Corporate review july 2014 by Andbank

ANDBANK RESEARCH Global Economics & Markets

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

Still think this is not going to be tough? Still not surprised to see how the UKIP or Le Pen’s FN have a sit in the European Parliament? That’s like the KKK having a team in the NBA.

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

Corporate Review

Table of Contents Executive Summary

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Overall Economic Environment Eurozone – Volumes are expanding while Inflation remains weak ..………………………………………………………4 Russian & Ukraine crisis - The other side of the conflict ………………...………………………………………………………14 China – About what is being said (and what is not) ………………………...………………………………………………………17 Latin America – Latest developments …………………………………………………...………………………………………………………27

Global Market Snapshot. Performance and Volatility

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Market Outlook Risk-on & Risk-off probabilities ...………………………………………………………………………………………………………………………34 Equity Markets. Fundamental Assessment ..……………………………………………………………………………………………………36 Fixed Income. Core Countries ..…………………………………………………………………………………………………………………………..38 Fixed Income. Emerging Markets ..……………………………………………………………………………………………………………………..42 Fixed Income. European Periphery ..…………………………………………………………………………………………………………………..46 Corporate Credit ..…………..…………………..…………………………………………………………………………………………………………………..49 Commodities & Precious Metals ..…..…………………………………………………………………………………………………………………..52 Forex …….…………………………..…………………..…………………………………………………………………………………………………………………..62

Summary Table for financial market prospects & Asset Allocation Proposal

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Corporate Review

Executive Summary Economy & Markets Europe – Volumes are expanding while inflation remains weak (our “Expansionary deflation” hypothesis would be unfolding). Eurozone PMI Composite Output Index at 54.0 (35-month high), while Eurozone April flash CPI came in at +0.7% y/y. Regarding the ECB, we continue to think that the actions available are very limited, with massive asset purchases (funded through expansion of monetary base) as a step of last resort. All in all, recent developments point towards a scenario that is not bad, either for equities or bonds, or the currency. USA – Employment figures were as investor-friendly as anyone could hope. All in all, the payroll headline suggests both broadening recovery that allows us to discard a recession, but which at the same time suggests that there is a longer period of just “decent” data before the Fed feels any need to tighten rates. Certainly a benign scenario close to the Goldilocks ideal that equity and bond markets both love.

Equities – Short-term view. Today, our indicators show an aggregate score of -1.7 (slightly worse than the -1.2 seen last month), showing that the market is just slightly overbought and, thus, that there is no significant stress in the equity market. Fundamental view. USA-S&P: Target price 1838 (-3% from current level). Europe-Stoxx600: Target price 354 (+4%). Asia EM ex Japan-FDSAG: Target price 927 (+19%). Latin America-Mexican IPC: Target price 45.500 (+8%). Latin AmericaBrazilian Bovespa: Target price 52.317 (+0%). Core Fixed Income – Bund: Sell at current levels. Start buying at 2%2.25% yield, sell at 1.5% or below. Treasury: Start buying at 3%-3.25%, sell at 2.5% or below. Sovereign Risk (European periphery): After Spain, Greece also leaves our list of recommended issuers. Only Italy and Portugal remain in our Buy list, though both now with just single-digit potential performance (around 4%-6% respectively).

China – Authorities seem determined to continue implementing orthodoxy when it comes to economic policy as well as unfolding reforms. (1) The government continues tightening its grip on banks after it has ordered lenders to curb interbank borrowing in the latest effort to check growth in the shadow-banking industry. (2) Authorities stressed that monetary easing is “no answer” to loan woes. (3) China is to avoid large-scale economic stimulus to boost the economy and will just stick to fine-tuning measures, with premier Li stressing that the government feels comfortable with the new growth pace. (4) Limits on foreign investments in listed companies will be relaxed. Additionally, quotas for capital flows will be expanded. All in all, this is long term credibility in exchange for short-term pain.

Corporate Credit: Expensive, though the positive mood will continue. Maintain your long positions. Build new exposure with ML EUR Corporate 110 yr index at 120bp of spread vs. swap, and the ML USD corp. index at 80bp of spread.

Latin America – In Argentina, the government has reduced the ST banking rate from 29% to 26.6%, triggering a sharp depreciation of the “parallel” (now at 12 ARS/USD), in what is already seen as a move that will force the government towards further depreciation of the official ARS. – In Mexico, We are lowering our FY2014 GDP estimate to

Commodities: Fundamental target for WTI at 95. Buy below $90s and sell above $100. CRY index fundamental at 275 (-10%). Preferred: Gas, Soybean and Cotton, and some minerals such as Copper and Nickel. Avoid precious metals.

3%. Disappointing data would be extending to 1H2014 and the relationship between the US & Mexican GDP had already broken down some time ago.

Fx: EUR/USD at 1.40. Short-term bias towards 1.35. Asian currencies are very attractive. Avoid JPY. GBP/EUR is expensive (range-bound 0.82-0.86). Neutral MXN. Short BRL (2.6). Structurally long COP, CLP and PEN.

EM Bonds Asia (local currency): We continue seeing value in these assets, especially in local currency. Volatility guaranteed. Preferred: Indonesia, China and South Korea (with higher real yields). But price performance is expected to be good also in India, Philippines and Malaysia. EM Bonds Latin America (local currency): Same reading as in Asian bonds. Volatility guaranteed. Most preferred: Mexico, Colombia, Peru and Chile.

Corporate Review

Table of Contents Executive Summary Overall Economic Environment Eurozone – Volumes are expanding while Inflation remains weak Russian & Ukraine crisis - The other side of the conflict China – About what is being said (and what is not) Latin America – Latest developments

Global Market Snapshot. Performance and Volatility Market Outlook Risk-on & Risk-off probabilities Equity Markets. Fundamental Assessment Fixed Income. Core Countries Fixed Income. Emerging Markets Fixed Income. European Periphery Corporate Credit Commodities & Precious Metals Forex

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Activity â&#x20AC;&#x201C; Figures show that volumes are expanding Eurozone PMI Composite Output Index at 54.0 vs. prior 53.1 (35-month high). Eurozone PMI Services Activity Index at 53.1 vs. prior 52.2 (34-month high). Eurozone PMI Manufacturing Output Index at 56.5 vs. prior 55.6 (3-month high). All eight national readings are in expansionary territory for the first time since November 2007. The recovery in the Eurozone is broadening. The EC kept its GDP forecast for 2014 unchanged (+1.4%), while lowering the outlook for 2015 (from +1.8% to +1.7%). It highlighted that (1) domestic demand will be a key driver for growth as real incomes benefit from lower inflation while activity and the labor market will stabilize. (2) It also noted that the contribution of net exports is expected to diminish.

Corporate Review

Inflation – The breakdown shows that trend is weakening Eurozone April flash CPI came in at +0.7% y/y vs. prior +0.5%. Recall that ECB President Draghi said CPI would pick up after the March reading was distorted by an energy drag and seasonal effects. The breakdown shows that the trend is still weakening. The EC cut the outlook for inflation: • In 2014 the ECB cut the CPI to +0.8% (from +1.0%) • In 2015 the outlook was also lowered, to +1.2% (from +1.3%). The ECB also noted that inflation could come in lower than expected. The IMF’s Olivier Blanchard sees a 25% chance of the Eurozone slipping into deflation by the end of 2014.

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Corporate Review

ECB policy – Very limited actions available Draghi would have designed a two-step strategy on monetary policy. According to sources, if low inflation and the strength in the euro persist, the ECB will: 1. cut rates by 10 bp to 0.15%. 2. … and will put in place negative deposit rates (although this will not have a big impact, since the use of the Deposit facility is now very low. See the second chart). The ECB would only study asset purchases as a step of last resort if (1) the trend in inflation and the currency does not significantly change, and (2) the expansion in activity clearly loses momentum. And this would only take place after the AQR in Autumn and subject to conditionality for banks to increase lending to SMEs.

The Bundesbank’s Weidman says they are ready to back ECB action (1) if needed, and (2) “not every measure discussed is suitable”.

In the meantime, we believe that Draghi will keep a dovish stance for a long time, leaving the door open for more policy easing and, of course, always looking set to push ahead with measures that could range from rate cuts to liquidity injections or asset purchases. (We consider this latest action as highly unlikely in a low-speed but broad based recovery environment).

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Us e o f De po sit Fa cility ( bn €) Tre ndline : 2 Y e a r Mo ving Ave ra ge Andbank, Deuts che Bundes bank

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Corporate Review

Money market conditions – Tighter but no need for concern Banks were focused on cleaning up balance sheets and this fuelled a fall in the amount of spare cash in the financial system, pushing up money market rates. Excess liquidity in the system fell to around €86B in the first week of May (the lowest level since the ECB offered LTROs in December 2011). The EONIA overnight money market rates hit 0.38% during the first week of May (the highest level since 2011 with the exception of two liquidity-tight days), although this tightness eased after the ECB carried out a liquidity operation. Draghi also stressed that banks are adapting to lower levels of liquidity in the system without the help of the ECB. As such, he noted that there is no need for concern, as banks are going back to trading on the market rather than relying on the ECB. 6,00

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Corporate Review

Lending conditions – Stabilizing and being offset by other borrowing alternatives The SMEs reported less of a deterioration in the availability of credit, while credit standards are broadly unchanged. Although corps are still clearly deleveraging (see chart 2), banks expect an increase in loan demand in 2H and also anticipate an easing up in corporate loan standards. Financing conditions for SMEs continue to differ significantly across the Eurozone, still being in general more difficult for SMEs than those of larger companies. The HY bond market is emerging as a stable alternative to banking loans. European companies have put in €15bn in HY debt during 1Q2014 (vs. €9.6bn for all of 2013). The cost of using HY bonds compares favorably with other borrowing alternatives.

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Total Loans Outstanding Corps NF & House (bll €) (Left) Change MoM (bll €) (Right) Change YoY (bll €) (Right) Andbank, European Central Bank

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Corporate Review

The Financial Markets â&#x20AC;&#x201C; Demand persists for euro-denominated assets The advantages: Demand for Peripheral debt persists, and flows into EZ debt have mirrored outflows from emerging markets. 10 year yields on French and Austrian bonds hit the lowest level in a year, while rates in all peripherals hit all-time record lows. The appetite for European assets would be creating a kind of virtuous cycle (WSJ): The rally is (1) accelerating the clean-up of the banking system, (2) improving credit conditions and (3) encouraging households to start spending again. Rating upgrades boost bond rally. A number of countries and companies have benefited from rating upgrades in a move that can exacerbate the trend (for the first time since 2007, upgrades outpace downgrades). Why is this important? Rating agencies have always been pro-cyclical, exacerbating tensions and also contributing to the improvement in sentiment with a series of upgrades. Peripheral debt would be showing signs of behaving more like a safe haven trade (something good if the recent performance actually responds to an increased fiscal and banking integration that brings national government metrics closer to those of Germany). European bank funding costs are also at four-year lows, after a decline of 20% during Q1. Data from Dealogic showed that banks have taken full advantage of this situation, increasing bond issuance by 52% to $148.4B compared with the same period in 2013, with banks from the periphery accounting for 45% of the Eurozone issuance.

The disadvantages: In our view, the recent rally does not tell the whole story, since an estimated â&#x201A;Ź160bn has fled Russia to Eurozone markets. The risks may lie in the fact that the rally could dampen the much needed reform progress due to the reduced market pressure. If the result of all this is a break in the reformist process, then neither the economic nor the banking union would be robust enough to withstand another market assault.

Corporate Review

Politics – Eurosceptics and populists could reach new heights in the coming European parliamentary elections In the EU’s five biggest economies the pessimism is felt by voters in the run-up to the European Parliament elections. This sense of frustration is expected to propel euro-skeptic and populist parties to new heights in the coming European elections. France: Two-thirds of voters believe the economy is worse than it was a year ago. Spain: one-third of voters polled feel the economy is worse than a year ago, with 43% saying it was no better. In Italy, corruption scandals could fuel voter anger. Seven officials connected with Expo 2015 Milan were arrested last week on charges of bribery and manipulating public tenders, and this has caused anger. The scandal could affect both the left and right while giving a lift to the anti-establishment and anti EU party “5-Star Movement”. In Greece, the far-right Golden Dawn party can run in the European elections despite calls to ban it as its leader waits in jail for membership of a criminal organization. Recent reports point out that the party is expected to perform well and could even obtain third place. 2009 results

Expected 2014 results

Pro-Europeans

Euroskeptics

Corporate Review

National Particularities – What unites us and divides us France: French PM Manuel Valls said that France will push for action to lower the value of the euro after the European parliamentary elections. He also added that growth initiatives must be matched by more active monetary policy. France’s Montebourg (Economy Minister) said the Euro level is an issue for political authorities, that have the right to assess the right level. Chancellor Merkel’s spokesman said the euro is not an issue for politicians. French lawmakers approve multi-year deficit reduction plan meeting the targets imposed by Brussels. The 2015-2017 Stability Program will now be submitted for approval to the European Commission. Hollande said he will push ahead with his plan to cut public spending and grant tax cuts for business as “the only way to boost jobs”. Italy: Finance Minister Padoan criticizes the EU for paying only lip service to the need for more growth and jobs. He defends a balanced recovery through a higher inflation and a weaker Euro. He added that Italy would use its six-month EU presidency from July to complete this process. We do not believe Italy will succeed (as it did not Greece) in implementing such policies. Italian statistics office sees real GDP growing +0.6% in 2014, +1% in 2015 and +1.4% in 2016. Renzi wins confidence vote over his plan to ease rules for companies that hire temporary workers. This is part of his broader plan to overhaul labor regulations. Spain: Bad debt as a proportion of overall credit dropped to 13.5% and 13.4% in January and February, respectively, versus a peak of 13.6% at the end of last year. The government is preparing a plan to boost jobs by 370k by 2016. The general secretary of industry will launch this plan with a budget of around €1bn. Portugal: Portugal is to exit its three-year €78B bailout without an emergency backstop. The troika has urged Lisbon to consider a line of credit as an emergency safety net, but the government is convinced it doesn't need assistance after its recent auction success. The Portuguese government outlined new reforms in its strategic budget. It included an increase in VAT by 0.25% from 23% to 23.25% and a 0.2% rise in social security contributions by workers from 11% to 11.2% as of 1-1-15.

Corporate Review

National Particularities – What unites us and divides us Greece: The government is anticipating a fiscal gap of just €1.9B in 2015-2016, which is less than half of what its creditors had expected, around €3.9B, and which is still targeted in the European Commission Report. The Finance Ministry insists that the gap can be eliminated under certain conditions (maturity extension and lower rates of bilateral loans). Greek privatization drive accelerates as Greece returns to bond market and signs of an economic revival is fueling a pick-up in investor’s demand for public assets. This higher interest is giving the Hellenic Republic Asset Development Fund more options to raise cash and cut debt. Samaras has proposed a series of far–reaching constitutional changes, including the reduction of deputies in Parliament and boosting the powers of the president. GDP growth contracted for the 23rd consecutive month by -1.5% y/y in Q1. The government takes it as a sign that Greece is on course to see growth this year for the first time since 1H 2008. Germany: German retail property acquisitions more than double in Q1: Cushman & Wakefield reported that investors bought €3.43B in retail property transactions (116% more than a year earlier). Labor market strength continues: The number of unemployed fell by 25.0K (vs. consensus of -10.0K, and prior figure of -14k). The March unemployment rate was unchanged at 6.7%. The outlook remains robust. German factory orders came in at +2.8% m/m in March (much higher than prior +0.9%), although the numbers were distorted by the timing of Easter. The German March trade balance came in lower at €14.8B vs. prior €15.8B. The narrower surplus came from a downturn in imports and exports, with falls of 0.9% m/m and 1.8% m/m respectively. This was the second consecutive fall in exports and the largest drop in ten months. Growth could fall on tougher Russian sanctions: A report in German magazine Stern said that German growth could be reduced by 0.9% this year and 0.3% in 2015 if the EU imposes tougher sanctions against Russia. It cited the German section of a European Commission study in which confidential scenarios for all 28 EU member states were prepared as the bloc debates how to respond if pro-Russian separatists prevent Ukraine from holding free presidential elections on 25-May. German Finance Minister says that excess liquidity must be reduced to prevent the next bubble. He said that the Euro region is on the right track but that rescue-program countries, although having met big reforms, must stick with the reforms commitments.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Russian & Ukraine crisis - The other side of the conflict

France rejects blocking Mistral Warship sale to Russia: France’s government said it will deliver Mistral helicopter carriers to Russia as planned, rejecting requests from its European and U.S. allies to cancel the sale. France refuses to link the contract (worth €1.2bn) to the debate over tighter sanctions on Russia. Russian sailors are scheduled to arrive in France next month for Mistral training. The first warship, built by France’s state-owned military contractor DCNS and the shipbuilder STX, is due in October with the next in 2016. There is an option for another two ships to be built in Russia by OAO United Shipbuilding Corp. The Mistral is a 200-meter (656-foot) ship, capable of carrying as many as 700 combat troops, 16 helicopters and 60 armored vehicles. Big oil western firms would be tempering the threat of Western governments by sanctioning key sectors in Russia. Why? Big western oil firms have considerable stakes in Russia, and this is a huge leverage for Putin. ExxonMobil sealed a half-trillion-dollar deal in 2011 with the mostly state-owned Russian firm Rosneft to frack in Siberia, drill parcels of the Arctic Ocean and to build a huge natural gas terminal in Russia’s far east (Rachel Maddow article in The Washington Post). British Petroleum has more than a third of its oil and gas reserves in Russia too. Additionally it owns 20% of Russian oil giant Rosneft. In Germany, big firms are also resisting economic sanctions against Russia: This weekend, the WSJ stressed in an article that large German firms like Siemens and BASF are resisting further economic sanctions. According to the article, “as the Ukraine crisis has worsened, German officials have faced a barrage of telephone calls from senior corporate executives, urging them not to take steps that would damage business interests in Russia”.

Corporate Review

Russian & Ukraine crisis - The other side of the conflict In the meantime, events are happening quickly, and seemingly going in favor of Russia: Gazprom’s CEO has just announced that the company will halt gas supplies to Ukraine on June 3 if Kiev does not pay the USD 3bn that it owes Gazprom for the gas supplied last year. Additionally, Ukraine will have to make a $1.66bn pre-payment for June gas deliveries (already at the new price of $485 per 1,000 cubic metres). Ukraine has already received the first tranche ($3.2bn) of the $17bn aid program from the IMF. Ukraine has just 9 billion cubic meters of gas in storage and needs at least 18.5 billion cubic meters to avoid problems in winter, so that it is likely that the money coming from the IMF ends up going to Russia. The strongest economy in central Asia, Kazakhstan, is prepared to sign the founding treaty of the Eurasian Economic Union (EEU), a project that has been driven and bolstered by Russia. Faced with Western sanctions, president Putin has looked to the east for new export markets. In this regard, Gazprom has signed a gas contract with China after years of talks. These are some key points of this contract: 1. Russia will supply Beijing with almost 40bn cubic meters (comparable to deliveries to Germany, its biggest client) for 30 years. 2. This quantity could be doubled during the life of the contract, in what could represent a supply for almost half of the gas that Russia currently sells to Europe. 3. Prices would be in the range of $300 to $400 per 1,000 cubic meters (equal or above European prices). In terms of British thermal units, the price under the contract will be between $10-$11 Mmbtu. 4. The advantages for China will be huge: i. This contract supports the country’s environmental policy to reduce severe pollution. ii. The Russian project is more competitively priced than Asian LNG imports. iii. It is even more competitive than the pipeline gas coming from Central Asia (that keeps an artificially low price because of Chinese’ subsidies). 5. Transport: This contract will mean the start of the Siberian Pipeline Project. 6. First deliveries of natural gas: Probably due in 2018.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

The Banking System – Authorities tighten the grip The government has ordered lenders to curb interbank borrowing in the latest effort to check growth in the shadow-banking industry. A commercial bank must limit its interbank borrowing to less than a third of its liabilities, while its lending to another financial firm shouldn't exceed 50% of its Tier 1 capital. NPL rise the most since 2005 in 1Q14. • NPL rose 54B Yuan ($8.7B) to 646B Yuan (the highest level since September 2008). • The banking regulator said that Chinese banks’ bad loan accounts rose to 1.04% of total lending at the end of March. • He also stressed that the capital adequacy ratio of banks fell slightly to 12.13% as of the end of Q1 (from 12.19%) • Trust and investment companies’ NPL ratio at 0.5% or 48B Yuan (Economic Information Daily quoting data from China Jianyin Investment). • Individual Banks: NPL for the Industrial & Commercial Bank of China (the largest one) rose by 0.03% to 0.97% by the end of March. NPL for ABC bank grows to 1.22%. And the Bank of China inched its NPL up 0.02% to 1.02%. Authorities stressed that monetary easing is “no answer” to loan woes. According to PBoC’s deputy director, “liquidity is ample”, with the broad money supply growing at a 12.1% pace y/y at the end of March. Additionally, he suggested that this figure underestimates actual money supply (since there are “massive” amounts of money transferred out of non-deposit-taking financial institutions, and these funds are not counted in M2). Instead, PBoC warns that some investment products will be allowed to fall. Wealthy investors stage protests over trust defaults. Banking system passes the stress test: According to PBoC, the banking system can weather large increases in bad debts or a sharp economic slowdown. “The asset quality and capital adequacy of China’s commercial banks is relatively high”. “Only some individual banks would fall below the required capital ratios in a worst case scenario”. The test covered the 17 domestic banks considered systemically important, and that account for 61% of total assets. Big 4 banks profits surprise: China's major banks continued to post robust profit growth in Q1 despite a slowing economy, helping them to build a buffer against a pickup in bad loans widely expected in coming years. Three of the four large state-run banks posted net profit increases of over 10%, with the Industrial & Commercial Bank of China the only one posting single-digit gains, coming in at 6.6%.

Corporate Review

Growth Dynamics – Upbeat signs that the economy is stabilizing Positive Dynamics About the risks of a hard landing, April data offers upbeat signs that the economy is already stabilizing: Manufacturing PMI at 50.4 (up from prior 50.3). HSBC PMI at 48.1 (up from previous 48) New orders at 51.2 (up from prior 50.6). New export orders at 49.1 (down from 50.1) Services PMI at 54.8 (up from prior 54.5). Instead, the HSBC Services PMI declined to 51.4 (from 51.9) Fixed Asset Investment at +17.3% in Q1 (slowest since 2011 but still undeniably high) Foreign Direct Investments +3.4% y/y in April (to $8.7bn). Up from the +1.47% y/y seen in March. Loan growth at 13.7% y/y in March (down from 13.9% but still above nominal GDP). M2 growth at 13.2% y/y (higher than the previous 12.1%, pointing to an acceleration in velocity of money). Trade balance of April relieves pressure on Beijing: Exports +0.9% y/y (to EU +15.1%, US +12%). Imports +0.8% y/y. Car sales jump 13% in April, although this may be due to consumers bringing forward purchases in anticipation of more cities adopting tougher regulations on ownership to fight pollution and congestion. Power consumption rises 5.2% y/y in 1Q13 (with a >7% pace in March). Copper premiums hit a 3-year high as robust demand met tight local supply. This has come as a surprise since it suggests that Chinese demand in some sectors is holding up better than broader data suggests. China’s overall trade is likely to gain momentum (according to statements from The Commerce Ministry): “After May, when high base effects fade off and because external trade is looking in better shape this year than previous years, trade will gain momentum”. In the meantime, the Guangdong province reported a sharp drop in trade numbers during Q1 (-25% y/y), giving wings to some bear analysts to expect a grim picture for the FY 2014 (relying on the argument of a challenging increase in domestic labor costs … but without considering that this increase would probably help to develop the economy domestically). China set to overtake the US as the biggest economy in terms of PPP: According to the International Comparison Program, China was already 87% the size of the US in 2011, and that China is poised to overtake the US in 2015. Negative Dynamics On the negative side, firms’ slow payments as unpaid debt weighs on finances. The median collection time for billings rose from 71 days to 90 days for the first time in a decade. This has led “receivables” to record amounts. Nevertheless, the amount is still very low ($160M among the 2,300 listed firms according to Reuters). Think tank cut 2014 growth forecast to 7.4% from 7.5% (Chinese Academy of Social Sciences).

Corporate Review

Authorities’ Stance on Growth – They simply feel comfortable with a lower growth

“Growth in line with potential and there is no need to be negative on growth outlook”. The Deputy head at Development & Research Centers confirmed that risks still lie in the property sector and the overcapacity of some industries, but it is precisely in this area where the government is tightening its grip. China to avoid a large-scale economic stimulus to boost the economy, and will just stick to fine-tuning measures, counter-cyclical in nature (and just in strategic areas). In this regard: (1)The government has just announced a rise in railway spending (to 800bn Yuan or $128bn) in 2014, aimed at providing 7k km of new industrial line. (2) The government has set aside 119B Yuan ($19bn) to accelerate construction in low-income housing this year. The fund will focus its efforts on cities and counties that have a large number of small companies. In the same line, Premier Li Keqiang stressed that the government feels comfortable about the new growth pace: “China will not relent by loosening monetary policy to calm volatile money markets”. “We must remain cool-minded amid slowdown”.

Corporate Review

The Stance on Reforms – Maybe slowly but reforms are broad and deep

On foreign Investments: The State Council announced the following measures: It will relax limits on foreign investments in listed companies. It will expand quotas for capital flows (see the third point, “Reforms on Capital Account”) It is unveiling guidelines for cross investment in the Shanghai-Hong Kong markets (setting up a local government bond system and facilitating cross-border investment and fund raising). The opening up of the capital account has made investors exit gold investments (demand for bars declined 44% in Q1), offsetting the rise in jewelry purchases (+30% y/y in Q1). On Foreign Trade: The Council highlighted that the overall Fx reserves has turned out to be a headache since total reserves have reached an all-time high of $3.95T. (US$ +130b just in Q1). Premier Li Keqiang said that China will take steps to reduce its trade surpluses with the rest of the world. At the same time, the State Council announced a series of measures to increase foreign trade (please note that this is not to say the trade surplus). How? 1. Clearing intermediary services and fees. 2. Expanding credits to importers and exporters. 3. Greater participation of infrastructure projects in neighboring countries and encouraging domestic firms to invest abroad. 4. The aim is to increase two-way Yuan movements by allowing market forces to play a larger role in setting the exchange rate.

On Capital Account & Fx: The PBoC deputy governor said that the Capital Account would continue being opened up slowly. Accordingly, we have seen how the dollar denominated QFII stands at $54.4bn at the end of April (up from the $53.6bn in March. On Fx exchange: Regulators announced that they would ease controls on the Yuan and will boost convertibility under the capital account.

On banking sector & Lending conditions: The Banking Regulatory Commission is working on a license system to limit banks to issue WMPs (wealth management products) based on three tiers of licenses. This measure will lead to a more prudent approach to manage risks. The Regulator is also stepping up oversight of inter-bank, non-standardized debt. The PBoC is designing a policy anchor for MM rates to limit volatility in interbank rates as well as fraudulent fixing. The PBoC is set to continue limiting lending access to developers and sectors with overcapacity.

Corporate Review

The Stance on Reforms â&#x20AC;&#x201C; Maybe slowly but reforms are broad and deep

On Streamlining the over-capacity: The central government is to subsidize SMEs that must shut down operations due to overcapacity or adapt to the stringent antipollution rules. Subsidies this year will be granted to companies with overcapacity in sectors including steel, nonferrous metals, machinery and textiles. Recently, authorities have again raised the target to close outdated steel smelting capacity to 28.7M tons this year as it tries to rein in inefficient and polluting industries (the last target was to close 27 tons in 2014). The overall capacity of crude steel output is 779m tons.

On Local government debt: China launched a pilot program to allow 10 local governments to issue municipal bonds in order to repay their own debt in 2014. Here are some key points of this new reform: The local governments will be responsible for repaying their own debt. Notional Municipal bonds will be subject to an annual limit decided by the State Council (CNY400bn in 2014). Municipal bonds must be rated by rating agencies. It is an important step towards reforming the local government debt framework. Outstanding local debt jumped to CNY 17.9tn in 2013 (US$2.8tn or 32% of GDP), and it is a more transparent scheme for raising local government debt, which should (1) help to ease market worries, thus (2) reducing the funding cost of local governments, and (3) a well developed municipal bond market will help to expand domestic capital markets and improve onshore capital allocation. On environmental policy: The recent revision of the environmental law represents the first change in 25 years. With this initiative, the new law will have 70 articles (while the existing law only had 47) and will come into effect on January 1, 2015. Companies will face strict penalties for breaking environmental law while individuals in charge of these companies will face up to 15 years in prison. The new laws set NO limits on the fines imposed on polluters. Local governments will also be held responsible if found guilty of covering up environmental breaches. Why has president Xi Jinping declared war on pollution? (1) A recent official report estimated that 20% of farmland is polluted. (2) This week the government said that nearly 60% of the country's groundwater is polluted. (3) 44% of cities had "relatively poor" underground water quality and 15.7% of cities had â&#x20AC;&#x153;very poor" underground water.

Corporate Review

Housing Market – The government is determined to manage this risk Sales fall but prices rise? Sales fell 5% y/y in Q1 for 20 major cities, while the average new-home price rose 9.1% y/y in April (China Real Estate Index System). Nevertheless, this rise in price represents a deceleration for the fourth straight month. Looking at high-frequency data, prices are already declining in 45 cities on a monthly basis. Fears of a bubble are on the rise: Keeping this in mind (a drop in home sales but an increase in prices) some bear analysts point out that signs have emerged that the property bubble is beginning to pop. Home price declines won’t become a trend! (according to the Academy of Macroeconomic Research). This firm’s conclusions are: (1) the urbanization rate is still relatively low and there is much more room for the property market to develop. (2) Declines in home prices in some cities will not develop into a trend across the country. Admittedly, developers are facing difficulties accessing bank loans (difficulties planned from the government) and this will extend to 2015 as banks are said to “tighten lending further” to all industries facing overcapacity. The goal? In the PBoC’s words: “to minimize the contagion risk to the entire financial system”. Developers are also facing difficulties accessing the bond market: Country Garden (a large developer) has postponed the launch of a US$ bond issue that was planned to refinance its debt. This is due to the high funding costs after the recent sell-off in a number of Chinese property bonds. However, other developers deny the closing down rumor. Guang Real Estate Group admitted it failed to deliver some projects to homebuyers in time due to financial tightening that authorities are imposing, but pointed out that it still has good access to credit. Developers face shrinking profits in Q1: Data from Centaline Property showed that among 117 developers, 61 posted shrinking profits. Total net profits were 9.65B Yuan for Q1 (down 27% y/y). Authorities put the focus on the Real Estate sector, using “fine-tuning” in order to streamline dynamics in the sector: (1) Since property headwinds may be approaching top-tier cities (with sales falling on a m/m basis) the Government is calling for banks to speed up mortgage approvals particularly for first-time buyers in order to help absorb the stock. (2) At the same time, the authorities are still keeping their grip on the developers by restricting new credit. A strategy clearly aimed at balancing the sector’s capacities with the new needs.

Corporate Review

The Currency & the Exchange Rate – Depreciation will not last long Use of the Yuan gains popularity in Q1. The Bank of China’s cross-border settlements in the Yuan soared by 71% to 1.49T Yuan. The cross-border RMB index hit a record 278 points in Q1, surging by 47% y/y. About the fixing of the Yuan. The RMB fell steeply in the first quarter despite the fact that foreign capital continues to flow heavily into China according to Balance of Payments data published last Friday 9. The Capital Account notched up a surplus of US$118.3bn (within this, real money inflows –FDI- were US$51.2bn and $67bn were in “hot money”). This means that it is the PBoC who depreciates the CNY. Why the PBoC wants to depreciate? During the 2005-2009 period, net capital inflows accounted for 30% of total reserve accumulation. And in the 1st quarter of 2014, the net Capital account contributed an astonishing 90% of the increase in Reserves. Who is bringing this capital into China? Over February and March, the amount of foreign currency (USD) that Chinese exporters sold to Chinese banks was higher than China’s trade surplus. This suggests two stimulating ideas: The USD did not come from their normal activity (but external borrowing of USD by Chinese companies) and Export companies wanted to be heavily long in RMB simply because they know the RMB will be a strong currency.

How the PBoC is trying to curve this trend? The instrument used by the PBoC to depreciate the CNY has been by buying large amounts of Fx (mainly US$ and Gold), especially in March. The new Yuan funds added to implement this were 174B in March. A figure that was close to the total amount outstanding in all financial institutions for foreign exchange operations.

Until when will the PBoC depreciate the CNY? In our humble opinion, the depreciation will not last long. Chinese corporations would apparently be reducing their borrowing activity in USD. The Chinese Academy of Social Sciences also pointed out that the depreciation would not last long. The Fx regulator has said that the Yuan “is approaching equilibrium” and that after the recent intervention (for reasons that are to do with the streamlining activity of speculators) “Regulators would ease controls on the Yuan and will boost convertibility”.

Corporate Review

Inflation & Markets – No surprises on the horizon Inflation: Reforms seem to be paying off in terms of lower and stable inflation (a sine qua non condition for the CNY to be established as a globally accepted means of exchange). This is already being reflected in a healthy and fully controlled rate of inflation (+1.8% y/y in April CPI, below the previous 2.4%). The advantages of this are already being felt in the funding costs: The one-year swap rate’s drop to a 10-month low of 3.63%. Monetary policy also seems to have contributed to calm money markets (with the 7-day repo rate falling to 3.14% on May 7. The low CPI figure gives policymakers more room to push ahead with the needed (but not yet welcomed) reforms. Financial Markets: UBS’s chief China equity strategist Chen Li sees a 20% downside for biggest China stocks on the back of a cut in profits (-3% in 2014), weak property market expectations and a depreciating Yuan. We share the outlook for the property market but not for a depreciating Yuan. However, recently released data shows how the profitability of listed firms has rebounded in 2013: A total of 1,577 companies registered net profits of CNY323.7bn ($52.2bn) in 2013, up 17.3% y/y. On the other hand, SOEs are beginning to off-load non-core assets under the state-backed plan to improve efficiency in the public sector. This sale of non-strategic assets will add cash to balance sheets, meaning less pressure for such companies to issue new debt. Pressure on the equity market will probably continue while the uncompetitive developers and other players in industries with overcapacity are left bankrupt and forced out of the market (and this is not necessarily bad in the long term).

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

Corporate Review

Asia – Monthly News Flow “The 9 points you need to know about the reforms in China” 1. The reforms announced after the 3rd Plenum are “clear and wide-ranging” (not just narrow economic changes) and aimed at a broad reform of Governance in China. 2. The central emphasis is on granting markets a decisive role in the allocation and pricing of resources (water, oil, gas, electricity, transport, telecommunications) by opening up more of the economy to private and foreign firms. 3. Local policy-makers and SOEs will step back from micro-level intervention. 4. Financial systems are being streamlined: (1) Private banks are allowed. (2) Interest rates on deposits are going to be liberalized. (3) Interbank and other reference rates will be determined by market forces (consumers). (3) Recapitalization will be allowed through the issuance of preferred shares. 5. The capital account is being liberalized. 6. Reform of local governments: (1) Clean-up of local government debt and finances. (2) Greater transparency of the budget by shifting responsibility for spending from local to central government. (3) Both local and central government debt will be monitored more closely. These moves should help rein in risks, which have certainly been growing. 7. Social welfare & residential reforms: (1) Hukou requirements for access to social welfare and affordable housing will be abolished in small cities, eased in medium-sized cities, and will remain in place for large cities. (Under the Hukou system people who worked outside their authorized home or geographical area would not qualify for grain rations, employerprovided housing, or health care). This should help to support a more sustained economic and urban development. 8. 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. 9. Growth is unbalanced, uncoordinated and unsustainable, meaning that a deep reform was necessary. 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.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Latin America – Monthly News Flow

Argentina: The government has reduced the ST banking rate from 29% to 26.6%, triggering a sharp depreciation of the “parallel” (now at 12 ARS/USD), in what is already seen as a move that will force the government towards further depreciation of the official ARS. We expect the official exchange rate to depreciate from the current 8 ARS/USD to a level near 10 ARS/USD. In light of this, farmers would be deciding not to sell their crops of soybean (to the big global players) and are waiting for an official depreciation (which will boost their USD fees in local terms). This would be prompting tensions on the fiscal front (since the government receives nearly 30% of the crop settlement). These dynamics could negatively affect Argentinian assets in the short term. Here is a brief summary of our positioning: 1. Long Term bonds in USD, NY law (Global): OUTLOOK NEGATIVE. +100bp widening in yield. 2. Long Term bond in USD, local law (Bonar): OUTLOOK STABLE. 3. Equity - ADRs in USD: OUTLOOK POSITIVE (This is the natural way for locals to be exposed to USD). 4. Equity - local: OUTLOOK NEGATIVE (The economy is likely to contract, bad sales, etc.). 5. Fx Official Exchange: OUTLOOK NEGATIVE (We expect a 25% depreciation, until 10 ARS/USD by year end).

Mexico: We are lowering our FY2014 GDP estimate to 3%. Here are some of our reasons: 1. Disappointing data would be extending to 1H2014 (although Q1 pace of 2% y/y is much better than the meagre 0.4% seen in Q4, it is still very poor). 2. The relationship between the US and Mexican GDP had already broken down some time ago, with the US GDP accelerating during the course of 2013 but the Mexican GDP heading in the opposite direction (decelerating). 3. Domestic factors must take most of the blame for the economy’s prolonged slump. (1) Investment contracted by 3% in 2013 due to the ongoing problems in the housing sector as a result of a shift in the government’s housing policy, which caused a widespread abandonment of projects. 4. The increase in tax, together with the rise in inflation (another tax) has caused weaker private consumption growth. With all this in mind, here is a brief summary of our positioning: 1. Fx: OUTLOOK STABLE. We are changing our target for the MXN slightly (from 12.75 to 12.9). 2. Fixed Income: OUTLOOK STABLE. Our target of 6% has been achieved in May. Although the 5.75% can be hit, we are keeping our target stable. 3. Equity: OUTLOOK POSITIVE. We are keeping our target for the IPC index unchanged at 45.500 (+8% from current levels.

Corporate Review

Latin America â&#x20AC;&#x201C; Monthly News Flow

Chile: We expect the Chilean central bank to hold interest rates at 4%. No chances of rate cuts. The IMACEC activity index suggest that GDP growth rebounded in February (near 3% y/y) driven by robust domestic sales growth. Inflation rose to 3.5% y/y (although still above the 3% target, it does not represent a serious threat). The problem still lies in the high current account deficit. But considering also the stability on the fiscal front, there is no reason to become unreasonably worried about a potential weakening of the countryâ&#x20AC;&#x2122;s credit metrics. The Chilean Peso has appreciated 2% in May (although YTD is still in negative territory, -5%). The Equity Market is performing relatively well in 2014 with a +5% price return. And the bond indices have accumulated a positive return of +7% YTD in local terms. Fundamentally, we believe these dynamics in Chilean Assets will continue.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Global Financial Markets Performance Powered by Andbank

Price Performance Last 30 days (% ) 23-may-2014

Price Performance YTD (% ) 23-may-2014

1.32% 0.87% 0.22% 0.30% 0.97%

4.00% 4.25% 1.14% 3.06% 3.68%

-0.50% 0.50% -0.65% -3.20% 0.54%

7.68% 9.59% 19.17% 14.70% 5.38%

-0.16% 0.62% 0.31% 1.75% 0.43%

1.72% 1.00% 2.83% 4.00% 1.47%

2.48% 2.59% 5.72% 0.16% -0.03%

6.88% 4.36% 5.16% 3.04% 7.42%

3.54% 7.06%

-7.36% 8.89%

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) Italy Benchmark Bond

FIXED INCOME INSTRUMENTS

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

Factset Database â&#x20AC;&#x201C; Powered by Andbank

EMEA Government Bonds (10 year) Russia Benchmark Bond Turkey Benchmark Bond

Corporate Review

Global Financial Markets Performance Powered by Andbank

Price Performance Last Month (% ) 22-abr-2014

Price Performance YTD (% ) 22-abr-2014

Global Equity EQUITY

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

ENERGY

MSCI EM Latin America Oil (WTI) Coal Natural Gas Average Energy Corn

CROPS

Wheat Soybean Sugar Cotton

PREC. METALS

Average Crops Palladium Platinum Gold Silver Average Precious Metals

Factset Database â&#x20AC;&#x201C; Powered by Andbank

MINERALS

Copper Nickel Zinc Aluminum Iron Ore Average Minerals

1.57% 2.19% 2.81% 1.54% 0.72% 2.11%

3.68% 4.93% 5.92% 3.56% -8.84% 2.21%

2.87% 1.65% -3.23% 1.53%

6.03% 9.46% 6.07% 6.89%

-5.05% -2.35% 4.45% -0.29% -6.65% -1.78%

14.90% 9.26% 12.00% 5.85% -1.00% 8.19%

5.73% 5.13% 0.66% -0.21% 3.54%

15.88% 7.59% 7.53% -0.41% 10.66%

5.21% 8.28% 0.75% -3.35% -16.06% 4.54%

-5.46% 40.44% -0.10% 1.14% -28.35% 5.86%

Corporate Review

Global Financial Markets - Equity Performance – YTD. 110

Global Equity Indices (Local - Base Index 100)

110

105

100

85 06 Jan

03 Feb

03 Mar

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

31 Mar

28 Apr

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

85 26 May

Latam Equity Indices (Local - Index 100)

120Systems ©FactSet Research

115 110 105 100 95 90 85 80 75 70 06 Jan

03 Feb MSCI Argentina

Andbank, MSCI, S&P Corp

03 Mar MSCI Bra zil

31 Mar

28 Apr

MSCI Chile

120 115 110 105 100 95 90 85 80 75 70 26 May

MSCI P eru

©FactSet Research Systems

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Short-term Outlook. Risk-on & Risk-off probabilities Positioning & Flows Assessment: Risky assets are not overheated A sudden Risk-off shift is unlikely

Nature of 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 -1.7 (slightly worse than the -1.2 seen last month), showing that the market is just slightly overbought and, thus, that there is no significant stress in the equity market.

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 2 2 11 Positive Bias 2 2 Mkt vs Data 12 Neutral 9 6 13 Negative Bias 5 9 14 Sell signal 3 2 15 FINAL VALUATION -1.2 -1.7 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 -0.5 0 0.5 -0.5 -0.5 1 1 n/a -1 -0.5 0 0.5 0 -0.5 0 -0.5 -0.5 -0.5 -1 0 -0.5

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Our fundamental value and the expected performance for the main equity indices P

target

= E[EPS2014] x E[PE

Index

ltm 2014

]

2014 2013 2014 2013 2014 * 2014 Expected Net Margin Expected EPS Expected Expected Sales Growth (Factset) Net Margin (Factset) Growth EPS EPS ($) A

2014 2013 Expected PE ltm PE ltm B

Target Price (A x B)

Current ** Price 22/05/2014

Expected Change (%) 2014

S&P

5.18

9.60

109.93

5.18

115.62

16.31

15.9

1,838

1,891

-2.8%

Stoxx 600 (sxxp)

4.81

6.50

7.50

20.2

20.93

24.43

15.99

14.5

354

341

4.0%

Ibex 35

4.31

6.64

8.00

559

25.68

702.53

17.74

16.0

11,240

10,490

7.2%

Asia Pac x Japan (FDSAG)

9.33

7.33

6.75

58.48

15.6

67.60

13.18

13.7

927

775

19.7%

10.00

11.28

12.0

45,500

42,008

8.3%

9.20

7.06

6.75

4175.7

4.41

4359.74

11.28

12.0

52,317

52,631

-0.6%

Mexico IPC Bovespa

* E[EPSg] 2014 = [(Sales 14 x Margin 14) / (Sales 13 x Margin 13)] -1 = [(100 (1+ E[Sales g 14]) x Margin 14] / (100 x Margin 13)]

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

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

Swap interest rates clearly point towards our disinflationary world. Looking at the current swap rates it cannot be said that a “strong” inflation rate is expected in the long term (2.63% in the US -down from the prior 2.9%- and 1.75% in the Eurozone –also down from 1.8%).

A positive “swap spread” (in both currencies) means that both, Treasury and Bund, not only reflect inflation expectations, but something that is related with “fears” (although the historical low spread could mean that fears are also lower now). The higher swap spread in the EUR curves points to higher market fears in this region. This may be a sign that macro & financial risks have not completely disappeared.

EUR swap spread: After the strong decline in the bund Yield, the spread is now at the historical average (41 vs. 45bp), meaning that, with no inflationary pressures in sight (and thus, the swap rate stable), the only way for this spread to be kept at the current normalized levels (45bp) is through a Bund Yield that must also remain close to the current level of 1.35%.

USD swap spread: It remains clearly below the historical average level (12 vs. 42bp). Again, with no inflationary pressures in sight, the only way for this spread to normalize towards the 40-50bp historical average is through a structurally low yield in the US Treasury bond.

USD: SWAP10 – Govie10

EUR: SWAP10 – Govie10 EUR - Swap 1 0 vs Govie 10

USD - Swap 10 vs. Govie 10

6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 '04

1.00 0.80 0.60 0.40 0.20 0.00

'05

'06

'07

'08

USD 10Y Swap Rate US 10Y Treasury Yield Andbank, Tullet Prebon

'09

'10

'11

'12

'13

-0.20

Swap Spread 10Y USD(Right) ©FactSet Research Systems

5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 '04

'05

'06

'07

'08

'09

EUR 10Y Swa p R ate EUR 10Y Go v Be nchma rk Yie ld Andbank, Deuts che Bundesbank

'10

'11

'12

'13

1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00

Swa p Sprea d EUR (R ight) ©FactSet Res earch Systems

Corporate Review

Core Fixed Income – US Treasury Bond Performance & Perspectives RECOMMENDED STRATEGY: NEUTRAL

Strategic range for the T10 Yield: 2.5%-3%

Buy above 3%

Sell in the 2.5% area

Current level: 2.55%

6.00

US D TREASURY Y IELDS (10Y & 2Y )

6.00

5.00

4.00

3.00

2.00

1.00

0.00

'04

'05

'06

'07

'08

'09

10Yr Govie

'10

'11

'13

0.00

2Y r Go vie

Andbank, Tullet Prebon Information

350

'12

©FactSet Research Systems

USD YIELD CURVE SLOPE 10/2Yr - Expressed in bp

350

300 250

200

150

100 50

- 50 -100 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

- 50 - 100

(10Y Y ie ld - 2Y Yie ld) Andbank, Tullet Prebon I nformation

©FactSet Res earch Systems

Corporate Review

Core Fixed Income – German 10 year Bund Performance & Perspectives 4,00

RECOMMENDED STRATEGY: SELL

Strategic range for the Bund Yield: 1.5%-2%

Buy above 2%

Sell below 1.5%

Current level: 1.38%

EUR BENCHMARK YIELDS (10Y & 2Y)

4,00

3,50

3,00

2,50

2,00

1,50

1,00

0,50

0,00

Jun Oc t Feb Jun Oc t Feb Jun Oc t Feb Jun Oc t Feb Jun Oc t Feb 10Y Y ie ld

2Y Y ie ld

Andbank, Tullet Prebon

300

©FactSet Research Sys tems

EUR YIELD CURVE SLOPE 10/2Yr - Expressed in bp

300

250

200

150

100

0 -50 '04

0 '05

'06

'07

'08

'09

'10

'11

'12

'13

-50

10Y Yield - 2Y Y ield Andbank, Tullet PRebon

©FactSet Research Systems

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

EM bonds – When? 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 low structural 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.

•

Historically, the rule of thumb for the EM bond markets has been “buy” whenever the real yield in these assets is about 150 - 200bp above 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 100-150bp of spread with US real yields as a good entry point.

•

Given that the real yield in the UST10 is now near 1.17% (nominal yield is 2.71% and y/y CPI all items is 1.54%), we can conclude the following: 1.

The current level of Yield in the UST offers value. (Real yield remains within the 1%-1.5% range).

The recommended entry point for EM bonds remains at 2.17%-2.67% in real yield. Some EM bonds meet this premise (see next page).

Corporate Review

EM bonds â&#x20AC;&#x201C; Where?

LATAM

EM ASIA

Nominal 10yr Yield

CPI (y/y) CPI (y/y) Andbank's Last reading Estimate

Real Yield (10yr bond)

S.Korea

3,38%

1,50%

1,88%

Taiwan

1,47%

1,65%

-0,18%

Thailand

3,68%

2,45%

1,24%

Malaysia

4,03%

3,39%

0,64%

Singapore

2,43%

1,37%

1,06%

Indonesia

7,96%

11,98%

4,50%

3,46%

Philippines

4,00%

4,14%

-0,14%

China

4,29%

1,80%

2,49%

India

8,76%

8,59%

0,17%

12,27% 5,88% 6,26% 5,63%

6,28% 3,50% 2,72% 3,52%

5,99% 2,38% 3,54% 2,10%

Brazil Mexico Colombia Peru

Cheap valuations Expensive Valuations

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

European Sovereign Risk Trends Periphery (10-Yr Government Bond) 35

10 Year Government Bond Yield - European Peripherals

5 0 '04

5 '05

'06 Ita ly

Andbank, JPM Chase

'07

'08

Sp ain

'09 Po rtug al

'10

'11

Ire land

'12

'13

Gre ece

©FactSet Systems CPI Research - European Peripherals

6 5 4 3 2 1 0 -1 -2 -3 -4

'04

'05

'06 Ita ly

'07

'08

Sp a in

Andbank, National I nstitutes of Statis tics

'09 P o rtuga l

'10 Ire la nd

'11

'12

'13

6 5 4 3 2 1 0 -1 -2 -3 -4

Gre e ce ©FactSet Research Sys tems

Corporate Review

European Peripheral bonds â&#x20AC;&#x201C; Where to invest?

EZ PERIPHERY

Nominal CPI (y/y)* 10yr Yield Last reading

Real Yield (10yr bond)

Italy

3.21%

0.34%

2.87%

Spain

3.00%

-0.21%

3.22%

Portugal

3.84%

-0.39%

4.23%

Ireland

2.79%

0.27%

2.51%

Greece

6.41%

-1.35%

7.76%

* Harmonized CPI All Items Recommended bonds Bonds to be avoided

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Corporate credit - EUR Expected Performance & Recommendation 7

EUR CORPORATE CREDIT SPREADS (5Yr Yields vs 5Yr Swaps)

4.00

3.50

3.00

EUR Corporates (ML EMU Corp Bond 1-10 yr Index): Spreads have remained stable during the last month (110bp vs. prior 109). We still consider euro denominated corporates as historically “expensive”, although spreads could stabilize around 90bp.

Sector breakdown: Industrials (101bp) and Financials (116bp). Utilities (135bp).

Recommended Strategy: We recommend maintaining positions in EUR corporate credit if you are already long. Wait until spreads reach cheaper levels to build new exposure.

New entry point above 120bp in the ML broad index.

2.50

2.00

1.50

1.00

0.50

'09

'10

'11

Co rp o ra te s (Right)

Financials

Andbank, Merril Lynch

'12

0.00

'13

Industrials

Utilitie s ©FactSet Research Sys tems

Corporates EUR - Mid Term Expected Performance (12m, ex-interest rate risk)

Spread effect Coupon effect Total Effect

Change (bp)

Price effect

From

Change

-20.0

0.70%

110

-20.0

1.39%

Eur3m+

1.10%

1.39%

2.09%

Corporate Review

Corporate credit - USD Expected Performance & Recommendation 4.00

USD Corporate Credit Spread (5Yr Yields vs. 5Yr Swaps)

USD Corporates (ML EMU Corp Bond 1-10 yr Index): Spreads have remained stable during the last month (74bp vs. prior 72bp). We still consider USD denominated corporates as historically “expensive”, although spreads could stabilize around 70bp.

1.00

Sector breakdown: Industrials (81bp) and Financials (61bp). Utilities (82bp).

0.50

Recommended Strategy: We recommend maintaining positions in USD corporate credit if you are already long. Wait until spreads reach cheaper levels to build new exposure.

New entry point above 80bp in ML broad index.

2.50

3.50 2.00

3.00 2.50

1.50

2.00 1.50 1.00 0.50 0.00

Corporates(Right)

Financials

Industrials

0.00

Urilities

Andbank, Merril Lynch USD Corporate bond 1-10yr Yield Index©FactSet Research Systems

Corporates USD - Mid Term Expected Performance (12m, ex-interest rate risk)

Spread effect Coupon effect Total Effect

Change (bp)

Price effect

From

Change

-4.0

0.14%

-4.0

0.97%

Lib3m+

0.74%

0.97%

1.11%

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Industrial commodities. The super-cycle ended in 2012 and 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 40 30 20 10 0 -10 -20 -30 -40 -50

China heavy industrial boom and Commodity Prices

25 20 15 10 5

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

(% 1YR , INDEX) CRB Spot Index, 1967=100, Index - United States (Left) (% 1YR) Industrial Production, China (Right) Andbank, CRB, Chinese National Bureau of Statistics

ÂŠFactSet Research Systems

1. This new norm will not necessarily imply big additional falls in commodity prices. 2. â&#x20AC;Ś 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.

Some examples of projects cancelled: 1. Germany’s Oetinger (Aluminum) removed 70,000 tons of capacity in 2013. 2. In Europe, despite the disappearance of 400,000 tons of production capacity during 2013, there continues to be overcapacity. 3. Brazil’s MMX cancelled an iron ore project in Atacama (Chile). 4. Canada’s Kinron Corp cancelled its FDN mining project in Ecuador. 5. Baoshan Iron & Steel Co. said China's steel industry is facing the harshest operating environment ever as a credit squeeze and overcapacity weighs on the sector. The company said that overcapacity may worsen in the next 2-3 years as steel production capacity is still growing (+3.8% this year) in China, outpacing demand growth of 3.3%.

220

WORLD PRODUCTION OF INDUSTRIAL & ENERGY C OMMODITIES

220

200

180

160

140

120

100

'99

'00

'01

'02

'03

'04

'05

'06

Primary Aluminium Coal Production Andbank, World Steel Association, Intl Alum Inst, EIA

'07

'08

Copper Crude Oil

'09

'10

'11

'12

'13

Natural Gas Crude Steel ©FactSet 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 Index 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

'12

'13

Baltic Dry Index - Price (Right) CRB Continuous Commodity Index - Price (Left) CRB Spot Commodity Index - Price (Left) Andbank, BIFFEX, CRB

ÂŠFactSet Research Systems

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

Central Banks’ Activity & Gold

The recent rise in Gold within the central bank reserves responds to an increase in inward remittances as overseas workers prefer to bring their savings in gold. Despite the improvement in the current account balance during the 2H2013 (from US$ -20bn to US$ -4bn), it is still too early to estimate whether the new government will definitely withdraw the ban on gold imports. Considering the government’s decision in March to tighten the norms for Indians bringing gold into the country, one has to conclude that the ban on gold will continue for several months more. In the event that the government withdraws this legislation, then India’s CA is likely to escalate again and the entire economy could be put back into the “Fragile five” club.

China has remained as the Central Bank that has been purchasing gold most actively, but we consider this within the temporary strategy of weakening the RMB, with the aim of curbing speculative activity from Chinese corporations (through a borrowing of USD and selling them to commercial banks to go long in RMBs).

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 ©FactSet Research Systems

Corporate Review

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

Recent Developments

Andbank’s Assessment

India's government is restricting gold imports

Some officials have called for restrictions on gold imports to be relaxed (due to strains caused by the domestic gold shortage, local jewelers having lobbied against the curbs, and 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

The Chinese government continues with its economic reforms, and financial liberalization is a key area where reforms are being implemented (private banks, deposit rates, preferred shares, Libor fixing, etc.). The gradual opening of the Capital Account will widen the investment alternatives for Chinese investors and this could reduce the demand for gold.

Expensive

Gold in real terms

The YTD gold price has increased from $1.128 to $1.203 and is now clearly above 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 Expensive historical average, the nominal price of gold should stay near US$814.

Gold in terms of Oil (Gold / Oil)

This ratio has decreased during the month to 12.52 (from 12.9), and is now slightly below its historical average value (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.

The 15yr average value for this ratio is 20.04. Currently this ratio stands at 12.8 (up from last month’s 12.6). Gold in terms of Equity (Dow If the DJI remains stable at year-end levels (let’s say 16.080), as we think it will, the gold price / Gold) should decline towards US$800 in order for this ratio to be near its LT average level.

Slightly expensive

Expensive

Gold & Money Impulse

The tapering represents the end of QE and therefore also the end of the explicit support that the Fed’s asset purchase program exerted over all financial assets, including gold.

Expensive

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 size of financial cash markets (212trn). The daily volume traded in the LBMA and other gold market places is near US$173bn (2.5% of global gold, and just 0.08% of total financial markets).

Cheap

Positioning in Gold (CFTC)

CEI 100oz Active contract: longs 157k (vs. 147k last month), and shorts of 65k (vs. prior 65k) = Net of +91k (vs +81k last month).

Expensive

Central Banks’ Activity

There is a lot of room for the “mercantilist” central banks to destock gold

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, while other commodities are at a fair value.

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 2014 Index100 (T-10Y) PERFORMANCE PERFORMANCE Energy

10 YEAR PERFORMANCE

ANNUALIZED GROWTH

ANDBANK'S ASSESSMENT

Oil Coal Gas

150.0 262.0 115.5 72.4

5.90% 7% -7% 27%

6.89% 6% 9% 6%

50% 162% 16% -28%

4.1% 10.1% 1.5% -3.2%

CHEAP EXPENSIVE CHEAP VERY CHEAP

Corn Wheat Soybean Sugar Cotton

174.0 164.2 177.4 177.2 215.2 135.8

-16.94% -42% -22% 5% -16% 15%

8.19% 15% 9% 12% 6% -1%

74% 64% 77% 77% 115% 36%

5.7% 5.1% 5.9% 5.9% 8.0% 3.1%

FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE CHEAP

Precious Palladium Platinum Gold Silver

283.9 333.2 180.5 338.0 331.4

-14.98% 2% -11% -28% -35%

10.66% 16% 8% 8% 0%

184% 233% 81% 238% 231%

11.0% 12.8% 6.1% 13.0% 12.7%

EXPENSIVE EXPENSIVE FAIR VALUE EXPENSIVE EXPENSIVE

Minerals Copper Nickel Zinc Aluminium Iron Ore

208.8 254.2 172.0 200.2 109.4 65.4

-6.53% -7% -18% 3% -14% -5%

5.86% -5% 40% 0% 1% -28%

109% 154% 72% 100% 9% -35%

7.6% 9.8% 5.6% 7.2% 0.9% -4.2%

FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE CHEAP VERY CHEAP

Commodities Average

204.2

-8.14%

7.90%

104.16%

7.12%

FAIR VALUE

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 Geopolitical developments 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 shortage of 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 only settlement currency for 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

7 6 2 1 3’ 5 4 4 3 1’ 2’ 3 2 4’ 1 0 -1 3 -2 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

100 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

©Fa ctSet Research Systems

(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 the US, 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 84k (vs. prior 101k), and short contracts are 86k (vs. prior 75k). The net position is -2k (vs. +26k last month).

POSITIVE

NEUTRAL

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.

POSITIVE

Recent Developments

Criteria Tensions in Europe

The continuing positive readings in our APRI mean that (1) on aggregate, peripheral 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 reserves (much higher than that implied Currency by the pace of their current account balances). USD flow to the world Positioning in € (CFTC. Options & Futures, ECA cur)

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

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

July remains the target for more BoJ easing: Investors seeing the BoJ easing further have been reduced from 46% to 31% (after the 5.9% y/y GDP pace seen in Q1). Though lower, it is still high. Abe to expand GPIF board in a move to increase allocation in higher-yielding assets. How? By adding 2-3 professional advisers to the investment committee (that will see their power increased, even as far as allowing it to make the final decisions on asset allocation). Currently, the committee can only advise the GPIF president. In our opinion, this aggressive policy will probably be accompanied with another â&#x20AC;&#x153;proequityâ&#x20AC;? market policy (probably through a weakening of JPY).

Year to Date EUR/JPY (EURJPY-FX1)

1 3 8.9 0 - 0.0 9 -0 .0 6 % 0 4 :3 2:3 9 P M J P Y

Ja n

Feb

D e c - 13 - M a y- 1 4

Ma r

Ap r

Ma y

145 144 143 142 141 140 139 138 137 136

Last 20 Years EUR/JPY (EURJPY-FX1)

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 and 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.

1 3 8.9 0 - 0.0 9 -0 .0 6 % 0 4 :3 3:0 4 P M J P Y

M a y- 9 4 - M ay - 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

Latin America Fx

Almost all regional currencies have fared well so far this month (after a turbulent past year). Most floating currencies have appreciated by 1-2% against the US$ so far this month (in part due to a stabilization of data from China, which helped to ease concerns of an imminent slowdown in the region’s key export markets).

With the exception of the Chilean Peso, all of the region’s floating currencies have appreciated against the US$ in the year to date.

Outlook: While we also expect bouts of volatility in the FX market as the US economy becomes less accommodative, we suspect that most of the adjustment is behind us.

120 115 110 105 100 95 90 85 80 75

LATIN AMERICAN CURRENCIES (Performance vs . USD)

Jan

Feb Argentine Peso BRL

Andbank,WM/Reuters

Mar CLP Col Peso

Apr

May

120 115 110 105 100 95 90 85 80 75

Peruvian New Sol MXN ©FactSet Research Systems

Corporate Review

Asian Fx

All Asian currencies except the CNY are markedly up for the year. In China, the PBoC has been depreciating the CNY within a temporary strategy aimed to curb down speculative activity from Chinese corporations (through a borrowing of USD and selling them at commercial banks to go long in RMBs).

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.

Outlook: We maintain our positive outlook for these currencies (see the chart on the next page).

We are still inclined to think that the best options to invest are in 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. More specifically, we favor the IDR, THB, PHP, MYR and of course the CNY.

The mercantilist approach (countries with huge Current Account surpluses), 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.

110

ASIAN CURRENCIES (Performance vs. USD)

110

108

106

104

102

100

98 96

98 Jan

Feb IDR

Andbank, WM/Reuters

Mar THB

PHP

Apr MYR

May

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 Ind ex 3mth smoothed (lh s) Asian curr Inde x (rh s)

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

Apr-14

Jan-14

Jul-13

Oct-13

Apr-13

Jan-13

Jul-12

Oct-12

Apr-12

Jan-12

Jul-11

Oct-11

Apr-11

Jan-11

Jul-10

Oct-10

-0,50

Apr-10

0,800

Jan-10

STRONG SELL

Jul-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

Oct-09

0,00

1,100

Apr-09

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

Jan-09

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 300bp (from 80 to 83), this component is negative for the rest.

Corporate Review

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Market Outlook Summary Table

Fundamental Asset Class

Instrument

(1) Expected performance at year-end.

Current

Fundamental

Performance

23/05/2014

Target

(12 months)

1.898

1.838

-3,1%

(2) Expected performance includes price and coupon effect.

S&P 500

342

354

3,7%

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

Ibex 35

10.539

11.240

6,7%

Mexbol

41.994

45.500

8,3%

Bovespa

52.797

52.317

-0,9%

774

927

19,8%

Stoxx 600 Equity

FDSAG Asia Pac xJapan

Recent changes: • • • •

Target in Portuguese bond yield, from 4.25% to 3.5%. Taiwanese bond yield, from 1.00% to 1.50%. Target in India's bond yield, from 8% to 8.50%. Mexican peso, from 12.75 to 12.9

Fixed Income (2)

Bund 10y

1,41%

1,75%

-1,32%

Treasury 10y

2,52%

2,75%

0,66%

Sovereign Risk

Spain

2,982

3,25

0,8%

Europe

Italy

3,147

4,3%

(10 year Yields)

Portugal

3,767

3,5

5,9%

Ireland

2,777

1,0%

Greec e Greec e

6,49 6,49

6,5 6,5

6,4% 0,0641

Average

3,17

3,19

3,0%

109

2,07%

1,02%

Corporate Credit Corporates EUR - EUR & usd (3) Corporates USD

(1)

(2) (2)

(3)

Corporate Review

Market Outlook Summary Table (1) Expected performance at year-end.

Fundamental

(2) Expected performance includes price and coupon effect.

Asset Class

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

EM bonds Asia (in local)

EM bonds Latam (in local)

Commodities

Recent changes: • • • •

Target in Portuguese bond yield, from 4.25% to 3.5%. Taiwanese bond yield, from 1.00% to 1.50%. Target in India's bond yield, from 8% to 8.50%. Mexican peso, from 12.75 to 12.9

Instrument

Current

Fundamental

Performance

23/05/2014

Target

(12 months)

Taiwan

1,50%

1,5%

Thailand

3,67%

3,80%

2,7%

Indonesia

8,03%

7,50%

12,3%

Malaysia

4,03%

3,75%

6,3%

India Philipines

8,63% 4,15%

8,50% 3,50%

9,7% 9,3%

12,27%

12,00%

14,5% 4,9%

Brazil Mexic o

5,88%

6,00%

Colombia

6,21%

6,50%

3,9%

Peru

5,58%

5,00%

10,2%

Chile

4,98%

4,50%

8,8%

Oil

104,12

-8,8%

CRY

307,92

275

-10,7%

Gold

1293,79

900

-30,4%

USD vs EUR

1,363

1,40

-2,6%

JPY vs EUR

138,77

160,00

-13,3%

JPY vs USD

101,79

114,00

-10,7%

CNY vs USD

6,24

6,00

3,9%

MXN vs USD

12,87

12,90

-0,3%

BRL vs USD

2,22

2,60

-14,8%

(2)

Corporate Review

Global Asset Allocation Proposal Tactical Asset Allocation Proposal â&#x20AC;&#x201C; May 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

23.7

10.0

15.0

6.0

8.5

4.0

5.5

Fixed Income Short-Term

25.0

31.6

15.0

18.0

5.0

5.7

0.0

Fixed Income OECD Government

30.0

15.8

20.0

10.0

12.0

5.7

5.0

2.3

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

1.9

1.2

0.7

0.3

13.9

8.8

5.0

2.0

20.0

15.8

20.0

15.0

10.6

5.0

3.5

5.0

7.9

10.0

15.0

21.2

10.0

13.9

Fixed Income Asia

2.4

4.5

6.4

4.2

Fixed Income Latam

3.9

7.5

10.6

6.9

High Yield

1.6

3.0

4.2

2.8

Equity OECD

5.0

5.3

15.0

30.0

28.3

55.0

50.8

US Equity

0.8

2.3

4.2

7.6

European Equity

4.5

12.8

24.1

43.2

Equity Emerging

0.0

5.0

8.0

10.0

15.1

12.0

17.7

Asian Equity

0.0

4.8

9.1

10.6

Latam Equity

0.0

3.2

6.0

7.1

Commodities

0.0

5.0

3.8

7.0

5.0

9.0

6.2

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

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