November 2012 Monthly Perspectives n For important disclosures, refer to the Disclosure Section, located at the end of this report.
October’s HighlightsOctober has been a positive month for risky on matters of taxation and spending. That wouldassets. However, the S&P 500 had its first negative send the US and probably the global economymonth since May. Euro and US financial stocks into a new recession. However, if the current levelshow a robust performance since the beginning of of uncertainty subsides with a successfulthe year. resolution of the US fiscal challenges ahead, growth could be boosted.The world economy maintains a trend-like growth.Balance sheet repair, de-leveraging and structural Europe remains a laggard. Fiscal retrenchment,adjustment (mainly in Europe) are key headwinds. structural adjustment, and banking sectorEmerging economies show growth below the high weakness, particularly in the peripheralrates of the past decade. Nonetheless, recent economies, are the sources of stagnation or eveneconomic data in the US and China have looked a recession.bit better. In China, growth seems to be stabilizingdue to accelerated government infrastructure On the subject of earnings, the Q3 2012 earningsspending and better exports. season has been poor, with many companies missing revenues estimates.The 2012 US Presidential Election outcome couldbe viewed by markets as a signal for the direction Besides the 57th US Presidential Election, twoof policy in some important areas. An adverse other important political events will be held inshock is still the possibility that politicians in November: the Communist Party Congress andWashington will not be able to reach an agreement the Catalonia regional elections.
Asset Performance Review – October 2012• October was a positive month for risky assets. Commodities were an important exception;• The ECB’s bond buying program continued to support gains in peripheral markets (equities and fixed income markets). The Greek Athex index rose 8.4%;• The S&P 500 fell -1.8%, down for the first time since May;• Core government bonds had a moderately negative month in October.Source: Bloomberg
Asset Performance Review – YTD 2012• Spanish and Chinese equities are the worst performing assets within our selection;• Greek equities have produced a YTD performance that is not too different with the performance seen in the Dax;• Euro and US financial stocks show a robust performance since the beginning of the year;• Brazilian equities are barely positive YTD. The Real exchange rate has depreciated.Source: Bloomberg
Portugal: Programme is still broadly on track• Portugal’s fifth troika Portuguese EC Economic Sentiment 18% 10-year Government Bond Yields (%) 18% review: GDP growth Indicator & GDP 110 3% 16% 16% Portugal projection has been kept 105 2% 14% Italy 14% 100 1% at -3.0% for 2012. 12% Spain 12% 95 0% Economic prospects for 90 -1% 10% 10% 2013 have been 85 -2% 8% 8% downgraded from 0.2% to 80 -3% 6% 6% 75 -4% -1.0%; 4% 4% 70 -5%• Portugal’s budget for 2013 02 03 04 05 06 07 08 09 10 11 12 13 2% 2% will allow it to meet the EC Economic Sentiment Indicator (LHS) GDP (% y/y, RHS) Jan-12 Apr-12 Jul-12 Oct-12 deficit targets set by the Source: INE and European Commission Source: Bloomberg troika. However, public General Government Balance and Debt (% GDP) Unemployment rate (%) 0% 130% 18% 18% resistance to austerity 16% 16% -2% Portugal seems to be growing. The 120% 14% 14% -4% Euro-zone economic downturn 110% 12% 12% should continue (see -6% 100% 10% 10% chart); -8% 8% 8% 90%• The long-end of the -10% 6% 6% Portuguese government -12% 80% 4% 4% 2009 2010 2011 2012F 2013F 2014F 2015F 2016F 2017F curve shows an impressive General Government Balance (% GDP) (LHS) 2% 2% performance this year. General Government Debt (% GDP) (RHS) 1998 2000 2002 2004 2006 2008 2010 2012 Source: IMF Country Report, October 2012 Source: Eurostat
Spain: Economic and fiscal outlook remains poor• GDP fell by -0.3% in Q3. This 120 8% Spanish GDP & EC Economic Spanish Government Bond Yields (%) marks the fourth consecutive 6% 8.0% 110 Sentiment Indicator quarter of falling GDP and puts 4% 7.0% the level of GDP 5.6% below its 100 6.0% 2% 2008 peak (see chart); 5.0% 0%• The country still lacks a banking 90 4.0% EC Economic Indicator (LHS) system that can actively support GDP (%y/y, RHS) -2% 3.0% 80 Spain’s economic restructuring; -4% 2.0%• Spain’s recent budget intends to 70 -6% 1.0% Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 00 01 02 03 04 05 06 07 08 09 10 11 12 13 deliver a deficit of 4.5% of GDP 2-year 5-year 10-year Source: European Commission and INE in 2013. However, GDP growth is Source: Bloomberg expected at -0.5% y/y, which is Spanish Central Government Borrowing 6% probably optimistic; (% of GDP)• The pressure on Spain to enter a 5% programme – and hence trigger 4% the ECB’s bond buying plan – 3% has been eased by the drop in government bond yields (see 2% 2011 chart); 1% 2012• Moody’s confirmed Spain at 0% Baa3, but kept the sovereign on Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Negative outlook. Source: INE, INE, ISTAT and Central Statistics Office of Ireland Source: Spanish Central Bank
Euro-zone: ECB prompts a period of relative calm Euro-zone Unemployment rate Euro-zone EC Economic Sentiment• Activity in Q3 was & PMI Composite Indicator & GDP 1.5% 65 7% probably more resilient 115 0.5% than initially expected; 8% 105 55• Nonetheless, business 9% -0.5% 95 and consumer surveys 10% -1.5% 85 points to a weak 45 11% outlook for Q4; 75 -2.5%• The German and French 35 12% 65 -3.5% 2005 2007 2009 2011 indices are also at low Euro-zone PMI surveys Composite (LHS) 1998 2000 2002 2004 2006 2008 2010 2012 levels; Unemployment rate (rev order; RHS) EC Economic Sentiment Indicator (LHS) GDP (%y/y, RHS) Source: Markit and Eurostat• Euro-zone Source: European Commission and Eurostat unemployment rate Probability of a Country Leaving the Euro (%) 80 reached a new record 70 high (11.6%) in 60 50 September; 40• German unemployment 30 registered its sharpest 20 monthly increase since 10 July 2009, leaving the 0 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 unemployment rate at By end 2012 By end 2013 By end 2014 6.9%. Source: Intrade Source: Finance Ministers
US Economy: Still sluggish but stable 30%• The resurgence in the 120 Consumer Confidence & Change in Non-Farm Capital Goods Orders 20% 300 Payroll Employment (000s) NAHB index points to 100 10% 250 continued growth in 80 200 residential construction 60 0% 150 spending; 40 -10%• A faster consumption -20% 100 20 growth offset a slower 50 0 -30% investment growth; 07 08 09 10 11 12 13 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12• The fall in mortgages University of Michigan Survey of Consumer Confidence Sentiment Change in Payroll Employment Three Month Average US Capital Goods Shipments Nondefense Ex Aircraft Y/Y NSA rates has supported Source: U. of Michigan Survey Research Center and US Census Bureau Source: Bureau of Labor Statistics mortgage refinancing Housing Starts & NAHB Homebuilders Index and reduced monthly 2,500 90 loan payments; 80 2,000• Once the media begins 70 60 to focus on the fiscal 1,500 50 cliff negotiations, will 40 households become 1,000 30 more aware of the 20 500 potential increase in NAHB Housing Index (Asv. 4m, LHS) 10 Housing Starts (000s Annualised, RHS) tax rates at the start of 0 0 2013? 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Source: Bureau of Economic Analysis Source: US Census Bureau and National Association of Homebuilders
China: Is the economy gaining traction ?• NBS manufacturing PMI China: Industrial Production and China: manufacturing PMIs rose to 50.2 in October 150% PMI Orders to Inventory ratios 20% 60 60 (see chart). It seems the 140% 130% economy has stabilized; 120% 15% 55 55• The components of new 110% 100% orders and new export 90% 10% 50 50 orders showed further 80% 70% gains. The corporate 60% 5% 45 NBS PMI 45 2005 2006 2007 2008 2009 2010 2011 2012 2013 sector’s de-stocking New Orders to Stocks of Finished Goods Inventory Ratio % (NBS) (LHS) Markit PMI 40 40 process could be close to New Orders to Inventories of Raw Materials Ratio % (NBS) (LHS) 2009 2010 2011 2012 2013 Industrial Production (y/y, RHS) an end; Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China and Bloomberg• On the external front, the China: Unemployment Rate and GDP China: Exports and PMI New Export Orders recovery in export growth 4.4% 13% 63 60% 12% to 9.9% y/y was 4.3% 58 50% 11% 40% encouraging (see chart); 53 30% 4.2% 10%• Q3 GDP growth was 7.4% 9% 48 20% y/y. Premier Wen 4.1% 8% 43 10% 0% commented on the likely 7% 38 4.0% -10% achievement of the 6% 33 -20% government’s target of 3.9% 5% 28 -30% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2006 2008 2010 2012 7.5% real GDP growth this Urban Registered Unemployment Rate (LHS) GDP (y/y, RHS) NBS PMI New Export Orders (LHS, 3-month lead) Exports (% y/y, RHS) year with confidence. Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China
Central bank action drove the rally. Earnings are still a concern• The equity rally continues to be MSCI World Consumer Discretionary and mainly explained by multiple 125 Staples Indices (LC) 125 expansion (see chart). Tail risks Dec. 2011 = 100 120 120 have been reduced after central 115 115 bank action. Expanding multiples may also imply better 110 110 growth ahead. Recent economic 105 105 data in the US and China have 100 100 looked better; 95 95 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12• Relative to long-term averages, Consumer Discretionary Consumer Staples forward P/Es don´t seem to be Source: Bloomberg Source: Bloomberg expensive (see chart); 51 S&P 500 Quarterly EPS Growth 35 S&P 500: P/E Market Multiples• Earnings revision in the US and (% y/y) Europe have a negative bias. In 37 30 Trailing P/E the US, Q3 2012 earnings are 28 NTM P/E expected to be down q/q and 16 19 17 15 14 25 12 11 11 y/y. According to consensus 8 7 2 20 forecasts, Q3 2012 should be the trough (see chart). Earnings -1 15 growth is expected to accelerate Sep-10 Sep-11 Sep-12 Sep-13 Jun-10 Jun-11 Jun-12 Jun-13 Dec-10 Mar-11 Dec-11 Mar-12 Dec-12 Mar-13 Dec-13 10 next year in the US (12.7%) and 88 92 96 00 04 08 12 in Europe (12.1%). Source: Standard and Poors Source: Standard and Poors
Flows into bonds and out of equities continues• Despite the current low yield CBOE S&P 500 Volatility Index AAII US Investor Sentiment Readings 50% 60% 60% environment, funds continue 45% to flow out of equities and into 40% 50% 50% bonds (see chart) ; 35% 40% 40%• Sentiment indicators suggest 30% 30% 30% investors are modestly bullish 25% (see chart); 20% 20% 20%• Investor sentiment remains 15% 10% 10% cautiously positive; 10% Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12• Volatility in equity indices AAII Bull Index AAII Bear Index continue to trend lower (see Source: Bloomberg Source: Bloomberg chart); Cumulative Estimated Flows to Long- S&P 500 Bottom-up Operating• Lower tail risks mean lower Term Mutual Funds ($tn) $31 Estimates Over Time $119 risk of a systematic shock. 1.2 Equity $30 $118 Idiosyncratic risk is now more 0.8 Bonds $29 $117 important, which increases the 0.4 $28 $116 benefit to stock picking; $27 $115 0.0• Earnings could be a challenge $26 Q3 2012 Est. (LHS) $114 for US Equities, especially if -0.4 $25 Q4 2012 Est. (LHS) $113 2013 Est. (RHS) the fiscal cliff headwinds are -0.8 $24 $112 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 confirmed. 2007 2008 2009 2010 2011 2012 Source: ICI Source: Standard and Poors
Credit still benefit from favorable demand-supply technicals• Credit spreads are a low levels 1400 700 Coporate Spreads: Investment Grade Coporate Spreads: 300 300 (see chart). Is further 1200 Europe HY and Asia IG 600 Spread (bp) Spread (bp) compression possible? With 1000 500 250 250 valuations not particularly 800 400 US IG Corp attractive, return is likely to 200 EU IG Corp 200 600 300 come mostly from receiving 150 150 400 200 the coupon. The risk-return trade-off looks less attractive. 200 100 100 100 But, equities need growth 0 0 2007 2008 2009 2010 2011 2012 50 50 (economic and earnings) to 2009 2010 2011 2012 EU HY Asia Ex-Japan IG Corp outperform; Source: Bloomberg Source: Bloomberg• With low yields across fixed Government Bond Yields Portugal-Germany Gov. 8% 8% income, equities seem Bond Yield Spread 7% 7% 20% increasingly attractive on a 6% 6% 10-year relative yield basis; 5% 5% 15% 2-year• European periphery sovereign 4% 4% yields have fallen because of 3% 3% 10% the ECB; 2% 2% 5%• Periphery yields are probably 1% 1% Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 already priced for much of the Italy 2-year Italy 10-year 0% expected ECB buying. Spain 2-year Spain 10-year Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Source: Bloomberg Source: Bloomberg
S&P 500 Earnings Update: Q3 2012 as of November 2, 2012• 379 companies have reported (c.80% of total • Revenues disappointed. According to market cap); Bloomberg, only 41% of companies beat sales• According to Bloomberg, 71% of companies estimates, while 59% of companies missed reporting have beaten earnings estimates and 28% sales estimates; have missed estimates. The average EPS surprise • Implications for Q4 2012 have been negative, has been 4.07%; with many companies lowering EPS guidance.
DJ Europe 600 Earnings Update: Q3 2012 as of Nov. 2, 2012• According to Bloomberg, 218 companies have • According to Bloomberg, the average sales reported Q3 results. The European earnings surprise has been -2.08%; season has been weak so far. 53% of companies • Consensus expects 2012 earnings growth to reporting have beaten estimates and 45% have be -2.6%. Since the beginning of the year, missed; consensus expected growth has been revised• On sales, 49% of companies reporting have beaten down by more than 12 percentage points. estimates and 51% have missed estimates;
What we are watching this month: World Calendar• In November, Eurogroup / EcoFin Date Region Event meetings will be held (Nov 12th). 05-Nov-12 06-Nov-12 US US ISM Non-Manufacturing Presidential Election No significant measures are 06-Nov-12 07-Nov-12 Australia Euro-zone RBA monetary policy meeting European Commission Releases Economic Growth Forecasts expected to be announced; 07-Nov-12 Greece Greek vote on structural reforms 07-Nov-12 Euro-zone ECBs Draghi speeks at Wirtschaftstag 2012• Three important political events 07-Nov-12 Euro-zone Chancellor Merkel meets MPs in EU parliament 08-Nov-12 China Communist Party Congress should be highlighted: the 57th US 08-Nov-12 Euro-zone ECB Governing Council Policy Meeting and press conference 08-Nov-12 UK Bank of England MPC Meeting Presidential Election (Nov 6th), the 08-Nov-12 Japan Machinery orders 08-Nov-12 Asia Korea, Indonesia and Malaysia monetary policy decisions Communist Party Congress (Nov 09-Nov-12 China CPI and PPI 8th) and the Catalonia regional 09-Nov-12 10-Nov-12 US China U. of Michigan prelim. consumer confidence Monetary data and trade balance elections (Nov 25th); 11-Nov-12 12-Nov-12 Greece Euro-zone Greek parliament votes on austerity measures Eurogroup and Ecofin Meetings• The Catalonia regional elections 13-Nov-12 Portugal Bank of Portugal releases Autumn Economic Bulletin 13-Nov-12 Euro-zone Zew Survey are a key political event in Spain. It 14-Nov-12 US Advanced Retail Sales 14-Nov-12 Iberia General Strike in Spain and Portugal could have an influence on the 15-Nov-12 Euro-zone GDP 16-Nov-12 US Industrial Production timing of the country request for 19-Nov-12 US NAHB Housing Market Index 19-Nov-12 Euro-zone European Union Foreign Ministers meet in Brussels help; 20-Nov-12 Japan BoJ Target Rate• The ECB (8th), the BOE (8th) and the 20-Nov-12 21-Nov-12 US Europe Housing Starts PMI Manufacturing BOJ (20th) will have policy 22-Nov-12 23-Nov-12 China Germany HSBC Flash Manufacturing PMI IFO Survey meetings this month; 25-Nov-12 Spain Catalonia Regional Elections 27-Nov-12 US Durable Goods Orders• The money supply / new loans 27-Nov-12 US S&P/Case Shiller Home Price Index 27-Nov-12 US FEDs Beige Book report is a key indicator for China 29-Nov-12 US GDP 30-Nov-12 Euro-zone Unemployment rate and will be released Nov 10th.
US elections: Status quo Implied probability, percent Implied probability, percent 100 100outcome is the most likely… 80 Republicans retain House majority 80• … and is probably priced into stock prices;• The 2012 election will have potential policy 60 60 outcomes on three areas: President Obama Reelected 40 40 o The resolution of the fiscal cliff; o The reform of entitlement programs and 20 20 Democrats retain Senate majority the tax code; and o The leadership of the Federal Reserve. 0 0 Abr Mai Jun Jul Ago Set Out Nov• A divided government seems to be the most Source: Intrade likely outcome (see chart) ;• Congress will need to once again increase the Current political groups at the Current political groups at the debt ceiling, avoiding a potential government House of Representatives Senate shutdown in February or March; Democrats• Romney has indicated that he would seek to ; 192 Democrats ; 47 replace Fed Chairman Ben Bernanke when his term expires in early 2014;• All three of the major ratings agencies have indicated they will reassess their rating over the Republican next year or so. Fiscal reform enacted by the Republican ; 53 ; 243 Congress in the next year will probably be decisive. Source: Fincor Source: Fincor
US Elections: What impact 300 The Fiscal Cliff negociation vs. Economic data 62 250 60should we expect? 200 58• The mid-2011 debt ceiling crisis episode was 150 56 associated with a negative economic impact, falling equity prices and a rally in Treasury 100 54 securities (see charts); 50 52• Under a total gridlock scenario (i.e. no 0 50 agreement), asset values will suffer, especially Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 risky assets; US Non Farm Payroll, m/m change (LHS) US Manufacturing PMI (RHS)• The most likely outcome is still that most of the Source: Bureau of Labor Statistics and Institute for Supply Management fiscal cliff is averted. However, if there´s a difficult negotiation, short-term volatility could The Fiscal Cliff negotiation vs. 115 Equity markets increase and uncertainty should dampen Base 100 = Jan 2011 sentiment; 110• Higher uncertainty usually leads to a flight to 105 safe havens, particularly US Treasuries; 100• The government cannot go on running high 95 budget deficits indefinitely. Beyond the fiscal Nasdaq 100 cliff, equity markets will probably focus on 90 S&P 500 whether credible and sustainable fiscal reforms 85 are put into place to address long-term Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 structural imbalances. Source: Bloomberg
China: 18th Communist Party Senior leaders to be electedCongress – Leadership transition National Party Congress National Peoples Congress• The formal transition of leadership at the Politburo NPC Standing Commitee national level occurs in two key steps: Politburo Standing Committee President/Vice President o The 18th National Congress of the Chinese General Secretary of the Party Supreme Court President Communist Party (Party Congress) in Secretaries of the Secretariat Procurator-General November 8th: The new leaders will be formally introduced, including the Central Military Commission (Party) Central Military Commission (State) Politburo Standing Committee (PSC); Central Disciplinary Commission Premier/Cabinet Ministers o The 12th National People’s Congress, Source: Xinhua probably in March 2013: Where the 100 Citigroup Economic Surprise Index - China transition of the Executive will take place. 80 A new President and Premier will be 60 appointed (from the PSC). The new 40 economic policy will start to be 20 implemented. 0• The fifth generation of leaders comes to power -20 at an important moment. After being able to -40 -60 maintain a rapid economic growth, the Chinese -80 economy faces important challenges, including -100 income inequality, structural imbalances and Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 rising costs. Source: Bloomberg
Greece is close to generate the €13.5bn of savingsdemanded by the troika• We approach the November 12th Eurogroup meeting, the likely date on which euro-zone finance ministers will make a decision on the next tranche of Greece’s loan;• Labor reforms have proved the most controversial issue for the three-party coalition;• Fiscal austerity should continue to hammer GDP growth (see chart). Debt dynamics seems to be unsustainable. The Government raised the public Source: IMF debt to GDP ratio forecast to 192% in 2014, far higher Industrial Production (excl. Construction) than the forecast in the original bail-out programme. 105 Political consensus will probably be necessary for 100 Greece to have some sort of haircut on its official- 95 sector debt; 90• Nonetheless, August’s Greek industrial production 85 figures showed an annual growth rate of 2.6% (see 80 75 chart). This was the first annual rise recorded since 70 Dec. 2004 = 100 2008. Are structural reforms and wage reductions 65 that have taken place over the last few years finally 2004 2005 2006 2007 2008 2009 2010 2011 2012 bearing some fruit? Source: Eurostat
Eurowatch: Eurogroup meeting (Nov. 12th) and ECB’s GoverningCouncil Meeting (Nov. 8th) ECB Bank Lending Survey and Loan Demand 60• After last week’s Eurogroup teleconference call, 40 Demand rising the euro-zone finance ministers have asked for 20 “remaining issues” to be resolved between Greece 0 and the troika; -20• Greece is expected to run out of cash by mid- -40 November. The Eurogroup will probably give a -60 Demand falling decision on the next tranche of the country’s loan -80 on November 12th; 2003 2005 2007 2009 2011 2013 Lending to Firms Consumer Credit Mortgage Lending• Can we expect some progress on Spain? Catalonia Source: ECB will held regional elections on November 25th. This Euro-zone credit to private sector and is an important political event for Spain. 12% M3 growth rate 14% Additionally, there’s still some political stigma 10% 12% attached to asking for a bailout, particularly in 8% 10% relation to a probable involvement of the IMF; 6% 8% 6%• The ECB is likely to remain on standby this month. 4% 4% The announcement of its Outright Monetary 2% 2% Transactions programme is still supporting market 0% 0% sentiment. However, we should focus on whether -2% -2% 2004 2006 2008 2010 2012 the statement shows any shift in tone on the risks Euro-zone Credit to Private Sector (LHS) M3 Annual Growth Rate (RHS) to the outlook for growth and inflation. Source: ECB
Charts we are watching China Real GDP vs. China Equities• Recent data seems to point to China GDP (% y/y, RHS) better China 210% 12% macro ahead. September data releases 170% 11% suggested that the impact of policy easing 130% 10% 90% measures adopted since April have started to 9% 50% push aggregate demand. Chinese equities are 10% 8% showing some signs of improvement. China is -30% 7% decisive to the outlook for the materials global -70% 6% 2002 2004 2006 2008 2010 2012 sector (metals and mining stocks). Shanghai Stock Exchange Composite Index (% y/ y, LHS) China GDP (% y/y, RHS) Source: Bloomberg • The Baltic Dry Index has recently improved. It 1800 Baltic Dry Index could suggest a better outlook to global trade. 1600 Latest export data in Korea and Taiwan 1400 inflected higher, though from low levels. This 1200 also hints of global growth stabilizing. 1000 Nevertheless, the fiscal cliff is a risk to growth 800 and market sentiment. Are investors 600 underestimating that risk ? 400 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Source: Bloomberg
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