Theodore Stanton, Head of Research at Oaks Field Partners, provides an October 2014 report for investors. In the US, Q2 GDP and annual revisions were better than expected, indicating positive factors for investment. Fixed investment was revised upwards and indicators like PMI remain positive. Emerging markets are facing challenges like declining commodity prices, currency weakness, and deteriorating domestic outlooks. Many currencies are near decade lows against the USD while sovereign spreads have risen. The report concludes by updating various economic indicator graphs provided in previous investor reports.

1. 1
North and South America
Investor Group – October 2014
Theodore T. Stanton
Head of Research
This document was initially
published on Thursday, October
2nd 2014 for clients, and written
on the previous day.

2. USA : Investment
Q2 GDP update and annual revisions were better than
expected, marking better indicators for investment
(Fig. 8). Our 2014 GDP forecast has not moved since
earlier this year and does stay around 2 – 2.5%,
matching the range of the FOMC as the last quarter will
not change much of the aggregated growth
accumulated since 2013.
Among the revised values in the 3rd estimate of GDP,
fixed investment was one of the most interesting and we
have been closely following it this year within our GDP
tracker. So far, expectations from PMI (Fig. 8) are still
quite positive and there are quantitative factors, as well
as qualitative factors, to justify for larger investments
ahead. As shown in Fig 1, the average age of fixed
private assets is the highest in half a century, something
that we’ve been discussing with vehicles in various
investor groups (see June Half Yearly review for stats),
and we have seen the results in sales (17m annual rate
on average, Fig 14).
As new fiscal year just started in the US, it’s interesting
to see that it will soon encounter a senate election that
will most likely end with a GoP lead (51 seats vs 49 for
Dem & Independents, see Fig. 2). Therefore, GoP will
handle both chambers and will have the ability to refuse
all major policies from Obama’s administration.
However, it should not create a major shift in domestic
policy, but tensions over budgets might resume soon.
For Obama’s credits, the better employment gets the
better the soundness of fiscal account will be (income
tax receipts) and less he will have to fight over budget.
While the FOMC is scheduled to end its QE program in
October, the lack of power from the government (with
still a large fiscal deficit), the deterioration of worldwide
growth outlook are pushing expectations of changes in
policy rates at very low and conservative levels (see
Figure 3). Markets are quite taking under consideration
the risks surrounding inflation, consumption and most of
all, real estate.
Regarding the later, some improvements have been
worth noticing on the construction side (Fig. 16)
however affordability indices and mortgage rates are
limiting demand.
To conclude, other indicators such as production,
shipments, and labor force are validating a 2,25%
growth rate for 2014 (See charts from 7 to the end).
2
Fig 1: Investment & aging assets
Source : Oaks Field Partners Research, BEA, October 2014
Fig 2: Senate Lead (and therefore Congress)
Source : Princeton University, OFP Research, October 2014
Fig 3: FOMC Outlook and Market Curves for FF
Source : Oaks Field Partners Research, October 2014
Investor Group – October 2014

3. Emerging Countries
Following our last monthly analysis, the large decline in
commodity prices, outflows and deteriorating
domestic outlook have brought down many FX pairs
near their decade’s low against USD, and pushed some
sovereign spreads higher.
Sovereign spreads, when compared to a 8y floating
period, are not around decade’s high. However, some
currencies unfortunately have been suffering a lot as you
can see on the chart beside (Fig 4, Brazil orange square
point).
One of the major issue remains the dependency toward
external inflows, but also the monetary policy path for
which we have been expecting rate cuts, jointly
sometimes with lower reserve requirement ratios to
alleviate banks turmoil in a context of higher default rate
and lower demand.
While Brazil as been for months the worst country in
Latam, we still have to look for signs of improvements
that are failing to happen. Among the countries where
we still see some interesting points for investment, Peru
keeps the lead with a USD credit default swap rate
around 150 basis points, close to its 5 year average.
Regarding external balances, many countries have been
more resilient than their currencies could suggest. The
decline in copper prices has been going for months and
months, and yet the country (Chile) manages to produce
a surplus on its external balance. However, the risks on
the monetary policy path explains the decline in
appetite for the currency (CLP) as carry trades unwind.
Looking ahead, margins of action for rates are still high
with rates at 11% in Brazil, or above 3% in Chile. Bear in
mind that in 2008-2009, the Central Bank of Chile
lowered its main rate to 0.25%.
Despite being quite volatile, the IPSA 40, the local stock
market in Santiago, is up by 5% year to date and flat
over the last 3 months.
To conclude, Mexican Peso is still the most liquid
currency for hedging against Latam currencies risks ; but
the new BRL future contract is gaining traction at 80
million USD traded a day (2 billion per day on the MXN
future). Therefore, we are still closely following any
change in CFTC net reported exposure (weekly) to see
any change in direction and a return of appetite of
investors.
3
Fig 4: Emerging Countries in Latin America
Source : Oaks Field Partners Research, October 2014
Fig 5: PMI Retailing in Brazil
Source : Oaks Field Partners Research, October 2014
Fig 6: Chilean Trade Balance
Source : Oaks Field Partners Research, October 2014
Investor Group – October 2014

4. Updates of Graphs (as shown in 2014 Investor Groups)
4
Fig 8: GFCF and Investment
Source : Oaks Field Partners Research, October 2014
Fig 10: WTI Stocks
Source : Oaks Field Partners Research, October 2014
Fig 12: Beveridge Curve
Source : Oaks Field Partners Research, October 2014
Fig 7: Consumer Confidence Indices
Source : Oaks Field Partners Research, October 2014
Fig 9: USD Dollar Index
Source : Oaks Field Partners Research, October 2014
Fig 11: ATA Truck Tonnage Index
Source : Oaks Field Partners Research, October 2014
Investor Group – October 2014

5. Updates of Graphs (as shown in 2014 Investor Groups)
5
Fig 14: Vehicle sales
Source : Oaks Field Partners Research, October 2014
Fig 16: Architecture Billing Index
Source : Oaks Field Partners Research, October 2014
Fig 18: NFIB Survey - Compensation Component
Source : Oaks Field Partners Research, October 2014
Fig 13: Rail Indicators (Shipments)
Source : Oaks Field Partners Research, October 2014
Fig 15: Working hours
Source : Oaks Field Partners Research, October 2014
Fig 17: MBAA vs Pending Home Sales
Source : Oaks Field Partners Research, October 2014
Investor Group – October 2014