Executive Summary - Economic & Financial Market Outlook
USA - Our view on the Fed is for a rate hike to occur in 3rdQ for three primary reasons: (1) Growth
should accelerate as certain negative effects fade (capex spending, strikes in West ports...). (2) The
Fed wants to have a tool to use in the event that growth starts to slow down. (3) They would like to
start a tightening cycle before the election year in 2016.


Eurozone – Industrial & consumer surveys point to the continuation of the cyclical recovery, with
GDP forecasts on an upward trend, though the best news could be already behind. ECB - Losses in
the fixed income universe have in fact increased the eligible bonds to be bought. The ECB has
reiterated its commitment to undertake the programme until September 2016 or beyond.


EM Asia – Most economies in Emerging Asia are likely to record decent growth over the next couple
of years. These countries have no big external imbalances, are well-placed to benefit from strong US
growth, are big winners from lower oil prices, and an anchored inflation means monetary policy is
set to remain supportive. See our GDP projections for each country inside. China – The economy is
moving up the value chain. The break between China’s exports and imports from EM Asia suggests
that China is importing fewer complex components because it is making them itself. India – We are
seeing friendly noises being made between India and China about advancing a “strategic cooperative
partnership”. Beijing has invited Delhi to join the “One belt One Road initiative” and India has
agreed to be a founding member of the AIIB bank. India has also given the green-light to the
construction of a new highway linking the two economies.


Japan - At the 30-Apr policy board meeting, BoJ board member T. Kuichi suggested that the pace of
JGB purchases should be slowed down, due to concerns over the lack of bond market liquidity.


LatAm – Brazil: Levy garnered additional support for his fiscal agenda (Congress approved the first
set of fiscal measures, although some points were defeated). This gives greater capability to start
introducing a more growth-oriented narrative. Social & Political unrest is now much calmer. Mexico
- The slowdown in growth during the 1Q15 was due almost entirely to weakness in industry. The
decline in manufacturing is related to the soft patch in the US economy. We see encouraging news
coming from the service sector, the own mining sector, and from the US, where we expect a
recovery of momentum during 2H2015.


Equity Markets - Keep exposure to OW Neutral in the global Equity markets in general. Our
Andbank system of flow and positioning indicators suggests a lack of significant stress in the equity
markets. We consider that the market is slightly overbought but a sudden deep and sustained risk-
off shift is unlikely. If a correction takes place, it should prove to be short-lived. Preferred:
Eurozone, Spain, India and Mexico.


Fixed Income Markets - Hold the 10Y US Treasury (Neutral). Accumulate with yields above
2.25%. Hold your German Bunds (Neutral) until yields come back to 0.4%. Then wait before buying
bunds until 1% in yield. Corp credit (EUR): HOLD. HY (EUR): BUY. Corp credit (USD): HOLD. HY
USD: HOLD. Peripheral Bonds: BUY. Stay long duration until yields are well below 1%. EM Gov
bonds: Still offer value. In hard currency we prefer Brazil, Mexico and Turkey. In local currency,
Indonesia, India, Brazil and Turkey.


Commodities - SELL. Heavy investment form 2008, full capacity and growth in supply lead us to
take the view that the prospects for a new bull market in commodities are dim. OIL: No changes for
now in our outlook, namely that we are in a Structural bear oil market. USD50 in the WTI could
represent the upper band of the fundamental range. Gold is expensive.

USA: FED prepares for lift-off, but is still flexible
Economy & Policy


GDP: The U.S. economy is likely growing somewhat faster than suggested by GDP numbers after the Winter doldrums.


Fed rates: Given the tight conditions in labor, it should still provide the inflation triggers necessary to justify a Fed hike by September.


Fed uncertainty: Considering the weak reading on nominal GDP in Q1 2015 (+3.9% YoY) and using history as a guide, there has never been a time (since 1955) in which the Fed has started a tightening cycle when nominal GDP growth was below 4.9% YoY.


Our view on the Fed is for a rate hike to occu in 3rdQ for three primary reasons: (1) Growth should accelerate as certain negative factors fade (capex spending, strikes in Western ports...). (2) The Fed wants to have a tool to use in the event that growth starts to decelerate. (3) They would like to start a tightening cycle before the election year in 2016.


Why the recent rise in bond yields? 40% of the rise was driven by a rise in inflation expectations (by the rise in oil prices, wage growth...), and 60% was due to a rise in real yield (not a rise in inflation expectations).


Forecasts


• Fed rates: First hike in Sept. 15


• GDP forecast 2.5% (down from 2.8%).


• CPI y/y at 1%.


• Unemployment forecast: 5.3%.


• 10Yr Treasury: 2.25% (from 2.00%).


• Equities (S&P): 2.138. Valuations are not


undermined unless 10yT yields rise above 2.8%.


With 90% of companies having reported, 50%


are missing revenue estimates and offering


muted guidance; nevertheless consensus is for


4.7% growth in 2015 EPS, and 12.3% growth in


2016 EPS (high in our view). Valuations are at


17.9 PE LTM (stretched but falling short of


extremes).


• Sectors: Tech, Banks, Cyclicals & Small caps


• Credit: Banks have reduced their bond


inventories. Default rates in IG at 1.7% (below


the 3.8% historical average). By sectors: IG buy


Materials, Media, Insurance. In HY buy Retail too.


Recommendations for Financial Markets


Equity: “HOLD”


Gov. Fixed Income: ”HOLD”


Inv. Grade Credit: “HOLD”


HY: “HOLD” 7