Corporate review november 2014 english 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 November, 2014

Table of Contents Executive Summary

Corporate Review

….……………………………………….……………………………………..……………………………………………………………………… 2

Overall Economic Environment USA – The new narrative seems a little bit more dim now …………………………………….…………………………………5 Europe - The credo remains intact. In our view, a healthy principle ..…………………………………………………10 Asia – China: “Towards a more sustainable footing” ………………………………………………………………………..………..23 Latam - Bonds and currencies fare better ..……………………………………….....………………………………………………………34

Global Market Snapshot. Performance and Volatility

…………………………………………………………………………………40

Market Outlook Risk-on & Risk-off probabilities ..…………………………………………………………………………………………..……………………..……44 Equity Markets. Fundamental Assessment …………………………………………………………………………………….……………..46 Fixed Income. Core Countries …………………………………………..………………………………………………………………………………..48 Fixed Income. Emerging Markets ………………….…………………………………………………………………………………………………..52 Fixed Income. European Periphery ……………….…………………………………………………………………………………………………..55 Corporate Credit …………………………..…..…………………………………………………………………………………………………………………..58 Commodities & Precious Metals .....…………………………………………………………………………………………………………………..61 Forex ……………………………………………………....…………………………………………………………………………………………………………………..71

Summary Table for financial market prospects and Asset Allocation Proposal

……………..………..78

Executive Summary

Corporate Review

Economy & Markets USA – The new narrative seems a little bit more dim now. This is maybe due to the fact that current economic recovery is certainly weaker than any other recovery process in the past. The recent fall in oil price (below US$80) feeds fears of a shutdown of the investment in the entire unconventional gas & oil industry. Additionally, the implementation of new regulations in the housing market, (especially the potential increase in the minimum down-payments in mortgages), could hurt the real estate sector. We continue to advocate for a late and mild tightening

Equities – Short-term view. Today, our indicators show an aggregate score of +0.7 (from -1.9 last month), showing that the market is slightly overbought, but that there is no significant stress in the equity market. Fundamental view. USA-S&P: Target price 2004 (now at a fair value). Europe-Stoxx600: Target price 362 (+11% potential). Asia EM ex Japan-FDSAG: Target price 319 (+12%). Latin America-Mexican IPC: Target price 47,000 (+8%). Latin America-Brazilian Bovespa: Target price 55,000 (+6%).

Europe – The purchase of covered bonds has joined the ABS program precisely because of the absence of ABSs. This "covered bonds" buying is narrow in volume and substance. In the meantime, the ECB's plan to buy ABSs draws sharp criticism from Germany while the legality of the OMT program continues under scrutiny: one factor that will continue to limit the ECB’s movements. In the Macro arena, the Eurozone Oct flash PMI beat expectations, leaving the composite number at 52.2 vs 52.0 in Sep. It was the first expansion for three months.

Core Fixed Income – Bund: Central Target 1.25%. Sell at 1.0% or below. Start buying at 1.50%. Treasury: New Central Target 2.25%. Sell at 2.0% or below. Start buying at 2.5%.

China – No changes in its policy stance. China to keep its “fine tuning” intact, although some major investments are to be announced soon. Activity figures are in general better than expected. September HSBC PMI services at 53.5. Major container ports’ volumes grew steadily in September as international trade activity continued to recover. Traffic at coastal container ports grew 6% y/y (above the 5.3% average pace seen in summer). Business registrations in China continue booming after the streamlining of processes for starting businesses. The Chinese property market shows signs of stabilization. Rating Agencies see the new easing of mortgage rules will alleviate downside pressures on property sales. US Rating Agencies see Chinese caps on local and regional debt as steps that will effectively limit the risks. Latin America – Mexico: Two months ago the exploration and exploitation of oil fields was announced, with bidding stage deals being opened. A stage of promotion that will last until 4Q2015. This will no doubt bring an environment of higher clarity on potential investments and, more importantly, their realization. Definitely a favorable scenario. We continue to see improvements in the economic data in Q3 (second quarter in a row), especially in retailers. Brazil: The outcome of this month’s election continues to affect Brazil’s financial markets. Recent economic data has shown some improvement (retailers), but this will not avoid GDP figures disappointing in 2014 (0.25% expected, with inflation above 6.25%).

Sovereign Risk (European periphery): Our long term view is for these assets to close the gap in yield with the German bund (up to 30-50 bps). Thus, the long-term view is positive. With a shorter-term view, and after the strong rally seen in 2014, we now consider it is time to reduce exposure. EM Bonds Asia (local currency): The recommended entry point for EM bonds today is when their real yields stay at 0.61% + 75 bps. This is, when Real yields approach 1.36%. Below this level the appropriate strategy would be “sell”. We continue seeing value in these assets, especially in local currency. Volatility guaranteed. Preferred: India, Indonesia, China and Korea. EM Bonds Latin America (local currency): Same reading as in Asian bonds. Volatility guaranteed. Most preferred: Mexico, Peru, Colombia and Chile. Corporate Credit: USD Corps: Increase exposure in US$ corps at current levels (+80bps spread). EUR Corps: 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 120 bps in the ML broad index. Currently at 105. Commodities: Outlook for the CRB -7% to fair value. Overcapacity and structural slowdown in Chinese heavy industry as the main factors driving prices. Energy (Cheap) Most Preferred: Gas & Oil. Buy WTI at $80s. Crops (Fair value) most preferred: Corn & Wheat. Minerals & Industrials (Expensive): most preferred are Nickel and Iron Ore. Precious Metals (Expensive). Fx: EUR/USD: Short term view: around 1.25. Fundamental view at 1.40. Asian currencies are very attractive. Avoid JPY. GBP/EUR is expensive (fundamental target range 0.82-0.86). MXN: Short term at 13.25 (long term at 12-12.5). BRL target at 2.45. Structurally long CLP and PEN.

Key Forecasts

Corporate Review

Table 1: GDP & Consumer Prices (% Y/Y) Country/Region

Share of World

1991-2010 average growth

2013

GDP 2014f

2015f

2013

Consumer Prices 2014f 2015f

2.5 1.2 0.8 1.3 1.0 0.4 1.0 2.0 1.8

3.0 1.0 1.5 1.9 1.5 1.1 1.2 2.0 2.2

1.4 0.3 1.3 1.6 1.0 1.3 1.5 2.5 1.3

1.7 2.0 0.5 1.4 1.0 0.7 0.3 1.7 1.4

2.0 1.0 1.0 1.4 1.2 1.0 0.8 1.8 1.5

US Japan Euro-zone Germany France Italy Spain Uk Developed

24.2 8.5 14.3

2.4 1.0 1.6

3.5 50.5

1.7

1.9 1.5 -0.5 -0.5 0.3 -1.9 -1.2 1.8 1.1

Mainland China Hong Kong

14.9 0.4

10.1 3.9

7.7 2.9

7.5 3.5

7.0 4.0

2.5 4.0

3.5 3.0

1.9 0.4 1.1

5.5 6.2 4.9

2.8 4.1 2.1

3.5 3.0 3.0

4.0 3.5 4.0

1.5 2.4 1.3

2.5 3.0 1.5

3.0 3.5 1.5

5.6 1.5 0.6 0.5 0.8 0.4 28.1

6.3 4.7 6.0 3.6 4.7 7.3 5.7

5.2 5.8 4.7 7.2 2.9 5.4 6.2

5.0 5.5 5.0 6.5 2.7 5.5 6.1

5.5 6.0 5.0 6.5 4.5 5.5 6.1

6.2 6.5 2.1 2.5 2.1 7.0 3.4

6.5 5.0 3.0 3.0 2.5 8.0 4.0

6.0 5.0 2.5 3.5 3.0 7.0 4.0

Australia New Zealand Austral-Asia

1.2 0.2 1.4

3.2 2.5 2.9

2.4 2.5 2.4

2.3 3.0 2.4

2.5 3.0 2.6

2.2 1.0 2.0

1.8 2.0 1.8

2.5 2.5 2.5

Brazil Mexico Argentina Colombia Venezuela Peru Chile Ec uador Latam

2.94 2.09 0.85 0.58 0.47 0.37 0.35 0.15 7.8

2.0 1.1 4.3 4.3 1.0 5.0 4.2 4.2 2.4

0.3 2.5 -1.0 4.0 -0.5 5.5 4.0 4.2 1.4

2.8 4.0 1.5 4.0 -1.0 5.5 4.0 3.5 3.0

6.0 3.7 24.0 2.3 36.0 2.5 2.0 3.5 8.5

6.4 3.5 30.0 3.0 33.0 2.3 2.5 4.0 9.1

4.8 4.0 25.0 3.0 30.0 2.0 2.5 3.5 7.9

Global

100

3.0

3.1

3.5

2.6

2.9

South Korea Singapore Taiwan India Indonesia Malaysia Philippines Thailand Vietnam EM Asia

Last month changes: Brazil: GDP 2014 is lowered from 1.5% to 0.25%. Eurozone: GDP 2014 is lowered from 1.2% to 0.80%. 2014 Inflation is cut from 0.8% to 0.5%

Table of Contents

Corporate Review

Executive Summary Overall Economic Environment USA – The new narrative seems a little bit more dim now Europe - The credo remains intact. In our view, a healthy principle Asia – China: “Towards a more sustainable footing” Latam - Bonds and currencies fare better

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 and Asset Allocation Proposal

Corporate Review

USA – The new narrative seems a little bit more dim now

Fed’s minutes (October 9): “There is some concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector”. a couple of participants pointed out that “the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC's 2 percent goal”.

Fed’s Charles Evans (October 8): “I feel very uncomfortable with calls to raise rates” "I am concerned about the possibility that inflation will not return to our 2% target within a reasonable period of time.“

Dudley William (New York, Sep 22) "Right now with inflation running below two percent we really need the economy to run a little hot for at least some period of time to actually push inflation back up to our objective“

Lockhart Dennis (Atlanta, Sep 25) "I am comfortable that being patient regarding lift off until the middle of next year or perhaps a little later will not bring on a systemic financial event"

Kocherlakota Narayan (Minneapolis, Sep 25) "Are we going to make the move at the right time to make sure inflation isn't going to get too high? Or are we going to raise rates too quickly, which I would submit is the more relevant question at this time"

Bullard James (St.Louis, Sep 23) "I thought it was premature to try to remove 'considerable time' from the statement because QE hasn't ended yet”.

Bullard James (St.Louis, Oct 16) “Fed should consider delay in ending QE”.

Corporate Review

USA â&#x20AC;&#x201C; Why do we remain so firm in our stance about the Fed fund rates, the USD, the Treasury yields, the equity markets, â&#x20AC;Ś? Real US expenditures indexed to the start of the different recessions

All recessions since 1960

2007 recession

BEA, NBR, Washington Post

The current economic recovery is certainly weaker than any other recovery process in the past.

Corporate Review

USA – … and this dim picture seems to be broad-based, which in turn means that it could be extended in time.

This fits perfectly with our central scenario of “expansive disinflation” for Western economies.

Durable goods

Non-Durable

BEA, NBR, Washington Post

Cars

Food

Appliances and furniture

Gas

Recreational goods

Clothing

Corporate Review

USA â&#x20AC;&#x201C; Why do we advocate late and mild tightening? The implications 1.

The new narrative now advocates a delay in rate tightening (Good for bonds, EM, EUR, etc.)

The US cannot afford to pay a normal rate of interest.

The current economic recovery is certainly weaker than any other recovery process in the past.

The recent fall in oil price (below US$80) feeds fears of a shutdown of the investment in the entire unconventional gas & oil industry (which could have dire consequences on the entire economy).

The implementation of new regulations in the housing market, (especially the potential increase in the minimum down-payments in mortgages), could hurt the real estate sector, and other highly correlated industries.

Obviously, the development of these factors automatically delays the threat of a Fed tightening which, ironically, will help to keep a good mood in the US equity market and USD Bonds for the rest of the year, but not in relation to the USD.

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

The ECB Covered bond buying hides a much more evocative message The purchase of covered bonds has joined the ABS program precisely because of the absence of ABSs. (and with no ABSs, there is no program). There are member states of the Euro area that do not have an ABS market, which, in itself, makes this program an unfair program and therefore unlikely. Some sources noted that this decision of the ECB is being viewed in some official forums as a colorful measure before the final and official ban on buying government bonds (or QE, as some call it). This "covered bond" buying is narrow in volume and substance. So, far from representing a threat to the currency, it represents the opposite:

According to Dealogic, new issues have been and are minimal in the covered bond market. Only â&#x201A;Ź92bn YTD, which is the minimum in TWO DECADES ...

Partly because the yields of these bonds are also at record lows (BoA Merrill Lynch bond index covered euro yield at 0.55%), so there is little interest (and will continue so).

The most important. These covered bonds are low risk and under Basel III consumes very little capital. Therefore, banks will not have a special interest in selling.

Corporate Review

The ECB We have now discovered who really is the boss… and what can’t be done ECB's plan to buy ABSs draws sharp criticism from Germany: one factor that will continue to limit the ECB’s movements: Weidman on Oct 3: • “There is a danger that the ECB would buy low-quality loan securitization, at inflated prices”. • “The credit risks taken by private banks would be transferred to the central bank and therefore taxpayers without getting anything in return”. • “ECB policy risks being held hostage by politics” • “The ECB’s mandate is narrower than buying government bonds” • “With government and borrowing costs at a super low, such a policy would have limited effect”. •

Bundesbank’s Nagel on Oct 21: • “ABS and covered bonds are not the segments where support is urgently needed” • “Politics is in the driving seat, not monetary policy”

Former ECB board member Stark, also made some warnings: • “the ECB is giving in to financial market expectations and political pressure from France and Italy rather than showing leadership”. • Stark also pointed to the “incalculable risks with this ABS program”. The timing for concrete actions from the ECB loses sharpness: • Nowotny: “I would not rule out QE forever but I do not see a discussion about buying government bonds at present”. • Hansson: “It is too early for the ECB to consider more stimulus before the current measures have been fully implemented. It would take time before the impact of previous policy measures would be felt in the economy”.

Corporate Review

The ECB We have now discovered who is really the boss… and what can’t be done ECB’s balance sheet declines since Draghi’s call for an increase in its size. The ECB’s balance sheet stays at €2.05T in the week of October 3. Down €10B from the last week of September, when president Draghi said he could lift the size from levels in early 2012 (when it was above €3T). The size has increased in the 3Q14 by €25.6B (at this pace, it will take 10 years to reach the €3T). This simply will not happen, if not accompanied by a clear upturn in the economy before.

ECB's Draghi now adopts Germany’s credo: “Monetary policy alone would not be sufficient to resume sustained growth. The ECB is willing to take additional measures if needed and ready to alter the size of unconventional interventions, but countries must do more in structural reforms. Those with a solid budgetary situation should use fiscal policy to support growth”.

Legality of the OMT under scrutiny: After the German constitutional court said the OMT plan is illegal (Feb 2014), it referred the case to the EU’s top court (the European Court of Justice or ECJ), that yesterday began a review of the ECB’s bond buying plan known as Outright Monetary Transactions or OMT. Our projections: The court is not due to give a ruling until the summer of 2015, but we can already advance that the OMT plan will probably never be implemented. Why? Simple. Even if the ECJ rules a favorable judgment, the case will return to the German Court which, according to sources, will probably block Germany’s participation in the scheme, making the entire program simply unfeasible.

Corporate Review

Eurozone & the Euro The data does not point to drama. Other factors behind the Euroâ&#x20AC;&#x2122;s fall Eurozone flash PMI beats expectations:

Eurozone Oct flash PMI beat expectations leaving the composite number at 52.2 vs 52.0 in Sep.

It was the first expansion for three months.

Eurozone Manufacturing improves at 50.7 vs prior 50.3 (although new orders and inflows of new business slowed). Eurozone Services were unchanged at 52.4.

The breakdown by country saw an upside surprise in Germany, with composite PMI at 54.3 vs prior 54.1

In contrast, French composite PMI falls to 48 vs prior 48.4.

EUR

Behind the recent decline in the Euro are the negative interest rates that are forcing some central banks to rethink how much of their foreign reserves must be held in Euros.

Central banks cut their Euro holdings in Q2, with estimated sales worth around $40 bn.

This could indicate that negative rates are becoming a factor that could influence the rebalancing of reserves. The 2-year interest rate in German government bonds stands at -0.06% and the 5year stands at 0.08%.

Corporate Review

Eurozone & the Euro The mild pace of activity responds to a continuing deleveraging in the private economy

Germany

Corporate Review

The credo remains intact. In our view, a healthy principle. Remember that from healthy principles we can only get healthy things. Germany holds firm on fiscal rigor and is not alone in its stance: Germany is unlikely to deviate from fiscal rigor despite reports that it is considering possible growth-friendly measures. Weidmann will keep warning about the dangers of fiscal stimulus at the G20: Weidmann: “In order to create sustainable growth there is little use in setting off an economic flash fire, particularly against this backdrop of high debt”. Weidmann: “The situation in Germany has changed since June, but the economy is basically in good shape”. “German consumers still have sufficient jobs, and thus income security, to underpin demand” Estonia is a tenacious advocate of budgetary discipline, while Germany's insistence on fiscal discipline wins applause across the Nordic area and central and eastern Europe. German MPs from the coalition government discussed economic issues early in the month, but there was no attempt to question the government pledge to cut the fiscal deficit to zero next year. Germany's position is guided by German Finance Minister Schaeuble's maxim that "growth and jobs are not generated by rising deficits".

Are German companies putting aside investment? Some are getting worried when they hear that (1) the share of capital formation in GDP is just 17%. Well bellow the 21% for industrialized countries, or (2) that domestic bank deposits owned by German companies almost doubled in the last decade to Jan 2014 to €418bn, suggesting that companies have sat on cash due to the poor outlook in Europe. You have to look at this in per capita terms. A 17% of GDP in Germany represents some €510bn or €6.500x person (similar to the $8.600 in the US and far above the €3,800 per person in Spain).

Germany

Corporate Review

The credo remains intact. In our view, a healthy principle. Remember that from healthy principles we can only get healthy things. Germany considers original remedies for sluggish growth: Signs of economic stagnation are prompting debate within Berlin about how it can support growth without diluting fiscal policy. German officials are discussing (1) business-friendly policy measures and (2) a limited boost to public spending to help investments and consumption. Some of the ideas on the table include (1) Using proceeds from next year's auctions of mobilephone frequencies to subsidize investment in a new internet network and (2) using legal incentives to encourage German companies to invest more. The Economics Ministry said that in no way do these measures represent a stimulus program.

Corporate Review

France Ironies of life. Ready to take the punishment from a Frenchman French Commissioner Moscovici ready to fine France if necessary:

EU commissioner-designate for economic policy said that he was ready to step up disciplinary action against Paris for not respecting EU budget rules.

The comments were made to the European Parliament's economic and monetary affairs committee that must approve him for the job.

Remember there has been criticism of Moscovici's appointment because some of France's problems came when he held the French finance minister role until six months ago.

France - EU likely to reject France's 2015 budget:

Several Eurozone officials said that the European Commission is likely to reject France's 2015 budget draft at the end of October and ask for a new one.

It would be the first time the EU executive exercises its power to demand changes to a budget draft under new prerogatives that EU countries granted the Commission in 2013.

The Commission is likely to step up the disciplinary procedure against France before demanding fines, while at the same time granting it the extra two years to bring down its budget within EU limits.

Meanwhile, Paris stands firm against fiscal enforcers:

After Paris announced its 2015 budget, Brussels attempted to convince Paris it must do more for them to accept the plan. As the prospects of an EU rejection became imminent, the discussions moved beyond the normal economic channels. France has emphasized its willingness to push on with economic reforms, but remains firm as to budget cutting.

Corporate Review

Italy Finally, interesting shifts. Slow but, after all, structural reforms. Italy - Renzi wins backing on labor market reforms

Renzi prepared confidence vote on labor reform and has won backing. He planned to introduce changes on the sensitive question of the Labor Statute (article 18), which protects permanent workers, guaranteeing they can have their jobs back if they are unfairly sacked.

Renzi won his confidence vote on labor market reform by a margin of 165 to 111 after hours of drama in Italyâ&#x20AC;&#x2122;s upper house.

Renziâ&#x20AC;&#x2122;s political battle is far from over, because the reform plans still need to get through the lower house. Then, the government must rewrite and implement the new legislation, so it is unlikely to be finalized before the middle of 2015.

An awkward question because Renzi is pressed to prove he is making headway on reforms, but there is doubt over whether he will be able to deliver changes quickly enough to stave off further economic pain.

We are optimistic as we begin to see interesting changes. Slow but, after all, long overdue structural reforms and much needed.

Italy - PM Renzi vows Italy will abide by EU deficit rules:

Renzi reiterated Italy's commitment to abiding by the EU's 3% debt-to-GDP rule.

He said it will not follow France's lead, but respected its right to take such a step to bolster economic prospects.

Corporate Review

Italy Though the risk of a clash with Brussels still looms on the horizon Italy joins France on potential collision course with Brussels

Italian PM Renzi presented an expansionary (tax-cutting) 2015 budget ignoring calls from Brussels that Rome is not doing enough to rein in its huge public debt.

This budget has been sent to the EU for scrutiny but EU officials have already pointed out that it could be rejected since it does not respect EU budget rules.

Both Italy and France are struggling with stagnant business activity and are reluctant to inflict public spending cuts (or tax hikes) on their economies.

Renzi says that the economic circumstances and his governmentâ&#x20AC;&#x2122;s reform efforts justify a waiving of the normal EU budget rules. (This is, in our view, a dangerous and ambiguous path).

The looming clash with the European Commission (EC), the EUâ&#x20AC;&#x2122;s executive arm, will test the powers in place to police national finances. This clash is due to come to a head on Nov 1, when the new EC is in place.

Corporate Review

Peripherals Overall, in the right direction. Ireland - Irish central bank significantly upgrades growth outlook.

The Irish central bank raised the 2014 GDP growth forecast to 4.5% vs the 2.5% previously forecast.

Ireland – Berlin backed Ireland’s request to restructure the Irish EU/IMF loan package.

The Irish government is expected to issue its first 15-year bond later this year to take advantage of cheap borrowing rates to raise the cash to pay off the IMF loan. Berlin’s positive vote backing this new scheme was a significant step in Ireland’s bid to repay €18B of its €22.5B loan from the IMF, which would be refinanced on financial markets by lower interest rates. The scheme will save Ireland an estimated €2.1B in interest payments based on borrowing costs of 1.88% for 10-year bonds compared to the 5% that the IMF is charging for shorter term loans.

Greece - Crucial week for government with draft budget & vote of confidence

The coalition government presents the draft budget for 2015, predicting a primary surplus for 2015 very close to the 3% target demanded by the troika without new austerity measures.

In fact, the draft 2015 budget aims to cut taxes and ease austerity measures in an effort to boost flagging popularity amid speculation that it may face snap elections next year.

It said that despite the tax cut, the government has indicated it will only post a minor budget deficit - equivalent to just 0.2% of GDP next year.

Corporate Review

Peripherals Overall, in the right direction. Greece – Wants to leave the Troika October 3. Greek PM Samaras claims that Greece’s bailout program to end early, with the rest of its financing needs coming from the market. Greek PM points out that the country can cover its financing needs alone (and cheaper than current conditions under the terms in the bailout).

Remember that Europe’s arm of Greece’s bailout program ends in December, but the IMF component is due to continue until spring 2016.

All this comes after Athens failed to reach a deal with the troika over the latest review of the bailout program. As a result, the Troika is leaving Athens without committing itself to giving the next tranche of bailout. The Troika will come back after the ECB’s results of the stress tests.

October 16. We have learned that Athens may be preparing a reconsideration of its plans for a clean bailout exit and may take-up the option of a precautionary credit line.

Samaras noted that the government will not allow any deviation from political stability and from an economic policy driven by adjustment and reforms.

EU officials told Reuters that Greece seemed to have second thoughts about a return to purely market funding after pressure from EU powers and from investors that sold off Greek bonds this week.

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

China – And finally … the beast awoke! Chin a Sh en zh en A Share (SZ A-SH E) [D elayed] 1405.99 -3.96 -0.28% 09:00:17 AM C NY 2013/12/31 - 2014/10/14

C hin a Sh an gh ai Co mp osite (SH ANG-SHG) [D elayed ] 2359.47 -6.53 -0.28% 09:00:00 AM C NY 2013/12/31 - 2014/10/14

Previous Close

2,400

1,400 2,350 1,350

Equity

+33%

2,300

Equity

1,300

+20%

2,250

1,250

2,200

1,200

2,150 2,100

1,150

2,050

1,100

2,000 1,050 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

1,950 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

USD/CNY (USDCNY-FX1)

6 .12 7 5 0 .0 03 0.0 5 % 0 5 :23 :5 3 P M C N Y

A pr-1 4 - O c t- 14

Yuan appreciation

6 .26 6 .24 6 .22 6 .2 6 .18 6 .16 6 .14 6 .12

Ma y

Jun

Jul

Au g

Se p

… and, what about from now onwards? I think there is more to come.

Corporate Review

China – No changes in its policy stance: “Towards a more sustainable footing” China to keep its “fine tuning” intact … although some major investments may be announced

Fiscal and monetary policies will be kept flexible and appropriate, with targeted adjustments made when needed to support the real economy. PBoC: “We will use various monetary tools to maintain adequate liquidity and reasonable growth in credit and social financing”.

It is in this regard that the PBoC cut the interest rate for 14-day repos for the second time in a month, selling the CNY20B yuan ($3.3B) of the contracts at 3.4% today, compared with 3.5% in a similar auction on 9 Oct.

PBoC: “Economic growth remains within a reasonable range” // Premier Li Keqiang said on Sep 8 that China will launch major investment projects in the formation of networks, water, conservation and environmental projects this year.

Li: “Outsiders misunderstand policy goals”. He argued that “the economy can grow below 7.5% as long as jobs and income continue to point to stable levels of activity”.

PBOC points to continued rigorous policies … and push for continued reforms.

An editorial of the PBoC talked down the stimulus potential saying that there is too much liquidity in the system to warrant a rate cut.

PBoC’s Chief Economist Ma Jun said that there is no reason for large-scale fiscal or monetary stimulus in the foreseeable future. “Leverage in certain sectors is too high to warrant stimulus”.

The WSJ cited comments from PBoC reiterating its commitment to pushing reforms in the areas of interest rates and exchange rate liberalization.

Corporate Review

China – Activity: Mixed figures but the economy keeps expanding. Activity figures are in general better than expected.

September HSBC PMI services at 53.5 (vs 54.1 in August)

Major container ports’ volumes grew steadily in September as international trade activity continued to recover. Traffic at coastal container ports grew 6% y/y (above the 5.3% average pace seen in summer)

Golden week retail sales at +12.1% (from 13.6%). Auto sales at 7% y/y (lowest in 19 months)

Exports +15.3% y/y (vs 13% consensus), fastest pace in 19 months. This rebound was partly due to a low base in Sep, although it also signaled some improvement in growth in DM.

Imports +7.0% y/y (vs 2.2% consensus): Renewed strength in imports appeared to be largely the result of a surge in inward shipments for processing and re-export rather than a pick-up in domestic demand.

PBoC: “Labor market remains strong and employment figures are robust”. “The labor market is performing better than expected and the economy is likely to grow at 7.5% this year”.

NDRC (National Development and Reform Commission): “Economic growth will remain in a proper range in Q4”. “We are confident we can achieve the growth target”. (Li Pumin, Secr. General)

Li Keqiang: “Hard landing will be avoided despite worries over a flagging real estate market”

GDP estimates: World bank: 2014 GDP down to 7.4% (from 7.6%), “due to the policies aimed at putting the economy on a more sustainable footing”.

Corporate Review

China â&#x20AC;&#x201C; Some relevant figures are quite reassurring. Business registrations in China continue booming after the streamlining of processes for starting businesses.

With the updated figures, we can observe that 2.65 million new private companies were registered in the first nine months of 2014, up 52% y/y. 1.5 million new private companies were registered in 1Q14.

Remember that the Chinese Authorities have lifted restrictions on minimum registered capital, payment deadlines, down payment ratios and cash ratios.

Maybe one of the most significant measures was the elimination of the onerous capital requirements, demolishing what represented a gigantic barrier to market entry for new companies. The capital required for a new firm was equivalent to almost 80% of the nationâ&#x20AC;&#x2122;s percapita income. In Europe or Latin America, for example, the capital required for a new firm is equivalent to just 3.5% of per-capita income. Only India and Sub-Saharan Africa had similar requirements.

Other relevant figures.

Foreign Direct Investment to $9B in September (vs $7.2B in August).

New Yuan Loans 857B Yuan (vs 702B Yuan in August). This will prompt the adoption of new measures to slow the pace (though this remains within the governmentâ&#x20AC;&#x2122;s target since it stands at +13.2% y/y)

Power consumption rose 2.7% y/y in September (better than the +1.5% in August) but still at a low pace.

Retail sales (and domestic dynamics) expected to maintain steady growth to 12% in 2014.

Corporate Review

China – Housing market. “Hard landing will be avoided despite worries over a flagging real estate market”

(Li Keqiang)

Chinese property market shows signs of stabilization.

Xinhuanet noted in October that home sales bottomed out after months of falling.

China will scrap some charges for homebuyers who borrow from a government housing fund. The government will exempt notarial, guarantee and mortgage insurance fees as well as valuation charges for new homes.

China daily: “analysts are optimistic that a significant upswing in the housing market could take place later this year, due to the recent easing of mortgage policies”. Xinhuanet: “Sentiment is improving in the sector, as reflected by the higher number of home buyers visiting sales offices”.

China Vanke (the largest property developer) said its September sales jumped 28.5% y/y, recording its highest monthly sales since February, due to easing policies from government.

However, Bloomberg cited that 133 out of 334 real estate firms have liabilities exceeding capital

Rating Agencies see the new easing of mortgage rules will alleviate downside pressures on property sales.

Fitch Ratings has noted that “the easing measures will support the growth in demand from buyers who intend to upgrade, since they are now able to enjoy the same mortgage benefits as first-time buyers”, although the agency also warned that it will also facilitate speculation”.

Moody’s said that “the easing of mortgage availability and the lower costs of mortgages will benefit property developers and partially alleviate the downside in sales”.

World Bank: “A major nationwide correction in real estate prices remains unlikely, although there may be pressure on prices in the less rapidly growing provinces.

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China – US Rating Agencies see Chinese policies as a step that will effectively limit risks. China’s caps on local and regional debt will help to mitigate risks.

NDRC to impose stricter controls on local debt. The Commission will not accept applications for issuance from units in regions whose standing LGFV debt exceeds 8% of GDP. Certainly a limit for LGFV capabilities to raise debt.

Fitch Ratings noted that the decisions by the central government to place caps on local and regional debt represent “significant changes that will ultimately help to mitigate risks associated with the rapid rise in local borrowing since 2010”.

Additionally, Fitch also see the new ban on additional borrowing through financing vehicles as “rules that will significantly improve local government’s budget and debt transparency”

Diversification as a hedging against systemic risks

Most of Chinese developers have started to speed up their diversification strategies with an eye on sustained, long-term growth. This is a consequence of sales falling and inventory pressures building (which has prompted profit margins to decline from 40% to 10%, according to the China Real Estate Information Corp.

Evergrande Group (famous for owning a soccer team) has established three subsidiaries for grain and oil products, dairy products and cattle farming.

Corporate Review

China – The Yuan … unstoppable in its “wild” internationalization China’s plans to ease capital controls boost the use of the Yuan.

China has released plans to allow citizens to invest in overseas stocks and property (via a Qualified Domestic Retail Investor scheme) … … as well as allowing the nation’s companies to sell yuan-denominated shares abroad (so, foreign investors can buy them).

This decision represents a further step in the internationalization of the Yuan.

The UK Treasury moved a step closer to becoming the first country to issue bonds in Yuan. The proposed deal underscores the UK’s ambitions to become a Western hub for Asian finance.

Yuan climbs to 7-month high.

The yuan hit a seven-month high despite signs of an economic slowdown. The rise in the yuan comes as the PBoC guides the currency stronger. The central parity rate was fixed at the stronger level against the US dollar in more than a month at 6.1408. The yuan touched 6.1230 today, and is up 2.2% since its April low.

The Yuan has risen in the internationalization index from 0.92 in 2012 to 1.69 by the end of 2013. PBoC plans to advance yuan convertibility:

PBoC Deputy Governor Hu Xiaolian said China aims to quicken the process of making the yuan convertible on the capital account and will allow foreign investors to use the currency to invest in Chinese financial institutions. Hu also said China will widen the number of channels for cross-border yuan flows and shift the focus of monetary policy to one that controls the price rather than the quantity of money.

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China – The biggest exporter of disinflation. A goal in itself to convert its debt market into one of the most stable ones in the world. Chinese inflation at 4 year low.

September’s CPI was fixed at 1.6% y/y (lower than consensus and below the 2% seen in August)

Despite this “anchored inflation”, this is not going to spur the government to respond with stimulus.

10-yr yield falls the most in a month

to 3.80%, the biggest drop since 19 Sep.

Corporate Review

China – Chinese Financial Markets: “Big and positive changes in a very short time”. Stocks investors’ confidence at 6-year high.

Xinhuanet reported how September’s survey placed investor confidence for the A-share market at 70.5 (up 1.3% from August and up 20.5% from a year ago).

Nearly 60% of respondents expect the Shanghai Composite Index to rise in the October-March period. Only 7.7% think the equity market could fall in this period.

US demand for China ETFs & Preferred Shares soars:

The Harvest CSI 300 China A-Shares ETF pulled in $130M in the span of five days last month, sending assets surging by 33% to $515M and nearly exhausting its Chinese government-imposed A-share purchasing quota. A clear example of growing US demand for Chinese assets.

Reuters noted that US firms are also readying the first line of ETFs designed to give American investors access to China's onshore bond market, which has been largely closed off to foreigners.

Strong demand for Bank of China preferred Shares. China’s first sale of preferred shares ($US 6.5B in offshore preferred shares) opened with a very strong demand from global investors, allowing the Bank of China to raise funds cheap (at 6.75%, below indicative terms) and setting an encouraging precedent for other Chinese lenders.

Chinese demand for foreign assets soars:

Chinese property buyers buy a record amount of Australian real estate. They have spent a record $400 M in the last financial year, a 43% y/y increase.

Corporate Review

China â&#x20AC;&#x201C; Chinese Financial Markets: â&#x20AC;&#x153;Although, admittedly, protests in Hong Kong do not helpâ&#x20AC;? Protests could delay Shanghai-Hong Kong stock connect: October 3 Sources at mainland Chinese brokerage houses said that the protests in Hong Kong could postpone the launch of the Shanghai-Hong Kong connect to November.

The sources said that the arrangement is ready to be launched and are just awaiting regulatory approval.

Remember that Hong Kong regulators are to issue a statement two weeks in advance of the launch of the program, and no statement has yet been given.

October 16 The China Regulatory Commission could announce the launch of the Shanghai-Hong Kong connect on time (on 27 Oct as expected).

Sources suggest that the daily limit of 13B yuan in orders could be filled up within minutes, with heavy buying.

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Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Latin America â&#x20AC;&#x201C; Bonds and currencies fare better

Following last monthâ&#x20AC;&#x2122;s broad sell-off in Latin Americaâ&#x20AC;&#x2122;s assets, the performance this month has been mixed. While equities have extended their losses, bonds and currencies have fared better.

Chile: The CLP has even appreciated following a change to a more neutral rhetoric from the central bank (recall that previous statements were more dovish).

Corporate Review

Brazil – Brazil is now in full recession

Policy: The outcome of this weekend’s election continues to affect Brazil’s financial markets. Equities rallied strongly after the first-round election result appeared to bring fresh hopes of change (+9% in Bovespa and +5% in the BRL). Since then, however, markets have retreated as opinion polls suggested that Dilma had closed the gap vs Aecio Neves. It is clear that markets would view a victory for Mr Neves more favorably. So far, the debates between the candidates have been from a very low pitch (in terms of economy and reforms), which certainly does not help the market to see any positive aspect in this election.

On the positive side: Recent data has shown some improvement (retailers), but this will not avoid GDP figures disappointing in 2014 (0.25% expected, with inflation above 6.25%). The recent depreciation of the Real, or the crisis in Ukraine, will be factors that help the economy (and markets), so we do not see an explosive situation in the short term. All the above, along with the significant level of currency reserves, and the focus on the necessary adjustments and reforms from the second round campaign, make most of Brazilian assets highly interesting at current levels.

Market implications: Fx: Neutral. Target at 2.40/2.50. Current 2.50. Bonds (local): BUY. 10yr yield Target 12%. Current 12% Equity: Neutral. Target Bovespa at 55.000 Current 57.200

Corporate Review

Mexico â&#x20AC;&#x201C; The only one showing a hopeful perspective.

Policy: Energy reform - Two months ago the exploration and exploitation of oil fields was announced, with bidding stage deals being opened. A stage of promotion that will last until 4Q2015. This will no doubt bring an environment of higher clarity on potential investments and, more importantly, their realization. Definitely a favorable scenario. Activity. We continue to see improvement in the economic data in Q3 (second quarter in a row), especially in retailers (supermarkets, etc). Inflation level remains in line with central bank expectations. Although it is still above the upper band of the target range, this situation is considered to be temporary and is caused by the issue of some arranged prices. As a result, we see no threats of rates tightening, and thus, the fixed income market remains well supported.

On the negative side. Bad news from the perspective of insecurity. The recent and ongoing facts related to the disappearance of groups of people will certainly delay some decisions on the transfer of human teams within all the investment processes that must follow the important reforms. However, we think that the present situation obliges the state to take definitive action, and this could even have a positive long-term impact. Other bad news comes from the issue of the drop in oil prices. This drop could delay some investment decisions. In this respect we are confident given that we see the current levels in oil as a floor.

Market implications. Fx: Neutral in the short-term (Target 13-13.5). Bullish in the Long-Term (Target 12-12.5) o Bonds (in local): Bullish. 10yr yield Target 6.00%-6.25%. Current 6.0%. High carry with a projected stability in the currency. Structural low yields in the US represent a cap in Mexican yields. Credit spread at 375 (still above the 277 seen in May 2013) Equity: Bullish. New target for the IPC at 47,000 (currently at 44,880) Attractive after the sell-off seen in September (down from 46,554). In October, companies will release results and something better than last yearâ&#x20AC;&#x2122;s figures is expected. Most attractive sectors: Petro-chemicals, Energy, Infrastructure and Consumption (has been somewhat behind).

Mexico â&#x20AC;&#x201C; It can fare better with the free fall in commodities

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The lowest dependency on commodities: In terms of how dependent each of the regionâ&#x20AC;&#x2122;s economies are on commodity export revenues, Venezuela, Chile, and Peru stand out as the most reliant, followed closely by Colombia and Brazil. At the other end of the scale, Mexico appears to be the economy in the region that is least dependent (see the second chart). Who is who: Chile and Peru are large metal exporters. Chile is dependent almost entirely on a single commodity, copper. Peru is also heavily reliant on copper, but exports some gold and silver too. Venezuela, Colombia and Mexico are the regionâ&#x20AC;&#x2122;s energy exporters, with Venezuela particularly reliant on oil exports. Finally, Argentina and Brazil export mostly agricultural products, although Brazil exports some iron ore too. Who benefits from lower prices: In some cases, lower commodity prices may bring some benefits. some parts of the region are energy importers and so may benefit from the recent sharp falls in oil prices. Those who benefit the most are Chile and Peru. Net importers with very few subsidies (lower oil is likely to feed through to the energy bills for households and businesses). This will help to spur domestic activity, as well as ease inflationary pressures.

Argentina – The Argentine economy is showing signs of strain.

Corporate Review

Activity. GDP stagnated in year-on-year terms in Q2, down from growth of 0.3% y/y in Q1. GDP breakdown showed that: 1. Consumption and investment both contracted even at a faster pace than in Q1 (-2.3% y/y in consumption) 2. It was only strong government spending and net trade (following a collapse in imports of -10.4%!!!), that prevented GDP from contracting. Q3 is being as bad, if not worse, as the shortage of foreign currency is compressing activity. Capital flight appears to have picked up following the government’s default in July, causing the peso to depreciate sharply in unofficial markets (the parallel is near 15, vs 8.4 in the official market). We expect the official peso exchange rate to be devalued to 10/$. Precipitating factors: 1. What is even worse, the shortage of hard currency is likely to be exacerbated by a 40% fall in soybean prices in recent months. Remember that soybeans account for 15% of exports. 2. Finally, the neighboring Brazilian economy is in recession and will remain so for the foreseeable future. This will weigh on Argentine’s economy, as Brazil is the destination of 20% of Argentine’s exports (most of which are manufactured).

Market implications. Fx: Bearish. Target at 10 - 10.5 from the current 8.4. Bonds: Local Law: Underweight in the Bonar 24 (USD) NY Law: Underweight Global bond 17 (USD). While uncertainty persists about how policy makers will proceed, we believe there could be better entry points in these bonds. In the end, we expect some sort of agreement. Equity: Neutral-Overweight in Argentine ADR in USD (as an effective way for domestic investors to be exposed to USD).

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Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Global Financial Markets Performance Powered by Andbank

Performance Last 30 days (% ) 24-oct-2014

Performance YTD (% ) 24-oct-2014

2.57% 0.94% 0.54% 2.19% 1.67%

8.59% 10.34% 2.68% 8.75% 8.27%

-1.01% -0.07% -0.34% -7.77% -0.34%

16.04% 19.47% 28.02% 15.12% 15.94%

2.57% 1.47% 2.04% 3.39% 0.83%

8.40% 6.16% 10.00% 13.63% 1.71%

-1.67% 1.54% 1.72% 0.71%

19.39% 9.66% 11.74% 5.40%

-3.14% 4.92%

-10.33% 18.49%

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

EMEA Government Bonds (10 year) Russia Benchmark Bond

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

Turkey Benchmark Bond

Corporate Review

Global Financial Markets Performance Powered by Andbank

Price Performance Last 30 days (% ) 24-oct-2014

Price Performance YTD (% ) 24-oct-2014

-1.69% -6.59% -4.99% -6.24% -6.68% -2.36%

6.29% -2.53% -0.33% -5.30% -0.77% 5.86%

-12.70% -3.43% -7.81% -7.98%

-17.69% -6.87% -17.96% -14.17%

9.95% 11.30% 12.92% 12.04% 4.08% 10.06%

-19.05% -11.20% -20.62% -0.18% -23.09% -14.83%

-4.81% -5.26% 0.63% -3.21% -3.16%

8.73% -8.73% 2.52% -11.85% -2.33%

0.14% -12.76% 0.62% 0.55% -3.87% -3.06%

-8.59% 7.41% 8.56% 11.00% -41.28% -4.58%

Global Equity (Price Return) EQUITY

S&P 500 Euro STOXX 50 STOXX 600 MSCI Japan MSCI EM Latin America

ENERGY

MSCI South East Asia 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

Corporate Review

Global Financial Markets - Equity Performance – YTD.

120

Global Equity Indices - Total Return (Local - Base Index 100)

120

115

110

105

100

85 06 Jan

24 Feb

14 Apr

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

02 Jun STOXX 600 MSCI Ja pa n

21 Jul

08 Sep

85 27 Oct

MSCI EM La tin America MSCI So uth Ea st Asia ©FactSet Research Systems

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Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Short-term Outlook. Risk-on & Risk-off probabilities Andbank’s System of Flow & Positioning indicators.

Reading: Following the recent declines in equity markets, our Andbank system of flow & positioning indicators shows an aggregate score of +0.7 (slightly better than the -1.9 seen last month), suggesting that 1. The equity market is no longer overbought, as well as a lack of stress in the price of assets. 2. Since risky assets are not overheated. A sudden, deep and sustained risk-off shift is unlikely. Flows: There were important entries during mid-month in short ETFs, with notable departures on EM. This shift has been reversed during the third week of October (confirmed by both Hot money –ETFs - and Mutual Funds). Surveys: Only 8% of global managers foresee a global recession. Most managers keep positive growth expectations (well above the readings seen in 2011). Beware the USD: The USD’s Z-score is a perilous 2.1, suggesting a formidable hurdle to further gains. Investors believe that the most repeated trade is long USD (confirmed by the JPM’s Global & Fx Strategy). The same research highlights a return to US Equity for many investors. All this data seems to have helped the USD’s strength in recent months and confirms the fact that many market players are on the same side of the scale (contrarian signal). Allocation: The equity allocation of managers is set to a minimum of the last two years (positive). The number of CDS (protection) on France, Germany and Spain are still falling, while Italy and Greece see an upturn in demand for coverage. Aggregate Result in our Flow & Sentiment Indicators

Buy signal Positive Bias Neutral Negative Bias Sell signal FINAL VALUATION

Current

Month

1 3 7 7 3 -1.9

3 4 9 5 1 0.7

Our Andbank system of flow indicators provides an aggregate assessment that can range from -10 (strong sell) to +10 (strong buy).

Table of Stress Assessment in Risky Assets

-5

-10 Market is

Overbought

Area of Neutrality Sell bias

Buy bias

+10 Market is Oversold

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Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

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

Index

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

Current ** Price 24/10/2014

Target Price (A x B)

Expected Change (%) 2014

S&P

3.00

9.60

10.10

109.93

8.36

119.13

16.31

16.8

1,965

2,004

2.0%

Stoxx 600 (sxxp)

3.61

6.50

7.00

20.2

11.58

22.54

15.99

16.1

327

362

10.6%

Ibex 35

1.85

6.64

8.00

559

22.71

685.95

17.74

17.0

10,339

11,661

12.8%

Mexico IPC

11.28

12.0

43,666

47,000

7.6%

Bovespa

11.28

12.0

51,940

55,000

5.9%

7.97

7.33

7.75

20.4

14.2

23.29

13.10

13.7

283

319

12.7%

Asia Pac x Japan (FDSAG)

* 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)] 2Q14 Revised Targets S&P We cut Sales (from 4.6% to 3%) but we raise Margins (from 9.6 to 10.1%). This results in higher EPS growth in 2014 (from 4.6% to 8.36%). New target for the S&P: 2004 (from 1934). Stoxx 600 We cut Margins (from 7.5% to 7%) . This results in a lower EPS growth 2014 (from 19% to 11.6%). New 2014 target for the Stoxx 600 at 362 (from 388) Brazil Dilma's victory now opens a period of questions for financial markets. This period could lead to some corrections. So we lower our target to 55,000 (from 58.000)

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Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Core Fixed Income From the Swap Spread perspective: Hold Treasuries and Bund 1.

Swap interest rates clearly continue pointing towards our disinflationary world. USD 10Y swap rate at 2.37%. EUR Swap at 1.50%

Government bond Yields: 10Y UST at 2.19%. Bund Yield at 0.81%

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 swap spread in the US means that fears in this country are also lower now). The higher swap spread in the EUR world points to higher market fears in this region. A clear sign that Macro, Political & Financial risks are still unresolved.

USD swap spread: Currently stable at 17 bps (from 16 bps last month), it remains clearly below its historical average (42bps). With no inflationary pressures in sight, the only way for this spread to normalize towards its historical average is through an even lower yield in the US Treasury bond (to 1.95%).

EUR swap spread: Currently at 70 bps, remains clearly above its historical average (45 bps). With no inflationary pressures in sight, the only way for this spread to return to its average is through a higher Bund Yield (to somewhere near 1.05%).

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 - 10 Yr Swap Spread

1.00

4.00

0.80

3.50

0.60

EUR - 1 0Yr Swap S pread

1.50 1.00

3.00

0.50

2.50 0.40

'05

'06

'07

'08

'09

USD 10Y Swa p Ra te (Le ft) USD 10Y Tre asry Yield (Le ft) Andbank, Tullet Prebon

'10

'11

'12

'13

'14

0.20

1.50

0.00

1.00

-0.20

0.50

Swap Sprea d 10Y USD (Right) ©FactSet Research Systems

0.00

2.00

-0.50 -1.00 '10

'11

'12

EUR 10Y Swap R a te (Left) EUR 10Y Gov bo nd Y ield (Left) Andbank, Tullet Prebon

'13

'14

-1.50

Swap Sprea d 10Y EUR (R ight) ©FactSet Research Systems

Corporate Review

Core Fixed Income – US Treasury Bond From a fundamental perspective: Hold Treasuries RECOMMENDED STRATEGY: HOLD

Strategic range for the T10 Yield (Hold): 2.0%-2.5% Slope is still high under historical standards. Given that the short end of the yield curve will remain well anchored, the long-end of the yield curve can remain well supported (lower yields), meaning that Treasuries are NOT expensive. According to the Asset swap spread (seen on page 53), the 10year Yield in Treasury could fall to 1.95%. (Cheap) Given the current “New Normal” (structural disinflation), it is reasonable to think of a real yield of 0.5% - 1.0% (let’s say at 0.75%) as a good entry point for Treasuries. Today’s real yield in the T10 is at 0.61% (nominal 10YT Yield is at 2.27% and CPI at 1.66%). (Slightly Expensive)

STRATEGY:

Buy above 2.5%

Sell below 2.00%.

Current level: 2.27% => HOLD

6.00

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

6.00

5.00

4.00

3.00

2.00

1.00

0.00

'05

'06

'07

'08

'09

10Yr Govie

'10

'11

'13

'14

0.00

2Yr Go vie

Andbank, Tullet Prebon Information

350 300 250 200 150 100 50 0 - 50 - 100

'12

©FactSet Research Systems

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

'85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13

350 300 250 200 150 100 50 0 -50 -100

(10Y Y ie ld - 2Y Y ie ld) Tre ndline : Ave ra ge Andbank, Tullet Prebon I nformation

©FactSet Res earch Systems

Corporate Review

Core Fixed Income – German 10 year Bund From a fundamental perspective: Neutral-UW Bunds RECOMMENDED STRATEGY: SELL

Strategic range for the Bund’s Yield (Hold): 1% - 1.5% Slope is now slightly below average under historical standards. Given that the short end of the yield curve remains extremely low (negative yields) and could normalize towards higher levels, the long-end of the yield curve could respond with higher yields, meaning that today, Bund is expensive. According to the Asset swap spread (seen on page 53), the 10year Yield in the Bund could rise to 1.05%. (expensive) Given the current “New Normal” (structural disinflation), it is reasonable to think of a real yield of 0.5% - 1.0% (let’s say at 0.75%) as a good entry point for Bunds. Today’s real yield in the 10Y Bund is at 0.00% (nominal Yield is at 0.84% and CPI at 0.80%). So, today IS NOT a good entry point (Expensive).

STRATEGY:

Buy above 1.5%

Sell below 1.0%.

Current level: 0.84% => SELL

4,00

EUR BENCHMARK YIELDS (10Y & 2Y)

4,00

3,50

3,00

2,50

2,00

1,50

1,00

0,50

0,00

Nov Apr Sep Feb

Jul

Dec May Oc t Mar Aug Jan Jun 10Y Y ie ld

2Y Yie ld

Andbank, Tullet Prebon

400 350 300 250 200 150 100 50 0 -50 -100

©FactSet Research Sys tems

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

'85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13

400 350 300 250 200 150 100 50 0 -50 -100

10Y Yield - 2Y Y ield Trendline : Ave rage Andbank, Tullet PRebon

©FactSet Research Systems

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Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

EM bonds – When & Where? What could be a good entry point?

Historically, a good entry level in Treasuries is when the real Yield reaches the 1.5% - 2% level. Given the new “reality” of low structural inflation (and thus low Yields).

Given the current “New Normal” (structural disinflation), it is reasonable to think of a real yield of 0.5% - 1.0% (let’s say at 0.75%) as a good entry point for Treasuries. Today’s real yield in the T10 is at 0.61% (nominal 10YT Yield is at 2.27% and CPI at 1.66%).

Historically, the rule of thumb for the EM bond markets has been “buy” whenever the real Yield in these assets is about 150 – 200 bps 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 our NEW ENTRY POINT when real yields in EM are between 50-100 bps (let’s say 75 bps) higher than the US real yields.

Given that the real Yield in the UST10 is now at 0.61%, we can conclude the following: 1.

According to our rule of thumb, today is not a good entry point in the 10Y US Treasury.

The recommended entry point for EM bonds today is when their real yields stay at 0.61% + 75 bps. This is, when Real yields approach the 1.36%. Below this level the appropriate strategy would be “sell”.

Corporate Review

EM bonds â&#x20AC;&#x201C; When & Where?

Real Yield (10yr bond)

2.69%

1.15%

1.55%

Taiwan

1.64%

0.72%

0.92%

Thailand

3.24%

1.75%

1.48%

Malaysia

3.79%

2.59%

1.19%

Singapore

2.24%

0.77%

1.47%

Indonesia

7.95%

9.92%

4.50%

3.45%

Philippines

4.04%

4.37%

-0.34%

China

3.85%

1.63%

2.22%

India

8.35%

6.46%

1.89%

Turkey Russia

8.81% 9.60%

8.97% 8.03%

7.00% 7.00%

1.81% 2.60%

Brazil Mexico Colombia Peru

12.08% 5.86% 6.62% 5.34%

6.75% 4.22% 2.86% 2.74%

6.40% 4.22% 2.86% 2.74%

5.68% 1.64% 3.76% 2.60%

EM ASIA

S.Korea

EME

CPI (y/y) Andbank's Estimate

LATAM

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

Cheap valuations Expensive Valuations

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

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

10 Yr Govies - European Peripherals

5 0

5 '05

'06

'07

'08 Ita ly Spain

Andbank, JPM Chase

'09

'10

Po rtugal Ire land

'11

'12

'13

'14

Gre ece ©FactSet Research Systems CPI Harmonized - European Periherals

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

'05

'06

'07

'08

(% 1YR) Ita ly (% 1YR) Sp a in

'09

'10

(% 1YR) P o rtuga l (% 1YR) Ire la nd

Andbank, National I nstitutes of Statis tics

'11

'12

'13

'14

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

(% 1YR) 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

2.52%

-0.08%

2.60%

Spain

2.17%

-0.26%

2.44%

Portugal

3.23%

-0.04%

3.28%

Ireland

1.79%

0.46%

1.33%

Greece

7.22%

-0.84%

8.05%

* Harmonized CPI All Items Rec ommended bonds Bonds to be avoided

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Corporate credit - USD Expected Performance and Recommendation

4.00

USD CORPORATES CREDIT SPREADS (5YR)

2.50

3.50

USD Corporates (ML EMU Corp Bond 1-10 yr Index): Corps have interrupted their long held rally in October, with spreads widening to 80 bps (vs. prior 62 bps). We still consider USD denominated corporates as historically “expensive”, although spreads will probably remain expensive (maybe stabilizing around 70 bps).

Sector breakdown: Industrials (87 bps vs. prior 69 bps). Financials (70 bps from prior 50 bps). Utilities (81 bps from prior 69 bps).

Recommended Strategy: Increase exposure at current levels.

Entry point above 70-80 bps in ML broad index.

2.00

3.00 2.50

1.50

2.00 1.00

1.50 1.00

0.50

0.50 0.00

'10

'11

'12

Co rpora te s (R ight) Financia ls (Le ft)

'13

'14

0.00

Industria ls (Le ft) Utilities (Le ft)

Andbank, Merril Lynch

©FactSet Research Sys tems

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

Spread effect Coupon effect Total Effect

Change (bp)

Price effect

From

Change

-10.0

0.35%

-10.0

1.03%

Lib3m+

0.80%

1.03%

1.38%

Corporate Review

Corporate credit - EUR Expected Performance and Recommendation

7.00

EMU CORPORATE CREDIT SPREADS (5YR)

4.00

6.00

3.50

5.00

3.00

2.50

4.00

2.00

3.00

1.50

2.00

1.00

0.50

0.00

'10

'11

'12

'13

'14

Co rpo ra te s (Right) (Right) Financials (Le ft) Industrials (Le ft) Utilitie s (Left) Andbank, Merril Lynch

©FactSet Research Sys tems

EUR Corporates (ML EMU Corp Bond 1-10 yr Index): Spreads in EUR have been more stable than in the USD market in October, with spreads tightening to 105 bps (vs. prior 107). We still consider EUR denominated corporates as historically “expensive”, although spreads will probably remain expensive (maybe stabilizing around 100 bps). Sector breakdown: Industrials (96 bps vs. prior 97 last month). Financials (113 bps vs. prior 115). Utilities (118 bps vs. prior 123). 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 120 bps in the ML broad index.

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

Spread effect Coupon effect Total Effect

Change (bp)

Price effect

From

Change

15.0

-0.53%

105

120

15.0

1.11%

Eur3m+

1.05%

1.11%

0.59%

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Industrial commodities. The prospects for a new structural bull market are still dim.

Corporate Review

1st. The primary driver of the commodities super-cycle has now slowed down and we suspect that this slowdown is structural (not just cyclical) 50 40 30 20 10 0 - 10 - 20 - 30 - 40 - 50

China heav y industrial boom & Commodity Prices

25 20 15 10 5

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

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

ÂŠFactSet Research Sys tem s

1. The new structural pace for heavy industry in China (8%-10%) is consistent with a 0% growth in commodity prices. This means that the prospects for a new structural bull market are still dim. 2. However, if the recent slowdown in the pace of Industrial Activity in China persists, additional declines in the prices of some minerals may take place.

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 MINERALS for a long period (years). This should keep prices subdued.

Some examples of projects cancelled: 1. Europe: German Oetinger (Aluminum) removed 70,000 tons of capacity in 2013. In Europe, despite the disappearance of 400,000 tons of Aluminum production capacity in 2013, there continues to be overcapacity. 2. Latin America: Brazil’s MMX cancelled an iron ore project in Atacama (Chile). Canada’s Kinron Corp cancelled its FDN mining project in Ecuador. 3. Asia: Baoshan Iron Co. said China's steel industry is facing the harshest operating environment ever as 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 (3.3%). 4. Australia: A total of 18 projects with a combined capital value of $150bn were cancelled or delayed in 2013. Some of the projects were: Browse LNG ($36bn), Outer Harbour ($30bn), Olympic Dam Expansion ($20bn), Sunrise LNG (12bn), West Pilbara Iron Ore ($7.4bn), Wandoan coal ($6bn), Kooragang ($5bn), etc…

225

WORLD PRODUCTION OF INDUSTRIAL COMMODITIES

225

200

175

150

125

100

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Primary Aluminium Coal

Copper Crude Oil

Andbank, World Steel Association, Intl Alum Inst, EIA

Natural Gas Crude Steel ©FactSet Research Systems

Corporate Review

3rd. Real vs. speculative demand still points towards a 7% decline

The rise in commodity prices during the 1H2014 was not justified (by an evident improvement in real volumes transported on ocean routes. See the chart â&#x20AC;&#x201C; Baltic Dry Index). Instead, the baseless upswing was mostly driven by speculative demand and, as such, we already anticipated that the recent downturn seen in the last months would take place. From now on, there are still NO fundamental reasons to believe that positive dynamics in most commodities (especially in dry commodities) could materialize and extend for a long time. However, following the recent falls seen in the Q2 & Q3, we are much closer to seeing the removal of the premium that commodities accumulated during the era of QE. (from 484 to 450 in the CRB continuous index, or -7%). 750

Baltic Dry Inde x Vs Commod ity Price s (daily)

14,000

700

12,000

650 10,000

600 550

8,000

500 6,000

450 400

4,000

350 2,000

300 250

0 '05

'06

'07

'08

'09

'10

'11

'12

'13

'14

Baltic Dry Index - Price (Right) CRB Continuous Commodity Index - Price (Lef t) CRB Spot Commodity Index - Price (Lef t) Andbank, B IFFEX, CR B

ÂŠFactSet Res earch Sys tem s

Corporate Review

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

Corporate Review

The Central Banks continue destocking gold.

In general, all central banks (especially the mercantilist ones) continue reducing their purchases of gold or in many cases selling part of their holdings.

Those that are still buying gold are cutting the pace of purchases: Singapore has reduced pace to just 3.9% y/y (from the previous month’s 8.3%). China has reduced pace to just 11.9% y/y (from the previous month’s 17.2%). The UK has reduced pace to just 6.9% y/y (from the previous month’s 8.8%).

Those that were already selling gold have increased in number: Chile joins Japan, Philippines, Thailand and India, forming the increasingly bigger group of central banks that are now destocking gold. Japan has accelerated Gold sales, destocking now at a -16.5% pace y/y).

While the huge number of conflicts remain, posing risks to energy prices and, thus, to the weak economic recovery in the West, gold purchases may persist and keep prices sustained. However, with a more structural view, we consider that most of these conflicts will fade over time. This, added to the fact that the global recovery, though subpar, is on track, will prompt most central banks to continue destocking their abnormally high stocks of gold (that were accumulated in the worst times of the Great Depression). OUR OUTLOOK FOR THIS ASSET REMAINS NEGATIVE . 100

GOLD STOCK IN CENTRAL BANK RESERVES

100

-20 -40

-20 '11 (MOV 6M , % 1YR) India (MOV 6M , % 1YR) Thailand (MOV 6M , % 1YR) Sing

Andbank, National Reserve Banks

'12

'13

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

'14

-40

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

Precious Metals

Corporate Review

Gold: Long-term target price of US$900 Criteria

Recent Developments

Andbank’s Assessment

India's government is restricting gold imports

Looking at the evident improvement in the CA balance (from -$31bn to -$13bn), after 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.

Expensive

Financial liberalization in China

The Chinese government continues with its economic reforms. Financial liberalization is a key area where reforms are being implemented (see the QII quotas). The gradual opening of the Capital Account (with higher “quotas” each month, widens the investment alternatives for Chinese investors (historically focused on gold)

Expensive

Gold in real terms

The YTD real price of gold has decreased from $1.128 to $1.139 (down from last month’s 1.125), remaining 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)

This ratio has increased during the month to 15.02 (from 12.9), basically due to a higher decrease in the price of oil. The ratio is now clearly above its historical average value of 12.85. Given that our 5yr target price for oil has now been raised to $95, the nominal gold price should approach the US$1,220 level for this ratio to be near its LT average level.

Fair Value

The 15yr average value for this ratio is 20.04. Currently this ratio stands at 13.64 (up from last month’s Gold in terms of Equity (Dow 14.02). If the DJI remains stable at what we consider a fair value (16.870), the gold price should / Gold) decline towards US$841 in order for this ratio to be near its LT average level.

Expensive

Gold & Money Impulse

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

Expensive

Size of Gold in the world

The total value of 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 contracts: longs 207k (Up from 170k last month), and shorts of 99k (vs. prior 106k) = Net of +108k (vs +63k last month).

Expensive

Central Banks’ Activity

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

Expensive

Final Assessment

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

Corporate Review

General commodities under a historical perspective.

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

10 YEAR PERFORMANCE

ANNUALIZED GROWTH

HISTORICAL ASSESSMENT

Oil Coal Gas

94.2 145.1 87.9 49.8

5.71% 7% -7% 27%

-14.66% -18% -7% -18%

-6% 45% -12% -50%

-0.6% 3.8% -1.3% -6.7%

VERY CHEAP CHEAP VERY CHEAP VERY CHEAP

Corn Wheat Soybean Sugar Cotton

177.8 179.2 172.8 226.9 166.0 143.9

-16.66% -42% -22% 5% -16% 15%

-15.77% -19% -11% -21% 0% -23%

78% 79% 73% 127% 66% 44%

5.9% 6.0% 5.6% 8.5% 5.2% 3.7%

FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE CHEAP

Precious Palladium Platinum Gold Silver

266.8 361.2 147.5 291.6 238.6

-13.59% 2% -11% -28% -35%

2.84% 9% -9% 3% -12%

167% 261% 48% 192% 139%

10.3% 13.7% 4.0% 11.3% 9.1%

EXPENSIVE EXPENSIVE CHEAP EXPENSIVE FAIR VALUE

Minerals Copper Nickel Zinc Aluminium Iron Ore

188.4 231.3 111.9 222.2 112.4 53.6

-6.03% -7% -18% 3% -14% -5%

0.62% -9% 7% 9% 11% -41%

88% 131% 12% 122% 12% -46%

6.5% 8.7% 1.1% 8.3% 1.2% -6.0%

FAIR VALUE FAIR VALUE CHEAP FAIR VALUE CHEAP VERY CHEAP

Commodities Average

181.8

-7.64%

-6.74%

81.80%

5.55%

FAIR VALUE

Energy

Crops

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

Andbank's Criteria VERY CHEAP CHEAP FAIR VALUE EXPENSIVE BUBBLE

Table of Contents

Corporate Review

Summary Table for financial market prospects and 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 relevant aspects (such as the internationalization of the RMB and the progress seen in the RMBdenominated debt market) with great interest since, in our humble opinion, they could be the result of strategic movements in 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 has occurred many times in the past, the prevailing currency reserve cannot keep pace with the growth of global trade, being eventually dwarfed by the growing size of international commerce. When this happens, it is the very same countries who are involved in international commerce who create solutions that historically lead to more than one currency cohabiting as currency reserves. This simply means that other currencies will be present in the “strategic reserves” of many central banks. In other words, the USD could be forced to make room for the new tenant, which could result in a lower relative demand for the USD.

7 6 5 4 3 2 1 0 -1 -2

USD FLOW TO THE REST OF WORLD

100 0 3’ -100 -200 4, 4’ -300 1’ 2’ 3 -400 -500 -600 -700 -800 -900 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 1

* *

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 to the world (25bn coming from this CA) represented a 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 (2’). Or each US$100bn represented 8% of quarterly 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) In 1Q14, the cumulative 12m CA was $396bn, and the quarterly flow of USD to the world ($99.2bn) represented 2.31% of commerce (or 100bn represents 2.33% of international commerce). (5) In 2Q14, the cumulative 12m CA was $389bn, and the quarterly flow of USD to the world ($97.2bn) represents 2.23% of commerce. (or the same $100bn now represents just 2.29% of international commerce).

Corporate Review

USD/EUR

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

Effect on the USD (Long-term view)

Eurozone sentiment remains weak and, though PMI figures have improved this month (52.2 in Oct vs 52.0 in Sep) pace continues to be low and fragile. While not necessarily affecting the euro negatively, these aspects will not help the single currency. With a longer term view, the Flash PMIs (52.2) still suggest a mild pace of expansion in volumes, reducing the likelihood of a re-run of tensions seen in peripheral economies (and fx).

NEUTRAL - POSITIVE

NEGATIVE

The “big brothers” (China, Brazil and Japan) have been reducing their abnormally high proportion of foreign currency reserves during Global accumulation September. They now stand at an average of 19.9 months of imports in of the Reserve the “big three”. Down from 21 in August). China has cut its holdings Currency from 24.9 months in August to 23.4 in September), still well above the level implied by the pace of their current account balances.

NEUTRAL - POSITIVE

NEGATIVE

Recent Developments

Criteria

Tensions in Europe

USD flow to the world

The flow of USD with respect to the global volume of commercial trade has reached a 15-year low. The quarterly flow of USD to the world ($97.2bn) represents 2.23% of commerce.

NEUTRAL - POSITIVE

NEGATIVE

Positioning in € (CFTC. ECA cur)

Non-commercial long contracts in EUR are 60k (vs. previous 60k), short contracts are 219k (vs. previous 202k). The net position is -159k (vs. 141k last month).

NEGATIVE

NEUTRAL

POSITIVE

NEGATIVE

Tapering, QE and Forward Guidance

Central Bank Idiosyncrasy

The Tapering process and the Fed’s tightening in the US will continue to be discussed, while the debate will remain about the QE program in the Euro area (especially after inflation hit new lows in Sep). In the long run, we think that tightening in the US will most likely happen later rather than sooner. According to our Hawk-o-meter, it is highly unlikely that we will see aggressive easing from the ECB. Both the low demand in the first TLTRO and the recent covered bond purchases by the ECB, suggest that there are important hurdles to implementing the ABS purchase program, which we think will be narrow in volume and substance

Final Assessment

POSITIVE

POSITIVE (AROUND 1.25)

NEGATIVE

NEGATIVE (1.40)

Corporate Review

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

Year to Date EUR/JPY (EURJPY-FX1)

BoJ officials are growing more concerned that CPI could slip below 1%.

1 3 6.9 4 -0 .1 1 -0 .0 8 % 0 5 :22 :3 2 P M J P Y

D e c -1 3 - O c t-1 4

146

Speculation growing on whether BoJ will extend the two-year deadline for 2% inflation target: The market sees inflation stalling around 1%, leaving an extension of the timeframe as the only option left on the table for the central bank.

144

Kuroda reiterates that QQE to remain in place until 2% target achieved in stable manner

138

Junior government coalition calls for fresh stimulus.

142 140

136 Ja n Feb Ma r Ap r Ma y Ju n

Ju l

Au g Se p

O ct

Last 20 Years EUR/JPY (EURJPY-FX1)

HOW FAR? Our guess is for the JPY-EUR to remain well above the 140 mark in the mediumterm, with the possibility of reaching the 160-170 level again.

1 3 6.9 2 -0 .1 3 -0 .0 9 % 0 5 :22 :5 2 P M J P Y

O c t-9 4 - O c t-1 4

Projected 1 7 0 160 150

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). 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.

140 130 120 110 100 90 '9 5

'9 7

'9 9

'0 1

'0 3

'0 5

'0 7

'0 9

'1 1

'1 3

Corporate Review

Latin America Fx – Positive outlook (following recent declines)

Year-to-date: All major currencies in the region have lost their yearly gains during this last month.

Outlook: This seems to be the typical risk-off shift that comes from the traditional threat of monetary tightening by the Fed. While we expect bouts of volatility in the FX market as the US economy becomes less accommodative, we maintain a constructive outlook for these currencies, in part due to a stabilization of data from China, which will help to ease concerns of an imminent slowdown in the region’s key export markets.

110

LATAM CURRENCIES (Performance vs USD)

110

105

100

Jan

Feb

Mar

Apr

Arge ntine P e so BRL Andbank, WM/Reuters

May

Jun

CLP Co l P e so

Jul

Aug

Sep

Oct

Corporate Review

Asian Fx – Positive outlook

Year-to-date: All major currencies in the region have seen their yearly gains shrink, although during the last part of October some currencies have rebounded and remain in positive territory. In China, the PBoC stopped depreciating the CNY already in June, and has accumulated a 2.25% appreciation since then.

Outlook: The fall seen from July seems to be the typical risk that comes from the traditional threat of monetary tightening by the Fed. Again, while we expect bouts of volatility in the FX market as the US economy becomes less accommodative, we maintain a constructive outlook for these currencies, in part due to the less vulnerable position of these economies against external shocks.

According to our “Asian Currency Diffusion Index” (see the chart on the next page), there is still considerable value in these currencies. 110

ASIAN CURRENCIES (Performance v s USD)

110

108

106

104

102

100

98 96

98 Jan

Feb

Mar IDR

Andbank, WM/Reuters

Apr

May

THB

Jun PHP

Jul MYR

Aug

Sep

Oct

Corporate Review

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

POSITIVE OUTLOOK

Asian currencies are still cheap compared to the USD. We recommend being long in the CNY, THB, IDR, PHP and MYR. Avoid those most closely related to the JPY (KRW, TWD).

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

0.001 STRONG BUY

0,40

0.001

0,30

0.001

0,20

0.001 BUY

0,10

0.001

0,00

0.001 SELL

-0,10

0.001

-0,20

0.001

Jun-14

Sep-14

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

0.001 Jun-10

-0,40 Sep-10

0.001 Mar-10

-0,30

Dec-09

STRONG SELL

0.001

Jun-09

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

Sep-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, the US and Japan as representative of this. Asia’s natural response to an upswing in the overall level of prices is to allow their currencies to appreciate, thus keeping purchasing power levels up. An increase in the overall M1 is therefore synonymous with currency appreciation in emerging countries.

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

Performance of the RMB.

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

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Market Outlook Summary Table (1) Expected performance to be achieved during the current year, based on our Fundamental Target Value resulting from our estimates in sales, margins, EPS and PE. Such fundamental value can be achieved during the year. (2) 12-month expected performance includes price and coupon effect and is based on our Fundamental Target for Yields resulting from our estimates for inflation, growth and monetary policy. For practical issues related to the calculation of the “carry effect”, we assume that the target yield is achieved in a 12-month period.

(3) 12-month credit performance excludes interest rate effect, and refers only to spread performance and coupon (FRNs). Also, for practical issues related to the calculation of the “coupon effect”, we assume that the target spread is achieved in a 12-month period.

Asset Class

Instrument

S&P 500 Stoxx 600

Current

Fundamental

24/10/2014

Target

Performance

1,965

2,004

2.0%

327

362

10.6%

Ibex 35

10,339

11,661

12.8%

Mexbol

43,666

47,000

7.6%

Bovespa

51,940

55,000

5.9%

283

319

12.7%

Bund 10y

0.85%

1.25%

-2.37%

Treasury 10y

2.27%

2.35%

1.63%

Spain

2.17%

2.50%

-0.44%

Sovereign Risk :

Italy

2.52%

2.50%

2.68%

Peripheral & EM

Portugal

3.23%

3.50%

1.11%

Europe

Ireland

1.79%

2.25%

-1.91%

(10 year Yields)

Greece

7.22%

5.75%

18.94%

Russia

9.60%

8.50%

18.43%

Turkey

8.81%

8.50%

11.29%

1.38%

105

120

0.59%

Equity

FDSAG Asia Pac xJapan

Core Fixed Income

Corporate Credit Corporates USD - EUR & usd Corporates EUR

(1)

(2)

(3)

Corporate Review

Asset Class

Instrument

Current

Fundamental

24/10/2014

Target

Performance

EM bonds

India

8.35%

8.50%

7.14%

Asia (in local)

Indonesia

7.95%

7.50%

11.52%

Thailand

3.24%

3.80%

-1.28%

Malaysia

3.79%

3.75%

4.10%

Philipines

4.04%

3.50%

8.32%

Taiwan

1.64%

1.50%

2.73%

12.08%

12.00%

12.68%

EM bonds

Brazil

Latam (in local)

Colombia

6.62%

6.50%

7.62%

Mexico

5.86%

6.00%

4.76%

Peru

5.34%

5.00%

8.07%

Chile

4.84%

4.50%

7.56%

Oil (WTI) Commodities

81.01

17.3%

CRY

270.22

251

-7.1%

Gold

1231.75

900

-26.9%

USD vs EUR

1.267

1.40

-9.5%

JPY vs EUR

137.03

160

-14.4%

JPY vs USD

108.17

114

-5.4%

CNY vs USD

6.12

6.00

2.0%

MXN vs USD

13.53

13.25

2.1%

BRL vs USD

2.45

0.2%

CLP vs USD

584

520

12.4%

(2)

Corporate Review

Global Asset Allocation Proposal Monthly Tactical Asset Allocation Proposal 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

13.2

10.0

7.5

6.0

4.0

2.4

Fixed Income Short-Term

25.0

29.3

15.0

5.0

4.4

0.0

Fixed Income OECD Government

30.0

17.6

20.0

10.0

12.0

5.3

5.0

2.0

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

2.5

1.3

0.5

13.2

7.5

4.0

1.5

20.0

23.5

20.0

15.0

13.2

5.0

4.1

5.0

8.8

10.0

15.0

19.9

10.0

12.2

Fixed Income Asia

2.2

3.8

5.0

3.1

Fixed Income Latam

2.2

3.8

5.0

3.1

High Yield

4.4

7.5

9.9

6.1

Equity OECD

5.0

7.6

15.0

19.5

30.0

34.4

55.0

58.2

US Equity

1.9

4.9

8.6

14.5

European Equity

5.7

14.6

25.8

43.6

Equity Emerging

Commodities

4.4

0.0

5.0

8.0

10.0

14.1

12.0

15.6

Asian Equity

0.0

5.6

9.9

10.9

Latam Equity

0.0

2.4

4.2

4.7

0.0

5.0

3.8

7.0

4.6

9.0

5.5

Corporate Review

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