change

3,95% -9

0,32%

Change

1,53%

HY / CROSS OVER EUR - SHORT TERM OUTLOOK 3M (ex-interest rate risk)

Spread effec t

0,22%

Change (bp)

Total Effect 0,70%

Change

CDX USD - SHORT TERM OUTLOOK 12M (ex-interest rate risk)

Change (bp) Coupon effec t

From

- 0,63% -0,39%

Yield effec t (5yr bond)

-0,09%

ITRAX MAIN EUR - MID TERM OUTLOOK 12M (ex-interest rate risk)

Spread effec t

Price effect

17,9

Total Effect

-0,39% -9

Change (bp)

0,44%

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Industrial commodities. The super-cycle ended in 2013 and, in our view, the prospects for a new structural bull market are still dim.

Corporate Review

1st. The primary driver of the commodities super-cycle has now slowed down and we suspect that this slowdown is structural (not just cyclical) 50

CHINA HEA VY INDUSTRIA L BOOM & COMMODITY PRICES

-25

-50

-75

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

(% 1 Y R , I N D E X) C R B S pot I ndex , 1 9 6 7 =1 0 0 - U nit ed S tat es (Le ft) (% 1 Y R) I ndus t ria l P rod uc tio n, V a lue A dde d, (R ight ) Andbank, CRB,Chines e N at Bureau of Stat is t ics

©Fact Set Res earch Sys tems

1. This new norm will not necessarily imply big additional falls in commodity prices 2. … but it means that the prospects for a new structural bull market are still dim.

Corporate Review

2nd. Metal producers and miners have been clearly caught off guard with a gargantuan excess capacity Many projects are being cancelled, although this WILL NOT PREVENT THE OVERSUPPLY IN METALS and, to a lesser extent, MINERALS for a long period (years). This should keep prices subdued.

220

WORLD PRODUCTION OF INDUSTRIAL & ENERGY COMMODITIES

220

200

180

160

140

120

100

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Primary Aluminium Coal Production

Copper Crude Oil

Andbank, World Steel Association, Intl A lum Inst, EIA

Natural Gas Crude Steel ÂŠFactSet Research Systems

Corporate Review

3rd. Real vs. speculative demand still points south for prices During 2H13 we saw a rise in the price of transporting dry commodities (a sign that global activity was recovering), but, as we suggested, it was too early to bet on a sustained rise in commodity prices based on a steady recovery in real demand. We still think this. Speculative demand is still the main driver for prices (as it has been over the last 4 years). Be cautious with the latest increase seen in the derivatives markets!

800

Baltic Dry Inde x Vs Commodity Prices (daily)

14,000

12,000

700

10,000 600 8,000 500 6,000 400 4,000 300

2,000

200

0 '04

'05

'06

'07

'08

'09

'10

'11

Baltic Dry Index - Price (Right) CRB Continuous Commodity Index - Price (Left) CRB Spot Commodity Index - Price (Lef t)

'12

'13

Corporate Review

Precious metals. We consider that the gold price remains expensive. In the long term, we feel comfortable setting the target price for gold at US$ 900.

Corporate Review

Precious Metals Gold – All our approaches lead us to conclude that Gold is still expensive. 2,500

GOLD PRICE - DEFLATED

GOLD PRICE IN TERMS OF OIL

2,500

2,000

1,500

1,000

500

0 0 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 Gold (2009 prices) Trendline: A ve ra ge

Trendline: 35 Year Mo ving Av erage

Andbank custo m series, DJ Com pany

50 45 40 35 30 25 20 15 10 5 0

'96

'98

'00

'02

'04

'06

'08

'10

'12

'96

'98

'00

'02

'04

Andbank, London B ullion Market A ssociatio n

50 45 40 35 30 25 20 15 10 5 0

DJ Industria l A verag e - Inde x P rice Lev el / London Gold (AM Fix ing $/ozt) - Price Trendline: A ve ra ge A ndbank, Dow Jones Company

'94

'06

'08

'10

'12

Gold S pot price / WTI o il price Trendline: A ve ra ge from 22-Feb -98 to 25-Fe b-13

©FactSet Rese arch Systems

GOLD PRICE IN TERMS OF EQUITY

'94

©FactSet Rese arch Systems

GOLD – NOMINAL vs. REAL PRICE: The gold price has increased significantly in real terms YTD (from $1.128 to $1.238) and is now much further from its historical LT average of US$700. This means that, given our 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. GOLD PRICE / OIL PRICE: The value of this ratio now stands at 13.35 (above its historical average value of 12.85). Given that our 5yr target price for oil has now been raised to $95, the nominal gold price should approach the US$1,220 level for this ratio to be near its LT average level. EQUITY PRICE / GOLD: The 15yr average value for this ratio is 20.04. Currently this ratio stands at 12.3. If the DJI remains stable at yearend levels (let’s say 16.080), as we think it will, the gold price should decline towards US$800 in order for this ratio to be near its LT average level.

Corporate Review

Have you asked yourself why Gold is so stable in these turbulent times, with EM in panic mode?

Because within the Reserve banksâ&#x20AC;&#x2122; activity in Asia we are witnessing two offsetting forces. On the one hand, we have India and Japan, which have been firmly reducing their stocks of gold (although Japan has stopped reducing stocks). On the other hand, we have China, showing a steady appetite to increase its gold reserves (see chart below), as part of its strategy of selling RMB (to depreciate it) and buying Fx reserves (USD and Gold).

100

GOLD STOCK IN CENTRAL BANK RESERVES

100

-20 -40

-20 '10

'11

(MOV 6M , % 1YR) India (MOV 6M , % 1YR) Thailand (MOV 6M , % 1YR) Sing Andbank, National Reserve Banks

'12 (MOV 6M , % 1YR) Philipp (MOV 6M , % 1YR) Japan (MOV 6M , % 1YR) UK

'13

-40

(MOV 6M , % 1YR) Chile (MOV 6M , % 1YR) China ÂŠFactSet Research Systems

Corporate Review

Which of these two forces will prevail? Will the gold price remain range-bound? Or is Gold going to head North again? In my very limited degree of wisdom, I identify today three major themes that could dominate gold prices in the foreseeable future.

(Ok, this is just one of the many opinions you receive each day but … I just hope it helps)

1.The Indian Factor. India, like China, accounts for 25% of global demand for Gold. As you already know (because I’ve been specially persistent in reminding you), Indian Fx & government bonds have been specially hard hit by market participants for belonging to the group of countries experiencing current account deficits. (India’s CA deficit was 5.5% in 2012 and, although lower, is still going to be high in 2013.) In that regard, India will likely continue destocking Gold (in order reduce imports or raise exports, improve CA, and finally abandon the “group” just to stop receiving blows). This factor will presumably continue to put pressure on the Gold price. All of which represents NEGATIVE IMPLICATIONS FOR GOLD.

Corporate Review

… The other themes

2. The Japanese Factor. Sales of gold by the monetary authorities in Japan are part of the BoJ’s asset purchase program. On the one hand, the BoJ expands the monetary base to get fresh money and buy bonds. On the other hand, the BoJ sells gold in order to get money from the market and buy bonds as well. The million dollar question is, will Japan continue doing this? You also know perfectly well my view on this: Yes, it will. Until when? Many people project the limits of this policy through the prism of the USD/JPY exchange rate. They say, “the BoJ will continue doing it until the USD/JPY reaches the 130 or maybe the 140 level, as it did in 1998 or 2002”. They forget that Japan now has Europe’s export champions in its crosshairs and that Germany is a major trade competitor. As a result, the prism should really be the EUR/JPY exchange rate. If so, the aggressiveness of gold selling could be much higher than previously thought, since gold selling could continue until the EUR/JPY exchange rate reaches the 160 or 170 level (as it did in 1998 and 2008). In summary, this factor will presumably continue to also put pressure on the Gold price. All of which represents

NEGATIVE IMPLICATIONS FOR GOLD.

Corporate Review

… The other themes 3. The Chinese factor. Do you have some slight idea of why China is now buying Gold again? Let me give you a visual hint U SD/ CNY (USDCNY-FX1)

6 .2 2 7 6 0 .0 00 4 0 .0 1 % 0 1 :0 7:4 0 P M C N Y

'0 9

'1 0

'1 1

M a r-0 9 - M a r-1 4

6 .9 6 .8 6 .7 6 .6 6 .5 6 .4 6 .3 6 .2 6 .1 6

'1 2

'1 3

Yes, the Yuan reached a 20-year record high at the beginning of the year for two reasons: 1. PBOC’s governor (Zhou Xiachouan) reported three weeks ago that the bank would end regular Fx intervention. This drew the attention of investors, who for a long time were eager to enter long the Yuan but remained out due to the CNY’s status of “intervened currency”. 2. The Chinese authorities have been progressively tightening (raising) reference rates in order to control loan and shadow banking dynamics. The result of these two actions has been a strong flow of capital into the country.

Corporate Review

… The other themes

… The Chinese factor. Well. At this point one should know that the PBOC does not like such intense appreciations of the Yuan (CNY) … … So what instruments does the PBOC have in order to respond to this sharp rise in the currency (a rise, moreover, driven by “speculative inflows”)? That’s right: sell Yuans in the market and buy Fx reserves or other strategic assets (US$ or Gold). In fact, we know that the PBOC purchased $73bn of Fx in October and another $70bn in November (CEIC). THE MOST IN THREE YEARS. And that the rate of purchases has kept pace in the first months of 2014. What next? The RMB depreciation has been orchestrated by the PBC and there are reasons to believe that the institution will not go much further. 1. China has no tradition of competitive depreciations (it kept the exchange rate fairly stable in 1997 and 2008). 2. Further depreciation would lead to unwanted growth in Fx reserves (which the PBC has already made clear have gotten too large to easily manage). 3. Beijing recognizes the risk of sparking a broader loss of confidence in the currency. My bet on this specific issue / factor? The PBC will soon stop selling RMBs (and so will stop buying gold at the current pace) => NEGATIVE IMPLICATIONS FOR GOLD.

Corporate Review

Our conclusions 1. While India and Japan are firmly reducing their stocks of gold, China is accelerating its purchases of gold (by selling CNY) in order to respond to the sharp rise of the CNY, a rise that has been driven by “speculative inflows” powered by recent decisions of the PBOC (the announcement of the end of regular intervention and the rise in the reference rates).

2. Today I identify three “major themes” that could dominate gold prices in the foreseeable future. Here you have the implications that, in my humble opinion, will arise from each factor: I.

The Indian Factor => NEGATIVE IMPLICATIONS FOR GOLD

II. The Japanese Factor => NEGATIVE IMPLICATIONS FOR GOLD III. The Chinese Factor => NEGATIVE IMPLICATIONS FOR GOLD

4. In summary, based on these considerations, we maintain a negative long-term outlook for Gold, with a fundamental target of US$ 900 ozt*.

Corporate Review

Precious Metals Gold: New long-term target price of US$ 900 Criteria

Recent Developments

Andbankâ&#x20AC;&#x2122;s Assessment

India's government is restricting gold imports

The biggest swing factor behind the improvement of the CA balance in India has been the effectiveness of curbs on gold imports. These restrictions were tightened progressively last year to contain the deficit. Some officials have called for these restrictions to be relaxed (due to strains caused by the domestic gold shortage, local jewelers have lobbied against the curbs, concerns about rising gold smuggling). Given the ongoing jitters in EM financial markets, it is likely that India will relax curbs but only gradually, to help keep the CA deficit low.

Expensive

Financial liberalization in China

With more than half of global physical gold demand coming from China and India, we consider that what happens in Asia is more likely to be a driver for gold than what happens at the Fed. The Chinese government continues with its economic reforms, pointing to a financial liberalization that could widen the investment alternatives for Chinese investors (capital account opening). This could reduce the demand for gold.

Expensive

Gold in real terms

The gold price has increased significantly in real terms YTD (from $1.128 to $1.238) and is now much further from its historical LT average of US$700. This means that, given our 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.

Expensive

Gold in terms of Oil (Gold / Oil)

The value of this ratio now stands at 13.35 (above its historical average value of 12.85). Given that our 5yr target price for oil has now been raised to $95), the nominal gold price should approach the US$1,220 level for this ratio to be near its LT average level.

Slightly expensive

The 15yr average value for this ratio is 20.04. Currently this ratio stands at 12.3. If the DJI remains stable Gold in terms of Equity (Dow at year-end levels (letâ&#x20AC;&#x2122;s say 16.080), as we think it will, the gold price should decline towards Expensive / Gold) US$800 in order for this ratio to be near its LT average level. Gold & Money Impulse

The tapering represents the end of QE and therefore also the end of the explicit support that the Fedâ&#x20AC;&#x2122;s asset purchase program exerted over all financial assets, including gold.

Size of Gold in the world

The total value of the gold in the world is circa US$6.9trn, a fairly small part (3.2%) of the total financial cash markets (212trn). The daily volume traded in the LBMA and other gold marketplaces is near US$173bn Cheap (2.5% of global gold, and just 0.08% of total financial markets).

Positioning in Gold (CFTC)

ZPA Golds active contract 1oz: longs (3630k) vs Shorts (2011k) = Net of +1619 // CEI 100oz Active contract: longs (170k) vs Shorts (51k) = Net of +118k

Expensive

We consider that the gold price remains expensive. In the long term, we feel comfortable setting the target price for gold at US$ 900.

Expensive

Final Assessment

Expensive

Corporate Review

General commodities under a historical perspective. Considering historic prices it could be said that only precious metals are expensive, while other commodities are at a fair value.

Corporate Review

Commodities (by groups) Viewed in perspective 450

ENERGY

x 1.75 in 10Y (5.8% annual)

450

400

350

300

250

200

150

100

50 0

'04

'05

'06

'07

'08

W TI C rude O il

'09 Co a l

'10

'12

'13

x 2.70 in 10Y (10.4% annual)

600

500

400

300

200

100

'04

'05

'06 Co rn

©FactSet Research Systems

PRECIOUS METALS

x 1.70 in 10Y (5.4% annual)

CROPS

Na tura l Ga s

Andbank, DJ Com pany

800

'11

50 0

600

'07 W he a t

'08

'09 So ybe a n

'10

'11

Suga r

Andbank, CRB

'12

'13

Co tto n ©FactSet Research Sys tems

MINERALS & METALS

x 1.76 in 10Y (5.8% annual)

800

450

700

600

400 350

500

400

300 250

300

200 150

200

100

100 50

'04

'05

'06

'07

P alla dium Andbank, NYMEX

'08

'09

P latinum

'10 Gold

'11

'12

'13

Silve r ©FactSet Research Systems

'04

'05

'06

Copper

'07 Nick e l

Andbank, London Metal Exchange

450

'08

'09 Zinc

'10

'11

Alum inum

'12

'13

Iro n Ore

©FactSet Research Systems

Corporate Review

Commodities Under a historical perspective, it could be said that only precious metals are expensive, while other commodities are at a fair value or even cheap CURRENT 2013 10 YEAR Index100 (T-10Y) PERFORMANCE PERFORMANCE Energy

ANNUALIZED GROWTH

ANDBANK'S ASSESSMENT

Oil Coal Gas

150.7 261.0 113.4 77.6

6.14% 7% -7% 27%

51% 161% 13% -22%

4.2% 10.1% 1.3% -2.5%

CHEAP EXPENSIVE CHEAP VERY CHEAP

Corn Wheat Soybean Sugar Cotton

163.9 152.2 180.4 147.2 201.5 138.0

-17.13% -42% -22% 5% -16% 15%

64% 52% 80% 47% 102% 38%

5.1% 4.3% 6.1% 3.9% 7.3% 3.3%

FAIR VALUE CHEAP FAIR VALUE CHEAP FAIR VALUE CHEAP

Precious Palladium Platinum Gold Silver

254.6 279.7 161.2 322.9 271.6

-15.14% 2% -11% -28% -35%

155% 180% 61% 223% 172%

9.8% 10.8% 4.9% 12.4% 10.5%

FAIR VALUE EXPENSIVE CHEAP EXPENSIVE EXPENSIVE

Minerals Copper Nickel Zinc Aluminium Iron Ore

165.1 209.2 112.4 173.6 101.6 75.0

-6.16% -7% -18% 3% -14% -5%

65% 109% 12% 74% 2% -25%

5.1% 7.7% 1.2% 5.7% 0.2% -2.8%

FAIR VALUE FAIR VALUE CHEAP FAIR VALUE CHEAP VERY CHEAP

Crops

Annualized growth last 10 Yr < 0% 0% - 5% 5% - 10% 10% -15% > 15%

Andbank's Criteria VERY CHEAP CHEAP FAIR VALUE EXPENSIVE BUBBLE

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

USD Global Monetary Policies point to a lower USD As of January, three out of the six central banks most actively holding currency reserves decided to increase exposure to the USD. Brazil, India and Indonesia increased their USD currency reserves to 18.9, 8.2 and 6 months of imports equivalent, Brazil being the most aggressive, with a 0.7 months equivalent increase. Meanwhile, China, Japan and Korea reduced their positions relative to their imports, China being the most aggressive, with an entire 1.1 month equivalent decline. In general terms, some of the “big brothers” still retain an abnormally high proportion of foreign currency reserves (much higher than that implied by the pace of their current account balance), meaning that they probably accumulated Currency Reserves and Gold on the back of systemic fears, which are gradually disappearing. In fact, from a long-term perspective, we can already appreciate how some of these players (Brazil, Japan and Indonesia) reduced their holdings during 2013. We still expect this normalization process to continue in the rest of central banks, putting pressure on the USD.

Foreign Currency Reserves (Monthly imports equivalent, 3mMA)

5 0

5 '04

'05

'06

'07 India C hina

A ndbank, Centra l Ba nks

'08

'09

Japan K ore a

'10

'11

'12

'13

Indonesia Brazil ©Fa ctSet Re search Systems

Corporate Review

USD Geopolitical developments also point to a lower USD The flow of USD with respect to the global volume of commercial trade has reached a 15-year low (at 1998 levels). Although this may sound like a shortage of USD (apparently supportive for that currency), from a geopolitical perspective it is not. We consider this factor as a trigger point that could give rise to dramatic new developments. With a long-term view, we see some interesting aspects, such as the internationalization of the RMB, and the progress seen in the RMBdenominated debt market, which could result in strategic movements of a specific group of countries in order to overcome the relatively low level of the USD (compared to the nominal level of commercial transactions that are looking for a currency to be settled). If true, the USD could stop being the settlement currency of a major part of global transactions. Why? Simply because, as many times in the past, the prevailing currency reserves cannot keep pace with the growth of global trade and are being dwarfed by the growing size of international commerce. When this happens, the countries involved in international commerce create solutions that lead to more than one currency cohabiting as currency reserves. This means that other currencies will be present in the foreign reserves of these central banks. In other words, the USD could be forced to make room for the new tenant, which could result in lower demand for the USD.

USD FLOW TO THE WORLD ECONOMY 1

2 3’

5 4

1’

2 1 0 -1

2’

3 4’

'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

0 -100 -200 -300 -400 -500 -600 -700 -800 -900

Quarte rly US C urr.Acc balance as a % of Quarterly Glob al Trade (Left) BOP , C urrent Account Balance, S A (12m Mov S um, US $bn) (Right) Recession Periods - Unite d S tate s A ndba nk, BEA

(1) In 1989, with a US$ 100bn cumulative 12m CA deficit, the quarterly flow of USD thrown to the world (25bn) coming from this CA represented 3% of quarterly international commerce (1’). In other words, US$ 100bn represented 12% of quarterly international commerce. (2) In 1995, with the same amount of 12m cumulative CA deficit in USA, the quarterly flow of USD (some 25bn) represented just 2% of international commerce. Or each US$100bn represented 8% of total international commerce. (3) In 2000, with a larger CA deficit of US$416bn (cumulative 12 months), the quarterly flow of dollars (some 100bn) represented 4.5% of international transactions. (4) Now, in 2013, with a similar CA deficit of $412bn, the quarterly flows of dollars (100bn) represent just 2.3% of the level of international transactions.

Corporate Review

USD/EUR Andbank’s Assessment Effect on the USD (Short-term view)

Effect on the USD (Long-term view)

NEUTRAL

NEGATIVE

NEUTRAL

NEGATIVE

The flow of USD with respect to the global volume of commercial trade has reached a 15-year low, increasing the probability of the appearance of a new reserve currency.

NEUTRAL

NEGATIVE

Non-commercial long contracts in EUR are 110k, vs. 73k in short contracts. The net position is +36k long EUR.

POSITIVE

NEUTRAL

POSITIVE

Recent Developments

Criteria Tensions in Europe

A positive reading in our APRI for the second quarter in a row means that (1) on aggregate, these economies are no longer deteriorating and (2) they continue showing positive dynamics in certain aspects.

Global accumulation In general terms, the “big brothers” still retain an abnormally high of the Reserve proportion of foreign currency reserve (much higher than that implied Currency by the pace of their current account balance). USD flow to the world Positioning in € (CFTC. Options & Futures, ECA cur)

The Tapering process will probably be more rapid than initially Tapering & Forward anticipated. This could undeniably support the USD, despite the fact that Guidance the ECB has been reducing its monetary base in recent months.

Central Bank Idiosyncrasy

New ECB official shares similarities with Weidmann. (The appointment of Latvia’s Ilmars Rimsevics and Bundesbank vice-president Sabine Lautenschläger makes the extension of non-conventional policies less likely.)

Final Assessment

NEUTRAL

NEUTRAL – POSITIVE (1.35)

NEGATIVE

NEGATIVE (1.40)

Corporate Review

Asian Fx 1.

Two out of the five main Asian currencies are markedly up for the year. The rest have been plodding along at the start of 2014.

PBoC has continued depreciating the CNY after it reached a 20-year high at year-end. Meanwhile, the THB and IDR have stood up quite well. In February the rest of currencies recovered the ground lost in January and are now almost flat in the year.

The majority of Asian currencies were hit during 2013 by the threat of Tapering. However, the drop has been of varying intensity, depending on the country.

The economies that have withstood the “crisis” best are those of the countries that “buy protection” via a mercantilist approach (which ensures current account surpluses): South Korea, Taiwan, etc…, while the countries hardest hit have been those experiencing current account deficits (in most cases due to the development of their domestic currencies).

The mercantilist approach certainly reduces the dependence on capital inflows, but … is it not true that these economies are the most leveraged to the Western cycle? What would happen if I told you that the Western economies will have subpar growth for many years? Yes, the outlook for these countries worsens automatically.

On the other hand, we are inclined to think that the best options to invest are in the countries that are least synchronized with the developed economies. Those with stronger domestic dynamics, at the expense of a negative current account balance – a deficit which, on the other hand, they have the ability to finance domestically.

110

ASIAN CURRENC IES (Performance v s USD)

ASIAN CURRENCIES (Performance vs USD)

110

108

105

106

100

104

102

100

98 96

6/1

20/1 IDR

Andbank, WM/Reuters

3/2 THB

17/2 PHP

3/3 MYR

17/3

Dec

Feb

IDR

Apr

Andbank, WM/Reuters

Jun THB

Aug PHP

Oct MYR

110

Dec

Feb

Corporate Review

Asian Fx The RMB’s satellites are a “buy” Asian Currency Diffusion Index

POSITIVE OUTLOOK

Asian currencies are still cheap relative to the USD.

Diffusion Index 3mth smoothed (lhs) Asian curr Index (rhs)

1,300 STRONG BUY

0,30

1,250

0,20

1,200 0,10 1,150 BUY

1,050

closely related to the JPY (KRW, TWD). SELL

1,000

-0,20

0,950 -0,30 0,900 -0,40

0,850

Feb-14

Nov-13

Aug-13

Feb-13

May-13

Nov-12

Aug-12

Feb-12

May-12

Nov-11

Aug-11

Feb-11

May-11

Nov-10

Aug-10

Feb-10

-0,50

May-10

0,800

Nov-09

STRONG SELL

Aug-09

Indeed, these markets will “dance” to the Tapering song in 2014. Every time there are rumors of Tapering, these markets could fall considerably (equities, bonds and currencies).

-0,10

Feb-09

0,00

1,100

May-09

We recommend being long in the THB, IDR, PHP and MYR. Avoid those most

Nov-08

S&P Volatility. Asian assets are the first to be sold when managers need to liquidate portfolios. A rise in the volatility of the S&P has a negative reading for the attractiveness of Asian currencies. A VIX above 25 makes this factor negative.

Kospi volatility. This factor helps to reflect the risks specific to the region. A reading above 23 makes this factor contribute negatively.

Overall velocity of money. As velocity increases, “animal spirits” grow in financial markets. We take the variation rate of M1 in the Eurozone, USA and Japan as representative of this. Asia’s natural response to an upswing in the overall level of prices is to allow their currencies to appreciate, thus keeping purchasing power levels up. An increase in the overall M1 is therefore synonymous with currency appreciation in emerging countries.

OECD LEI. When global growth slows, Asian countries’ exchange rate policies are used as a tool to counter short-term dynamics and manage the domestic economy. The commercial mindset of many central bankers makes them limit the appreciation of their currencies in such episodes. This factor computes negatively when the LEI of the Asian big five falls.

Performance of the RMB.

Performance of the JPY, traditionally a currency “anchor” for the rest. Korea and Taiwan have a product overlap with Japan, competing in many fields with Japanese products. A weak yen therefore “invites” competitive devaluations from the rest. With the JPY down by over 300 bps (from 80 to 83), this component is negative for the rest.

Corporate Review

JPY - We still recommend staying short JPY/long EUR. How far and how fast can the JPY depreciate? News of the month:

The BoJ released the minutes of its Jan 21-22 monetary policy meeting. The minutes contained little that had not already been revealed to markets. Board members speculated that they may not stop easing once the inflation target is reached.

EUR/JPY (EURJPY-FX1)

1 4 1.1 0 0 .0 2 0 .0 1 % 0 5 :0 4:1 3 P M J P Y

M a r-1 3 - M a r-1 4

145 140 135

Koichi Hamada, an advisor to Prime Minister Abe, said that the BoJ can wait for more data in the summer before it decides whether to ease policy further. Thus, in the meantime they will continue with the current pace.

130 125 120 Ap r Ma y Ju n Ju l Au g Se p O ct No v De c Ja n Feb Ma r

HOW FAR? Considering the global aspects affecting mostly developed economies, particularly Japan, our guess is above 140, with the possibility of reaching the 170 level again. HOW FAST? We believe that a rapid & disorderly depreciation of the JPY will inflict severe pain on various business segments (chemicals and steel producers) and on households in the form of much higher import prices. We expect the momentum to ease, with the BoJ seeking a more managed decline. This could well be a 3-5 year process before the aforementioned targets are reached.

EUR/JPY (EURJPY-FX1)

1 4 1.1 0 0 .0 2 0 .0 1 % 0 5 :0 4:2 3 P M J P Y

M a r-9 4 - M a r-1 4

170 160 150 140 130 120 110 100 90 '9 4

'9 6

'9 8

'0 0

'0 2

'0 4

'0 6

'0 8

'1 0

'1 2

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Market Outlook Summary Table Short Term Asset Class

Instrument

S&P Stoxx 600 Equity

Fundamental

Current

Performance

Fundamental

Performance

20/03/2014

(1-2 months)

Target

(12 months)

1.873

(0%, +5%)

1.850

-1,2%

328

(0%, +5%)

370

12,9%

Mexbol

39.514

(0%, +5%)

47.500

20,2%

Bovespa

47.398

(0%, +5%)

52.000

9,7%

768

(0%, +5%)

925

20,4%

FDSAG Asia Pac xJapan

Fixed Income (2)

Bund 10y

1,67%

-0,36%

1,75%

1,03%

Treasury 10y

2,72%

0,23%

2,75%

2,50%

Sovereign Risk

Spain

3,366

(0%, +5%)

3,25

4,3%

Europe

Italy

3,428

(0%, +5%)

6,9%

(10 year Yields)

Portugal

4,376

(0%, +5%)

4,25

5,4%

Ireland

3,076

(0%, +5%)

3,7%

Greece

6,957

(0%, -5%)

Average

3,56

(1)

(2)

(1) Expected performance at year-end. (2) Expected performance includes price and coupon effect. (3) Credit performance excludes interest rate effect, and refers to spread performance and coupon (FRNs).

Itraxx Main (â&#x201A;Ź) Corporate Credit CDX Main (US$) - EUR & usd (3) X-Over (EUR)

6,5

0,10613

3,38

5,1%

72,751

-0,70%

1,37%

65,125

-0,65%

1,21%

273,188

-3,70%

300

2,35%

(3)

Corporate Review

Market Outlook Summary Table Short Term Asset Class

(3) Credit performance excludes interest rate effect, and refers to spread performance and coupon (FRNs).

Current

Performance

Fundamental

Performance

20/03/2014

(1-2 months)

Target

(12 months)

EM bonds

Taiwan

1,60%

(0%, +5%)

1,10%

5,6%

Asia (in local)

Thailand

3,75%

(0%, +5%)

3,80%

3,4%

Indonesia

8,07%

(0%, +5%)

7,50%

12,6%

Malaysia

4,09%

(0%, +5%)

3,75%

6,8%

India

8,82%

(0%, +5%)

8,00%

15,4%

Philipines

4,57%

(0%, +5%)

3,50%

13,1%

13,34%

(0%, +5%)

12,00%

24,1%

EM bonds

Brazil

Latam (in local)

Mexic o

6,33%

(0%, +5%)

6,00%

9,0%

Colombia

6,89%

(0%, +5%)

6,50%

10,0%

Peru

6,11%

(0%, +5%)

5,00%

15,0%

Chile

5,05%

(0%, +5%)

4,50%

9,5%

(1) Expected performance at year end. (2) Expected performance includes price and coupon effect.

Instrument

Fundamental

Oil Commodities

Fx (Always US$

99,59

(0%, -5%)

-4,6%

CRY

299,59

(0%, -5%)

275

-8,2%

Gold

1330,52

(0%, -5%)

900

-32,4%

EUR/USD

EUR/JPY perspective, except for the JPY exchange USD/JPY rate, where we use a MXN/USD JPY perspective )

BRL/USD

1,378

(0%, +5%)

1,4

-1,6%

141,2

(0%, -5%)

160

-11,8%

102,5

(0%, -5%)

114

-10,1%

13,3

(0%, -5%)

12,75

-3,9%

2,3

(0%, +5%)

2,6

11,8%

(2)

Corporate Review

Global Asset Allocation Proposal Tactical Asset Allocation Proposal â&#x20AC;&#x201C; April 2014 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

19.3

10.0

12.0

6.0

6.6

4.0

4.1

Fixed Income Short-Term

25.0

26.7

15.0

5.0

4.6

0.0

Fixed Income OECD Government

30.0

24.1

20.0

15.0

12.0

8.3

5.0

3.2

Core Fixed Income Peripheral Risk Corporate Invest. Grade Fixed Income EM / HY

6.0

3.8

2.1

0.8

18.0

11.3

6.2

2.4

20.0

16.0

20.0

15.0

10.3

5.0

3.2

5.0

7.5

10.0

14.0

15.0

19.3

10.0

12.1

Fixed Income Asia

3.0

5.6

7.7

4.8

Fixed Income Latam

2.2

4.2

5.8

3.6

High Yield

2.2

4.2

5.8

3.6

Equity OECD

5.0

6.4

15.0

18.0

30.0

33.0

55.0

56.9

US Equity

1.0

2.7

5.0

8.5

European Equity

5.5

15.3

28.1

48.4

Equity Emerging

0.0

5.0

8.0

10.0

14.7

12.0

16.6

Asian Equity

0.0

4.8

8.8

9.9

Latam Equity

0.0

3.2

5.9

6.6

Commodities

0.0

5.0

2.5

7.0

3.2

9.0

3.9

Risk Parameters(1)

100

VaR

2.6%

9.3%

15.5%

21.4%

CVaR

4.6%

18.7%

32.0%

41.5%

maxDD(*)

-2.1%

-8.1%

-14.4%

-19.2%

Corporate Review

Legal Disclaimer All the sections in this publication have been prepared by the financial institutionâ&#x20AC;&#x2122;s team of analysts. The views expressed in this document are based on the assessment of public and private information. These reports contain evaluations of a technical and subjective nature on economic data and relevant social and political factors, from which the financial institutionâ&#x20AC;&#x2122;s analysts have extracted, evaluated and summarized the information they believe to be the most objective, subsequently agreeing upon and drawing up reasonable opinions on the issues analyzed herein. The opinions and estimates in this document are based on market events and conditions that took place before the publication of this document, and therefore cannot be determining factors in the evaluation of future events that take place after its publication. The financial institution may hold views on financial instruments that differ completely or partially from the general market consensus. The market indices chosen have been selected using the exclusive criteria that the financial institution regards as most appropriate. The financial institution cannot in any way guarantee that the predictions or events given in this document will take place, and expressly reminds readers that any past performances mentioned do not in any circumstances imply future returns; that the investments analyzed may not be suitable for all investors; that investments can fluctuate over time in terms of their share price and value; and that any changes that might occur in interest rates or currency exchange rates are other factors that may also make it unadvisable to follow the opinions expressed herein. This document cannot be regarded, under any circumstances, as an offer or proposal to buy the financial products or instruments that may have been mentioned, and all the information herein is for guidance purposes and should not be regarded as the only relevant factor when it comes to making a decision to proceed with a specific investment. This document does not, therefore, analyze any other determining factors for properly appraising the decision to make a specific investment, such as the risk profile of the investor, his/her knowledge, experience and financial situation, the duration or the liquidity of the investment in question. Consequently, investors are responsible for seeking and obtaining appropriate financial advice in order to assess the risks, costs and other characteristics of any investments they wish to make. The financial institution cannot accept any responsibility for the accuracy or suitability of the evaluations or estimates of the models used in the valuations in this document, or any possible errors or omissions that may have been made when preparing this document. The financial institution reserves the right to change the information in this document at any time, whether partially or in full.