Corporate review october 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 October, 2014

Table of Contents Executive Summary

Corporate Review

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

Overall Economic Environment Euro Area – Latest developments. Revisiting our long-held economic scenario.…………………………………5 Euro Area – Fundamental reflections on the situation of the currency. …………………………………………………8 US - Why should we be optimistic that the growth (though modest) factor will be displayed? ………..14 UK – Intractable problems still lurk. …………………………………………………….....………………………………………………………25 Emerging Asia – Will these economies get caught off guard again when Fed rate hikes start? …27 Emerging Asia – China: The latest on Reforms. Are reforms already paying off? ……………………..……31 Latin America – A negative overall picture but still some good investment opportunities……………..38 left.

Global Market Snapshot. Performance and Volatility

………………………………………………………………………………..48

Market Outlook Risk-on & Risk-off probabilities …………………….…………………………………………………………………………………………………..52 Equity Markets. Fundamental Assessment ..………………………………………………………………………………………………..54 Fixed Income. Core Countries ….…..…………………………………………………………………………………………………………………..56 Fixed Income. Emerging Markets ...…………………………………………………………………………………………………………………..60 Fixed Income. European Periphery .…………………………………………………………………………………………………………………..63 Corporate Credit …………………………….…..…………………………………………………………………………………………………………………..66 Commodities & Precious Metals ………………………………………………………………………………………………………………………..69 Forex ……………………………………………………………………………………………………………………………………………....……..………………….79 …………………..………..86 Summary Table for financial market prospects and Asset Allocation Proposal

Executive Summary

Corporate Review

Economy & Markets Europe – Juncker offers Britain supervision of EU financial services. This should contribute to a political calm at the heart of the EU. France’s Moscovici wins EU Economic Affairs job but will be overseen by Finland's Katainen, who was awarded the newly created title of vice-president for jobs and growth. Certainly a new indication about the true nature of the economic governance to be displayed in the EU (Katainen has always been one of the most vocal advocates of tough fiscal discipline). The ECB is expected to buy a total of €200bn of asset-backed securities (ABS) and covered bonds over the course of a year (below expectations). US – Both the fixed income market and some of the most prominent members at the Fed would now be betting against aggressive and early rate hikes. The latest Fed members suggesting that it is preferable to be patient in adjusting the stance of the US monetary policy have been Lockhart, Evans, Kocherlakota, Bullard and Dudley. China – GDP stabilized during Q2 through the use of fine tuning that is far from large-scale economic stimulus. Nevertheless, recent data suggest that the slowdown has continued. Beijing has loosened (eased) restrictions for banks and also eased pressure on the housing sector with the aim of controlling the pace of activity. Japan – BOJ cuts forecasts for FY2014 real GDP growth to 1.0% from 1.1% in April. Mixed Data from the economic arena. Deflation still a threat (some officials at the BoJ said that they thought a drop below 1% core inflation exsales tax impact was "possible”). The BoJ governor may have to continue talking down the yen in order for the government to raise the sales tax next year as scheduled. Latin America – Mexico: The Mexican economy seems to be entering a sweet spot. In about 180 days we will know what assets are going to be sold by the main telecom players. In the energy reform, we are now entering Round 1, where we will know the specific projects. While all this noise remains, tailwinds will blow in the financial markets. Brazil: Attention is now focused on October’s election. The latest polls show Dilma winning in the first round but offer a more equal outcome in the second round, even suggesting that Ms. Marina could win by a narrow margin.

Equities – Short-term view. Today, our indicators show an aggregate score of -1.9 (slightly better than the -3.3 seen 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 1934 (now at a fair value). Europe-Stoxx600: Target price 388 (+14% potential). Asia EM ex Japan-FDSAG: Target price 323 (+11%). Latin America-Mexican IPC: Target price 47,000 (+5%). Latin America-Brazilian Bovespa: Target price 58,000 (+6%). Core Fixed Income – Bund: New Target 1.25%. Sell at 1.0% or below. Start buying at 1.50%. Treasury: Target yield 2.75%. Sell at 2.5% or below. Start buying at 3%-3.25%. 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 recent months, we now consider it is time to reduce exposure. Corporate Credit: Expensive, though the positive mood will continue. Maintain long positions. Entry point in the ML USD Corp 1-10 yr index at spread of 70 bps (currently at 62 bps). Entry point in the ML EUR Corp 1-10 yr index at spread of 120 bps (currently at 107 bps). EM Bonds Asia (local currency): We continue seeing value in these assets, especially in local currency. Volatility guaranteed. Preferred: India, Indonesia, China, Philippines and Malaysia. EM Bonds Latin America (local currency): Same reading as in Asian bonds. Volatility guaranteed. Most preferred: Brazil, Mexico, Peru, Colombia and Chile. Commodities: Energy (Cheap) Most Preferred: Gas & Oil. Buy WTI at or below $95s. Crops (Fair value) most preferred: Corn & Wheat. Minerals (Fair value): most preferred are Nickel and Iron Ore. Precious Metals (Expensive). Fx: EUR/USD: Short term view: 1.20-1.25. 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 1.2 2.0 1.0 0.4 1.0 2.0 1.9

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 0.8 1.4 1.0 0.7 0.3 1.7 1.5

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

South Korea Singapore Taiwan

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

India Indonesia Malaysia Philippines Thailand Vietnam EM Asia

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 Ecuador 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

1.5 2.5 -1.0 4.0 -0.5 5.5 4.0 4.2 1.9

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

3.2

3.5

2.6

3.0

2.9

4.6

4.4

4.5

3.6

4.5

4.0

World ex USA & Europe

Table of Contents

Corporate Review

Executive Summary Overall Economic Environment Euro Area – Latest developments. Revisiting our long-held economic scenario. Euro Area – Fundamental reflections on the situation of the currency. US - Why should we be optimistic that the growth (though modest) factor will be displayed? UK – Intractable problems still lurk. Emerging Asia – Will these economies get caught off guard again when Fed rate hikes start? Emerging Asia – China: The latest on Reforms. Are reforms already paying off? Latin America – A negative overall picture but still some good investment opportunities left.

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

Europe – Latest developments

The first hurdle for Mr. Draghi’s ABS purchase program. Draghi has replied to criticism on the ABS plan by proposing what we (at Andbank) consider a kind of nonsense. He has called on governments to provide public guarantees for the riskier parts of the ABS eligible for purchases (minutiae, as you can see). But do not get ahead in the story and start from the beginning. You may well ask why this suggestion from Mr. Draghi? Obviously, this comes as a reply to concerns raised by the Bundesbank (and others) that the ECB is taking more risk than it should. Furthermore, our sources suggest that Paris and Berlin will express disagreement with the ECB's proposal for governments to guarantee the riskier tranches of the securities. In short, what we are witnessing is the first hurdle for Mr. Draghi’s ABS purchase program.

President Juncker unexpectedly offered an olive branch to the UK. Junker offers Britain supervision of EU financial services by appointing Jonathan Hill as the EU’s first financial services commissioner. (Not bad considering the UK’s brutal rejection of Juncker’s appointment). This should, without doubt, contribute to a political calm at the heart of the EU (and who knows if also in the markets).

New indications about the true nature of the economic governance to be displayed in the EU: Meanwhile, one country that should not be at all happy is France, for whom Moscovici’s naming as the EU economic affairs commissioner may have been a poor victory. Under the new structure of the EC, France's Moscovici will be overseen by Finland's Katainen, who was awarded the newly created title of vice-president for jobs and growth. While Moscovici has long advocated greater flexibility in the EU’s budget rules, Katainen has always been one of the most vocal advocates of tough fiscal discipline. Is this a new hint or a new indication of the true nature of the economic governance to be displayed in Europe in the years to come? If true, the implications are very clear, especially for currencies and bonds (both public and private).

Corporate Review

Europe – No alterations in our long-held scenario of “disinflation with a moderate growth expansion (DMGE)” Prices in the Euro Area continue to expand at a very low pace (+0.34% y/y in August), while activity (industrial productions) maintains its moderate growth path of around 1% y/y in the last 12 months.

INF LATION - EURO AREA

-1

'10

'11

'12

'13

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

Andbank, Eurostat

'14 15

-1

IND UST RIAL P ROD UCT IO N - EZ

©FactSet Research Systems

-5

'11

'12

'13

'14

-5

(% 1YR) Index of product ion, Total Industry excluding construct ion (% 1M , MOV 3M ) Index of production, To tal Indust ry excluding construction

Eurostat

©Fact Set Rese arch Syst ems

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

1. Equilibrium in domestic rate, level of output, quantity of money, demand of money and the exchange rate suggests that “Draghi’s QE” should not imply a depreciation.

For any increase in the Quantity of Money [ /P], when accompanied by an increase in output (Y), that should not imply a depreciation of the Exchange Rate (E). If Mr. Draghi’s QE program is “Targeted” to boost Credit (via new loans through TLTRO or new ABS’s via an Asset purchase program) responding to a new real demand, then this program is aimed at boosting Real Investment, and thus GDP. Such a QE should not imply a depreciation in the Exchange Rate.

Corporate Review

2. Once we have defined the equilibrium relations and some of the principles by which one currency is governed, historical and projected inflation points towards 1.40 as a fair value for the $/â&#x201A;Ź

Corporate Review

3. The other argument used for those betting on a $1.20/â&#x201A;Ź is the projection for an earlier and significant FED tightening due to mounting inflation. This need not be so.

The Fed will start a tightening process as a result of a combination of a consistent and healthy GDP growth and persistent inflationary pressures.

In that regard, our projection for prices is for â&#x20AC;&#x153;disinflationâ&#x20AC;?. Here are the reasons. i.

Inflation cannot exist in a country with a broken credit distribution mechanism (when the banking multiplier is falling). See the chart.

ii.

By nature, capitalism is expansionary but also deflationary (this is what we saw in the nineteenth century with the industrial revolution and what we have been seeing in the last 25 years).

iii. The ability of companies to incorporate robotics into their processes is unprecedented. iv. Capitalism has led to investments in mining, resources and energy to unprecedented levels. This means excess capacity, and thus, an excess of stocks. Definitely a deflationary aspect. v.

The progressive internationalization of the Renminbi, enabling the industrialization of countries such as Vietnam, Bangladesh and Cambodia (thanks to cheap Chinese credit). This means more production made in cheaper centers, and that also leads to global disinflation.

Corporate Review

4. Thus …, Tightening. When? It could be later rather than sooner (contrary to the general opinion) Our position (“later than sooner”) is based on three arguments: 1.

2. 3.

Everybody knows that the post-2008 “new normal” will be much weaker and more unstable than the previous era. As such, our projections for growth in the West (and also the US) are for a mild pace of expansion (clearly below the long term average). Thus, although the cyclical improvement does continue, this will be slow, unstable and could (should) not trigger a sharp monetary tightening in the US (at least with the intensity that many think). Since January this year, the US OECD LEI* -Leading Economic Indicators- has shown a declining pace (see the chart below) suggesting that the US economy could be entering a period of softer growth. What really matters is Mrs. Yellen’s view, and it is worth mentioning that she has abandoned the idea of a threshold in the unemployment rate (as the trigger for the first rate hike) in favor of a set of measures. This simply means that she can always find one indicator to delay a rate hike. Inflation expectations are not unanchored: The spike in CPI has been fueled by a recent increase in items such as commodity prices or rents. Aspects that we feel might not have continuity, especially in the first case. Although rate hikes are needed (to set a more appropriate cost for capital), Mrs. Yellen is unlikely to raise rates quickly unless CPI expectations become unanchored. 8

US OECD LEI

-2

-4

-6

-8

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

-8

Usa Leading Indicator Tre nd Y oY % - United States A ndbank, OECD

* The survey that best tracks the factors that directly influence future economic activity, since it overcomes the survivorship bias that can typically be seen in other surveys.

©Fa ctSet Re se arch Syste ms

Corporate Review

Euro Area – Conclusions about the currency 1. For any increase in the Quantity of Money [ /P], when accompanied by an increase in Product –or GDP- (Y), that should not imply a depreciation of the Exchange Rate (E). 2. Thus, Draghi’s QE does not mean automatic EUR depreciation: If Mr. Draghi’s QE program is “Targeted” to boost Credit (via new loans through TLTRO or new ABS via an Asset purchase program) responding to a new real demand, then this program is aimed at boosting Real Investment, and thus GDP. Such a QE should not imply a depreciation in the Exchange Rate according to our “Equilibrium Model”. 3. Given historical average inflations (in Germany and the US); 1.37 seemed a fair value for the $/€ exchange rate at Dec 2013. 4. Given our own projections for 2014 inflation rates in the Euro Area and the US (+0.4% and +2.1% respectively), 1.39 is the level in the $/€ exchange rate that brings the real exchange rate close to 1, being thus what could be considered a fair value for the $/€ exchange rate in Dec 2014. 5. We are fully aware that the real exchange rate might be far from 1, but as the EU and the US seem close to sealing the TTIP (Transatlantic Trade and Investment Partnership) in the foreseeable future, there is little sense in betting on a real exchange rate significantly far from 1. Instead, logic leads us to think in real convergence of the exchange rate. 6. These projections are based on our assumptions for the main refinancing rates in both areas: Stable in the Euro Area (near the 0% floor) and only moderate increases in the US Fed Funds Rates during the 2H15 (of around 50 bps). 7. Admittedly, the market forces can bring this exchange rate far below what we consider a fair value for the pair (under our rates, inflation and economic assumptions). In such a case, and while our assumptions remain stable, we consider that any significant variation in the pair (from our fundamental target at $1.39/€) represents an opportunity to increase exposure (depending on the direction of the pair).

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

US – Can this bull Equity market be extended over time? Yes

A conscientious analyst recently stated that to be sustainable, a bull market should rest on three pillars: Liquidity, Valuation and Growth.

These three pillars must not necessarily cohabit. Instead, at any given moment, just one can bear most of the load.

For instance: LIQUIDITY played the key role at the outset of this cycle. Then it was the turn for VALUATIONS, with sales and EPS showing lackluster growth in 2012-2013, but multiples expanding to bring valuations up from obviously cheap to roughly fair value (see the chart). With no new liquidity and valuations neutral, the GROWTH pillar is going to have to take the weight (if the equity markets are to maintain the upward trend).

US Equity multiples

Valuations are not cheap but, … they are not extreme!

30 25 20

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 S&P 500 - P E R atio (La s t 12m) S&P 500 - P E R atio (Fw 12m)

Andbank, Standard & Poor's Corporation

Tre ndline : Avera ge ©FactSet Research Systems

Corporate Review

US â&#x20AC;&#x201C; Can this bull Equity market be extended over time? Yes

But before considering whether the GROWTH factor can be deployed, let us consider all options available to the S&P (and the rest of Western equity indices) to continue the upward trend:

There are now three ways in which S&P could be brought towards new highs:

MARKET OUTCOME

1. The S&P can rise further without the GROWTH component by just expanding valuations (PE) further. 2. Maybe it is the turn for GROWTH to play the key role: (Keeping liquidity and multiples stable means that the S&P can climb further at the pace of growth in sales and EPS => which means the pace in nominal growth of the global GDP).

3. Or maybe a combination of GROWTH and VALUATION.

Short-lived and Unstable rally

Long-lived and Stable rally

Very Long-lived and Unstable rally

Which scenario are we expecting? In our view, the most likely scenario is the third one.

Corporate Review

US – Why should we be optimistic that the GROWTH factor is going to be displayed? (I) I. Households have deleveraged.

US households have deleveraged by almost USD 1 trillion since 2008 (see chart 1), with leverage ratios now back at levels of the early 2000s (see chart 2)

We sense that with this “healthier” position in their balance sheets, households are now more comfortable about beginning to add debt. Certainly a positive factor for domestic demand and, thus, growth.

16,000

HOUSEHOLDS - TOTAL DEBT (bn US$)

16,000

1 trillion less in household liabilities

14,000 12,000

10,000

8,000

6,000

4,000

2,000

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

Households - To tal liabilities Household - Home mortgages Households - C onsumer C redit A ndba nk, Federal Reserve System

©Fa ctSet R esearch Systems

1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60

HOUSEHOLDS - TOTAL DEBT (% of GDP)

From 100% of GDP to barely 80%

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60

Househo ld To tal Lia bilities a s a % of Nominal GDP A ndba nk, Federal Reserve Syste m

©Fa ctSet Research Systems

Corporate Review

US – Why should we be optimistic that the GROWTH factor is going to be displayed? (II) II. The Labor Market is Getting tighter… and is likely to prompt wage growth

The pace in the monthly US payrolls is recovering, and this trend seems statistically significant since the change can be easily observed in the more stable long-term moving average (see chart 1)

Admittedly, a big portion of the new jobs created are part-time, but more than 10 million of full-time jobs that were lost have also been recovered since 2010 (see chart 2).

For lower income brackets, the state of the labor market is far more important than for the middle to upper income brackets since a tighter labor market means higher wage growth

300

US - MONTHLY CHANGE IN US PAY RO LLS - LO NG TERM

FULL-TIME vs. PART-TIME JOBS (US)

300

250

130

200

120

150

100

-50

110 100 90

-50

-100

-150

-200

'39 '42 '45 '48 '51 '54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11

Trendline: 10 Year Moving Average Trendline: 5 Year Moving Average Andbank, Department of Labor

©FactSet Res earch Systems

'68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13

26 24 22 20 18 16 14 12 10 8 6

Employed Full-Time (Left) Employed Part-Time (Right) Andbank, US Department of Labor

©FactSet Research Systems

Corporate Review

US – Why should we be optimistic that the GROWTH factor is going to be displayed? (II) …

One of the preferred cyclical labor market indicators, the employment-to-population ratio for the core working ages of 25-54, is also recovering (see the chart).

This ratio rose to 76.7% in June, from 76.4% in May (and up from 75% at the bottom in 2010-2011)

In summary, this tighter labor market has prompted renewed growth in wages!!

While the current 2.3% YoY pace in wages is NOT impressive (one of the reasons we advocate a subpar growth), it is far better than the 1% seen in 2012! EMPLOYMENT-TO-POPULATION RATIO IN CORE WORKING AGES

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

Em p lo ym e n t- P o pu la tio n Ra tio - 25 to 54 Yrs . ( %) Em p lo ym e n t- P o pu la tio n Ra tio - 25 to 34 Yrs . ( %) Andbank, U.S Department of Labor

©FactSet Research Sys tems

Corporate Review

US – Why should we be optimistic that the GROWTH factor is going to be displayed? (III) III.The housing inventory overhang has clearly abated, and this is good news for growth.

The stock of vacant homes (for rent or for sale) has fallen from a peak of 6.6mn in late 2009 to nearly 5mn today (see chart 1).This is roughly the level that prevailed before inventories started piling up in 2006.

On the other hand, household formation is growing and running substantially above construction activity. As a result, the stock of total housing relative to the number of households has clearly abated, to such an extent that it has overshot the levels that prevailed before the housing boom began in 2003.

This is not to say that the kind of speculative building seen in the mid-2000s will be quickly repeated, but there is certainly a potential for catch-up growth, and this is good news for growth.

140

Housing stock (million units)

5.00

130

4.00

120 110

3.00

100 90

2.00

1.00

60 0.00 '65 '69 '73 '77 '81 '85 '89 '93 '97 '01 '05 '09 '13 All Housing Units (Left) For Rent (Right) Andbank, US Census Bureau

For Sale (Right)

1.12

Housing stock relative to the number of households

1.12

1.11

1.10

1.09

1.08

'04

'05

'06

'07

'08

'09

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'11

'12

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1.08

Total housing stocks/total household ©FactSet Research Systems

Andbank, US Census Bureau

©FactSet Research Systems

Corporate Review

Conclusions 1. To be sustainable, a bull market should rest on three pillars: Liquidity, Valuation and Growth. 2. Liquidity already played a key role at the outset of this cycle. Then it was the turn for valuation in 2012-2013. This means that the growth pillar is going to have to take the weight (if the equity markets are to maintain an upward and sustainable trend). 3. Should we be optimistic that the GROWTH factor is going to be displayed? Yes (although the pace will be moderate in the US and the rest of the developed economies). Why? i.

US households have deleveraged by almost USD 1trillion since 2008. With this “healthier” position in their balance sheets, households are now more comfortable about beginning to add debt. Good for growth. ii. The Labor Market is getting tighter in the US… and is likely to prompt renewed wage growth. iii. The stock of total housing relative to the number of households has clearly abated, to such an extent that it has overshot the levels that prevailed before the housing boom began in 2003. This means that there is certainly potential for catch-up growth 4. Our fundamental value for the S&P stays at 1.840 (somewhat below current levels), but this target price results from considering the 2014 sales and profit projections and applying a PE multiple of 15.9. What we are currently witnessing is a moderate expansion in PE multiples (which is certainly a psychological aspect), and this explains the slight difference between the current price and our target price. 5. Our target price for the S&P will rise at the pace of growth in the EPS in 2015 and subsequent years, which we predict will be positive. 6. We also recognize that the S&P (and the rest of the equity indices in the West) may grow at a faster rate than the rate implicit in profits, either because the multiples expand further, or due to a combination of growth and valuations. 7. In summary. With a mid-term view, we believe that THE EQUITY MARKET (in the US and Europe) IS A BETTER ALTERNATIVE THAN CASH!

Corporate Review

Ok then. The GROWTH factor is going to be displayed but…, at what pace? Can this lead to a full blown tightening in the Fed’s rates? In our humble opinion. No

• Many mistakenly focus on data from chart 1. • But if you look at Chart 2, you will see how since the 1970’s trends in the financing gap and capital spending almost always coincided. • Nevertheless, since 2012 the story is quite different. Companies are spending their cash, but not because of hiring more staff, new plant or new equipment. The capital spending growth rate is positive but at historical lows (and in real terms, the growth rate is near 1%)

Chart 1

G R O S S F IX E D IN V ES TM EN T - U S

CORPORATE CASH & CAPEX - US

Chart 2

3 2 5

1 0

-1 -2 -3

-5

'11

'12

'13

-5

(% 1Q) Gross Domestic Fixed Invest ment, Bil. Chained 2005 $, SAAR - United States (% 1YR) Gross Domestic Fixed Investment, Bil. Chained 2005 $, SAAR - United States

Andbank, Federal Reserve System

©Fact Set Research Systems

-4

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

25 20 15 10 5 0 -5 -10 -15 -20

Financing GAP a s % o f GDP (Left) (% 1YR) Private Fix ed Inves tment - Nonres identia l (Right) Andbank, Federal Reserve System

©FactSet Res earch Systems

Corporate Review

Where is the cash going? Simply put, companies are returning the capital to shareholders • As can be seen in the charts, the money goes toward dividends, share buybacks, or the purchase of competitors. Three different ways of returning the capital to shareholders. • About US$1.7 trillion have been in paid in share buybacks in the last 4 years, and US$3.2 trillion in dividends. In total, US$5 trillion in the last 4 years have been returned to shareholders (and not invested).

950

S&P – Share Buybacks – Quarterly ($MM)

US CORPORATES - NET DIVIDENDS PAID

950

900 850

800 750

700

650 600

550 500

'10

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(MOV 4Q) Net Divide nds Pa id, F.7 - Bn USD, Saar - United States Andbank, Federal Reserve System

©FactSet Research Systems

Corporate Review

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

Monetary Information System

Interest Rates

Exchange Rates

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

United Kingdom – Behind the appearance of a fast-growing economy, intractable problems lurk.

Indeed, sterling has appreciated about 9% against the EUR in the last 18 months, from 0.87 to 0.798. Maybe because the UK has been the fastest-growing major advanced economy (+3.1% in 2Q14).

However, the UK suffers a number of serious problems that, in my opinion, will cause the price of sterling to decline along with the pace of GDP growth: 1. 2. 3. 4. 5. 6.

A lightweight manufacturing sector A frothy housing market An overdependence on domestic consumers An overvalued pound (after a +25% appreciation vs. the USD in REER terms since the beginning of 2009) … … resulting in a poor performance of the external sector (Exports have contracted over the past 12 months) This is uncomfortably reminiscent of the pound’s REER appreciation between 1996 and 2000, and of how seriously this damaged British manufacturing (which stagnated between 2000 and 2008), in a period where German or Irish manufacturing doubled investment and output. With manufacturing in the doldrums and exports contracting, economic growth has been driven by recruitment in the financial sector. Nevertheless, with the financial sector’s profitability constrained (due to the tougher EU’s regulations), and as the labour market tightens, this dynamic will not last. This means that, without a rise in manufacturing and exports (something I believe will not happen unless we see a depreciation of the GBP first), the UK’s current pace of growth is not sustainable.

Conclusions and Outlook: 1. We believe the pound is expensive in real terms (+25% vs. the USD in REER terms since 2009, with a 10% spurt since March 2013). 2. GDP growth is not sustainable at current levels. As a short term solution, the government should ensure a depreciation aimed at boosting the manufacturing and external sectors (and relieving a financial system that cannot give much more). 3. The economy will suffer an evident slowdown in the pace of activity, which will lead to a slower depreciation of the pound … but a more durable one.

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Emerging Asia – In general terms, these economies continue expanding. The best performers, those less synchronized with the West. The worst performers, those using a mercantilist approach. • China has stabilized while Indonesia would have gained traction. Other “minor” economies such as Vietnam continue with the process of industrialization (supposedly through cheap credit in RMB) and show a continued acceleration. These are precisely those economies less synchronized with the West (and interestingly those with a relatively worse position in the external balance, which casts doubt on the argument that the most vulnerable are those with a bad Current Account position). • The most developed countries within the region (mercantilist approach) are experiencing the most evident slowdown. South Korea and Taiwan.

Corporate Review

Emerging Asia – Will these economies get caught off guard again when Fed rate hikes start? In our opinion, no. EM assets were sold off sharply last year after the US Fed hinted that QE was on borrowed time. Many analysts now ask the following: Could the EM become jittery again because of speculation that the Fed will hike earlier than previously expected?

In our opinion, monetary tightening in the US (if it occurs) will NOT catch investors in EM by surprise: 1. Investors have had plenty of warning that interest rate hikes are on the way in the US (as such, they are unlikely to catch investors by surprise in the same way last year’s Fed announcement did). 2. Asian economies have learned how to adapt to monetary tightening in the US. There have been three major Fed tightening cycles in the US in the past quarter of a century. The chart below shows the change in the Fed funds rate in each cycle, alongside bond, equity and currency returns for Asian markets. According to this, the records of Asian assets during previous cycles has been better in every episode!! 3. Emerging Asia also looks resilient in terms of its fundamentals. According to some reputable research (Capital economics), the Risk Indicator average for most of Asia’s major economies has been falling over the past year and is now much lower than on the eve of the Asian financial crisis (1997) or the last global financial crisis (2008). As a result, it could be said that these economies now look much less vulnerable after having shrunk their current account deficits (India and Indonesia), and raised interest rates in almost all cases.

Performance of EM assets during the first 12 months of last three major Fed Tightening cycles

Corporate Review

Emerging Asia â&#x20AC;&#x201C; Will these economies get caught off guard again when Fed rate hikes start? In our opinion, no. The US Fed is likely to start raising interest rates sometime next year. Although we do not expect the shift to a tighter monetary policy to lead to a repeat of last yearâ&#x20AC;&#x2122;s turmoil in EM currency markets, a further sell-off cannot be ruled out. In the event of another downturn, current account balances are again likely to be an important determinant of which currencies get hit hard, and which escape (see chart 1). The trend over the past year in most of Emerging Asia has been towards bigger current account surpluses or smaller deficits. This should make their currencies less vulnerable to any negative shifts in investor sentiment when the Fed eventually starts to tighten monetary policy.

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

China – So far, reforms have not been negligible and continue to develop.

Reforms in Financial markets. Investment quotas: The government continues to steadily expand investment quotas (opening of the capital account). • The outstanding amount of China’s dollar-denominated QFII (Qualified Foreign Institutional Investor) program stood at $56.5B in June (from $55.7B). • The standing amount under the Renmimbi QFII program also rose (to $40.33B) Regulator to streamline M&A process: (1) Listed companies no longer need to provide profit forecast when acquiring assets. (2) Listed companies will no longer need regulatory approval for asset restructuring. PBoC approves the launch of the first swap contract for coal and iron ore. This will provide: • More influence for China over the price of key commodities, posing a threat to the coal and iron-ore swap contracts cleared by the Singapore Exchange and CME. • Industry participants benefit from new financial tools to hedge the risks of volatile prices. Shanghai FTZ is reducing restrictions on foreign investment, trimming the number of restricted sectors to 139 from 190. Some foreign investors were initially disappointed with the number of restricted sectors.

Reforms in Currency. New clearing banks: The PBoC is set to designate clearing banks for its currency in Paris and Luxembourg as it continues to push to make the Yuan a global currency and gain ground in the battle to win a major share of business in cross-border transaction settlements. The end of the intervention? The PBoC strengthened its daily central parity rate and the Yuan rose again in its longest winning streak since January, touching a 22-week high at 6.14. China signs swap agreements with more countries: Argentina ($11bn), Switzerland ($23.4bn). In essence, through these swaps, the two countries will be able to (1) pay for Chinese imports with the Yuan, (2) settle operations at a fixed price, and (3) as the SNB has stated, they will be able to invest some of their huge Fx reserves in the Chinese bond market. The Yuan has risen in the internationalization index from 0.92 in 2012, to 1.69 by the end of 2013. The Yuan to be the third largest international currency in 2020 (according to the International Monetary Institute in China)

Corporate Review

China – So far, reforms have not been negligible and continue to develop.

Current Government’s stance. The PBoC has turned rather dovish: The PBoC eased monetary policy and the bond market was grateful. Beijing has loosened (eased) restrictions for banks in loan-to-deposit ratio (leading to a rebound in credit in May and June to keep pace near the 15% y/y). The PBoC target for credit growth is 18% or so. Beijing also eases pressure on housing sector: giving approval for local governments to take action. (1) Several local authorities (Jiangsu is the latest one) announced yesterday a lifting of home purchase restrictions for apartments above 90 square meters. However, restrictions remain on using mortgages to buy apartments above 90 square meters. (A clear sign that authorities are keeping a tight grip on the issue of private debt). (2) Beijing will revive mortgage-backed debt sales (ABSs) after a sixyear hiatus, in a clear attempt to help the sector (proceeds from ABS sale to be used in new loans only in those cases that meet regulations: first house, first mortgage, small units, officially protected, etc…) New Stimulus: China will spend over $50B on 14 railway projects as it aims to transform the transportation sector. Projects represent a total of 3,700 km.

Corporate Review

China – The situation in the most sensitive sectors is tending to normalize .

Tensions in the MM? No tensions in the MM sector: The PBoC resumed selling repos to drain funds from the system, driving the MM rates to a 3-month high. The Bank sold 20bn Yuan ($3.2bn) of 28-day repos at 4%. The seven-day repo rate jumped 45 bps to 4.45%% in May, making it the 8th straight month of slowing growth). But the day after, the same repo rate fell 54 bps, since cash demand declined after banks met their quarter-end funding requirements.

Property market. Sales slump but only in Capital: New home sales in Beijing have slumped this year by 48.8% y/y, hitting the lowest mark since 2005. Rising prices have affected the cooling housing market. Inventories at 18-month high: Dwindling sales volumes and a sharp increase in property construction during the 1Q14 (+70% y/y) have driven the Beijing’s housing inventory to a 18-month high. At a national level, property sales were flat in Q2. A sign that the recent correction may not be prolonged? Prices continue easing moderately: Prices of new homes in 288 cities fell 0.06% m/m in June (the third drop in a row). The fall in prices still does not affect the y/y magnitude (housing prices rose a 5.3% y/y in June -from 5.8% in May-) although this represents the 8th straight month of slowing growth). What are the prospects for prices? Property developers in two of the Chinese cities where sales are weaker, are offering home buyback options far above the purchase price. • In Hangzhou, Shanheng Real Estate Group is giving homebuyers an option to sell their apartments in five years for 40% above the purchase price. • In Wenzhou, the Do Think Group is offering homebuyers an option to sell their apartments in three years for 120% above the purchase price. A strategy to maintain sales targets? Suicide? Or a clear sign of confidence that the sector will not sink and that prices will continue to rise? Maybe a combination of all the above? Who knows!

Next Defaults in sight? Qilu Bank is suing LGFV (a local government financing vehicle) over unpaid debt on a $5.7M outstanding loan.

Corporate Review

China – China’s rapid debt build-up and the government’s main challenges

We see no imminent risks from China’s debt build-up (an aspect of great concern in the West): Indeed, private leverage will expand again in 2014. With credit growth expected at a pace of 18% by year end, and nominal GDP at around 10%, national leverage will continue to expand, with the total credit-toGDP ratio increasing to around 240%. Nevertheless, there are some aspects to be considered: • Net leverage is much lower if you count the $4T in strategic reserves (which accounts for 50% of GDP) • Public leverage is non-existent (with central government’s gross debt to GDP ratio at around 22%, but with a lot more assets that make the net figure negligible). • It is relatively easy for the Authorities to stay within the budget. Fiscal revenue in H1 was 7.46trn yuan (+8.8% y/y). Spending was 6.92trn Yuan (up 15.8% y/y). Total surplus was 540bn Yuan ($ 87bn).

The government’s biggest challenge is to convince private sector businesses that long-term growth will be robust precisely due to the economic reforms. So far, these reforms have not been negligible, but they have not been enough to fundamentally change the private sector’s outlook since private investment remains weak, with capital spending growth mainly supported by the state sector. 60

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Sentiments And Surveys, Pmi: Purchasing Managers Index, Total Nsa - China (Left) (MOV 3M) Industrial Production, Value Added Of Industry, Total Nsa - China (Right)

Andbank, CMEI - China Monthly Economic Indicators

©FactSet Research Systems

China – The reforms are paying off

Corporate Review

1. GDP stabilized during the Q2 through the use of fine tuning that is far from large-scale economic stimulus. GDP growth in the second quarter picked up slightly to 7.5%, beating expectations. 2. Entrepreneurs have been starting up companies like crazy.

Chinese Authorities have eliminated some 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 nation’s per-capita income. Only India and Sub-Saharan Africa had similar requirements. In Europe or Latin America, for example, there is a minimum capital requirement that averages 3.5% of per-capita income. Number of new companies: 1.5 million new private companies were registered in 1Q14 (+100% vs. 1Q13) Growth in Capital Formation: Capital Formation in new private companies has accelerated (+21% yoy), with a 10% pace of nominal GDP growth, which means that this factor could take over the concept of public “Fine Tuning” (used to soften the slowdown while implementing sound and sometimes bitter reforms).

3. Xi’s approach seems unique, clear and courageous: This trend towards new capital formation is consistent with Xi Jinping’s approach to reform and governance: “Shaking up the economy in hopes of revitalizing growth”. 4. I do not share the view of those claiming that China is only friendly to local private companies but not to foreign companies.

These arguments are based on trifles such as the US$292mn fine that Audi has to pay to settle charges by Chinese anti-monopoly regulators, or a series of anti-monopoly investigations of foreign companies, which have not only included automakers, but also pharmaceutical firms and technology companies including Microsoft. We have to consider that many goods in China (including milk powder, cars, clothes, etc.) are pricier than they are abroad. Indeed, part of the blame for high prices lies with taxation, local protectionism, logistic inefficiencies, etc … but it is also true that high-quality foreign brands have immense pricing power (in the case of Audi, it has been punished for the practice of increasing spare-parts prices to absurd heights). Nevertheless, What is a US$292 fine for Audi? Remember that its parent company (Volkswagen) has reported profits of €2.6bn from its China operations just in 1H14

5. Thus, foreign firms maintain (and will continue to maintain) their interest in investing in China: No. I definitely do not think that the recently “aggressive” stance of Chinese regulators represents a less friendly stance to foreign firms. In my opinion, they will continue keeping their interest in exploiting the opportunities in the world’s fastest-growing economy.

Corporate Review

China – Financial Markets - Fundamental Outlook.

Outlook regarding the Equity market: Stable outlook Chinese Equities could do well: In the past, Chinese stocks have typically rallied by 10-15% a year when the economy has emerged from a growth trough. But it still seems early for that: The experts think that such a re-rating still looks unlikely this time round since many of China’s economic problems have yet to be solved and the private sector outlook has yet to be changed. For now, EPS is gaining momentum: Chinese companies are expected to report 10.6% earnings growth on average in 1H2014, compared with 8.1% in Q1. Mainland Equities trading at largest discount to HK shares since May 2006. This comes despite the government’s effort to allow HK investors to buy mainland securities. The lack of details on tax issues may be behind the spread.

Fixed Income: Stable to Positive outlook The PBoC has turned rather dovish and will continue so: Following a recent PBoC easing, the bond market performed pretty well, with 10Y yields falling 45 bps to 4.05% in Q2 (the biggest quarterly gain since 2009). In our opinion, yields will remain stable or will decline further.

FX: Positive outlook (Long Term) After the designation of new clearing banks for the Yuan (in Paris and Luxembourg), the currency continues on its path of becoming a truly global currency and gaining ground in the battle to win a major share of business in cross-border transaction settlements. Certainly not an insignificant issue. Apparently, the PBoC has completed its “brief” intervention to depreciate the Yuan. The PBoC strengthened its daily central parity rate to 6.1523 per dollar during the first half of the month, and the Yuan rose again in its longest winning streak since January, touching a 12-week high at 6.20.

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Latin America â&#x20AC;&#x201C; Most policy makers continue with the catnap

Economies in Latin America have slowed further in the first half of 2014 and there is now little chance of a rebound in the foreseeable future. The key factors that drove the strong growth in the past decade are crumbling. The global commodities boom has ended and the rapid credit growth will have to cool. Additionally, most policy makers seem to be shying away from the much needed reforms to overcome the old, structural drawbacks that are heavily influencing these economies, especially in Brazil and Argentina. Argentina and Venezuela remain stuck in balance of payments crises and GDP is on course to contract in both countries, with Venezuela having strong chances of following Argentina into default. Despite this negative reading, Latin America still has a polyhedral reading, which means that there are still some good investment opportunities in the region.

Corporate Review

Brazil â&#x20AC;&#x201C; Brazil is now in full recession

Policy: Attention is now focused on Octoberâ&#x20AC;&#x2122;s election. The latest polls show Dilma winning in the first round but offer a more equal outcome in the second round, even suggesting that Ms. Marina could win by a narrow margin. However, this advantage of Mrs. Marina has been dissipating recently, and this has been felt in the financial markets through a strong depreciation of the Real and a double-digit drop in the equity market in September (although the Fedâ&#x20AC;&#x2122;s threat of a monetary tightening has also influenced markets). The data suggest that the authorities are not delivering the needed reforms and fiscal adjustments. In this sense, we do not foresee any change in the short term, as we perceive an election campaign that will be very populist in the first round, leaving the exploration of the required settings for later.

On the positive side: 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. With the official rate at 11% and the inflation rate stable now at 6.3%, the real yield in the 10Y government bond stands now above 500 bps (very attractive levels with lower possibilities of additional depreciation in the currency). 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 2.43 Bonds (local): BUY. 10yr yield Target 10.0%. Current 11.5% Equity: Neutral. Target Bovespa at 58.000 Current 57.200

Corporate Review

Mexico – The only one showing a hopeful perspective.

Policy: The Telecommunications reform enters a stand-by phase in which we will wait about 180 days before we know what assets are going to be sold by the main players. As for the energy reform we are now entering the November-March period (Round 1), where we will know the specific projects, and therefore the investments that will be on the table. While all this noise remains, we believe that tailwinds will blow in the financial markets.

Activity. The Mexican economy seems to be entering a sweet spot of accelerating GDP growth, falling inflation and thus record low interest rates. Current data masks a better dynamic: The y/y % growth of GDP was just 1.6% in Q2 (from 1.9% in Q1) but this deceleration apparently masks a sustained improvement in q/q pace during the 1H 2014: Output expanded by a seasonally-adjusted 1% in Q2 (up from +0.4% in Q1, and +0.2% in Q4 2013). A hopeful perspective: 1. Compelling reasons: There are good reasons to expect the economy to continue to build momentum: (1) Domestic demand looks set to be bolstered by a fiscal stimulus equal to 2% of GDP aimed at infrastructure and housing. (2) The neighboring US economy is on track to register slightly stronger growth in the 2H 2014. (3) An ambitious private-public investment plan worth up to 25% of GDP during 2014-2018 and (4) The macro reforms that are currently implemented, especially those aimed at boosting competence in the sectors considered as strategic (Telecommunications, transport, financial services and energy) 2. Improved estimates: In light of all this, some international experts are now raising their estimates for GDP growth to around 4% in the 2015-2016 period. 3. Benign inflation: Despite the stronger economic growth, it is unlikely we will see a rise in inflation (good for bonds) due to: (1) In the near-term, a reversal of the impact of indirect tax hikes will force inflation down towards the central bank’s 3% target and, (2) the slack in economy after 18 months of weak growth means that “capacity pressures” are far from building on the supply-side of the economy. 4. Low rates: With inflation remaining close to target for the foreseeable future, there is no need for aggressive rate hikes, which will in turn be supportive for the economy. I expect rates to remain at their historic low of 3% for at least 1 year, with the first hike not until 2016.

Corporate Review

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

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 6.10% o High carry with a projected stability in the currency o Structural low yields in the US also represents a cap in Mexican yields o Credit spread (Mex vs. US) at 356 (far above the 256 bps seen in previous periods) 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 year figures is expected. Most attractive sectors: Petro-chemicals, Energy, Infrastructure and Consumption (has been somewhat behind).

* Projected 1 Yr return of investing in the local currency bond and then translated into hard currency. We thus consider: coupon, price and Fx return.

Argentina â&#x20AC;&#x201C; Default to prolong recession

Corporate Review

Judicial Process and negotiations. There is now very little hope of the Argentine governmentâ&#x20AC;&#x2122;s debt dispute being resolved before 2016. As such, the government will remain barred from international debt markets until a deal can be reached. There is a lot of uncertainty about how policymakers will proceed. One temporary solution may be to swap defaulted bonds into Argentine law although this means circumventing court rulings. Certainly, not a reassuring solution. Nevertheless, agreements such as those achieved with China or Russia can soften the lack of market access, although these will not represent a complete alternative.

Activity. Given that a shortage of FX drove the economy into recession again in Q1 (-0.8% q/q, from -0.5% q/q in 4Q13), the latest default threatens to weigh on the economy in two ways: (1) It has already driven up borrowing costs for local governments and private agents, (2) if the debt dispute turns ugly it could spark capital flight, and (3) capital flight would also put renewed pressure on the peso (exacerbating CA problems through over-billing of importers and under-billing of exporters, inflation, etc.). With foreign exchange reserves at an eight-year low of $29bn, the government does not have ammunition to defend the official peso. With the black market weakening sharply (the blue is at 14.2), we still think a devaluation of 20% or more in the official peso will take place soon. We expect GDP to contract by up to 2% this year, while output could also fall in 2015 if the debt dispute turns ugly.

Policy. The dire state of the economy puts even more focus on next yearâ&#x20AC;&#x2122;s presidential election. Success for a continuity candidate would leave the economy stuck in the doldrums. Nevertheless, if President Fernandez is succeeded by a moderate (as we believe), Argentina could make a return to international markets. In that regard, the two candidates leading the polls (Massa from Frente Renovador and Macri from Pro) represent different degrees of rupture, the latter being the clearest option for change. But even if Masa wins, we believe that at least a semblance of change would take place, and that would help. The new government is likely to show a strong interest in fixing the problems that keep Argentina away from financial markets. Investors, as always, will try to get ahead (basically through the bond market).

Corporate Review

Argentina – Default to prolong recession

Market implications. Fx: Bearish. Target at 10 - 10.5 from the current 8.4. Bonds: Local Law: Neutral to Underweight in the Bonar 24 (USD-Local law) NY Law: Neutral to Underweight Global bond 17 (USD-NY law) at 85 (from 98). While the uncertainty persists about how the policy makers 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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©FactSet Research Systems

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©FactSet Res earch Sys tems

Chile – Chinese slowdown still having an influence

Corporate Review

Activity. Weakest expansion in five years. GDP pace dropped to 1.9% y/y in Q2 (from 2.4% y/y in Q1). On the negative side we have a consumer spending that remains broadly stagnant (due to the end of the copper boom and the resulting deterioration of the terms of trade). On the positive side we see how a significant portion of this slowdown comes from (1) a contraction in government consumption, and (2) a reduction in exports to China, a factor that could eventually be temporary –although admittedly exports of copper seem unlikely to bounce back in the short term due to a cooling in the Chinese property sector. The Outlook for GDP growth is a gradual recovery in the pace: Circa 2% in 2014, 3.5% in 2015 and 3.75% in 2016). Rates. Central Bank: Inflation has remained above the upper bound of the BCC’s 2-4% target range but we expect it to fall back into the target range. As such, we think there is room for further monetary easing (that could help activity). Rates may remain on hold at 3.75% until year end although if we are right on the assumption for inflation, we could pencil in another 50 bps cut by year end. Big improvement in Current Account: Rate cuts cannot be aggressive since it could put pressure on the Peso (and the CA deficit, which in turn is showing a clear improvement –from 3.5% in 2013 to 2.5%). Market implications: Fx - Bullish. Fundamental Target at 520. Current 590 (+13% potential appreciation). 40

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Corporate Review

Peru – Reforms versus populist spending!

Reforms. The fact that the Peruvian government has responded to weaker economic growth with reforms rather than populist spending is positive. GDP pace has slowed to 4.5% in the 1H2014, due in large part to the ending of the commodities boom. The commodities boom drove growth in two ways: (1) It attracted large foreign investments into mining projects, and (2) led to large improvement in the terms of commerce that helped to fund domestic demand. The reforms are aimed at boosting business investment via two main channels: 1. Introducing new tax incentives. i. The introduction of a “lock-in” tax rate for mining firms on investments of $500m ii. One of the major reforms will be a “tax amnesty” allowing firms and individuals to write off debts owed to the state-owned pension and healthcare systems (ONP and EcSalud). According to the Finance Ministry this will benefit 180k taxpayers and write off around $7.1bn 2. By cutting red tape. i. A reduction in the time that state agencies have to approve projects. ii. Allowing permits to be granted at different levels of government. iii. A reduction in the maximum penalties that the OEFA (the environmental regulator) can impose for environmental infringements. iv. Measures to streamline the public-private partnership (PPP).

The assessment. The positive side: 1. Peru’s economy seems to be at full capacity –inflation is at 3.5% y/y in June -above the 1%-3% target range, unemployment has fallen to historic lows, and the current account deficit is large. Stimulus spending would be more likely to add to these imbalances. By contrast, supply-side measures are more prudent and create lasting benefits. 2. Policymakers estimate that these measures could add 1.5-3.0% to GDP growth in the coming years. As such, The government now expects growth to return to 6-7%. In our view, this may seem too optimistic, but after this GDP pace could remain at a consistent 5% for the coming years.

Corporate Review

Peru – Reforms versus populist spending! The negative aspects: 1. It will take time for these supply-side reforms to feed through into stronger economic growth–mining projects take time to generate returns. 2. The reforms will do nothing to reduce the economy’s reliance on the natural resources sector, keeping Peru vulnerable to a swing in commodity prices. This will cause anti-cyclical policies to gain importance. 3. Rising commodity exports will put pressure on the real exchange rate (this could erode the competitiveness of local firms). Market implications. Fx: Bullish. Target at 2.65. Current 2.86 (+8% potential appreciation)

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Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Global Financial Markets Performance Powered by Andbank

Price Performance Last 30 days (% ) 26-sep-2014

Price Performance YTD (% ) 26-sep-2014

-1.04% 0.07% -0.17% -1.10% -0.95%

4.06% 8.14% 1.69% 4.40% 4.84%

0.27% 0.02% -0.45% -3.76% 0.96%

13.81% 16.06% 24.15% 17.47% 14.19%

0.61% 0.33% 0.19% 0.33% -0.97%

3.22% 1.74% 0.99% 3.84% -0.33%

-2.73% -2.37% -3.33% -0.88% 0.00%

10.29% 2.59% 4.74% -0.39% 23.23%

-0.23% -4.51%

-12.57% 3.63%

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

European Peripheral Government Bonds (10 year) Italy Benchmark Bond

FIXED INCOME INSTRUMENTS

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

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

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

EMEA Government Bonds (10 year) Factset Database â&#x20AC;&#x201C; Powered by Andbank

Russia Benchmark Bond Turkey Benchmark Bond

Corporate Review

Global Financial Markets Performance Powered by Andbank

Price Performance Last 30 days (% ) 26-sep-2014

Price Performance YTD (% ) 26-sep-2014

-0.86% 0.69% -0.19% -4.03% 3.99% -3.31%

7.28% 3.56% 4.28% 2.87% 1.44% 6.51%

-0.34% -4.63% -1.02% -1.59%

-4.96% -4.17% -9.62% -5.74%

-15.34% -12.77% -22.79% -1.91% -10.06% -13.57%

-27.23% -21.57% -30.83% -6.09% -25.71% -23.28%

-11.87% -8.31% -4.99% -10.01% -8.74%

9.22% -4.93% 1.73% -10.05% 3.38%

-4.58% -8.11% -3.77% -6.63% -11.61% -5.02%

-8.43% 23.69% 8.87% 8.75% -39.25% 3.67%

Global Equity (Price Return) EQUITY

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

ENERGY

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

CROPS

Wheat Soybean Sugar Cotton

PREC. METALS

Average Crops Palladium Platinum Gold Silver Average Precious Metals

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

MINERALS

Copper Nickel Zinc Aluminum Iron Ore Average Minerals

Corporate Review

Global Financial Markets - Equity Performance – YTD. 120

Global Equity Indices (Local - Base Index 100)

120

115

110

105

100

85 06 Jan

17 Feb

31 Mar

12 May

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

23 Jun

04 Aug

15 Sep

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

LATAM EQUITY INDICES (Local currency - Base Index 100) ©FactSet Research Systems

150

140 130 120

110 100 90

80 70

Jan

Feb

Mar

Apr

May

(INDEX) MSCI Argentina (INDEX) MSCI Bra zil (INDEX) MSCI Chile Andbank, MSCI

Jun

Jul

Aug

Sep

80 70

(INDEX) MSCI Peru (INDEX) MSCI Co lom bia (INDEX) MSCI Mexico ©FactSet Research Systems

Table of Contents

Corporate Review

Summary Table for financial market prospects and Asset Allocation Proposal

Corporate Review

Short-term Outlook. Risk-on & Risk-off probabilities Positioning and Flows Risky assets are not overheated. A sudden and deep Risk-off shift is unlikely. Hedge Fundâ&#x20AC;&#x2122;s beta moves from 0.5 to 0 in a more neutral and less aggressive stance (positive factor). Sentiment indices are now at less stressed and relaxed levels. YTD flow continues being dominated by European stocks although QTD this dynamic has shifted towards the US stocks.

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 -1.9 (slightly better than the -3.3 seen last month), showing that the market could be slightly overbought although there is no significant stress in the equity market.

Aggregate Result in our Flow & Sentiment Indicators

Buy signal Positive Bias Neutral Negative Bias Sell signal FINAL VALUATION

Market is Overbought

Current

Month

2 1 6 5 7 -3.3

1 3 7 7 3 -1.9

-5

-10

Area of Neutrality Sell bias

Buy bias

+10 Market is Oversold

Nature of Index 1 2 3 Positioning 4 5 6 7 8 9 Flow 10 11 Mkt vs Data 12 13 14 15 16 17 Sentiment 18 19 20 21 22

Index

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

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

Table of Contents

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

Target Price (A x B)

Current ** Price 30/09/2014

Expected Change (%) 2014

S&P

4.60

9.60

109.93

4.60

114.98

16.31

16.8

1,934

1,983

-2.5%

Stoxx 600 (sxxp)

3.61

6.50

7.50

20.2

19.55

24.15

15.99

16.1

388

340

14.1%

Ibex 35

1.85

6.64

8.00

559

22.71

685.94

17.74

17.0

11,661

10,650

9.5%

Mexico IPC

11.28

12.0

47,000

44,884

4.7%

Bovespa

11.28

12.0

58,000

54,430

6.6%

9.33

7.33

7.75

20.4

15.6

23.58

13.10

13.7

323

289

11.9%

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 Bovepa (1) 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. (2) Our analysts attache a target price of 60.00 for the index if Mr.Marina wins. Given the most recent outcome in polls, and following the recent loss in the equity market we rise our target price for this index to 58.000 Mexico (1) New target for the IPC at 47.000 (current at 44.880). In October, companies will release results and it is expected something better than last year figures

Table of Contents

Corporate Review

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 point towards our disinflationary world in both markets. Looking at the current swap rates , it cannot be said that a “strong” inflation rate is expected in the long term (2.66% in the US and 1.62% in the Eurozone, down from 1.77% last month).

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 16 bps (from 14 bps last month), it remains clearly below its historical average (42bps). Again, 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 2.24%). Therefore, and despite the fact that yields in the 10Y Treasury bonds remain near historical lows, we CANNOT recommend selling Treasuries at this moment.

EUR swap spread has jumped to 69 bps this month after the strong decline in the bund Yield, now being clearly above its historical average (45 bps). This means that, with no inflationary pressures in sight (which means stability in the fixed pay swap rate), the only way for this spread to return to its average is through a higher Bund Yield (to somewhere near 1.17%). So, at current levels (near 1%) we recommend staying NEUTRAL or SLIGHTLY SHORT IN BUNDS (according to this perspective).

USD: SWAP10 – Govie10 7

EUR: SWAP10 – Govie10

USD - 10 Y r Swap S pread

1.00

4.00

0.80

3.50

0.60

0.40

0.20

0.00

'05

'06

'07

'08

'09

USD 10Y Swap Rate (Le ft) US 10Y Tre a sury Y ie ld (Le ft) Andbank, Tuller Prebon

'10

'11

'12

'13

'14

3.00 2.50 2.00 1.50 1.00

-0.20 0.50

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

EUR - 10Y r Swap Spread

'10

'11

'12

EUR 10Y Swa p R ate (Le ft) EUR 10Y Go v Be nchm a rk Yie ld (Left) Andbank, Deuts che Bank

'13

'14

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 (Right) ©FactSet Res earch Systems

Corporate Review

Core Fixed Income – US Treasury Bond From a fundamental perspective: Hold Treasuries 6.00

RECOMMENDED STRATEGY: NEUTRAL

US D 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 below 2.5%.

2.00

Current level: 2.50%

1.00

0.00

'05

'06

'07

'08

'09

10Yr Govie

'10

'11

'13

'14

0.00

2Y r Go vie

Andbank, Tullet Prebon Information

350

'12

©FactSet Research Systems

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

350

300

250 200

150

100 50

-50 -100

- 50 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13

- 100

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

©FactSet Res earch Systems

Corporate Review

Core Fixed Income – German 10 year Bund From a fundamental perspective: Neutral-UW Bunds 4,00

RECOMMENDED STRATEGY: Slightly UW

Strategic range for the Bund Yield: 1.00%-1.50%

Buy above 1.50%

Sell below 1.00%

Current level: 0.93%

EUR BENCHMARK YIELDS (10Y & 2Y)

4,00

3,50

3,00

2,50

2,00

1,50

1,00

0,50

0,00

Oc t Feb Jun Oc t Feb Jun Oc t Feb Jun Oc t F eb Jun Oc t Feb Jun 10Y Yie ld

2Y Y ie ld

Andbank, Tullet Prebon

300

©FactSet Research Sys tems

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

300

250

200

150

100

0 -50

0 '05

'06

'07

'08

'09

'10

'11

'12

'13

'14

-50

10Y Yield - 2Y Yield Andbank, Tullet PRebon

©FactSet Research Systems

Table of Contents

Corporate Review

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), it is reasonable to think of a real yield of 0.5% - 1.0% as a good entry point for Treasuries. Today’s real yield in the T10 is at 0.80% (nominal 10YT Yield is at 2.5% and CPI at 1.71%).

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 at a spread of 50-100 bps between EM and US real yields.

Given that the real Yield in the UST10 is now at 0.80%, we can conclude the following: 1.

According to our rule of thumb, today could be a good entry point in the 10Y US Treasury (this adds to our Swap spread argument that backs our thesis that we cannot recommend selling the 10Y-T).

The recommended entry point for EM bonds today is when their real yields stay at 0.80% + (50 – 100 bps). This is in the 1.30%-1.80% range in Real Yield (with an average value of 1.50%). Below this level the appropriate strategy would be “sell”.

Corporate Review

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

Real Yield (10yr bond)

2.91%

1.41%

1.50%

Taiwan

1.72%

2.07%

-0.35%

Thailand

3.49%

2.09%

1.40%

Malaysia

3.92%

3.27%

0.65%

Singapore

2.44%

1.01%

1.43%

Indonesia

8.22%

12.44%

4.50%

3.72%

Philippines

4.19%

4.92%

-0.73%

China

4.04%

1.99%

2.05%

India

8.65%

7.80%

0.84%

Turkey Russia

9.64% 9.12%

9.83% 7.55%

8.00% 7.00%

1.64% 2.12%

Brazil Mexico Colombia Peru

11.87% 6.09% 6.67% 5.59%

6.51% 4.15% 3.02% 2.69%

6.40% 4.15% 3.02% 2.69%

5.47% 1.94% 3.65% 2.90%

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

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

CPI Harmonized - European Periherals

'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

2.38%

-0.17%

2.55%

Spain

2.17%

-0.51%

2.69%

Portugal

3.10%

-0.07%

3.17%

Ireland

1.66%

0.64%

1.02%

Greece

6.08%

-0.30%

6.38%

* Harmonized CPI All Items Recommended 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 continued the rally this summer, with spreads tightening to 62 bps (vs. prior 64 bps). We still consider USD denominated corporates as historically “expensive”, although spreads will probably remain expensive (maybe stabilizing around 70 bps).

Sector breakdown: Industrials (69 bps vs. prior 71 bps). Financials (50 bps from prior 51 bps). Utilities (69 bps from prior 71 bps).

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

New entry point above 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 rpo ra 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

8.0

-0.28%

8.0

0.62%

Lib3m+

0.62%

0.34%

From

Change

Corporate Review

Corporate credit - EUR Expected Performance and Recommendation

7.00

EMU CORPORATE CREDIT SPREADS (5YR)

EUR Corporates (ML EMU Corp Bond 1-10 yr Index): Spreads have continued the rally in summer, with spreads tightening to 107 bps (vs. prior 111). We still consider EUR denominated corporates as historically “expensive”, although spreads will probably remain expensive (maybe stabilizing around 100 bps).

Sector breakdown: Industrials (97 bps vs. prior 100 last month). Financials (115 bps vs. prior 118). Utilities (123 bps vs. prior 131).

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.

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

0.00

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

©FactSet Research Sys tems

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

Spread effect Coupon effect Total Effect

Change (bp)

Price effect

From

Change

13.0

-0.46%

107

120

13.0

1.13%

Eur3m+

1.07%

1.13%

0.68%

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 heavy industrial boom and Commodity Prices

25 20 15 10 5 ??

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

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

ÂŠFactSet Research Systems

1. This new norm will not necessarily imply big additional falls in commodity prices. In fact, the new structural pace for heavy industry in China (8%-10%) is consistent with a 0% growth in commodity prices â&#x20AC;Ś but it 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 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 south for prices 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, that baseless upswing was mostly driven by speculative demand and, as such, we already anticipated that the recent downturn seen in the last months could take place. From now on, we continue having NO fundamental reasons to believe that positive dynamics in most commodities (especially in dry commodities) could materialize and extend for a long time. WE STILL SEE NO FUNDAMENTAL VALUE!

750

Baltic Dry Index Vs. Commodity Prices (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 (Left) CRB Spot Commodity Index - Price (Left) Andbank, BIFFEX, CRB

ÂŠFactSet Research Systems

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 Banksâ&#x20AC;&#x2122; Activity and Gold

In general, all central banks (especially the mercantilist ones) are 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 from 10.3% y/y pace in June to 8.3%. China has reduced the pace from 19.7% to 17.2%. UK has cut the pace from 9.2% to 8.8%. Chile from 5.4% to 2.7%.

Those selling gold have increased in number: Philippines and Thailand join India and Japan, forming the increasingly bigger group of central banks that are now destocking gold.

While the huge number of conflicts remain, posing risks on energy prices and, thus, on 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, and 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). 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 (MOV 6M , % 1YR) Philipp (MOV 6M , % 1YR) Japan (MOV 6M , % 1YR) UK

'13

'14

-40

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

Corporate Review

Precious Metals 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

Gold in terms of Oil (Gold / Oil)

The YTD real price of gold has decreased from $1.128 to $1.125 (down from last month’s 1.201), 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. This ratio has increased during the month to 12.9 (from 12.68), basically due to a higher decrease in the price of oil. The ratio is now just slightly 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.

The 15yr average value for this ratio is 20.04. Currently this ratio stands at 14.02 (up from last month’s Gold in terms of Equity (Dow 13.1). 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

Fair Value

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 contract: longs 170k (down from 197k last month), and shorts of 106k (vs. prior 51k) = Net of +63k (vs +146k last month).

Slightly 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

ANDBANK'S ASSESSMENT

Oil Coal Gas

116.9 191.4 88.6 70.7

6.72% 7% -7% 27%

-5.74% -5% -4% -10%

17% 91% -11% -29%

1.6% 6.7% -1.2% -3.4%

CHEAP FAIR VALUE VERY CHEAP VERY CHEAP

Corn Wheat Soybean Sugar Cotton

158.7 148.3 145.4 196.4 168.0 135.6

-16.09% -42% -22% 5% -16% 15%

-23.28% -27% -22% -31% -6% -26%

59% 48% 45% 96% 68% 36%

4.7% 4.0% 3.8% 7.0% 5.3% 3.1%

CHEAP CHEAP CHEAP FAIR VALUE FAIR VALUE CHEAP

Precious Palladium Platinum Gold Silver

270.0 351.8 159.9 298.5 273.2

-13.94% 2% -11% -28% -35%

3.38% 9% -5% 2% -10%

170% 252% 60% 199% 173%

10.4% 13.4% 4.8% 11.6% 10.6%

EXPENSIVE EXPENSIVE CHEAP EXPENSIVE EXPENSIVE

Minerals Copper Nickel Zinc Aluminium Iron Ore

189.1 224.8 117.0 225.5 107.6 55.4

-5.74% -7% -18% 3% -14% -5%

3.67% -8% 24% 9% 9% -39%

89% 125% 17% 125% 8% -45%

6.6% 8.4% 1.6% 8.5% 0.7% -5.7%

FAIR VALUE FAIR VALUE CHEAP FAIR VALUE CHEAP VERY CHEAP

Commodities Average

183.7

-7.26%

-5.49%

83.70%

5.83%

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 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

(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 weakens to lows of late 2013 and growth slows to its weakest pace this year. These aspects will weigh on the EUR in the short term. With a longer term view, the September level in manufacturing PMIs (50.5) still suggests a mild pace of expansion in volumes, reducing the likelihood of a re-run of tensions seen in peripheral economies (and fx). Unemployment has also improved gradually and now stands at 11.5% in the EZ.

POSITIVE

NEGATIVE

In general terms, the “big brothers” (China, Brazil and Japan) seem to be increasing their abnormally high proportion of foreign currency Global accumulation reserves (now at an average of 21 months of imports in the “big three”). of the Reserve China has raised its holdings from 22 months in 4Q13 to 25 months Currency currently), still well above the level implied by the pace of their current account balances. The threat of a Fed tightening is behind this shift.

POSITIVE

NEGATIVE

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.

POSITIVE

NEGATIVE

Non-commercial long contracts in EUR are 60k (vs. 58k), short contracts are 202k (vs. 146k). The net position is -141k (vs. -88k last month).

NEUTRAL

NEGATIVE

POSITIVE

NEGATIVE

Recent Developments

Criteria

Tensions in Europe

USD flow to the world Positioning in € (CFTC. ECA cur)

Tapering, QE and Forward Guidance

Central Bank Idiosyncrasy

The Tapering process and the Fed’s tightening in the US will continue being discussed, while the debate will remain about the QE program in the EZ (specially after inflation hit new lows in Sept). In the long run, we think that tightening in the US will most likely happen later than sooner. According to our Hawk-o-meter it is highly unlikely that we will see aggressive easing from the ECB. Both the 80bn demand in the first TLTRO and the recent announcement of a €200bn purchase in ABS in the next 12 months suggest this. Additionally, when targeted to new credits, these programs should not exert pressure on the fx exchange.

Final Assessment

POSITIVE

POSITIVE (AROUND 1.20 – 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:

Interest rate divergence and persistent trade deficit, still a headwind for the JPY/USD

Mixed Data on the economic arena: (Negative) Household spending at 4.7% y/y in August vs. 5.9% in July. (Positive) Real wages at 2.6% y/y vs. 1.4% in July

Deflation still a threat: Some officials at the BoJ said that they thought a drop below 1% core inflation exsales tax impact was "possibleâ&#x20AC;&#x153;. Remember that the central bank said that inflation was expected to slow in the summer, but not drop below 1%. Falling oil prices were cited as a catalyst. However, lower energy costs could also act as a sort of economic stimulus.

The BoJ governor may have to continue talking down the yen in order for the government to raise the sales tax next year as scheduled. Note that Kuroda has publicly supported raising the sales tax hike as scheduled.

Year to Date EUR/JPY (EURJPY-FX1)

1 3 8.1 5 - 0 .6 9 -0 .5 0 % 0 1 :3 6 :1 7 P M J P Y

D e c -1 3 - S ep-1 4

145 144 143 142 141 140 139 138 137 136 Ja n

Feb

Ma r

Ap r

Ma y

Ju n

Ju l

Au g

Se p

Last 20 Years EUR/JPY (EURJPY-FX1)

1 3 8 .1 4 -0 .7 0 - 0 .5 0 % 0 1 :3 6 :2 7 P M J P Y

S ep-9 4 - S ep -1 4

Projected 1 7 0 160 150

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. 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.

Last Month: During the month, the worst performers have been BRL (-8.7%), COP (-5.5%), MXN (-3.2%), PEN (-1.7%), CLP (-1.7%), ARG (-0.7%)

Outlook: This seems to be the typical risk that comes from the traditional threat of a monetary tightening by the Fed. As we already said last month, 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

LATIN AMERICAN CURRENCIES (Performance vs. USD)

110

105

100

Jan

Feb

Mar

Apr

Argentine Peso BRL Andbank, WM/Reuters

May CLP Col Peso

Jun

Jul

Aug

Sep

Corporate Review

Asian Fx – Positive outlook

Year-to-date: All major currencies in the region have lost their yearly gains during this last month, although most of them remain in positive territory.

Last Month: During the month, the worst performers have been MYR (-4%), IDR (-3.9%), PHP (-3%), THB (-1.4%), CNY (-0.10%)

In China, the PBoC stopped depreciating the CNY in June within a temporary strategy aimed at curbing speculative activity from Chinese corporations that aggressively borrowed USD to go long in RMBs. From June, the CNY has appreciated by +2.5%.

Outlook: This seems to be the typical risk that comes from the traditional threat of a monetary tightening by the Fed. Again, as we already said last month, 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 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 vs USD)

110

108

106

104

102

100

98 96

98 Jan

Feb

Mar IDR

Andbank, WM/Reuters

Apr THB

May PHP

Jun MYR

Jul

Aug

Sep

Corporate Review

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

POSITIVE OUTLOOK

BUY

1.200

0.20 0.10

1.100

0.00

1.050 SELL

-0.10

1.000

-0.20

0.950

Aug-14

Feb-14

May-14

Nov-13

Aug-13

Feb-13

May-13

Nov-12

Aug-12

Feb-12

May-12

Nov-11

Aug-11

-0.50

Feb-11

0.800

May-11

-0.40

Nov-10

0.850

Aug-10

-0.30

Feb-10

STRONG SELL

0.900

May-10

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).

0.30

1.150

closely related to the JPY (KRW, TWD).

0.40

1.250

Nov-09

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

STRONG BUY

Aug-09

Asian currencies are still cheap compared to the USD.

May-09

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

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, 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 months period.

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

Asset Class

Instrument

S&P 500 Stoxx 600

Current

Fundamental

30/09/2014

Target

Performance

1,978

1,934

-2.2%

341

388

13.7%

Ibex 35

10,686

11,661

9.1%

Mexbol

44,898

47,000

4.7%

Bovespa

54,625

58,000

6.2%

286

323

13.0%

Bund 10y

0.92%

1.25%

-1.76%

Treasury 10y

2.48%

2.75%

0.30%

Spain

2.22%

2.50%

0.01%

Sovereign Risk :

Italy

2.4%

2.50%

1.62%

Peripheral & EM

Portugal

3.1%

3.50%

0.15%

Europe

Ireland

1.7%

2.25%

-2.76%

(10 year Yields)

Greec e

6.4%

5.75%

12.01%

Russia

9.1%

8.50%

14.22%

Turkey

9.8%

8.50%

20.40%

0.34%

107

120

0.68%

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

30/09/2014

Target

Performance

EM bonds

India

8.70%

8.50%

10.26% (2)

Asia (in local)

Indonesia

8.40%

7.50%

15.61%

Thailand

3.49%

3.80%

0.98%

Malaysia

3.90%

3.75%

5.06%

Philipines

4.19%

3.50%

9.75%

Taiwan

1.72%

1.50%

3.49%

12.48%

11.00%

24.28%

Colombia

6.87%

6.50%

9.87%

Mexico

6.16%

6.00%

7.43%

EM bonds Latam (in local)

Brazil

Peru

5.64%

5.00%

10.73%

Chile

4.84%

4.50%

7.56%

94.57

0.5%

CRY

283.14

275

-2.9%

Gold

1217.75

900

-26.1%

USD vs EUR

1.269

1.40

-9.4%

JPY vs EUR

138.73

160

-13.3%

JPY vs USD

109.35

114

-4.3%

CNY vs USD

6.15

6.00

2.5%

MXN vs USD

13.50

13.25

1.9%

BRL vs USD

2.45

0.0%

CLP vs USD

602

520

15.7%

Oil Commodities

(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

16.4

10.0

6.0

5.4

4.0

3.3

Fixed Income Short-Term

25.0

35.5

15.0

19.5

5.0

5.9

0.0

Fixed Income OECD Government

30.0

16.4

20.0

10.0

12.0

5.4

5.0

2.1

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

2.5

1.4

0.5

12.3

7.5

4.1

1.6

20.0

16.4

20.0

15.0

10.2

5.0

3.1

5.0

8.2

10.0

15.0

20.3

10.0

12.5

Fixed Income Asia

1.6

3.0

4.1

2.5

Fixed Income Latam

4.1

7.5

10.2

6.2

High Yield

2.5

4.5

6.1

3.7

Equity OECD

5.0

7.1

15.0

19.5

30.0

35.2

55.0

59.4

US Equity

1.8

4.9

8.8

14.8

European Equity

5.3

14.6

26.4

44.5

Equity Emerging

Commodities

4.1

0.0

5.0

8.0

10.0

14.4

12.0

15.9

Asian Equity

0.0

5.6

10.1

11.2

Latam Equity

0.0

2.4

4.3

4.8

0.0

5.0

2.5

7.0

3.2

9.0

3.7

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.