Corporate review may 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 May, 2014

Corporate Review

Table of Contents

Executive Summary

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Overall Economic Environment

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Global Market Snapshot. Performance and Volatility

.……………………………………………………………………16

Market Outlook Risk-on & Risk-off probabilities ….………………………………………………………………………………………………………………………20 Equity Markets. Fundamental Assessment ……………………………………………………………………………………………………22 Fixed Income. Core Countries .…………………………………………………………………………………………………………………………..24 Fixed Income. Emerging Markets ……………………………………………………………………………………………………………………..28 Fixed Income. European Periphery …………………………………………………………………………………………………………………..31 Corporate Credit

…………..…………………..…………………………………………………………………………………………………………………..34

Commodities & Precious Metals …..…………………………………………………………………………………………………………………..37 Forex …….…………………………..…………………..…………………………………………………………………………………………………………………..47

Summary Table for financial market prospects & Asset Allocation Proposal

…………………..54

Corporate Review

Executive Summary

Economy & Markets Europe – The EZ manufacturing PMI came in at 53 (from 53.2), but the breakdown highlighted an evening out in manufacturing across the Eurozone. Credit upgrades beat downgrades in Q1 2014 for the first time in six years on the back of a better adaptation to the stressed business environment, a better positioning to weather a credit shock and improvements in corporate financing conditions. Disinflation remains a constant: Eurozone producer prices came in at -0.2% m/m and -1.7% y/y (vs. previous -1.4%). USA – Employment figures were as investor-friendly as hope. All in all, the payroll headline suggests both recovery and a longer period of decent data before the need to tighten rates. Certainly a benign scenario close to ideal that equity and bond markets both love.

anyone could a broadening Fed feels any the Goldilocks

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 -1.2 (from the -2 seen last month), showing that the market is just slightly overbought and thus, that there is no significant stress in the equity market. S&P: Fundamental Term view. Our 2014 projections are: Sales +5.1%, margins +9.6%, EPS +5.1%, target PE 15.9, target price 1838, potential appreciation from current level is -2%. Europe (Stoxx600) Fundamental Term view. Our 2014 projections are: Sales +4.8%, margins +7.5%, EPS +20.9%, PE 14.5, target price 354, potential appreciation +5.1%. Asia EM ex Japan Fundamental Term view. Our 2014 projections are : Sales +9.3%, margins +6.7%, EPS +15.6%, PE 13.7, potential appreciation +20%. Mexbol’s target price is 45,500 (potential appreciation +13%). Brazil’s Bovespa target price is 52,000 (potential appreciation +1.5%).

China - Authorities reported a 7.4% rise in 1QGDP (better than market Core Fixed Income – Bund: Start buying at 2%-2.25% yield, sell at expectations). Additionally, growth clearly picked up in March from the 1.5%. Treasury: Start buying at 3%-3.25%, sell at 2.5%. lows of January and February. Solid growth in real household income (+8.6% y/y). China's State Council unveiled a plan to support Sovereign Risk (European periphery): Spain leaves our list of growth through additional spending on market-priced freight recommended issuers. Only Italy and Greece are in our Buy list, both now railway and low cost housing. Deflation also present in China (a new with just single-digit potential performance (around 4%-6% respectively). exporter of low prices). Nominal GDP decreased from 9.7% in 4Q to Corporate Credit: Expensive, though the positive mood will continue. 7.9% in 1Q14. 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 Japan - 46% of investors see the BoJ doubling its annual ETF purchase 80bp of spread. target to ¥2T/year in its first QQE expansion. Abe adviser Etsuro Honda reiterated that the BoJ should take additional easing measures to boost EM Bonds Asia (local currency): We see value in these assets, the stock market and weaken the yen. Aso highlighted that “Many especially in local currency. Volatility guaranteed. Preferred: Indonesia, countries appreciate Japanese stimulus measures”, and Kuroda said “the China and South Korea (with higher real yields). But price performance is BoJ should adjust monetary policy without hesitation if necessary”. expected to be higher in India and Philippines Meanwhile QQE is drying up bond market liquidity for the first time in 13 EM Bonds Latin America (local currency): Same reading as in Asian years. bonds. Volatility guaranteed. Most preferred: Mexico, Colombia and Peru. Commodities: Fundamental target for WTI at 95. Buy below $90s and sell Latin America - There have been further signs during this 1Q14 that above $100. CRY index could fall further (-11%). Preferred: Gas, Soybean, the region has entered a new era of sluggish economic growth. Looking Cotton, and some minerals such as Nickel. Avoid precious metals. ahead, it seems unlikely that these trends could be reversed in the Fx: Fundamental target for the USD/EUR at 1.40. Short-term bias towards foreseeable future, but we believe that most of these economies will not 1.35. Asian currencies are very attractive from a fundamental point of show further deterioration. view. Avoid JPY (vs. EUR and USD). GBP range-bound vs. EUR in the 0.82. 0.86 area). Neutral MXN (target at 12.75). Short BRL (2.6).

Corporate Review

Table of Contents

Executive Summary Overall Economic Environment 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

Eurozone – Monthly News Flow

Corporate Review

“Manufacturing recovery evens out” Manufacturing: The EZ manufacturing PMI came in at 53 (from 53.2), but the breakdown highlighted an evening out in manufacturing across the Eurozone. Germany, the Netherlands and Austria lowered the pace, but France, Italy, Spain and Ireland accelerated. Spain hit a 47-month high of 52.8. Ireland hit a 35-month high of 55.5, and France a 33-month high at 52. Italy’s reading was fixed at 52.4. Credit upgrades beat downgrades in Q1 2014 for the first time in six years on the back of a better adaptation to the stressed business environment, a better positioning to weather a credit shock and improvements in corporate financing conditions. Politics: o France fiscal policy sets up clash with Brussels: France PM Manuel Valls promises more than €11B in extra tax cuts for business and households, saying that the need to boost growth must take precedence over EU-enforced austerity. He will remove a production tax on companies worth €6B and will cut main corporate tax rate from 2016. In addition he will cut €5B in employee social charges on the low paid by 2017. These proposals come on top of the €30B in tax cuts for employers promised by president Hollande in January. Accordingly, Hollande requested a delay in meeting the 3% deficit target in 2015 but this plea found an answer from EU commissioner Olli Rehn: “Paris’ deadline on the deficit has been extended twice” o Italian Renzi’s cabinet approves text for constitutional reforms aimed at streamlining parliament, speeding up the legislative process and reducing political instability (making it harder for the two chambers to vote a government out of office). PM Renzi cut government 2014 growth forecast to 0.8% (from 1%) but kept the target for a budget deficit of 2.6% (warning that Italians should expect €4.5B in spending cuts). He added that the public debt will climb to a postwar record of 135% (from the previous record of 132.6% in 2013. o Germany’s cabinet adopts the minimum wage bill that introduces a statutory pay floor of €8.50 an hour to be introduced in 2015 and targeting 5 million workers. Disinflation remains a constant: Eurozone producer prices came in at -0.2% m/m and -1.7% y/y (vs. previous -1.4%). Prices fell in all members, signaling that this is due to the structural factors we have been mentioning (rather than idiosyncratic or demand-driven factors).

USA – Monthly News Flow

Corporate Review

“Employment figures are close to the Goldilocks ideal”

US employment figures were as investor-friendly as anyone could hope: o Coming after the shockingly weak December payrolls that triggered January’s global equity correction, the rebound in employment in February and March to the three-year average of 184k gave both equity and bond investors cause for cheer. o For Equity investors, the data suggests that there can no longer be any serious concerns about a US economic recession with the consequent setbacks in revenues and profits. o For Bond investors the data clearly indicates that there is no sign of GDP acceleration towards 4% and hence no reason to bring forward expectations of a Fed rate hike in 2015 o All in all, the payroll headline suggests both a broadening recovery and a longer period of 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. Is the Equity market over-extended or should we follow the signs of a well seated market? o The present rally has continued too long without interruption. Beginning on March 9, 2009, it has been longer than any bull market since 1920. o As a result the market seems to be over-extended, complacent and priced for perfection. Under these circumstances a significant correction could take place as a consequence of the smallest catalyst. o Nevertheless, the P/E ratios are only modestly above their long-term average… o …and some measures (such as lots of cash on the sidelines) mean we remain fairly comfortable. o Moreover the gains on Wall Street have been orderly, with little sign of the acceleration that preceded major corrections such as those in 1968, 1974, 1987, 2000 and 2007 Conclusion: It looks increasingly likely that US equities have embarked on a structural bull market. o Given that 2007 levels have now been exceeded by 22%, a 15% correction could take place, but which would still leave the S&P in a long-term bull market. o For a correction to turn into something more serious (a 30% bear market), something would have to go seriously wrong in the months ahead. Either a US economy recession or a sharp tightening of monetary conditions. Based on the evidence coming out from the US, neither of these seems at all likely.

Asia – Monthly News Flow

Corporate Review

“China may well succeed in striking a balance between reform and growth” China reported a 7.4% rise in 1QGDP (better than market expectations). Additionally, growth clearly picked up in March from the lows of January and February. Solid growth in real household income (+8.6% y/y). Deflation also present in China (a new exporter of low prices). Nominal GDP decreased from 9.7% in 4Q to 7.9% in 1Q14. Authorities stance on Growth: o China's State Council unveiled a plan to support growth through additional spending on market-priced freight railway and low cost housing. o The State Council unveiled the long-awaited urbanization plan on 16 March, aiming to have about 60% of the country's people living in cities by 2020, up from the current 52.6%. o The NDRC, China's top planner, recently granted approval for five railway construction projects. o The pro-growth measures we are seeing now come nowhere near the RMB 4 trillion stimulus launched right after the global financial crisis. Thus we consider this as a “Support”, not “Stimulus”. o Accordingly, we expect manufacturing PMIs to rebound in summer. Chinese premier Li Keqiang said on 26 March that “he was confident of maintaining economic growth in a reasonable range”. The entire region will benefit. Taiwan, Korea and Malaysia will benefit most. Authorities stance on Reforms: o The CSRC, China Securities Regulatory Commission, unveiled rules on 21 March for a pilot program allowing listed companies to issue preferred shares in what could be an important step towards a major capital market reform. o Four Chinese banks set to boost capital by issuing RMB 290bn (US$47bn) in preferred shares. More lenders expected to follow. Potential impact? (1) Will help to restore bank’s health. (2) Will help to dim worries about NPL, currently reported at 1-2%. (3) Will help to address risks coming from the rapidly growing Shadow Banking, currently representing no more than 20% of total assets. (4) Rising capital in Chinese banks should be reflationary for SME loans, equity markets or even other EM since they are dependent on Chinese demand. o China’s leaders are well aware of the dangers that massive credit expansion and distorted state sector investment incentives would pose to the country’s economic health. o The favored tool for this support package—railway construction—shows how the government wants to balance maintaining economic confidence with its commitment to press ahead with reforms.

Asia – Monthly News Flow

Corporate Review

“China may well succeed in striking a balance between reform and growth” o Rail investment enhances productivity, improves logistical efficiency and raises labor mobility. The problem with railways in China were with the “tariff fixing model”. It is encouraging now to see that the accelerated construction was coupled with a move on tariff reform. As a test, one new coal line (Shunchi Railway) will be allowed to set its own tariffs based on market demand. This approach underlines the broad national goal: Stabilizing growth, tied to market liberalization. o Authorities are also to regulate more closely the fixing of all benchmark interest rates by changing the way that overnight and 7d repo rates are fixed in order to weaken manipulation by individual banks. This leads to a truer market-determined interest rate, and helps to disclose the real price of interbank funding. o The leadership’s stance will require fine-tuning to moderate any risk coming from local governments & SOEs (but such fine-tuning should be well within Beijing's capabilities). o In our opinion, these developments come as a reminder that China may well succeed in striking a balance between reform, monetary prudence and growth. o The Equity market has yet to price in the possibility of such success. With equities priced now for catastrophe, there is the possibility of a significant upward rerating should all these measures persuade the market that Beijing may succeed in striking such a balance. PBOC & the CNY’s depreciation: The central bank could continue to dampen the market’s one-way expectations on CNY appreciation via daily fixings or intraday dollar-bidding. RMB’s internationalization to continue: o The Bundesbank and the PBoC have agreed to cooperate on the clearing and settlement of payments denominated in the CNY. This adds to the multiple steps taken around the burgeoning CNY’s participation in the global economy, and will continue promoting its internationalization. o Boston Consulting Group said that China’s bond market is projected to double within five years and account for 70% of the Asian bond market, exceeding Japan’s.

Asia – Monthly News Flow

Corporate Review

“About the real situation in China’s macro figures” 1Q13 GDP pace has been 7.4% (vs. final full 2013 GDP pace of 7.7%). Public debt circa 10% of GDP, with fiscal surplus (+4.2% in 1Q13, +3.5% in 2Q, -1.5% 3Q, -2% 4Q) External debt (public) around 4.1% of GDP (The World Factbook). Meaning that the USD 3.34 trn in Fx reserves represents a coverage coefficient of circa 10 times, which dissipates fears of potential tensions in the balance of payments. The economy is running at full employment (4.1% unemployment rate) The surplus in the current account balance provides assurance that China will not become one of the “Fragile” economies. The mercantilist approach of this economy continues to be the instrument used for buying protection (ensuring current account surpluses and thus reducing the dependence on capital inflows), while the hardest hit economies have been (and presumably will continue to be) those experiencing current account deficits. Foreign direct investments circa USD 250bn (on a yearly basis), representing a healthy 3% of GDP. Industrial production expanding at a more sustainable pace of 10%.

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

Asia – Monthly News Flow

Corporate Review

“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) aimed at a broad reform of Governance in China. 2. The central emphasis is on granting markets a decisive role in the allocation and price 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 rate 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 on 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.

Japan – Monthly News Flow

Corporate Review

BoJ seen buying more ETFs in first QQE expansion in July 46% of investors see the BoJ doubling its annual ETF purchase target to ¥2T/year in its first QQE expansion. Abe adviser reiterates that BoJ may have to do more (April 7): Abe adviser Etsuro Honda reiterated in a recent interview that the BoJ should take additional easing measures to boost the stock market and weaken the yen. Aso says: “Many countries appreciate Japanese stimulus measures” Kuroda says: “The BoJ should adjust monetary policy without hesitation if necessary” QQE drying up bond market liquidity: NQN reported that BoJ bond-buying operations have dried-up liquidity in the inter-dealer bond market for the first time in 13 years. In our view this poses significant risks in BoJ and commercial banks’ balance sheets in the case of a spike in rate volatility. Banks motivated by QQE to shift into riskier assets: The Nikkei reported that Japanese banks are shifting assets out of JGB into foreign bonds, HY bonds, and even loans to SMEs. Bank’s balance in JGBs are down 21% y/y in Feb, while foreign bonds were up 5.5% y/y. Loans to SMEs have grown every month since July 2013. Shareholdings remained unchanged. Retail sales affected after the implementation of the sales tax: Japanese department store Takashimaya’s revenue in April 1-7 period crashed 25% after Japan raised its sales tax from 5% to 8%. Other figures are also disappointing: Industrial output +2.3% m/m (from 4%). Housing Starts +1% y/y (from 12.3%). Big 50 construction orders +12.3% (from 15.2%). March Manufacturing PMI 53.9 (vs. 55.5). FY14 cappex plans +4.2% (vs. +5.2% in 2013) Pension funds overhaul - Pension funds aimed for higher returns, suggesting that the funds would allocate less to bonds and more to stocks. The draft calls for funds to take “forward-looking risk analysis” and manage funds actively. (April 9) The GPIF has issued a tender for asset managers to oversee its portfolio of foreign bonds and expand it to include HY and EM bonds. The GIPF holds US$1.3T of assets. (April 16) Aso hints that GPIF could increase stock allocation in June. Conclusion: It is likely that PM Abe will continue implementing an aggressive monetary policy on the back of (1) Certain progress in the area of GDP and Inflation, (2) Lack of dynamism in the external sector, and (3) the need to keep long term rates low. Against this backdrop, the equity market could continue rising but it is worth mentioning that foreigners were net sellers of Japanese stocks for the first time since 2012 in March.

Latin America – Monthly News Flow

Corporate Review

“The worst in Financial Markets is probably behind us” There have been further signs during this 1Q14 that the region has entered a new era of sluggish economic growth. With most of the official data for 4Q released, regional GDP growth seems to have slowed to 2.6% y/y in Q4 (from 2.9% y/y seen in Q3). Some independent trackers point out that output is expanding at a similar pace to 1Q13. Looking ahead, it seems unlikely that these trends could be reversed in the foreseeable future, but we do not believe that most of these economies will show any further deterioration. (1) Concerns about a hard landing in China are overdone. (2) Concerns that the shift within the Chinese economy away from commodity-intensive investment and towards consumption will weigh on Latin America’s heavy commodity producers (Chile, Peru) are also overdone in the sense that the intensive activity will be done in other parts of Asia. (3) Perhaps the most concerning issue is that tightening global monetary conditions will make the entire region rein in its bulging current account and fiscal deficit, making it necessary to weaken domestic demand. Current Assessment: Latin America’s financial markets stabilized in March after a woeful start to the year. Fx: Most of the region’s floating currencies strengthened in March but it was the Colombian peso that was the best performer, appreciating by 4% against the US$. Equity markets have also performed well this month. Argentina, Mexico and Brazil’s benchmark equity indices made significant gains of 2-6%. Colombia outperformed again with the benchmark COLCAP index gaining 8.2%. On the other hand, Peru’s equities performed woefully, with the benchmark IGBVL declining by 9% this month. Bonds: Argentine and Venezuelan bonds have rallied (+7% and +5% respectively) although these markets are expected to come under renewed pressure as the countries remain on the brink of a balance of payments crisis. The Colombian bond also posted a good performance General Outlook: For the rest of the region’s financial markets, we think the worst is probably behind us, although, admittedly, lower commodity prices could be a factor and put some downward pressure on these markets. But in contrast, we do not expect that the “gradual normalization” of interest rates in the developed world will take place as early as market participants expect. Additionally, a relatively stronger economic growth, aided by the EU recovery and the US’ stable path, will support financial markets in the region, particularly in Mexico.

Latin America – Monthly News Flow

Corporate Review

“The worst in Financial Markets is probably behind us”

Brazil: Positive aspects: (1) S&P’s downgrading of Brazil’s debt rating to BBB- comes as no surprise. Negative aspects: (1) The poor growth outlook points to an era of larger budget deficits and rising debt. (2) More timely economic data indicates that growth remains extremely disappointing at around 2% y/y in Q1. (3) Drivers for growth are still skewed towards consumer spending (something that must be curved). (4) Industry remains very weak. (5) Central bank raised rates (to 11%) given the pick up in IPCA-15 (to near 6%) and this does not help. (6) Inflation is set to remain stubbornly high and, thus, interest rates are set to remain in double-digits for some time, and this will not help.

Mexico: Positive aspects: (1) Forward-looking indicators show some signs of improvement: The IMEF services survey has picked up while the US ISM manufacturing index is consistent with positive dynamics in the Mexican manufacturing sector. (2) Headline CPI fell to 4.2% in February (from 4.5%) and could remain around the 4% mark (upper band of the 2%-4% range), meaning that interest rates could remain at the current historical low of 3.5% for much of this year, and this should help. Negative aspects: (1)The poor performance of the economy in 2013 spilled over into the first months of 2014. The IGAE Activity index slowed to just 0.6% y/y in January (3m avg.) from 0.8% y/y. (2) Primary and secondary sectors contracted, while the tertiary sector slowed growth. (3) We have cut our projections for FY2014 GDP growth. From 4% to 3.25%.

Argentina: Positive aspects: (1) Financial markets seem to have stabilized. Foreign currency bond yields fell by 50bp to 11.3%, and the official peso has stabilized around 8/$ (requiring very little intervention by the BCRA). (2) Foreign exchange reserves also seem to have stabilized. Negative aspects: (1) January’s devaluation is likely to have aggravated the already-high inflation perhaps near the 30% y/y now. (2) Inflation will remain stubbornly high due to the large (and monetized) government spending ahead of next year’s presidential election. (3) This combination of factors will weigh heavily and will cause capital flight, putting pressure on the peso, maybe until 10/$. (4) Some trackers suggest that the economy remained very weak in 4Q and our forecast is that the GDP will contract in 2014.

Latin America – Monthly News Flow

Corporate Review

“The worst in Financial Markets is probably behind us” Chile: Positive Aspects: (1) Retail sales have been growing at a less frenetic rate of 6.6% y/y on a 3 month average basis in February. Indeed they are lower than the 8% pace seen for most of 2013 but are still healthy. (2) Although inflation has picked up to 3.2% y/y in February it still remains well within the official 2-4% target range, allowing the Central Bank to cut interest rates to 4% in a move that could help the broad economy. Nevertheless we think it is unlikely to see further monetary easing if CPI remains above the central point. (3) The currency weakness and recent slowdown in domestic consumption should help to curve down the problematic current account deficit, that is already improving mildly and is now at 3.5% of GDP from the previous 4%. Negative aspects: (1) The slowdown seen in 4Q13 continued in 1Q14. The IMACEC activity index suggests growth slowed to a very low 1.3% y/y in January, although it recovered in February to a mild 2.87% y/y. (2) The slowdown has been apparent in most major sectors, with industrial activity posting a -1.9% y/y pace in February in what represents the fourth consecutive month of contraction. Colombia: The FY2013 GDP growth was 4.3%. While it is clearly below the average of 4.7% seen over the past decade, it is by no means a disaster. Positive aspects: (1) The pace seems to have picked up with 4Q14 GDP growth being 4.9% y/y -a touch below the 5.1% of 3Q, but better than the expected 4.7%. (2) Construction, Mining and consumption were among the main drivers for growth. (3) Some GDP trackers suggest that Colombian GDP started the 1Q13 in a similar fashion, with growth being around the 4.5% y/y. (4) CPI remains stable at a healthy 2.3% y/y (below the target of 3%) and will remain well controlled, allowing the interest rates to be left on hold at 3.25% for the entire year. This should help. Negative aspects: (1) In contrast, the manufacturing (secondary) sector continued to perform woefully. (2) Growth stands at a 4.5% y/y pace but still remains unbalanced and skewed towards consumer-facing sectors, while the manufacturing sector continues to struggle. (3) The Colombian peso has weakened against the USD since May 2013 (from 1800 to near 2000) but this is seen as insufficient to restore the external competitiveness of industry.

Peru: Positive Aspects: (1) Unlike the rest of the economies, Peru posted a strong end to 2013 and has recorded a robust 4.8% y/y pace in its INEI’s economic activity indicator in the early stages of the year. Negative aspects: (1) Here there are also concerns about the underlying balance of growth. Mining, construction and retail sales are still strong but manufacturing continues to perform poorly (0.42% y/y in January), as it has done in the last two years, in part due to the overvalued currency. Maybe the depreciation seen in 2013 (from 2.58 to 2.80) helps to reestablish competitiveness. (2) Headline inflation rose to 3.8% y/y, well above the 1-3% target range, limiting therefore the authorities’ capacity to ease policy (now rates stand at 4%), although RRR for banks were lowered to 12.5%.

Latin America – Monthly News Flow

Corporate Review

“The worst in Financial Markets is probably behind us” Venezuela: Negative aspects: (1) With no signs of an end to anti-government protests and clashes becoming increasingly violent, the situation threatens to spiral out of control. (2) Shortage of foreign currency leads to widespread shortages of many goods. (3) This has caused inflation to rocket to near 60% y/y in February. (4) The recent sharp fall in motor vehicle sales of -70% y/y suggests that economic activity has collapsed. (5) The government has responded by introducing a new foreign exchange mechanism –SICAD2- with the first transactions made at an exchange rate of 51.8$, equivalent to an almost 90% discount from the official rate. The goal is to help bring the black market rate down, but with the dangerous low level of Fx reserves and the erosion of the current account surplus, tensions in the balance of payments could mount rapidly. (6) As such, it is likely that the dollar drought will persist, and so the shortage of goods, social unrest, etc. As such, Fx and bond yields could head much higher during 2014.

Corporate Review

Table of Contents

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Global Financial Markets Performance

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

Price Performance YTD (% ) 22-abr-2014

0.83% 3.62% 3.16% 4.80% 2.31% 7.10%

2.29% 3.44% 3.58% 2.05% -10.35% 0.64%

0.19% 0.77% -0.04% 0.29% 0.36%

2.58% 3.28% 1.02% 2.48% 2.61%

2.54% 2.24% 4.62% 7.54% 1.82%

8.12% 8.90% 19.46% 18.89% 4.83%

1.72% 0.18% -0.10% -0.50% 0.23%

1.68% 0.45% 2.23% 2.25% 0.93%

4.24% 0.21% 2.92% 3.44% 7.45%

3.52% 1.37% -0.76% 3.12% 8.09%

Global Equity EQUITY

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

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

European Peripheral Government Bonds (10 year) FIXED INCOME INSTRUMENTS

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

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

LatAm Government Bonds (10 year) Brazil Benchmark Bond

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

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

Corporate Review

Global Financial Markets Performance

ENERGY

Oil (WTI) Coal Natural Gas Average Energy Corn

CROPS

Wheat Soybean Sugar Cotton

PREC. METALS

Average Crops Palladium Platinum Gold Silver Average Precious Metals

MINERALS

Copper Nickel Zinc Aluminum Iron Ore Average Minerals

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

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

Price Performance YTD (% ) 22-abr-2014

2.54% 4.90% 10.83% 4.54%

3.77% 8.17% 9.83% 5.90%

2.57% -5.71% 5.02% 0.89% 1.29% 0.58%

19.23% 11.53% 8.22% 3.53% 6.79% 9.36%

-1.44% -2.17% -2.36% -3.42% -1.99%

9.27% 2.08% 7.43% 0.05% 6.92%

1.82% 12.98% 6.46% 8.05% 4.10% 6.10%

-10.36% 30.49% -0.86% 4.20% -14.57% 1.04%

Corporate Review

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

Global Equity Indices (Local - Base Index 100)

06 Jan

27 Jan

17 Feb

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

10 Mar

31 Mar

106 104 102 100 98 96 94 92 90 88 86 21 Apr

MSCI AC Asia Pa cific e x JP MSCI Ja pa n MSCI EM La tin America ©FactSet Research SystemsLatam Equity Indices (Local - Index 100)

115

110 105

100 95

85 80

75 70

75 70 21 Apr

06 Jan

27 Jan MSCI Argentina

Andbank, MSCI, S&P Corp

17 Feb MSCI Bra zil

10 Mar

31 Mar

MSCI C hile

MSCI P eru

©FactSet Research Systems

Corporate Review

Table of Contents

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 Index 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 -1.2 (from the -2 seen last month), showing that the market is just slightly overbought and, thus, that there is no significant stress in the equity market.

1 2 3 Positioning 4 5 Aggregate Result in our Flow & 6 7 Sentiment Indicators 8 Previous Current 9 Flow Month Month 10 Buy signal 1 2 11 Positive Bias 2 2 Mkt vs Data 12 Neutral 9 9 13 Negative Bias 7 5 14 Sell signal 3 3 15 FINAL VALUATION -2.0 -1.2 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 -1 0 0.5 0 -0.5 1 1 n/a -1 -0.5 -0.5 0.5 0 -0.5 0 -1 0 0 -0.5 0 0

Corporate Review

Table of Contents

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 06/05/2014

Expected Change (%) 2014

S&P

5.18

9.60

109.93

5.18

115.62

16.31

15.9

1,838

1,875

-2.0%

Stoxx 600 (sxxp)

4.81

6.50

7.50

20.2

20.93

24.43

15.99

14.5

354

337

5.1%

Ibex 35

4.31

6.64

8.00

559

25.68

702.53

17.74

16.0

11,240

10,507

7.0%

Asia Pac x Japan (FDSAG)

9.33

7.33

6.75

58.48

15.6

67.60

13.18

13.7

927

774

19.8%

10.00

11.28

12.0

45,500

40,296

12.9%

9.20

7.06

6.75

4175.7

4.41

4359.74

11.28

12.0

52,317

51,569

1.5%

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)] ** 1st Quarter revision of targets: Stoxx 600: Target price lowered from 370 to 354 due to the follow ing reasons: (1) 1Q data show s that EPS in 2013 were 20.2 (not 20.77 as estimates projected in 4Q13). This low er base implies that PE multiples were much higher, thus, keeping stable our target PE 2014, means a low er expansion of multiples (in this case, a higher contraction until our target of 14.5 is reached) (2) A more detailed breakdow n of geographical sales has changed slightly our sales estimates (3) W e have changed a few Nominal GDP estimates in some economies, that in turn translates into a different sales grow th. Ibex 35: Target price lowered from 11.710 to 11.240 due to the following reasons: (1) 1Q data show s that EPS in 2013 were 559 (not 574 as estimates projected in 4Q13). This lower base implies that PE multiples were much higher (17.7, not 16.9) Thus, keeping stable our target PE 2014 near the 16, means a higher contraction in PE. (2) A more detailed breakdow n of geographical sales has changed slightly our sales estimates (from 2.5% to a higher 4.3%) (3) W e have changed a few Nominal GDP estimates in some economies, that in turn translates into a different sales grow th. Mexico IPC: Target price lowered from 47,500 to 45.500.

Corporate Review

Table of Contents

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

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

Swap rates point towards our disinflationary world. Looking at the current swap rates it cannot be said that strong inflation is expected in the long term (2.9% in the US and 1.8% in the Eurozone).

A positive “swap spread” (in both currencies) means that Treasury and Bund reflect not only 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: It is now slightly below the historical average level (23 vs. 45bp), meaning that, with no inflationary pressures in sight, the only way for this spread to normalize towards 40-45bp is through a 15bp decline in the bund yield.

USD swap spread: It is now clearly below the historical average level (13 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 UST.

USD: SWAP10 – Govie10

6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00

EUR: SWAP10 – Govie10

USD - Swap 10 vs Govie 1 0

'04

'05

'06

'07

'08

USD 10Y Swa p Ra te US 10Y Trea sury Yie ld Andbank, Tullet Prebon

1.00

'09

'10

'11

'12

'13

5.00 4.50 0.80 4.00 0.60 3.50 3.00 0.40 2.50 0.20 2.00 1.50 0.00 1.00 - 0.20 0.50

Swa p Sprea d 10Y USD(Right) ©FactSet Res earch Systems

EUR - S wap 1 0 vs Govie 10

'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 Dollar Performance & Perspectives 6.00

RECOMMENDED STRATEGY:

USD TREASURY Y IELDS (10Y & 2Y )

6.00

5.00

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

4.00

Buy above 3%

3.00

Sell in the 2.5% area

2.00

1.00

0.00

'04

'05

'06

'07

'08

'09

10Yr Govie

'10

'11

'13

0.00

2Y r Govie

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

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

- 100

(10Y Y ie ld - 2Y Y ie ld) Andbank, Tullet Prebon I nform ation

©FactSet Res earch Systems

Corporate Review

Core Fixed Income – EUR Performance & Perspectives 4,00

RECOMMENDED STRATEGY:

Strategic range for the T10 Yield: 1.5%-2%

Buy above 2%

Sell in the 1.5% area

EUR BENCHMARK YIELDS (10Y & 2Y)

4,00

3,50

3,00

2,50

2,00

1,50

1,00

0,50

0,00

May Oc t Mar Aug Jan Jun Nov Apr Sep Feb 10Y Y ie ld

Dec

2Y Y ie ld

Andbank, Tullet Prebon

300

Jul

©FactSet Research Sys tems

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

300

250

200

150

100

0 -50

0 '04

'05

'06

'07

'08

'09

'10

'11

'12

'13

-50

10Y Yield - 2Y Yield Andbank, Tullet PRebon

©FactSet Research Systems

Corporate Review

Table of Contents

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 structural low inflation (and thus low yields), it is reasonable to think of a real yield of 1%-1.5% as a good entry point for Treasuries.

•

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

CPI (y/y) Nominal CPI (y/y) Andbank's 10yr Yield Last reading Estimate

Real Yield (10yr bond)

S.Korea

3.55%

1.29%

2.26%

Taiwan

1.56%

1.61%

-0.05%

Thailand

3.62%

2.11%

1.50%

Malaysia

4.08%

3.48%

0.60%

Singapore

2.59%

1.37%

1.22%

Indonesia

7.92%

11.85%

4.50%

3.42%

Philippines

4.10%

3.92%

0.18%

China

4.45%

2.38%

2.06%

India

8.84%

8.31%

0.53%

12.59% 6.22% 6.27% 6.18%

6.15% 3.76% 2.51% 3.38%

6.44% 2.46% 3.76% 2.80%

Brazil Mexico Colombia Peru

Recommended bonds Bonds to be avoided

Corporate Review

Table of Contents

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

European Sovereign Risk Trends Periphery (10 Yr Government Bond)

10 Year Government Bond Yield - European Peripherals

'04

'05

'06 Ita ly

Andbank, JPM Chase

'07 Spain

'08

'09 Po rtugal

'10

'11

Ire land

'12

'13

Gre ece

ÂŠFactSet Research Systems

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

3.12%

0.34%

2.79%

Spain

3.08%

-0.21%

3.30%

Portugal

3.64%

-0.39%

4.03%

Ireland

2.84%

0.27%

2.57%

Greece

6.12%

-1.35%

7.47%

* Harmonized CPI All Items Recommended bonds Bonds to be avoided

Corporate Review

Table of Contents

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Corporate credit - EUR Expected Performance & Recommendation 7

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

4.00

3.50

3.00 2.50

2.00

1.50

1.00

0.50

'09

'10 Corporates (Right)

'11 Financials

'12 Industrials

Andbank, Merril Lyubch EMU Corporate bond 1-10 yr Yield Index

'13

0.00

Utilities

EUR Corporates (ML EMU Corp Bond 110 yr Index): At a spread of 109bp, we consider euro denominated corporates as historically “expensive”, although spreads could stabilize around 90bp. We recommend maintaining positions if you are long. Wait until spreads reach cheaper levels to build new exposure. New entry point above 120bp in ML broad index.

©FactSet Research Systems

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

Spread effect Coupon effect Total Effect

Change (bp)

Price effect

From

Change

-19.0

0.67%

109

-19.0

1.40%

Eur3m+

1.09%

1.40%

2.07%

Corporate Review

Corporate credit - USD Expected Performance & Recommendation

3.50

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

3.00

USD Corporates (ML EMU Corp Bond 110 yr Index): At a spread of 72bp, we consider USD denominated corporates as historically “expensive”, although spreads could stabilize around the 70bp. 2.50 2.00

2.50 2.00

1.50

1.00

We recommend maintaining positions if you are long. Wait until spreads reach cheaper levels to build new exposure. New entry point above 80bp in ML broad index.

1.00 0.50

0.50 0.00

10 Corporates(Right)

11 Financials

0.00

Industrials

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 effec t Coupon effec t Total Effect

Change (bp)

Price effect

From

Change

-2,0

0,07%

-2,0

0,95%

Lib3m+

0,72%

0,95%

1,02%

Corporate Review

Table of Contents

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 & Commodity Prices

25 20 15 10 5

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

(% 1Y R , INDEX) C RB Spo t Inde x , 1967=1 00, Ind e x - U nite d Sta te s (Le ft) (% 1Y R) I ndustria l P ro ductio n, C hina (R ight) Andbank, CRB, Chines e National Bureau of Statis tics

ÂŠFactSet Research Sys tems

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.

240

WORLD PRODUCTION OF INDUSTRIAL & ENERGY COMMODITIES

240

220

200

180

160

140

120

100

'99

'00

'01

'02

'03

'04

'05

'06

Crude Steel Primary Aluminium Andbank, World Steel Association, Intl Alum Inst, EIA

'07

'08

Coal Production Copper

'09

'10

'11

'12

'13

Crude Oil Natural Gas ÂŠFactSet Research Systems

Corporate Review

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

800

Baltic Dry 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

Within the Reserve banks’ activity in Asia we are still witnessing two offsetting forces. On the one hand, India and Japan have been firmly reducing their stocks of gold. Now Thailand and Philippines have joined this group of “gold sellers”. On the other hand, we have China showing a steady appetite to increase its gold reserves (see chart below), as part of its strategy of selling RMB (to depreciate it) and offsetting this move by buying Fx reserves (in the form of USD or Gold). 100

GOLD STOCK IN CENTRAL BANK RESERVES

100

-20 -40

-20 '10

'11

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

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

'13

-40

(MOV 6M , % 1YR) Chile (MOV 6M , % 1YR) China ©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 gold price has increased significantly in YTD real terms (from $1.128 to $1.207) 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 historical average, the nominal price of gold should stay near US$814.

Expensive

Gold in terms of Oil (Gold / Oil)

The value of this ratio now stands at 12.9 (very close to its historical average value of 12.85). Given that our 5yr target price for oil has now been raised to $95), the nominal gold price should approach the US$1,220 level for this ratio to be near its LT average level.

Slightly expensive

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

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

Size of Gold in the world

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

Positioning in Gold (CFTC)

ZPA Golds active contract 1oz: longs (3630k) vs Shorts (2011k) = Net of +1619 // CEI 100oz Active contract: longs (147k) vs. Shorts (65k) = Net of +81k

Expensive

Central Banks’ Activity

We have 2 of the big three in Asia that are “gold sellers” (India and Japan). While one big “gold buyer” (China), though we consider this move in the last player as a temporary one.

Expensive

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

Expensive

Final Assessment

Expensive

Corporate Review

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

Corporate Review

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

ANNUALIZED GROWTH

ANDBANK'S ASSESSMENT

Oil Coal Gas

156.9 270.3 116.8 83.5

6.20% 7% -7% 27%

57% 170% 17% -16%

4.6% 10.5% 1.6% -1.8%

CHEAP EXPENSIVE CHEAP VERY CHEAP

Corn Wheat Soybean Sugar Cotton

173.8 166.4 184.8 161.9 212.3 143.4

-16.90% -42% -22% 5% -16% 15%

74% 66% 85% 62% 112% 43%

5.7% 5.2% 6.3% 4.9% 7.8% 3.7%

FAIR VALUE FAIR VALUE FAIR VALUE CHEAP FAIR VALUE CHEAP

Precious Palladium Platinum Gold Silver

259.1 288.9 161.9 326.6 317.6

-15.44% 2% -11% -28% -35%

159% 189% 62% 227% 218%

10.0% 11.2% 4.9% 12.6% 12.3%

FAIR VALUE EXPENSIVE CHEAP EXPENSIVE EXPENSIVE

Minerals Copper Nickel Zinc Aluminium Iron Ore

196.5 236.4 151.8 201.3 107.3 77.8

-6.31% -7% -18% 3% -14% -5%

96% 136% 52% 101% 7% -22%

7.0% 9.0% 4.3% 7.2% 0.7% -2.5%

FAIR VALUE FAIR VALUE CHEAP FAIR VALUE CHEAP VERY CHEAP

Crops

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

Andbank's Criteria VERY CHEAP CHEAP FAIR VALUE EXPENSIVE BUBBLE

Corporate Review

Table of Contents

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

USD Global Exchange Policies point to a gradual decline of the USD As of March, four out of the six central banks most actively holding currency reserves decided to increase exposure to the USD. China (from 23.8 to 25), Brazil (from 19.2 to 19.6), Indonesia (from 6.4 to 6.8) and India (at 8.1 months). Meanwhile, South Korea remained stable and Japan reduced its exposure (from 18.5 to 17.5). In general terms, some of the “big brothers” still retain an abnormally high proportion of foreign currency reserves (much higher than that implied by the pace of their current account balance), meaning that they probably accumulated Currency Reserves and Gold on the back of systemic fears, which are gradually disappearing. In fact, from a long-term perspective, we can already appreciate how some of these players (Brazil, Japan and Indonesia) reduced their holdings during 2013. We still expect this normalization process to continue in the rest of central banks, putting pressure on the USD.

Foreign Currency Reserves (Expressed as monthly imports)

5 0

5 '04

'05

'06

'07

India C hina

'08

'09

'10

Japan (MOV 3M)S outh Ko re a

A ndba nk, National Ce ntral B anks

'11

'12

'13

Indonesia Brazil ©Fa ctSet Research Systems

Corporate Review

USD Geopolitical developments also point to a lower USD The flow of USD with respect to the global volume of commercial trade has reached a 15-year low (at 1998 levels). Although this may sound like a shortage of USD (apparently supportive for that currency), from a geopolitical perspective it is not. We consider this factor as a trigger point that could give rise to dramatic new developments. With a long-term view, we see some interesting aspects, such as the internationalization of the RMB, and the progress seen in the RMBdenominated debt market, which could result in strategic movements of a specific group of countries in order to overcome the 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 USA, the quarterly flow of USD (some 25bn) represented just 2% of international commerce. Or each US$100bn represented 8% of total international commerce. (3) In 2000, with a larger CA deficit of US$416bn (cumulative 12 months), the quarterly flow of dollars (some 100bn) represented 4.5% of international transactions. (4) Now, in 2013, with a similar CA deficit of $412bn, the quarterly flows of dollars (100bn) represent just 2.3% of the level of international transactions.

Corporate Review

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

Effect on the USD (Long-term view)

NEUTRAL

NEGATIVE

NEUTRAL

NEGATIVE

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

NEUTRAL

NEGATIVE

Non-commercial long contracts in EUR are 101k, vs. 75k in short contracts. The net position is +26k long EUR.

POSITIVE

NEUTRAL

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 reserve (much higher than that implied Currency by the pace of their current account balance). USD flow to the world Positioning in € (CFTC. Options & Futures, ECA cur)

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

Central Bank Idiosyncrasy

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

Final Assessment

NEUTRAL

NEUTRAL – POSITIVE (1.35)

NEGATIVE

NEGATIVE (1.40)

Corporate Review

Asian Fx 1.

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

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

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

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

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

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

110

ASIAN CURRENCIES (Performance vs. USD)

110

105

108

100

106

104

102

100

Jan

Mar

Andbank, WM/Reuters

May

Jul

IDR

THB

Sep PHP

Nov MYR

Jan

Mar

98 Jan

CNY ©FactSet Research Systems

110

Feb IDR

Andbank, WM/Reuters

THB

Mar PHP

MYR

Apr

CNY ©FactSet Research Systems

Corporate Review

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

POSITIVE OUTLOOK

0,20

BUY

0,10

1,100

0,00

1,050 SELL

-0,10

1,000

-0,20

0,950

Mar-14

Dec-13

Jun-13

Sep-13

Mar-13

Dec-12

Jun-12

Sep-12

Mar-12

Dec-11

Jun-11

Sep-11

Mar-11

-0,50

Dec-10

0,800

Jun-10

-0,40

Sep-10

0,850

Mar-10

-0,30

Dec-09

STRONG SELL

0,900

Jun-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).

0,30

1,200 1,150

closely related to the JPY (KRW, TWD).

0,40

1,250

Sep-09

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

STRONG BUY

Mar-09

Asian currencies are still cheap relative to the USD.

Asian curr Index (rhs)

Dec-08

Diffusion Index 3mth smoothed (lhs)

1,300

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

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

46% of investors see the BoJ doubling its annual ETF purchase target to ¥2T/year in its first QQE expansion.

Abe adviser reiterates that the BoJ may have to do more (April 7): Abe adviser Etsuro Honda reiterated in a recent interview that the BoJ should take additional easing measures to boost the stock market and weaken the yen.

Aso says: “Many countries appreciate Japanese stimulus measures”.

Kuroda says: “The BoJ should adjust monetary policy without hesitation if necessary”

Year to Date EUR/JPY (EURJPY-FX1)

1 4 2.0 1 0 .6 9 1 1 :2 8:5 3 A M

0 .4 9 % JP Y

Ja n

D e c - 13 - A pr-1 4

Feb

Ma r

Ap r

145 144 143 142 141 140 139 138 137 136

Last 20 Years

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

EUR/JPY (EURJPY-FX1)

1 4 2.0 1 0 .6 9 1 1 :2 9:0 3 A M

0 .4 9 % JP Y

A p r-9 4 - A pr-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

Table of Contents

Summary Table for financial market prospects & Asset Allocation Proposal

Corporate Review

Market Outlook Summary Table Fundamental Asset Class

Instrument

S&P 500 Stoxx 600 Equity

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

Fundamental

Performance

28/04/2014

Target

(12 months)

1.863

1.838

-1,3%

335

354

5,8%

Ibex 35

10.362

11.240

8,5%

Mexbol

40.198

45.500

13,2%

Bovespa

51.399

52.317

1,8%

774

927

19,8%

-0,59%

FDSAG Asia Pac xJapan

(1) Expected performance at year-end.

Current

Fixed Income (2)

Bund 10y

1,49%

1,75%

Treasury 10y

2,68%

2,75%

Sovereign Risk

Spain

3,058

3,25

(2) (2) 2,09%

1,5%

Europe

Italy

3,12

4,1%

(10 year Yields)

Portugal

3,702

4,25

-0,7%

Ireland

2,857

1,7%

Greec e

6,413

6,5

0,05717

Average

3,18

3,38

1,7%

109

2,07%

1,02%

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

(1)

(3)

Corporate Review

Market Outlook Summary Table Fundamental Asset Class

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

Current

Fundamental

Performance

28/04/2014

Target

(12 months) 5,6%

EM bonds

Taiwan

1,57%

1,07%

Asia (in local)

Thailand

3,48%

3,80%

0,9%

Indonesia

7,89%

7,50%

11,0%

Malaysia

4,08%

3,75%

6,7%

India

8,88%

8,00%

15,9%

Philipines

4,41%

3,50%

11,7%

12,58%

12,00%

17,2% 8,2%

EM bonds

Brazil

Latam (in local)

Mexico

6,24%

6,00%

Colombia

6,29%

6,50%

4,6%

Peru

5,90%

5,00%

13,1%

Chile

4,93%

4,50%

8,4%

Oil

101,26

-6,2%

CRY

310,69

275

-11,5%

Gold

1302,20

900

-30,9%

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

Instrument

Commodities

Fx (Always US$

EUR/USD

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

BRL/USD

1,387

1,4

-0,9%

141,9

160

-11,3%

102,4

114

-10,2%

13,1

12,75

-2,8%

2,2

2,6

15,9%

(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

19.3

10.0

12.0

6.0

6.6

4.0

4.1

Fixed Income Short-Term

25.0

26.7

15.0

5.0

4.6

0.0

Fixed Income OECD Government

30.0

24.1

20.0

15.0

12.0

8.3

5.0

3.2

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

6.0

3.8

2.1

0.8

18.0

11.3

6.2

2.4

20.0

16.0

20.0

15.0

10.3

5.0

3.2

5.0

7.5

10.0

14.0

15.0

19.3

10.0

12.1

Fixed Income Asia

2.2

4.2

5.8

3.6

Fixed Income Latam

3.7

7.0

9.6

6.0

High Yield Equity OECD

1.5 5.0

6.4

2.8 15.0

18.0

3.9 30.0

33.0

2.4 55.0

56.9

US Equity

1.0

2.7

5.0

8.5

European Equity

5.5

15.3

28.1

48.4

Equity Emerging

0.0

5.0

8.0

10.0

14.7

12.0

16.6

Asian Equity

0.0

4.0

7.3

8.3

Latam Equity

0.0

4.0

7.3

8.3

Commodities

0.0

5.0

2.5

7.0

3.2

9.0

3.9

Risk Parameters(1)

100

VaR

2.6%

9.3%

15.5%

21.4%

CVaR

4.6%

18.7%

32.0%

41.5%

maxDD(*)

-2.1%

-8.1%

-14.4%

-19.2%

Corporate Review

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