Corporate review february 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 February, 2014

Corporate Review

Table of Contents Executive Summary………………………………………………………………………….……………………………………………………………..3 Overall Economic Environment Emerging Markets - Panic Mode? ……………………………………………..……………………………………………………………..4 Asia – Conditions are improving gradually……………………………………………………………………………………………..8 Eurozone – Incredible start to the year. Why?……………………..……………………………………………………………..17 USA – Where is the corporate cash going? ……………………………..……………………………………………………………..34 LatAm – A mixed picture………………………….…………………………….……………………………………………………………..41

Market Snapshot.……………….……………………………………………..……………………………………………………………..43 Performance and Volatility Market Outlook Equity. Short Term Outlook & Fundamental Outlook (Fundamental Analysis)………………………….………..47 ………………………………..…………………………………………………………..59 Interest Rates. Core Global Fixed Income Sovereign Risk (European Periphery)…………………………………………………………………………………………………..67 Corporate Credit..…………………………………………………………………..……………………………………………………………..71 Commodities & Precious Metals…………………………………………….……………………………………………………………..76 Forex………………………………………………………….………………………………..………………………………………………………..94

Summary Table for financial market prospects & Asset Allocation Proposal……………………………..101

Executive Summary

Corporate Review

Economy & Markets Equities – S&P: Short Term view. 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 -6.6 (worse than the -2.5 seen last month), showing that there would be now a significant stress level in the equity market (Overbought). Despite this, and although we would not recommend entering now long in the S&P, margin debt dynamics can go higher leading the S&P slightly above current levels. S&P: Fundamental Term view. Here are our figures: Sales +6.2%, margins +9.5%, EPS +6.2%, target PE 15.9, target price 1849, potential appreciation +3.2%. Europe (Stoxx600) Fundamental Term view. Here are our figures: Sales +3.4%, margins +6.5%, EPS +22.7%, PE 14.5, target Price 370, potential appreciation +14.5%. Asia EM ex Japan Fundamental Term view. Here are our figures: Sales +9%, margins +7.7%, EPS +15.3%, PE 13.7, potential appreciation +25%. Mexbol’s target price is 47.500 (potential appreciation +15.9%). For Brazil’s Eurozone – There are evident signs of economic improvement. An Bovespa target price is 52.000 (potential appreciation +8.8%). improvement reflected in the strong recovery of the Industrial Activity in Core Fixed Income – Bund: Start Buying at 2% yield, sell at 1.5%. the last part of 2013. Liquidity flows among the Eurozone continue Treasury: Start buying at 3%-3.25%, sell at 2.5% improving although admittedly, they are still far from “normal” levels. According to our analysis of debt sustainability, and our projections for Sovereign Risk (European Periphery): We project a 75-100 bp the different drives affecting the stock of public debt, then we only need additional cut in yields for the long maturity bonds of these issuers. Double to be patient with the French for just one year before the debt dynamics digit potential performance in Italy, Spain, Portugal and Greece. stabilizes first, and starts to improve thereafter. Corporate Credit: We prefer HY bonds (+4.2% expected potential), vs. a mild 1.9% in the itraxx and CDX. Buy EUR credit at +100bp spread. CDX at USA – The cash in corporations is now gone, but not being invested. +90bp and increase exposure in HY with spreads above 400bp. The money goes toward dividends and share buybacks, two different EM Bonds Asia (local currency): The Tapering issue will probably ways of returning the capital to shareholders. About US$2 trillion have continue damaging these bonds. Despite this, we see a lot of value in these been in paid in share buybacks and US$3.5 trillion in dividends. In total, assets, especially in local currency. Volatility guaranteed. Preferred: US$3.5 trillion in the last 4 years have been returned to shareholders Malaysia, Indonesia & India. (and not invested). While the blatant manipulation of the monetary EM Bonds Latin America (local currency): Same reading as in Asian policy continues, capital spending will continue being low. According to bonds. Volatility guaranteed. Most preferred: Chile, Mexico and Peru the “forward guidance” provided by the central banks this manipulation Commodities: Our target price for Oil (WTI) remains stable around the will continue, and so could the lack of investment. The market $85. Buy below 80’s and sell above $95. Commodities in general at fair implications of this are clear: (1) Regarding the 10 Year Treasury Yield, value. Preferred: Gas, wheat, cotton, and some minerals. Avoid metals. this should remain structurally low (3% Neutral, 3.25% Buy, 3.5% Fx: Fundamental target for the USD/EUR at 1.40. Asian currencies are Strong Buy). (2) Concerning the equity market, it could remain high but attractive. Avoid JPY (vs. EUR and USD). GBP vs. EUR range bound in the not higher. (3) in the Fx arena, this factor is neutral to negative for the 0.82-0.86 area). Neutral MXN (target at 12.75). Short BRL (2.6). USD, which should remain stable to weak (vs EUR) Emerging – Panic do not destroy capital because capital was previously destroyed by massive misallocation in unproductive activities. The good news is that you only have to be worried about those economies that more heavily misallocated. At times when global central bank reserves are shrinking (as suggested by the huge improvement in the US trade balance), and monetary conditions are to be tightened … the weak spots are always (1) the countries attempting to defend its fixed (and usually artificially high), exchange rates in order to cushion its domestic financial industry and the stock of foreign investment: Argentine, Ukraine or (2) The countries running large current account deficits: Turkey, South Africa, Brazil, India. Meanwhile, December PMIs for Emerging Asia point to gradually improving conditions in the region’s manufacturing sector and Asia’s export recovery seems to gain momentum.

Corporate Review

Table of Contents Executive Summary Overall Economic Environment Emerging Markets - Panic Mode? Asia – Conditions are improving gradually Eurozone – Incredible start to the year. Why? USA – Where is the corporate cash going? LatAm – A mixed picture

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

Corporate Review

Panic do not destroy capital because capital was previously destroyed by massive misallocation in unproductive activities 1.

Why investors misallocated? “Combine the false price of some currencies” with the “false price in the cost of capital”, and the odds of a considerable global misallocation go up through the roof” (C.Gave)

The good news is that you only have to be worried about those economies that more heavily misallocated …

…. and observe the rest of markets (economies) that are being punished for no apparent reason beyond the hypothesis of contagion.

With the EM in panic mode, there are there are clear weak spots within this universe (the ones that more aggressively misallocated)…

… but also countries in position of strength

Corporate Review

Let us go with the weak spots â&#x20AC;˘

At times when global central bank reserves are shrinking (as suggested by the huge improvement in the US trade balance), and monetary conditions are to be tightened â&#x20AC;Ś the weak spots are always:

The countries attempting to defend its fixed (and usually artificially high), exchange rates in order to cushion its domestic financial industry and the stock of foreign investment: Argentine, Ukraine

The countries running large current account deficits: Turkey, South Africa, Brazil, India

Corporate Review

Meanwhile, other emerging markets are plodding along •

This helps to explain why markets as diverse as …

Indonesia (feeling the brunt of China’s lower demand of minerals)

Thailand (despite a violent political crisis)

Chinese Yuan

Philippines (still recovering from the most powerful Typhoon ever recorded)

… or Vietnam, Malaysia, Sri Lanka, Pakistan, etc…

• … are all flat or up for the year!

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

December PMIs for Emerging Asia point to gradually improving conditions in the regionâ&#x20AC;&#x2122;s manufacturing sector PMIs rose in four of the six economies in South Asia (with India and Australia being the exceptions). New orders were not so strong across the board but they are higher than a couple of months ago in most economies, which bodes well for the coming months.

Source: Markit, Capital Economics

Corporate Review

Asiaâ&#x20AC;&#x2122;s export recovery to gain momentum Exports from Emerging Asia staged a mild recovery in the second half of the year

Capital Economics, Thomson Datastream

The most encouraging recent development for Asian exporters has been a turnaround in demand from the EU.

Capital Economics, Thomson Datastream

Corporate Review

Prospects for exporters are improving The new export orders component of the PMIs is consistent with export growth moving up into the double digits Indeed, the expected slowdown in China will act as a drag specially in commodity exporters (such as Malaysia or Indonesia although they are raising the share of the manufacturing export sector so that they stop being considered as â&#x20AC;&#x153;commodity exportersâ&#x20AC;?

Markit, Capital Economics, Thomson Datastream

Corporate Review

Prospects for exporters are improving Nevertheless, in general terms, the Chinese slowdown is expected to be more than compensated for by stronger demand coming from the developed world.

Markit, Capital Economics, Thomson Datastream

Corporate Review

Exporters of manufactured products move faster. Commodity exporters lagging The best performing exporter is Vietnam. Its export-oriented manufacturing sector is benefiting from the relocation of lowend manufacturing away from China (which has been steadily moving up the value chain). Commodity exporters have suffered from softer commodity prices.

Capital Economics, Thomson Datastream

Corporate Review

What could be a good strategy? The Newly Industrialized Economies â&#x20AC;&#x201C;or NIEs economies(HK, Singapore, Taiwan and Korea), as the most export oriented economies, stand to gain the most from an expected upturn in global demand (fuelled by demand in DM). The ASEAN-4 economies (Thailand, Malaysia, Indonesia and Philippines) will also benefit from global dynamics in 2014, but to a lesser extent. Accordingly, we consider a good strategy would be to be long equities in exporters in NIEs markets. Markit, Capital Economics, Thomson Datastream

Corporate Review

So, Tapering or Not, Look to Asia No doubt Asian assets remain vulnerable to another round of taper-related outflows, specially those with structural deficits.

Nevertheless, there are powerful counter-forces to the â&#x20AC;&#x153;liquidityâ&#x20AC;? concerns. 1. Valuations (Fx, Fixed Income or even Equity) 2. Compelling structural narratives (debt, budget balance discipline, strong Fx reserves, etc) 3. Growth potential (and capacity to improve credit metrics)

Corporate Review

Recently, a number of additional considerations make us feel even more comfortable now with Asian Assets

1.Given that fixed income volatility was probably the biggest cause for the Asian sell-off this summer, it should be good news that in the US, the long end of the bond market is already yielding some 100 bp higher than Mayâ&#x20AC;&#x2122;s taper call.

2.Inflationary pressures have continued to dissipate worldwide (in fact, deflation remains a threat). As such, the Fed is in a much better position to manage monetary policy, i.e to couple tapering with convincing promises that short rates will remain anchored at zero for the foreseeable future (and also, the long end of the curve).

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Still think I exagerate? A 110 pb narrowing in the Portuguese bond yield in just 15 days !! Portug al 10Y Yield (TPI) (PT10YY-TU1) 4.92 -0.06 -1.29% 09:18:00 AM EUR

2013/07/19 - 2014/01/21 7.5 7 6.5 6 5.5 5

Aug

Sep

Oct

Nov

Dec

Jan

Corporate Review

Why?

Trading profit: EUR3.42 bn Net Income: EUR3.71 bn Ratio x 0.92

Corporate Review

Yes but, Why Banks and investors have made the eurodenominated assets to rally?

In my humble opinions, there are only two reasons: 1. They think that economic conditions are actually improving 2. They think that the â&#x20AC;&#x153;debt issueâ&#x20AC;? is eventually sustainable

Corporate Review

Eurozone â&#x20AC;&#x201C; There are evident signs of economic improvement

Corporate Review

Eurozone â&#x20AC;&#x201C; Gradual economic improvement

Corporate Review

An economic improvement reflected in the strong recovery of the Industrial Activity in the last part of 2013

Corporate Review

EZ - Liquidity flows among the Eurozone continue improving although they are still far from “normal” levels 1,500

TARGET 2

1,500

1,000

500

- 500

- 1,000 - 1,500

- 1,000 '09

'10

'11

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'13

- 1,500

Ge rma ny, Ho lla nd, Lux ,Finla nd & Austria GIP SIs Andbank, Central Banks

©FactSet Res earch Systems

1.Rally is being driven by residents out of the Euro area 2.This imbalances explain the low level of credit Nevertheless, we already know that there is plenty of money to be borrowed.

Corporate Review

EZ - Liquidity flows among the Eurozone continue improving although they are still far from â&#x20AC;&#x153;normalâ&#x20AC;? levels

3. This can only be compensated with (1) a trade surplus of GIPSIs with the rest of the world, or at best, start turning the trade balance with North.

4. While this imbalances persist, the ECB must act as a lender of last resort (both for public borrowers, and private borrowers)

5. â&#x20AC;Ś making a credit crunch still possible.

Corporate Review

Yes but, Why Banks and investors have made the eurodenominated assets to rally?

Corporate Review

The main drivers of public debt dynamics

Change in D/GDP ratio =

Snowball Effect

Primary fiscal balance

stock/flow adjustment

[Snowball Effect]: Is the impact of the difference between the cost on outstanding debt and the nominal GDP growth. [Primary fiscal balance]: Is the budget balance excluding interest payments, as a % of GDP. [Stock / Flow adjustment]: Net changes in the public debt ratio that does not affect deficit (i.e Funds to bail out domestic banks that must be funded in the international markets, official bailouts received from abroad, repayment of funds by rescued banks, etc.)

Corporate Review

Let us start with the first term: “The Snowball Effect” Remember, the Snowball Effect is the impact of the difference between the cost on outstanding debt and the nominal GDP growth. Dynamics are quite simple here. The larger the quantum of debt, the greater the multiplier effect coming from the difference between the cost of debt and nominal growth.

Snowball Effect (t) =

D (t-1)

Int.rate (t) - Var GDP nom (t) 1 + Var GDP nom (t)

Sensitivity Table to exemplify the variation mechanism of the Snowball Effect Cost of Debt >> Cost of Debt > Cost of Debt = Cost of Debt < Cost of Debt << Nominal growth Nominal growth Nominal growth Nominal growth Nominal growth

Nominal GDP t-1 (bn €)

1,935

1,799

% Cost of Debt (t) (B)

3.00%

Nominal GDP growth (t) (A)

2.00%

2.50%

3.00%

3.50%

4.00%

Snowball Effect (t) (bn €)

17.64

8.78

0.00

-8.69

-17.30

Snowball Effect (t) (% GDP)

0.89%

0.44%

0.00%

-0.43%

-0.86%

t-1 (bn €)

Andbank

Corporate Review

Now we can project the value for the “Snowball Effect” in France for the coming years Remember

Snowball Effect (t) =

D (t-1)

Int.rate (t) - Var GDP nom (t) 1 + Var GDP nom (t)

Projections for French aggregates (%) (Source IMF & Andbank)

Real GDP growth (IMF projections) Inflation (IMF projections)

And now we just have to do our exercise

Nominal GDP (t-1) (bn €) Debt (t-1) (bn €) % Cost of Debt (t) (B) Nominal GDP growth (t) (A) Snowball Effect (t) (bn €)

Snowball Effect (t) (% GDP)

0.20% 1.40%

1.00% 1.70%

1.50% 1.50%

1.70% 1.70%

1.80% 1.70%

1.90% 1.90%

1,935

1,987

2,047

2,116

2,190

2,274

1,799

1,810

1,801

1,789

1,772

1,755

2.20%

2.30%

2.40%

2.50%

2.60%

1.60%

2.70%

3.00%

3.40%

3.50%

3.80%

10.6

-8.8

-12.2

-17.3

-17.1

-20.3

0.54%

-0.43%

-0.58%

-0.79%

-0.76%

-0.86%

The IMF expects real growth to revive gradually but modestly.

We expect the cost of debt to remain structurally low but rise moderately (our estimates for rates are higher than IMF’s ones)

Corporate Review

But we are still missing two concepts that will eventually set the level of debt: The Primary Deficit & The Stock/Flow adjustment Projections for French aggregates (%) (Source IMF & Andbank)

Snowball Effect (t) (% GDP)

0.54%

-0.43%

-0.58%

-0.79%

-0.76%

-0.86%

Primary Deficit (% GDP)

2.00%

1.50%

0.70%

-0.10%

-0.90%

-1.70%

Stock / Flow adjustment

0.70%

0.30%

0.10%

Change in Debt Ratio (pp)

3.24%

1.37%

0.22%

-0.79%

-1.56%

-2.46%

New Debt-to-GDP ratio

93.5%

94.9%

95.1%

94.3%

92.7%

90.3%

Indeed, a 1.7% primary surplus may seem very ambitious, specially if we consider that represents a situation that France has never enjoyed. However, some aspects must be considered at this point.: 1.

As the output improves from 2015 to 2018, the French government will presumably take the opportunity of a better growth environment to reduce public spending and comply with the EU’s fiscal compact.

It is not an unattainable goal. Some of France’s neighbors have exerted strong control over their public finances that, in many cases, has resulted in a considerable primary surplus (Germany posted a 2.5% primary surplus already in 2012, and Greece’s primary surplus as of November 2013 was near the 1.5% of GDP)

Corporate Review

Thus, if we are to believe the conservative projections for real GDP growth and inflation … then we only need to be patient with the French for just one year before this situation stabilizes.

France - Public Debt Projection 100%

94.9% 95%

95.1%

93.5%

90.3%

90%

According to our projections for debt costs, and considering the conservative estimates for nominal GDP… … our joint analysis of the three main factors driving the quantum of debt (snowball effect, primary deficit and flow adjustment)…

85% 80% 75% 70% 65% 60% 55% 50% 04

Debt-to-GDP ratio

Andbank's Projection of Debt-to-GDP ratio

… results in a French gross public debt rising from 93% of GDP in 2013 to a peak near the 95% in 2015, but then stabilizing and eventually decreasing to 90% of GDP in 2018

Corporate Review

The Spanish case Projections for French aggregates (%) (Source IMF & Andbank)

Real GDP growth (IMF projection) Inflation (Andbank Projection)

-1.30% 1.50%

0.20% 1.60%

0.50% 1.70%

0.70% 1.80%

0.90% 1.90%

1.20% 2.00%

100

102

104

107

110

Nominal GDP (t-1) (Base 100) Debt (t-1) (% of GDP) % Cost of Debt (t) (Eurostat) Nominal GDP growth (t) Snowball Effect (t) (monetary units)

86.0

89.2

90.6

91.4

91.7

91.5

3.40%

3.20%

3.00%

2.80%

2.60%

2.40%

0.20%

1.80%

2.20%

2.50%

2.80%

3.20%

3.2

1.4

0.8

0.3

-0.2

-0.9

Snowball Effect (t) (% GDP)

3.19%

1.38%

0.78%

0.29%

-0.19%

-0.78%

Primary Deficit (% GDP) Budget Balance (EC relaxed targets in April 2013) Stock / Flow adjustment

3.10% 6.50% 0.00%

2.30% 5.50% 0.00%

1.10% 4.10% 0.00%

0.20% 3.00% 0.00%

0.10% 2.70% 0.00%

0.10% 2.50% 0.00%

Change in Debt Ratio (pp)

6.29%

3.68%

1.88%

0.49%

-0.09%

-0.68%

Debt-to-GDP ratio Andbank's Projection of Debt-to-GDP ratio

92.3% 92.3%

96.0%

97.9%

98.3%

98.2%

97.6%

Forecasted (acceleration)

0.10%

-0.20%

Corporate Review

Spanish Debt Dynamics – Andbank’s projection

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

The cash in corporations is now gone, but not being invested Since the 1970â&#x20AC;&#x2122;s, trends in financing gap & capital spending almost always coincided. Nevertheless, since 2012 the story is quite different. Companies are spending their cash, but not because of new hires, new plant or new equipment. Indeed, capital spending growth rate is close to zero (and in real terms, growth rate is at zero)

4 3

CORPORATE CASH & CAPEX

Positive Financing Gap = Companies in negative Cash Flow

20 15 10 5

2 1 0 -1 -2 -3

Negative Financing Gap = Companies in positive Cash Flow

-4 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

0 -5 -10 -15 -20

Financing GAP as % of GDP (Left) (% 1YR) Private Fixed Investment - Nonresidential (Right) Andbank, Federal Reserve System

ÂŠFactSet Research Systems

Corporate Review

Where is the cash going? Simply put, companies are returning the capital to shareholders As can be seen in the charts, the money goes toward dividends, share buybacks, or purchase of competitors. Three different ways of returning the capital to shareholders About US$2 trillion have been in paid in share buybacks and US$3.5 trillion in dividends. In total, US$3.5 trillion in the last 4 years have been returned to shareholders (and not invested)

900

US Corporates â&#x20AC;&#x201C; Share Buybacks ($tr)

US CORPORATES - NET DIVIDENDS PAID

850 800 750 700 650 600 550 500

'09

'10

'11

'12

'13

(MOV 4Q) Corp Business, Net Dividends Paid, Flows, Billin USD, Saar Andbank, Federal Reserve System

ÂŠFactSet Research Systems

Reuters Thomson One, J.P Morgan

Corporate Review

Why US corporate managers do not invest their Free Cash Flow? Investors and managers base their investment decisions on the information they receive on the price of money (domestic money and foreign money) and their expectations about these two concepts. Interest rates and exchange rates constitute the two building blocks of the monetary information system (MIS). Thus, when they are manipulated (kept artificially low), then business realize that the entire Monetary Information System is distorted and the rational behavior is NOT to make any investment decision. In such a world, it is preferable to return the capital to the shareholders and leave them with the problem of what to do.

Monetary Information System

Interest Rates

Exchange Rates

Corporate Review

What are in our view the potential implications of this?

Economy: 1. While the blatant manipulation of the monetary policy continues, capital spending will continue being low. According to the “forward guidance” provided by the central banks this manipulation will continue, and so could the lack of investment. 2. In the past, companies started to invest when the output gap had closed (they run out of free capacity). Currently we are far from potential growth, which seems to indicate that there is a lot of unused capacity, meaning that there is no capital expenditure in sight. 3. Thus, any growth acceleration in 2014 will have to come from private consumption or net exports (since investment should be ruled out and government spending will continue subdued). This means that the acceleration, if any, can not be intense. 4. GDP growth rate will probably end 2013 around 2.75%. We see GDP expanding at 2.75%-3% pace in 2014. 5. With a longer term view, the resulting outcome of a lack of investment is a decline in the structural growth rate and thus a widening of the Output Gap. 6. Persistent and large output gap have severe consequences for a country’s labor market through the concept known as “hysteresis effects” (the longer the workers remain idle, due to an economy operating below its capacity, the more their skills can atrophy, potentially rendering these workers unemployable). In the USA, the long-term unemployment rate stood at 36.9% in 3Q13.

Financial Assets: 1. 10 Year Treasury Yield: Structurally low (3% Neutral, 3.25% Buy, 3.5% Strong Buy) 2. Equity: High but not higher. 3. USD: Stable to weak (vs EUR)

Corporate Review

Why we remain in our commitment for low yields? 1. Every Christian soul in this world bets for the end of the liquidity injections in 2014. So I dare to say that everything is already in price => Yields should not go much higher 2. US CPI reading for November and December (1.2% and 1.5% y/y respectively), and the recent 0.86% y/y reading in Euro zone, make that THE RISK OF A MOVE INTO A PRONOUNCED DEFLATION LOOKS NON-TRIVIAL => Another anchor for yields 3. THIS WILL NO DOUBT BEAR ON THE FED’S DECISSION ON THE FUTURE OF ITS BOND BUYING PROGRAM => Any surprise will come in the upside (A surprise could be the Fed delaying the Tapering => which could make the core government bonds to rally) 4. These trend in prices will not change (according to our central scenario for the foreseeable future). If true, the implications are clear: Low yields and high price in risky assets?

INFLATION - USA

INF LATION - Euro zo ne

4 8

-2

-1

-2

'70

'72

'74

'76

'78

'80

'82

'84

'86

'88

'90

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'98

'00

'02

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'06

'08

'10

'12

3 2

'91

(% 1YR) CPI All Item s US Department of Labor

'93

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

(% 1YR) Harmonized Cpi, All-Items Hicp - Euro Area

©FactSet Res earch Sys tems

Eurostat

©FactSet Research Systems

Corporate Review

US Economy â&#x20AC;&#x201C; Data was mixed in the last month

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

How is each country positioned in each of the subjects that will dominate in 2014? Subject

Worst Positioned

Demand from Asia

•

Colombia, Mexico, Argentina

Global monetary conditions (twin deficit)

•

Brazil, Chile, Mexico

Domestic vulnerabilities (Investment)

•

Brazil

Global Competitiveness

•

Brazil, Argentina

Rapid build-up of private sector debt

•

2014 growth

Inflation & Real income deterioration

Final Assessment

Best Positioned •

Chile, Peru

•

Colombia, Argentina

•

Chile

•

Chile, Peru

Brazil

•

Mexico, Argentina

•

Argentina, Brazil

•

Peru, Chile, Mexico

•

Argentina

•

Peru, Chile

•

Brazil (bad position in 5 out of 7 subjects) Argentina (bad position in 4 out of 7 subjects)

• •

Chile (in 5 out of 7) Peru (in 4 out of 7)

•

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Global Financial Markets Performance

Performace Tot.Return Last Month (% )

Performace Tot.Return YTD (% )

-0.15% 1.54% 2.68% -1.32% 1.90% -4.33%

-0.99% 0.36% 1.41% -1.98% -1.46% -5.02%

1.61% 1.38% 0.16% 1.33% 2.50%

2.04% 1.88% 0.56% 1.70% 2.90%

2.57% 3.66% 8.32% 1.66% 3.17%

1.99% 3.45% 8.08% 1.10% 3.27%

-0.04% -1.38% -1.09% 1.71% 0.26%

-0.48% -1.05% -2.09% 1.41% 0.24%

0.00% 0.13% -0.52% -2.32% -9.72%

-0.16% -0.52% -0.08% -2.32% -11.14%

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

Andbank Data â&#x20AC;&#x201C; Powered by Factset Research Systems Data as of 1-24-2014

LatAm Government Bonds (10 year) Brazil Benchmark Bond Mexico Benchmark Bond Peru Benchmark Bond Colombia Benchmark Bond Argentina Benchmark Bond (Citi EMUSDGBI Argentina (USD)

Corporate Review

Global Financial Markets

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

Performace Tot.Return Last Month (% )

Performace Tot.Return YTD (% )

-1.91% -0.52% 20.52% 1.90%

-1.12% -1.14% 23.87% 2.64%

-0.71% -5.52% -4.98% -7.22% 5.11% -3.60%

2.32% -4.82% -5.57% -8.35% 3.26% -3.65%

7.26% 9.38% 3.99% 3.66% 6.39%

3.85% 6.61% 3.56% 3.13% 4.31%

0.07% 4.16% -1.25% 0.24% -9.28% 0.27%

-1.48% 4.76% -1.65% -1.94% -8.96% -0.56%

Corporate Review

Global Financial Markets - Equity Performance – YTD. 103 102 101 100 99 98 97 96 95 94

Global Equity Indices (Local - base 100)

06 Jan (INDEX) S&P 500 (INDEX) Euro STO XX 50 (INDEX) ST OXX 600

Stoxx, S&P, MSCI

13 Jan

103 102 101 100 99 98 97 96 95 94

20 Jan

(INDEX) MSCI AC As ia P acific ex JP (INDEX) MSCI Japan Latam Equity Indices (Local - Index 100) (INDEX) MSCI EM La tin Ame110 rica

110

©FactSet Research Systems

105

100

6/1 MSCI Argentina MSCI Bra zil

MSCI, S&P Corp

13/1 MSCI Chile - P rice Inde x MSCI P eru

20/1

MSCI La tin Am e rica ©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 ST Assessment: 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 -6.6 (worse than the -2.5 seen last month), showing that there would be now a significant stress level in the equity market.

Nature of Index

1 2 3 Positioning 4 5 Aggregate Result in our Flow & 6 7 Sentiment Indicators Previous Current 8 9 Flow Month Month 10 Buy signal 0 0 11 Positive Bias 3 2 Mkt vs Data 12 Neutral 9 3 13 Negative Bias 6 3 14 Sell signal 4 14 15 FINAL VALUATION -2.5 -6.6 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 -1 -1 -0.5 -0.5 -0.5 -1 0.5 0 -1 -1 0 0.5 0 -1 -1 -1 -1 -1 -1 -1 -1 -1

Corporate Review

Nominal margin debt is at an all-time high

And all the “other people’s money has been invested” … … as suggested by the negative credit balance (Free credit cash in Margin Account minus Margin debt)

Corporate Review

Although admittedly, 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 30-ene-14

Expected Change (%) 2014

1,849

1,792

3.2%

(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: The monetary impulse (13.4), the profit cycle (17.4) and the historical value (16.9). The average value is 15.9, and 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 30-ene-14

Expected Change (%) 2014

370

323

14.5%

(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 30-ene-14

Expected Change (%) 2014

925

740

25.0%

Corporate Review

Global Equity Ranking â&#x20AC;&#x201C; Fundamental Outlook Long-term view

P to Book Avg grade Hierarchy World South Korea Russia Turkey Hong Kong Japan Chile Indonesia China India Israel Brazil Thailand Taiwan Poland Australia Germany Canada Italy Malaysia France Mexico Eurozone Spain United States South Africa Switzerland Sweden United Kingdom

-2,01 -2,66 -2,17 -1,38 -0,47 -1,23 -0,06 -0,79 -0,32 -0,08 -1,67 0,36 -0,11 -0,80 -0,19 1,49 -0,76 -0,73 0,45 0,35 2,25 0,97 0,29 3,07 1,94 2,81 1,95 1,88

3 1 2 5 11 6 16 8 12 15 4 19 14 7 13 22 9 10 20 18 26 21 17 28 24 27 25 23

Price to Earnings Avg grade Hierarchy -0,88 -2,05 -2,12 -0,77 -0,38 0,21 -1,51 -0,82 -0,70 0,77 -0,82 -0,70 1,10 0,09 -0,17 0,11 -0,25 2,26 0,23 2,12 0,95 2,06 2,74 1,14 0,43 2,37 1,84 2,42

4 2 1 7 10 15 3 5 9 18 6 8 20 13 12 14 11 25 16 24 19 23 28 21 17 26 22 27

Price to dividend Avg grade Hierarchy -0,79 1,23 0,62 -0,06 -0,94 0,43 0,63 0,58 0,30 -0,65 1,31 0,74 -0,44 0,89 0,81 -0,76 0,89 -0,29 0,75 -0,60 -0,15 -0,86 -0,77 -0,58 0,43 -0,57 0,29 -0,31

3 27 20 14 1 17 21 19 16 6 28 22 10 26 24 5 25 12 23 7 13 2 4 8 18 9 15 11

EV to EBITDA Avg grade Hierarchy -0,38 -2,30 -1,60 -0,57 -0,50 -0,80 -1,46 -0,09 -0,46 0,29 0,10 -0,27 0,62 -0,79 0,91 1,00 -0,04 -0,19 0,22 0,86 0,41 1,15 0,56 1,25 1,15 2,22 1,32 2,16

9 1 2 6 7 4 3 12 8 16 14 10 19 5 21 22 13 11 15 20 17 23 18 25 24 28 26 27

Real yield ratio Avg grade Hierarchy -0,34 2,22 -0,02 1,27 -0,29 0,76 0,61 0,58 0,43 -0,12 -0,75 -0,32 -0,50 -1,43 -0,24 -0,74 -1,08 -1,16 -0,60 -0,99 -0,65 -1,32 -1,71 -0,51 -0,92 -0,84 -1,04 -1,21

12 1 7 2 10 3 4 5 6 8 18 11 13 27 9 17 23 24 15 21 16 26 28 14 20 19 22 25

VALUATION composite Avg grade Hierarchy 6,2 6,4 6,4 6,8 7,8 9 9,4 9,8 10,2 12,6 14 14 15,2 15,6 15,8 16 16,2 16,4 17,8 18 18,2 19 19 19,2 20,6 21,8 22 22,6

1 2 2 4 5 6 7 8 9 10 11 11 13 14 15 16 17 18 19 20 21 22 22 24 25 26 27 28

Corporate Review

Table of Contents Executive Summary Overall Economic Environment Eurozone – Incredible start to the year! …. Why? Eurozone – A brief debate on the State of the Union Eurozone – About debt sustainability. The French case & the Spanish case USA – Where is the corporate cash going? Asia – Gradually improving conditions LatAm – A mixed picture

Market Snapshot. Performance and Volatility Market Outlook Equity. Short-Term Outlook (Flow Analysis) & Long-Term 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

Corporate Review

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

Still a disinflationary world: Swap rates & Treasury yields have increased during the last months primarily due to the threat of Tapering. Despite this, it cannot be said yet that strong implicit inflation is expected in the long term (2.85% in the US and 1.97% 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 spread between the EUR curves points to the existence of a relatively higher demand for bunds as a result of higher market fears. Maybe a sign that global macro risks & financial fears have not disappeared. Nevertheless, it can be said that today, these fears are now lower.

EUR swap spread is now slightly below the historical average level (31 vs 45bp). In order for this spread to normalize towards 40-45 bps, with no inflationary pressures in sight, this can only materialize through a 15 bp decline in bund yield.

However, the swap spread in the US remains more clearly at historical lows (12 bps) and this should normalize towards the 4050 bps average. With no inflationary pressures in sight, this can only materialize 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: 27/01/2014

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)

27-Jan-2014

Short Term Target

0,13

0,00

-13

1,96

0,25%

0,02%

0,25%

0,13%

0,27%

0,37%

0,28

0,18

-10

2,86

0,28%

0,05%

0,28%

0,33%

0,56%

0,51

0,43

-7

3,83

0,28%

0,08%

0,28%

0,51%

0,37%

0,79%

0,76

0,71

-5

4,68

0,22%

0,13%

0,22%

0,76%

0,35%

0,98%

0,89

0,87

-2

5,31

0,11%

0,15%

0,11%

0,89%

0,26%

1,00%

1,12

1,13

6,09

-0,03%

0,19%

-0,03%

1,12%

0,16%

1,09%

1,34

1,37

6,83

-0,22%

0,22%

-0,22%

1,34%

0,01%

1,13%

1,58

1,64

7,62

-0,44%

0,26%

-0,44%

1,58%

-0,18%

1,14%

1,67

1,75

8,45

-0,71%

0,28%

-0,71%

1,67%

-0,43%

0,96%

0,35

0,25

-10

1,92

0,19%

0,06%

0,19%

0,35%

0,25%

0,54%

0,73

0,65

-8

2,92

0,25%

0,12%

0,25%

0,73%

0,37%

0,98%

1,19

1,12

-7

3,81

0,27%

0,20%

0,27%

1,19%

0,46%

1,46%

1,56

1,51

-6

4,68

0,26%

1,56%

0,52%

1,82%

1,88

1,84

-4

5,52

0,23%

0,31%

0,23%

1,88%

0,54%

2,11%

2,20

2,17

-3

6,29

0,18%

0,37%

0,18%

2,20%

0,54%

2,37%

2,40

2,38

-1

6,95

0,10%

0,40%

0,10%

2,40%

0,50%

2,49%

2,56

7,89

0,00%

0,43%

0,00%

2,56%

0,43%

2,56%

2,74

2,75

8,37

-0,12%

0,46%

-0,12%

2,74%

0,34%

2,62%

Duration

Corporate Review

EM bonds - Asia 1.The Market failure: Thee drop has had different intensities The group of economies that has withstood the “crisis” better has been the one comprising the countries that “buy protection” via a mercantilist approach (that ensures current account surpluses): South Korea, Taiwan, etc… And the countries hardest hit have been those experiencing current account deficits (in most cases due to the development of their domestic currencies). 2. The opportunity: The mercantilist approach reduces the dependence on capital inflows, but synchronizes the domestic cycle to the Western The best options to invest are in those countries that are less synchronized with the developed economies. Those with stronger domestic dynamics.

Corporate Review

EM bonds – Yes but, is it now a moment to stay in? • Indeed, these markets will “dance” the Tapering song • Admittedly they get worse but we see value in these assets. • This is not a balance sheet problem, and thus, it is 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 – low yields, it is reasonable to think of a real yield of 1% 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 the EM bonds are now structurally low and this will persist, making it more reasonable to set the 100-150 bp of spread between real yields as a good entry point. This means that, given that real yield in T10 is now near 1.5%, we recommend buying EM bonds when they offer a real yield near the 2.5%.

Corporate Review

Asian bonds. Is there already some opportunity?

S.Korea Thailand Singapore Phillipines Taiwan Malaysia Indonesia China

CPI (y/y) Nominal CPI (y/y) Andbank's 10yr Yiled Last reading Estimate 3.60% 0.70% 0.70% 3.95% 1.50% 1.50% 2.46% 1.80% 1.80% 4.28% 2.90% 2.90% 1.65% 0.50% 0.50% 4.26% 2.60% 2.60% 8.60% 8.30% 4.50% 4.49% 3.00% 3.00%

Real Yield (10yr bond) 2.90% 2.45% 0.66% 1.38% 1.15% 1.66% 4.10% 1.49%

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

European Sovereign Risk Trends Periphery (CDS 5yr)

Good start to the year! The recent volatility has just affected the weakest links (Greece & Portugal) 700 PERIPHERAL

600 500 400 300 200 100

Portugal

Spain

Ireland

Italy

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Corporate Review

European Sovereign Risk Trends Core Countries (CDS 5yr)

Stability in the Tier 1 bonds!! 125 CORE COUNTRIES

100

Belgium

France

Germany

Austria

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Corporate Review

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

CURRENT LEVELS FOR SOVEREIGNS

Yield 10Y Spread 10Y CDS 5Y (cash bond) (cash bond, bp) (usd, bp)

Peripheric

27/01/2014

Recommendation Overweight

Greec e

8,72

705

Neutral

Portugal

5,29

363

294

Overweight

Ireland

3,04

138

103

Neutral

Spain

3,82

216

124

Overweight

Italy

3,94

228

166

Overweight

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Corporate credit Recent Performance & Recommendation Corporate Credit - EUR 140

110

130

100

120 110

100

90 80

Figures as of:

CDX Main

120

150

Corporate Credit - USD

Itrax Main

27-1-14

EUR Corporates (itraxx): At 80bp of spread, we consider euro corporates as “expensive”. Nevertheless we believe that the positive mood in the market will persist during the year. We recommend maintaining positions if you are long but not to build new exposures. Entry point above 100bp.

Best names: (1) Fin Subs and Tier 1 of core countries’ banks. (2) Fin Sen of “troublesome” countries. (3) Leader corps in peripheral countries. (4) Small operators in the TMT sector.

Avoid: (1) Financial corps of countries that have not undertaken reforms in the financial sector (Fra & Germ). (2) Autos of Germ & Fra (not expensive but bad dynamics)

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

SNRFIN CDSI GEN 5Y Curncy SUBFIN CDSI GENERIC 5Y Corp

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 troublesome European countries

Corporate Review

Credit – HY EUR Recent Performance & Recommendation Markit iTraxx Europe Crossover 1000 900 800 700 600 500 400 300 200 100 0

HY Crossover: At 328bp of spread, we consider EUR-HY as “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

16,2

-0,57%

83,8

100

16,2

Spread effec t

0,28%

Eur3m+

0,84%

0,28%

Coupon effec t

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

0,17%

0,76%

0,71%

Price effect

From

Change

-13,8

0,48%

83,8

-13,8

Spread effec t

1,41%

Eur3m+

0,84%

1,41%

Coupon effec t

Total Effect Yield effect

1,89% -5

0,17%

72,7

17,3

0,24%

USLib3m+

0,73%

0,24%

1,56%

1,51%

-0,06%

-6

0,71%

Price effect

From

-7,7

0,27%

72,7

-7,7

1,30%

USLib12m+

0,73%

1,30%

-0,05%

Yield effec t

1,56%

1,51%

-0,06%

-6

Change (bp)

Price effect

From

86,0

-3,01%

314,0

400

86,0

0,84%

USLib3m+

3,14%

0,84%

0,76%

0,71%

- 0,05%

Coupon effect Total Effect Yield effect (5yr bond)

Change

-2,17% -5

0,17%

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

Spread effec t

Change (bp)

Price effect

From

-14,0

0,49%

314,0

300

-14,0

3,71%

USLib12m+

3,14%

3,71%

0,76%

0,71%

- 0,05%

Coupon effect Total Effect Yield effect

Change

4,20% -5

0,17%

Change

1,57%

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

Spread effec t

0,20%

Change (bp)

Total Effect 0,76%

Change

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

Change (bp) Coupon effec t

From

- 0,61% -0,36%

Yield effec t (5yr bond)

-0,05%

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

Spread effec t

Price effect

17,3

Total Effect

-0,28% -5

Change (bp)

0,20%

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Industrial commodities. The super-cycle ended in 2013 and we do not expect a big upward movement in prices.

Corporate Review

1st. The primary driver of the commodities super-cycle has now slowed down and we suspect that this slowdown is clearly 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 RB S pot I ndex , 1 9 6 7 =1 0 0 - U nit ed S tat es (Le ft) (M O V 3 M ) % 1 Y R C hina he a vy indus t ria l v alue added (Right) 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 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, during a long period of time (years), and this should keep prices subdued. 240

WORLD PRODUCTION OF INDUSTRIAL & ENERGY COMMODITIES (Index)

220 200 180 160 140 120 100 80

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 C rude Steel P rimary A luminium C opper

Energy (O il, Gas , C oal) C oal P roduc tion C rude O il

Andbank, World Steel As s oc, I nt Alum Ins t, EIA

N atural Gas C oal ÂŠFactSet Res earch Systems

Corporate Review

3rd. Real vs. speculative demand still points south for prices During the 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 for a sustained rise in commodity prices based on a steady recovery in real demand. We still think this. Real vs. Speculative demand continues to behave differently, with the latter being still the main driver for prices over the last 4 years

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 (Left)

'12

'13

Corporate Review

Precious metals. We consider that 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

HISTORICAL GOLD PRICE DEFLATED

2,500 30

GOLD PRICE IN TERMS OF OIL

2,000

2,000 25

1,500

1,500 20

1,000

1,000 15

500

0 0 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 Gold (2009 price s) Trendline: Ave ra ge

50 45 40 35 30 25 20 15 10 5 0

GOLD PRICE IN TERMS OF EQUITY

'96

'98

'00

'02

'04

'06

'08

'10

'12

©FactSet Research Systems

50 45 40 35 30 25 20 15 10 5 0

A ndbank, London B ullion Market Associatio n

©FactSet Rese arch System s

GOLD – NOMINAL vs. REAL PRICE: The gold price continues experiencing a significant adjustment. However, in real terms should approach the LT average of US$700, meaning that given our deflator (we have changed recently the base year from 2005 to 2009), the nominal price of gold should stay near US$814. GOLD PRICE / OIL PRICE: The value of this ratio stands now at 12.65 (fairly close the historical average value of 12.85). Given that our 5yr target price for oil remains at US$85, the nominal gold price should approach the US$1,092 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 12.64. If the DJI remains (as we think) stable at year end levels (let us say at 16.080), the gold price '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 should decline towards US$800 in order for this ratio to be near its DJ Industria l A verage - Inde x P rice Lev el / London Gold (AM Fix ing $/ozt) - Price LT average level. Trendline: A ve ra ge

A ndbank, Dow Jones & Compa ny

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

Trendline: 35 Y ear Mo ving Avera ge

Andbank custom series, Dow Jones Company

'94

©FactSet Rese arch Systems

Corporate Review

Have you asked yourself why is Gold so stable in these turbulent days 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 that are firmly reducing their stocks of gold. On the other hand we have China showing an evening appetite to increase its gold reserves (see the chart)

Corporate Review

Which of these two forces will prevail? Is it gold price to 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 more of the many opinions you receive every day but … 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 remind it to you), Indian Fx & government bonds have been specially hit hard by market participants for belonging to that group of countries experiencing current account deficits. (India’s CA deficit was 5.5% in 2012, and although lower, it is going to be still high in 2013). In that regard, India will likely continue destocking Gold (in order reduce imports or raise exports, improve CA, and finally to abandon the “group” just to stop receiving blows. This factor will presumably continue to put pressure on Gold price Representing therefore NEGATIVE IMPLICATIONS FOR GOLD

Corporate Review

… The other themes

2. The Japanese Factor. The sale of gold by the monetary authorities in Japan is part of the BoJ’s asset purchase program In the one hand, the BoJ expands monetary base to get fresh money and buy bonds. In 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 whether Japan will continue doing it. And … you also know perfectly my view in this regard. Yes. Until when? Many are projecting the limits of this policy through the prism of the USD/JPY exchange rate. They said “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 has now Europe’s export champions in its crosshairs and that Germany is a major trade competitor. As a result, the prism should be better the EUR/JPY exchange rate. If so, the aggressiveness of gold sale could be much higher than previously considered since gold sale could continue until the EUR/JPY exchange rate reaches the 160 or 170 level (as it did in the 1998 and 2008). In summary, this factor will presumably continue to put also pressure on Gold price Representing therefore

NEGATIVE IMPLICATIONS FOR GOLD

Corporate Review

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

6 .06 0 9 - 0.0 0 0 8 -0 .01 % 0 1 :3 8:2 6 P M C N Y

'0 9

'1 0

'1 1

Ja n- 0 9 - J an-1 4

'1 2

6 .9 6 .8 6 .7 6 .6 6 .5 Yuan 6 .4 appreciation 6 .3 6 .2 6 .1 6 '1 3

Yes, the Yuan is now at 20 year record high because of 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. 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 an intense appreciations of the Yuan (CNY) … … What are then the instruments the PBOC has in order to respond to this sharp rise of the currency? A rise that, on the other hand, has been driven by “speculative inflows”? Indeed. Sell Yuans in the market and buy Fx reserves (US$ or Gold). In fact, we know that the PBOC purchased $73bn of Fx in October and another $70bn in November (according to CEIC). THE MOST IN THREE YEARS. What from now on? Please note that China is doing nothing more than “sacrificing growth” in order to ensure the necessary credibility of the CNY (as a potential new currency reserve in the region). Remember the expression? “China must sacrifice growth”. (If you say the Working Paper, I promise a reward)

In this process, market participants may think of two ways: 1. Think just like us that sacrifice will entail sustainability. In this regard investors will probably decide to go long the CNY. In such a case, the PBOC will continue selling Yuans and buying Gold => POSITIVE IMPLICATIONS. 2. Nevertheless, if investors fears about a sharp slowdown in China spread, they could decide to go short the Yuan, allowing the PBOC to buy the local currency while selling Fx reserves in the form of USD or gold => NEGATIVE IMPLICATIONS. My bet on this specific issue / factor? I do not know. Let me say it a “Neutral Factor”

Corporate Review

Our conclussions 1. Gold remains stable (despite the turbulent moments seen in EM) because within the Reserve banks’ activity in Asia, we are witnessing two offsetting forces.

2. 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 the regular intervention and the raise in the reference rates)

3. I identify today 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 => NEUTRAL IMPLICATIONS FOR GOLD

4. In summary, and according to these considerations, I maintain a negative long-term vision for the Gold with a fundamental target US$ 900 ozt*.

* For those interested in the calculus of our target price for gold, please look at the Monthly Corporate Review document

Corporate Review

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

Recent Developments

Andbankâ&#x20AC;&#x2122;s Assessment

India's government is restricting gold imports

India accounts for up to 25% of physical gold demand with imports of roughly 1,000 tons a year (15% of India's total imports), which explains a big share of the current account (CA) deficit in the country. Due precisely to the recent deterioration of the CA balance, which has triggered capital outflows by foreign investors, the government has been forced to impose restrictions on gold imports. As a result, gold imports (which were running at a pace of 125 tons a month) have now dropped off to almost zero. This will continue in 2014.

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 continues experiencing a significant adjustment. However, in real terms should approach the LT average of US$700, meaning that given our deflator (we have changed recently the base year from 2005 to 2009), the nominal price of gold should stay near US$814.

Expensive

Gold in terms of Oil (Gold / Oil)

The value of this ratio stands now at 12.65 (fairly close the historical average value of 12.85). Given that our 5yr target price for oil remains at US$85, the nominal gold price should approach the US$1,092 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 12.64. If the DJI remains (as Gold in Terms of Equity (Dow we think) stable at year end levels (let us say at 16.080), the gold price should decline towards / Gold) US$800 in order for this ratio to be near its LT average level.

Expensive

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.

Expensive

Debt crisis in Europe.

The satisfactory political resolution of the debt crisis in Europe should help ease systemic concerns

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

Corporate Review

General Commodities Under a historical perspective. Considering historic prices it could be said that only precious metals are expensive. Other Commodities would be at a fair value.

Corporate Review

Commodities (by groups) Viewed in Perspective 500 450 400 350 300 250 200 150 100 50 0

ENERGY

'04

x 1.67 in 10Y (5.3% annual)

'05

'06

'07

(INDEX) W TI

'08

'09

(INDEX) C o a l

'10

'12

'13

x 2.59 in 10Y (10.1% annual)

900

800

700

600

500

400

300

200

100

'04

'05

'06

'07 P a lla dium

Andbank, NYMEX

'08

'09

P la tin um

x 1.66 in 10Y (5.2% annual)

CROPS

'10 Go ld

'11

'12

'13

700

600

500

400

300

200

100

'04

'05

'06 Co rn

PRECIOUS METALS

700

(INDEX) Na tura l Ga s

Andbank, DJ Company

900

'11

500 450 400 350 300 250 200 150 100 50 0

'07

'08

W he a t

'09

'10

So ybe a n

Suga r

Andbank, CRB

500 450 400 350 300 250 200 150 100 50 0

'05

'12

'13

MINERALS & METALS

'04

'11

'06 C o p pe r

x 1.50 in 10Y (4.2% annual)

'07 Nick e l

Andbank, London Metal Exchange

'08

'09 Zinc

'10 Alum inum

'11

'12

'13

500 450 400 350 300 250 200 150 100 50 0

Corporate Review

Commodities Under a historical perspective, it could be said that only Precious metals are expensive. Other Commodities would be at a fair value or even cheap CURRENT Index100 (T-10Y)

10 YEAR PERFORMANCE

ANNUALIZED GROWTH

Oil Coal Gas

167.7 294.0 126.0 83.0

68% 194% 26% -17%

5.3% 11.4% 2.3% -1.8%

FAIR VALUE EXPENSIVE CHEAP VERY CHEAP

Corn Wheat Soybean Sugar Cotton

166.5 158.0 143.0 167.0 236.3 127.5

67% 58% 43% 67% 136% 28%

5.2% 4.7% 3.6% 5.3% 9.0% 2.5%

FAIR VALUE CHEAP CHEAP FAIR VALUE FAIR VALUE CHEAP

Palladium Platinum Gold Silver

259.9 303.6 165.5 310.6 310.2

160% 204% 66% 211% 210%

10.0% 11.7% 5.2% 12.0% 12.0%

EXPENSIVE EXPENSIVE FAIR VALUE EXPENSIVE EXPENSIVE

Copper Nickel Zinc Aluminium Iron Ore

150.5 284.9 90.4 192.5 102.0 82.4

50% 185% -10% 93% 2% -18%

4.2% 11.0% -1.0% 6.8% 0.2% -1.9%

CHEAP EXPENSIVE VERY CHEAP FAIR VALUE CHEAP VERY CHEAP

Energy

Crops

Precious

Minerals

ANDBANK'S ASSESSMENT

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

Commodities - Conclusions 1. Industrial commodities: The super-cycle ended in 2013 and we do not expect a big upward movement in prices. •

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

•

It can by no means be anticipated that India will pick up China’s baton as a leader in commodity consumption

•

Metal producers and miners have been clearly caught off guard with a gargantuan excess capacity.

•

Real vs. speculative demand still points south for prices

2. Precious metals. We consider that the gold price remains expensive. With a long term perspective, we feel comfortable setting the target price for gold at US$ 900. 3. General Commodities Under a historical perspective. Considering historic prices, it could be said that only precious metals are expensive. Other Commodities would be at a fair value. This is in line with our more fundamental approach that concludes that “we do not expect a big upward movement in prices”. 4. Most preferred commodities: •

Within minerals: Zinc & Nickel are at heavy discounts vs. other minerals, nevertheless there are no apparent reasons to think in a more limited presence of these commodities in the different industrial processes (i.e, the nickel is used in the manufacture of super alloys with copper (highly resistant to oxidation), is used in rechargeable batteries, coinage (for what it will take a lot of it if central banks continue expanding monetary base, is also used in foundries, metal coatings and to make white gold (although its use in jewelry is limited by being a toxic product).

•

Within Crops: Wheat & Cotton

•

Within Energy: Natural Gas

5. Commodities that should be avoided: •

Energy: Oil WTI (up to US$85)

•

Precious metals: Silver, Gold, Palladium

•

Metals & Minerals: Aluminium, Steel and Copper

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

USD Global Monetary Policies point to a lower USD As of December, Just one out of the six central banks most actively holding currency reserves decided to increase exposure to the USD. India increased the stock of its foreign currency reserve from the 8 equivalent months of imports to the 8.3. Meanwhile, China and Japan slightly reduced their positions in terms relative to their imports. China Fx reserves declined form 22.6 to 21.6 months of imports) while Japan cut tis Fx reserves from 17.2 to 17 months. The other central bank’s Fx reserves remained fairly stable. 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, that are gradually disappearing. We have seen a normalization of this in countries such as India or Indonesia while 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

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 new and dramatic developments. With a long-term view, we see some interesting aspects, such as the internationalization of the RMB, and the progress seen in the RMB denominated debt market, that could result in strategic movements of a specific group of countries in order to overcome the relatively low level of the USD currency (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 can not keep pace with growth of global trade, being dwarfed by the growing size of international commerce. At such a point, the countries involved in that 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 translates in lower demand for the USD.

7,00 6,00

U SD FLO W TO TH E W O RLD 1 2

0 -100 -200

5,00

4 -300

4,00

-400

3,00

-500 -600

2,00 1,00

-700

0,00

-800

-1,00

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

-900

Quarterly US Current Account deficit as a % of Quarterly Global Trade (Left) BOP Current Account balance (12m Mov Sum, US$bn) Recess ion P eriods - United States

US Bureau of Economic Analysis

ÂŠF actSet Research System s

(1) In 1989, with a US$ 100bn CA deficit (cumulative 12m), the quarterly flow of USD thrown to the world coming from this CA represented 3% of the quarterly international commerce. (2) In 1995, with the same amount of CA deficit, this USD flow represented just 2% of international commerce. (3) In 2000, with a larger CA deficit of US$416bn (cumulative 12 months), the quarterly flow of dollars represented 4.5% of international transactions. Which means that for each US$100bn in CA deficit, the world received US$ equivalent to 1% of international commerce. (3) Now, in 2013, with a similar CA deficit of $412bn, quarterly flows of dollars represent just 2.3% of the level of international transactions. Meaning that for each US$ 100bn of CA deficit, the world is receiving the equivalent of 0.5% of international trade.

Corporate Review

USD/EUR Andbank’s Assessment 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

The flow of USD with respect to the global volume of commercial trade has reached a 15 year low.

Short positioning in € (CFTC. Options & Non commercial Long contracts in EUR are 87k, vs. 73k in short Futures, ECA cur) contracts. The net position is +14k long EUR.

The Tapering process would probably be more rapid than initially anticipated. This could undeniable support the USD despite the fact that the ECB has been reducing its monetary base in the last months

Central Bank Idiosyncrasy

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

Final Assessment

Effect on the USD (Short-Term view)

Effect on the USD (Long-Term view)

NEUTRAL

NEGATIVE

NEUTRAL

NEGATIVE

NEUTRAL

NEGATIVE

NEUTRAL

POSITIVE

NEUTRAL

NEUTRAL (1.35-1.40)

NEGATIVE

NEGATIVE (1.40)

Corporate Review

Asian Fx 1.

Three out of the five main Asian currencies has been plodding along in the start of 2014 (being flat or even up for the year). CNY has continued appreciating while THB and IDR have withstood quite well. In the other hand, the MYR and the PHP have declined a bit in the early stages of the year.

The majority of Asian currencies have been hit during 2013 because of the threat of Tapering. However the drop has had different intensities depending on the country.

The group of economies that has withstood the “crisis” better has been the one comprising the countries that “buy protection” via a mercantilist approach (that 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).

Indeed, the mercantilist approach 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 a subpar growth for many years? Yes, the perspectives for these countries worsen automatically.

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

110

ASIAN CURRENCIES (Performance v s USD)

110

105

100

Feb Mar

Apr May IDR

Andbank, WM/Reuters

Jun

Jul

THB

Aug Sep PHP

MYR

Oct

Nov Dec

Jan

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)

0.001 STRONG BUY

0,30

0.001

0,20

0.001 0,10 0.001 BUY

0.001

closely related to JPY (KRW, TWD). SELL

-0,10

0.001

-0,20

0.001 -0,30 0.001 -0,40

0.001

Dec-13

Jun-13

Sep-13

Mar-13

Dec-12

Jun-12

Sep-12

Mar-12

Dec-11

Jun-11

Sep-11

Mar-11

Dec-10

Jun-10

Sep-10

Mar-10

Dec-09

Jun-09

-0,50

Sep-09

0.001

Mar-09

STRONG SELL

Dec-08

Indeed, these markets will “dance” the Tapering song in 2014. Each time the Tapering sounds hard, these markets could fall considerably (equities, bonds and currencies).

0,00

0.001

Sep-08

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

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, the “animal spirits” grow in financial markets. We take the variation rate at 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.

100

Corporate Review

We still recommend staying short JPY/Long EUR. How far and how fast can the JPY depreciate?

HOW FAR? Viewing the second graph, we can make a guess. Considering the global aspects affecting mostly developed economies, and 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 and on households in the form of much higher import prices. Steel producers (with a high energy dependence) and the chemicals sector (net importers) will suffer if the pace of depreciation continues with the intensity of recent weeks. 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 3 7.7 3 0 .2 5 1 0 :3 3:1 1 A M

0 .1 8 % JP Y

F eb -1 3 - F e b-1 4

145 140 135 130 125 120 Feb Ma r Ap r Ma y Ju n Ju l Au g Se p O ct No v De c Ja n EUR/JPY (EURJPY-FX1)

1 3 7.7 4 0 .2 6 1 0 :3 2:3 5 A M

0 .1 9 % JP Y

F eb -9 4 - F e b-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

101

Corporate Review

102

Market Outlook Summary Table Short Term Asset Class

Instrument

S&P Stoxx 600 Equity

Fundamental

Current

Performance

Fundamental

Performance

27/01/2014

(1-2 months)

Target

(12 months)

1.790

(0%, +5%)

1.850

3,3%

322

(0%, +5%)

370

14,9%

Mexbol

40.980

(0%, +5%)

47.500

15,9%

Bovespa

47.787

(0%, +5%)

52.000

8,8%

768

(0%, +5%)

925

20,4%

FDSAG Asia Pac xJapan

Fixed Income (2)

Bund 10y

1,67%

-0,43%

1,75%

0,96%

Treasury 10y

2,74%

0,34%

2,75%

2,62%

Sovereign Risk

Spain

3,807

(0%, +5%)

3,25

8,3%

Europe

Italy

3,93

(0%, +5%)

3,25

9,4%

(10 year Yields)

Portugal

5,295

(0%, +5%)

7,7%

Ireland

3,31

(0%, +5%)

5,8%

Greece

8,683

(0%, -5%)

Average

4,09

(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)

7,5

0,18147

3,63

7,8%

83,835

-0,28%

1,89%

72,711

-0,36%

1,57%

314,008

-2,17%

300

4,20%

(3)

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103

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

27/01/2014

(1-2 months)

Target

(12 months)

EM bonds

Taiwan

1,64%

(0%, +5%)

1,14%

5,6%

Asia (in local)

Thailand

3,94%

(0%, +5%)

3,80%

5,1%

Indonesia

9,18%

(0%, +5%)

8,20%

17,0%

Malaysia

4,22%

(0%, +5%)

3,75%

8,0%

India

8,74%

(0%, +5%)

8,00%

14,7%

Philipines

4,29%

(0%, +5%)

3,50%

10,6%

10,88%

(0%, +5%)

12,00%

1,9%

EM bonds

Brazil

Latam (in local)

Mexic o

6,58%

(0%, +5%)

6,00%

11,2%

Colombia

6,95%

(0%, +5%)

6,50%

10,6%

Peru

5,63%

(0%, +5%)

5,00%

10,7%

Chile

5,15%

(0%, +5%)

4,50%

10,4%

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

Instrument

Fundamental

Oil Commodities

Fx (Always US$

96,88

(0%, -5%)

-12,3%

CRY

282,54

(0%, -5%)

275

-2,7%

Gold

1269,17

(0%, -5%)

900

-29,1%

EUR/USD

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

BRL/USD

1,369

(0%, -5%)

1,4

-2,2%

140,3

(0%, -5%)

160

-12,3%

102,4

(0%, -5%)

114

-10,1%

13,5

(0%, -5%)

12,75

-5,6%

2,4

(0%, -5%)

2,6

8,4%

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104

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