Asset Allocation Presentation - millenniumbp.ch€¦ · Asset Allocation Presentation . 2 1....

Wealth Management Unit

July 2015

Asset Allocation

Presentation

2

1. Overview of market and portfolios’ performance

2. Allocation matrix

3. Market review

4. Market outlook

Summary

3

Market overview

Highlights

Greece and creditors do not reach and

agreement and the Greek PM sets a referendum

on the agreement. Greece misses the payment

to the IMF. Greek banks close and capital

controls are imposed.

ECB announces that it will do whatever

necessary, within its mandate, to guarantee

financial stability in the euro area

European Commission President proposed a

common euro area finance department to be set

until 2025

Inflation increases more than expected and

European yields increase. Draghi says one can

expect more volatility in bonds, but expects QE

to be fully implemented.

US and European macro data globally better

Bank of Japan Governor says the yen has

depreciated too much

Chinese Central Bank cuts interest rates again

and eases regulatory requirements. Government

announces new and accelerated investment

projects.

Market performance

Government bonds depreciated 1.0% in the US,

with yields increasing 19bp to 2.29% on average.

European bonds depreciated 2.7%, with the

average yield up 37bp to 1.59%. German yields

+28bp to 0.76% (10yr), Italian +49bp to 2.33% and

Spanish +46bp to 2.30%, due to higher inflation

and concerns regarding Greece.

Corporate bonds returns were negative due to

the impact of the underlying yield curve but also

due to relevant spread widening both in IG and

HY.

Emerging market debt in USD corrected 1.6%, on

higher UST yields and some spread widening.

Equity markets corrected 2.9% in LC, -3.9% in

euros, mostly impacted by risk aversion related to

Greece and a correction in Chinese equities.

Eurozone equities fell 3.9%, Japanese equities -

3.1%, US equities -1.9% and EM equities -2.3%,

with EM Asia down 3.6%.

Commodities prices were up 1.7%, pulled by a

12.8% jump in agricultural prices.

Currencies: the euro was up 1.5% against the USD

to 1.11 and the yen appreciated 1.3% to 122.50.

4

Market performance

Source: Bloomberg. Note: EFFAs indices used for government bonds, BoA-ML indices used for credit, MSCI Net TR indices local currency used

for equities, Dow Jones-UBS Commodity Index TR used for commodities, EUR performance against USD.

Monthly return 6 months return 12 months return

percentage percentage percentage

Govt bonds Govt bonds Govt bonds

-2.7 Euro area -1.3 Euro area 4.0 Euro area

-1.0 USA -0.2 USA 2.6 USA

Credit Credit Credit

-1.8 EUR HG -1.4 EUR HG 1.8 EUR HG

-1.7 EUR HY 2.1 EUR HY 2.2 EUR HY

-1.6 US$ HG -0.5 US$ HG 1.0 US$ HG

-1.5 US$ HY 2.5 US$ HY -0.5 US$ HY

-1.6 EM Debt 1.7 EM Debt 0.5 EM Debt

Equities Equities Equities

-3.9 Euro area 12.8 Euro area 11.5 Euro area

-1.9 USA 1.4 USA 7.0 USA

-6.4 UK 1.1 UK -0.2 UK

-3.1 Japan 16.0 Japan 30.8 Japan

-2.3 Emerging 5.6 Emerging 6.2 Emerging

1.7 Commodities -1.6 Commodities -23.7 Commodities

1.5 EUR -7.8 EUR -18.5 EUR

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 -8 -4 0 4 8 12 16 -25-20-15-10 -5 0 5 10 15 20 25 30 35

5

Market performance

Ref. Date: 30-Jun-2015 MTD 3M 6M YTD 1Y 2Y

Equities indices Local Dollar Euro Local Dollar Euro Local Dollar Euro Local Dollar Euro Local Dollar Euro Local Dollar Euro

MSCI USA Net TR -1.9 -1.9 -3.4 0.2 0.2 -3.6 1.4 1.4 10.0 1.4 1.4 10.0 7.0 7.0 31.3 32.9 32.9 55.0

MSCI Europe Ex-UK Net TR -4.3 -2.8 -4.3 -4.4 -0.8 -4.6 10.2 4.7 13.6 10.2 4.7 13.6 10.4 -7.4 13.7 37.2 21.0 41.2

MSCI Eurozone Net TR -3.9 -2.5 -3.9 -4.9 -1.2 -4.9 12.8 4.0 12.8 12.8 4.0 12.8 11.5 -9.2 11.5 41.3 21.1 41.3

MSCI UK Net TR -6.4 -3.8 -5.2 -2.8 3.0 -0.9 1.1 2.1 10.7 1.1 2.1 10.7 -0.2 -8.3 12.6 12.0 15.8 35.0

MSCI Japan Net TR -3.1 -1.5 -2.9 5.2 3.3 -0.6 16.0 13.8 23.5 16.0 13.8 23.5 30.8 8.5 33.2 46.6 19.0 38.8

MSCI Asia exJapan Net TR -3.7 -3.9 -5.4 -1.0 -1.0 -4.8 5.4 3.4 12.2 5.4 3.4 12.2 7.9 -0.7 21.8 24.1 16.7 36.1

MSCI Emerging Market Free Net TR -2.3 -2.6 -4.1 0.7 0.7 -3.1 5.6 2.9 11.7 5.6 2.9 11.7 6.2 -5.1 16.5 20.8 8.5 26.5

MSCI EMEA Net TR 1.3 0.4 -1.1 1.2 1.9 -2.0 6.9 3.9 12.7 6.9 3.9 12.7 5.2 -14.2 5.4 22.9 -3.5 12.5

MSCI EM Eastern Europe Net TR 0.2 -2.8 -4.3 2.4 5.2 1.2 14.2 16.7 26.6 14.2 16.7 26.6 5.0 -24.7 -7.5 16.9 -16.4 -2.5

MSCI EM Latin America Net TR 0.5 1.0 -0.5 3.2 3.5 -0.4 4.4 -6.4 1.6 4.4 -6.4 1.6 0.3 -23.4 -6.0 9.7 -16.5 -2.6

MSCI EM Asia Net TR -3.6 -4.0 -5.5 0.1 -0.2 -4.0 5.8 5.1 14.0 5.8 5.1 14.0 8.4 3.1 26.6 24.0 20.3 40.3

MSCI World Information Technology Net TR -4.4 -4.2 -5.6 -0.5 -0.4 -4.2 2.1 1.5 10.1 2.1 1.5 10.1 12.8 9.7 34.7 46.5 43.0 66.8

MSCI World Health Care Net TR -1.7 -1.2 -2.6 0.4 1.5 -2.3 10.4 9.9 19.3 10.4 9.9 19.3 22.9 17.2 43.8 54.8 50.8 75.9

MSCI World Financials Net TR -1.9 -1.2 -2.7 0.4 1.6 -2.2 4.6 2.4 11.1 4.6 2.4 11.1 11.0 2.0 25.2 31.3 23.1 43.6

MSCI World Energy Net TR -4.5 -3.9 -5.4 -2.5 -1.2 -4.9 -3.6 -5.1 3.0 -3.6 -5.1 3.0 -22.0 -26.3 -9.6 -0.5 -3.8 12.3

MSCI World Utilities Net TR -6.2 -5.5 -6.9 -4.1 -2.9 -6.6 -6.0 -7.9 -0.1 -6.0 -7.9 -0.1 -1.6 -8.5 12.3 18.5 12.8 31.6

MSCI World Telecom Net TR -1.6 -0.6 -2.1 1.9 3.4 -0.5 7.7 5.2 14.1 7.7 5.2 14.1 11.1 0.6 23.5 31.8 23.1 43.6

MSCI World Materials Net TR -5.2 -4.3 -5.8 -2.4 -0.9 -4.6 3.7 1.0 9.6 3.7 1.0 9.6 0.0 -9.9 10.6 21.1 12.5 31.2

MSCI World Industrials Net TR -3.5 -2.8 -4.2 -1.9 -1.1 -4.9 2.9 1.0 9.6 2.9 1.0 9.6 6.7 -1.6 20.8 31.4 23.1 43.6

MSCI World Consumer Staples Net TR -3.1 -2.3 -3.7 -2.4 -1.0 -4.7 2.3 1.3 9.9 2.3 1.3 9.9 9.5 2.8 26.2 23.4 19.3 39.2

MSCI World Consumer Discretionary Net TR -1.6 -0.9 -2.4 0.5 1.1 -2.7 8.7 7.0 16.1 8.7 7.0 16.1 17.7 10.0 35.0 40.4 32.8 54.9

Global Developed Real Estate -3.9 -3.9 -5.3 -6.7 -6.7 -10.2 -2.8 -2.8 5.5 -2.8 -2.8 5.5 0.4 0.4 23.3 14.9 14.9 34.0

European Real Estate -4.4 -2.8 -4.3 -6.9 -3.3 -6.9 11.4 2.7 11.4 11.4 2.7 11.4 21.4 -1.1 21.4 54.1 32.2 54.2

North America Real Estate -4.2 -4.2 -5.7 -10.0 -10.0 -13.4 -6.1 -6.1 1.9 -6.1 -6.1 1.9 2.8 2.8 26.2 16.4 16.4 35.8

Asia Real Estate -3.7 -3.7 -5.2 -1.8 -1.8 -5.5 0.8 0.8 9.4 0.8 0.8 9.4 -2.9 -2.9 19.1 5.4 5.4 22.9

MSCI World Net TR -2.9 -2.3 -3.9 -0.7 0.3 -3.3 4.1 2.6 11.5 4.1 2.6 11.5 8.4 1.4 24.6 31.9 25.8 46.8

MSCI AC World Net TR -2.9 -2.4 -3.9 -0.5 0.3 -3.3 4.3 2.7 11.5 4.3 2.7 11.5 8.2 0.7 23.8 30.7 23.8 44.5

Government Debt (EFFAS > 1 YR INDEX)

US -1.0 -1.0 -2.4 -2.0 -2.0 -5.7 -0.2 -0.2 8.3 -0.2 -0.2 8.3 2.6 2.6 26.0 5.0 5.0 22.5

Eurozone -2.7 -1.2 -2.7 -5.5 -1.8 -5.5 -1.3 -9.0 -1.3 -1.3 -9.0 -1.3 4.0 -15.3 4.0 14.1 -2.2 14.1

UK -1.6 1.2 -0.3 -3.4 2.3 -1.6 -1.3 -0.4 8.1 -1.3 -0.4 8.1 9.4 0.6 23.5 12.2 16.0 35.3

Japan -0.1 1.6 0.0 -0.2 -2.0 -5.7 -0.8 -2.6 5.6 -0.8 -2.6 5.6 1.9 -15.5 3.8 5.0 -14.7 -0.6

Corporate Debt (BoA M L indices)

US$ Investment Grade -1.6 -1.6 -3.1 -2.7 -2.7 -6.4 -0.5 -0.5 8.0 -0.5 -0.5 8.0 1.0 1.0 24.0 9.1 9.1 27.3

US$ High Yield -1.5 -1.5 -3.0 0.0 0.0 -3.9 2.5 2.5 11.2 2.5 2.5 11.2 -0.5 -0.5 22.1 11.2 11.2 29.7

EUR Investment Grade -1.8 -0.3 -1.8 -2.7 1.1 -2.7 -1.4 -9.1 -1.4 -1.4 -9.1 -1.4 1.8 -17.1 1.8 8.9 -6.7 8.9

EUR High Yield -1.7 -0.2 -1.7 -1.1 2.8 -1.1 2.1 -5.9 2.1 2.1 -5.9 2.1 2.2 -16.8 2.2 16.5 -0.2 16.5

Emerging M arkets Sovereign Debt

EMBI Global Diversif ied Index -1.6 -1.6 -3.0 -0.3 -0.3 -4.1 1.7 1.7 10.3 1.7 1.7 10.3 0.5 0.5 23.4 12.2 12.2 30.9

ML Global Government Index -1.2 -2.6 -0.6 -0.6 3.6 8.4

ML Global Broad Market Corporate Index -1.6 -2.6 -0.5 -0.5 1.8 9.5

ML Global High Yield & EM Plus Index -1.5 -0.1 2.3 2.3 0.2 11.9

Commodities (DJ index)

Energy -0.4 -0.4 -1.9 10.9 10.9 6.7 1.8 1.8 10.5 1.8 1.8 10.5 -43.2 -43.2 -30.3 -33.8 -33.8 -22.7

Industrials -4.8 -4.8 -6.3 -5.3 -5.3 -8.9 -10.4 -10.4 -2.7 -10.4 -10.4 -2.7 -19.4 -19.4 -1.1 -12.7 -12.7 1.8

Prec. Metals -3.0 -3.0 -4.4 -2.6 -2.6 -6.3 -1.3 -1.3 7.1 -1.3 -1.3 7.1 -15.8 -15.8 3.3 -9.6 -9.6 5.5

Agricultural 12.8 12.8 11.1 8.3 8.3 4.2 -1.3 -1.3 7.1 -1.3 -1.3 7.1 -14.6 -14.6 4.9 -17.0 -17.0 -3.2

Commodities 1.7 1.7 0.2 4.7 4.7 0.7 -1.6 -1.6 6.8 -1.6 -1.6 6.8 -23.7 -23.7 -6.4 -17.4 -17.4 -3.7

Alternatives

Listed Private Equity (LPX Composite TR Index EUR) -3.5 -2.0 -3.5 0.1 4.1 0.1 17.0 7.8 17.0 17.0 7.8 17.0 24.0 1.1 24.0 51.8 30.1 51.8

Amundi Funds Absolute Volatility (EUR) 2.0 3.6 2.0 1.5 5.5 1.5 0.1 -7.8 0.1 0.1 -7.8 0.1 3.4 -15.7 3.4 -9.1 -22.0 -9.1

HFRX Macro Systematic Diversif ied CTA Index (USD) -1.2 -1.2 -2.7 -0.8 -0.8 -4.6 1.3 1.3 9.9 1.3 1.3 9.9 -1.1 -1.1 21.4 4.2 4.2 21.5

S&P/LSTA Leveraged Loan Total Return Index (USD) -0.4 -0.4 -1.9 0.7 0.7 -3.2 2.8 2.8 11.6 2.8 2.8 11.6 1.8 1.8 25.0 7.5 7.5 25.4

Currencies

DB EUR Trade Weighted Index 0.1 1.5 -8.0 -8.0 -11.9 -11.1

EUR/USD 1.5 4.0 -7.8 -7.8 -18.5 -14.3

EUR/GBP -1.3 -1.9 -8.7 -8.7 -11.4 -17.1

EUR/JPY -0.1 5.8 -6.1 -6.1 -1.8 5.6

JPY/USD 1.6 -1.8 -1.9 -1.9 -20.6 -23.2

Dollar Index -1.5 -2.9 5.8 5.8 19.7 14.9

JPM Emerging Markets Currency Index -0.8 -0.2 -5.0 -5.0 -16.5 -18.5

6



3. Market review

4. Market outlook

Summary

7

Asset allocation matrix

Comments

Global Asset Classes Low yields w ith some upside pressure especially in the US imply unattractive returns

Search for yield, grow th and still ample liquidity are supportive, but spreads are already quite narrow

Economic grow th, M&As, share buybacks, low er input prices, attractive valuations relative to other asset classes

Important source of diversif ication especially w ith low yields

Government bonds Public QE in Europe, low grow th and low inflation

Low bond yields that face some upside pressure as the unemployment rate fell below 6%, although best safe haven

EM economic slow dow n, low er f iscal revenues for commodity producers and political risk related to Russia

Corporate bonds ECB quantitative easing and economic grow th supportive but spreads are very low

ECB support and easing bias, plus search for yield are supportive, altough spreads very low

> Economic recovery and search for yield positive, recent spread w idening an opportunity, although energy is a risk

Equities ECB support and QE, improving grow th, low er euro and low er commodity prices

Ongoing domestic economic grow th but EPS challenged by global exposure and stronger pound

Expanding economy, M&As, share buy backs, but stronger USD and very high profit margins are a challenge

BoJ QE programme, low er yen, increase in equities exposure by Japanese pension fund and structural reforms

Decelerating economies, commodity price falls mixed, structural reforms in Asia

Equity sectors High structural grow th and benefiting from global recovery, but stronger USD can impact profits

Stable cash f low s, standing as a more defensive exposure

Structural challenges in EU, and in the US litigations and increased risk from energy related loans

Energy prices seem to have found a f loor and corporates are implementing cost cuts

High dividend yield but w eak grow th in Europe and strong competition

Possible dow nside from metal prices correction associated w ith China's construction slow dow n

Wealthier middle class in EM, recovery in DM and benefiting from increased non-energy disposible income

Softening regulatory risk, ECB's easing, low global inflation and yields, mitigate the risk of higher yields in US

Supported by industrialisation process in EM and recovery in US and EU

Alternatives Real Estate is recovering in Europe and US, but prices above historical high in both US and Asia

Energy prices seem to have stabilised, but China still decelerating

Important source of diversif ication especially w ith low yields w ith upw ard pressureOther alternatives

Telecoms

Consumer Goods

Utilities

Industrials

Real Estate

Materials

Commodities

Emerging Markets

Overweight

Euro govt bonds

US aggregate bonds

EU Investment Grade

EM govt bonds

Energy

EU High Yield

Information Tech

Financials

Healthcare

US High Yield

Europe ex-UK

UK

US

Asia Pacific

Monthly

change

Govt. Bonds

Equities

Alternatives

Underweight Neutral

Corporate bonds

8



3. Market review

4. Market outlook

Summary

9

Source: Bloomberg.

Market review: short term rates

May 2015

Source: Bloomberg.

The 3m Euribor stood in negative territory at -0.01%. The ECB reference rate is +0.05%.

2yr bund yields closed at -0.23% by the end of June, ending the month at the same level it started

but with some moderate volatility along with risk aversion related to Greece. Under its QE

programme the ECB is not buying bonds with yields below its deposit rate of -0.20%.

The US 3m Libor stood at 0.28% in June. UST 2yr yields were up 4bp to 0.64%, although touching

0.73% by the middle of the month, moving in line with changing expectations of Fed rate hikes

and some degree of safe haven demand.

-0.10-0.050.000.050.100.150.200.250.300.350.400.450.500.550.600.650.700.75

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Reference and short term rates

Euribor 3m US libor 3m

ECB reference rate FED funds rate

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Government 2yr bond yields

US 2yr yields GE 2yr yields

10

Market review: corporate credit

Source: Bloomberg. Source: Bloomberg.

Government bonds in Europe (>1year) increased a further 37bp to 1.59%, returning -2.7% (-1.3%

ytd), reflecting both an increase in core yields and non-core yields, with the instability

surrounding Greece having a moderate impact on non-core yields. German 10yr bunds increased

28bp to 0.76%, French 10yr yields increased 40bp to 1.20%, Italian yields were up 49bp to 2.33%

and Spanish yields increased 46bp to 2.30%. Portuguese yields increased 43bp to 3.00%. Greek

yields jumped 417bp to 15.42% as a Greek exit became a more likely possibility after the

referendum.

US treasuries average yields (>1year) were up 19bp to 2.29%, on improving macro data and

reinforced expectations of a Fed hike later in 2015, with Yellen saying she expects the Fed to raise

rates this year if economy continues to improve. 10 yr UST yields increased 23bp to 2.35%.

0.0

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Government bond yields

EU average bond yields >1yr

GE 10yr bund yields

US average bond yields >1yr

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Government 10yr bond yields

Portugal

Italy

Spain

11

Market review: corporate credit

Source: Bloomberg. Rating: Bloomberg Composite, average of Moody’s, S&P, Fitch and DBDR ratings rounded down

Region: Core (core European countries), Peripheral (Greece, Ireland, Portugal, Spain, Italy)

Source: Bloomberg. Rating: Bloomberg Composite, average of Moody’s, S&P, Fitch and DBDR ratings rounded down

Region: Core (core European countries), Peripheral (Greece, Ireland, Portugal, Spain, Italy)

Credit returns corrected in June, impacted by both the negative impact from the underlying yield

curve and relevant spread widening in both IG and HY, with risk aversion regarding Greece having

a toll, and possibly impacted by liquidity issues.

EU IG fell 1.8% (-1.4% ytd), with spreads widening 21bp, while EU HY fell 1.7% (+2.1% ytd) with

spreads widening 55bp.

US HY fell 1.5% (+2.5% ytd), with spreads widening 48bp.

EUR Investment Grade & High Yield spreads (bp) US$ Investment Grade & High Yield spreads (bp)

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1000

1200

1400

1600

1800

2000

2200

0

100

200

300

400

500

600

700

800

01-A

pr-

07

01-O

ct-0

7

01-A

pr-

08

01-O

ct-0

8

01-A

pr-

09

01-O

ct-0

9

01-A

pr-

10

01-O

ct-1

0

01-A

pr-

11

01-O

ct-1

1

01-A

pr-

12

01-O

ct-1

2

01-A

pr-

13

01-O

ct-1

3

01-A

pr-

14

01-O

ct-1

4

01-A

pr-

15

US IG spread to UST (LHS)

US HY spread to UST (RHS)

12

Market review: emerging market debt


Emerging market debt in USD was down 1.6 % (+1.7% ytd), on the back of higher UST yields and

slightly wider spreads (+9bp).

Latin America (-2.4%) and Asia (-0.5%) continued to underperform this month.

JPM EMBI Global diversified

yield and spread (USD)

100

200

300

400

500

600

700

800

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

Sp

read

Yie

ld

Yield Spread-10 0 10 20 30

EMBI Global Diversified

LATIN

EUROPE

AFRICA

MIDDLE EAST

ASIA

JPMorgan EMBI (USD) spread change (bp)

Ytd month

13

Market review: equities


Equity markets corrected 2.9% in LC (-3.9% in euros) in June, impacted by the Greek crisis and to a

lesser extend some risk aversion related to a correction in Chinese equities.

Euro area equities underperformed, down 3.9%, while UK equities were the worse performers, -6.4%

in LC and -5.2% in euros.

US equities were the best performers, but corrected 1.9%, -3.4% in euros, having some support from

improved macro data.

Japanese equities corrected 3.1% (-3.2% in euros) and EM equities fell 2.3% (-4.0% in euros), with

Asia underperforming (-3.6% in LC and -5.4% in euros) impacted by the sell off in Chinese equities.

Sector wise, utilities was the worse performer impacted by higher yields, followed by materials and

energy, as well as IT. Defensives healthcare and telecoms outperformed, but still posted negative

performances.

INDUSTRY RETURNS (MSCI TR LC) %

-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11

Utilities

Materials

Energy

Technology

Industrials

Consumer Staples

Financials

Health Care

Telecom

Consumer Discretionary

Ytd

month

REGIONAL MSCI EQUITY INDICES (LC NET TR) Indexed

85

90

95

100

105

110

115

120

125

130

135

140

145

01-J

ul-

14

01-A

ug

-14

01-S

ep

-14

01-O

ct-1

4

01-N

ov-1

4

01-D

ec-

14

01-J

an-1

5

01-F

eb

-15

01-M

ar-

15

01-A

pr-

15

01-M

ay-1

5

01-J

un-1

5

01-J

ul-

15

US

Eurozone

UK

Japan

Emerging Markets

14

Market review: commodities


Commodity prices were up 1.7% in June, exclusively due to the jump in agricultural commodities’

prices.

Energy prices fell just 0.4% (+1.8% ytd).

Industrial metal prices continued to correct, down 4.8% in June (-10.4% ytd), impacted by the

slowdown in the Chinese economy.

Precious metal prices fell 3.0%, even with the USD depreciating 1.5%.

Agricultural prices jumped 12.8%, with corn and wheat impacted by heavy rains in the US which

generated concerns about crops, amid solid demand.

Dow Jones-UBS Commodity Indices

50

60

70

80

90

100

110

120

130

Jun-1

2

Sep

-12

Dec-

12

Mar-

13

Jun-1

3

Sep

-13

Dec-

13

Mar-

14

Jun-1

4

Sep

-14

Dec-

14

Mar-

15

Jun-1

5

Energy Industrials

Prec. Metals Agricultural

Crude oil futures ($/barrel)

40

50

60

70

80

90

100

110

120

130

Jun

-10

Dec-1

0

Jun

-11

Dec-1

1

Jun

-12

Dec-1

2

Jun

-13

Dec-1

3

Jun

-14

Dec-1

4

Jun

-15

Crude oil generic Brent

15

Market review: currencies


The euro appreciated 0.1% trade weighted and 1.5% against the USD to 1.11, with European yields

increasing more than US yields. The lack of impact of the Greek situation into the currency market

may indicate that the markets see contagion limited.

The USD depreciated 1.5%, trade weighted (+5.8% ytd).

The yen appreciated 1.3% against the USD to 122.50, being down 0.1% against the euro.

The emerging markets currency index was down 0.8% (-5.0% ytd).

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

70

75

80

85

90

95

100

105

110

115

120

De

c-0

0Ju

n-0

1D

ec-

01

Jun

-02

De

c-0

2Ju

n-0

3D

ec-

03

Jun

-04

De

c-0

4Ju

n-0

5D

ec-

05

Jun

-06

De

c-0

6Ju

n-0

7D

ec-

07

Jun

-08

De

c-0

8Ju

n-0

9D

ec-

09

Jun

-10

De

c-1

0Ju

n-1

1D

ec-

11

Jun

-12

De

c-1

2Ju

n-1

3D

ec-

13

Jun

-14

De

c-1

4Ju

n-1

5

USD Index and Euro-USD exchange rate

USD Index EUR-USD

70

80

90

100

110

120

130

140

150

160

170

De

c-0

0Ju

n-0

1D

ec-

01

Jun

-02

De

c-0

2Ju

n-0

3D

ec-

03

Jun

-04

De

c-0

4Ju

n-0

5D

ec-

05

Jun

-06

De

c-0

6Ju

n-0

7D

ec-

07

Jun

-08

De

c-0

8Ju

n-0

9D

ec-

09

Jun

-10

De

c-1

0Ju

n-1

1D

ec-

11

Jun

-12

De

c-1

2Ju

n-1

3D

ec-

13

Jun

-14

De

c-1

4Ju

n-1

5

Yen against the USD and Euro

EUR-JPY USD-JPY

16

Summary



3. Market review

4. Market outlook

17

Update on Greece

Data source: Bloomberg.

Where do we stand regarding Greece?

In Greece, 61% of voters said they did not want the agreement with Creditors at stake before June 30th. The 2nd

financial assistance programme expired on June 30th and Greece failed to pay the IMF on June 30th.

Banks are closed, there are limits to ATM withdrawals and there are capital controls. The ECB has maintained the

emergency liquidity line but increased collateral requirements for Greek banks. The Greek financial system is

hence under a lot of stress.

The next key deadline is July 20th, when repayments to the ECB are due. If Greece defaults, the ECB may

withdraw support and a solution has to be found for Greek banks. Nationalisation and bail ins (including deposits)

could be on the table.

The Greek government requested for a 3rd bailout, although lacking detailed reform plans, and an emergency EU

Summit will take place on July 12. If the Greek government and the creditors compromise, a 3rd bail out could

start being negotiated and eventually a bridge loan facilitated.

Meanwhile, with banks closed pressure will also weight on the Greek government. If the ECB tightens further they

can be forced into resolution.

A possible outcome can be the issuance of “I Owe You” notes to pay for wages and pensions which would probably

trade at significant discount to the euro and constitute a kind of parallel currency with or without a formal exit

from the euro area. Imports would however continue to be difficult.

The Greek crisis and euro area markets

So far, the contagion impact on euro area financial markets has been limited. Stock markets have corrected, bond

yields of non-core countries have risen only modestly and the euro has been stable.

18

Update on Greece (cont.)

Underlying the modest contagion are:

(1) ECB has a QE programme in place and also the OMT

if needed and has explicitly stated it would do

everything within its mandate to maintain stability.

(2) The direct exposure to Greek assets is now

concentrated in the official sector (EU, ECB, IMF).

(3) Fundamentals of other more vulnerable European

countries have improved. Structural reforms were

made, deficits reduced, banks deleveraged, and

economies are back to growth.

Hence, we believe that in the case of Greek exit,

volatility should prevail, but contagion should be

limited. Nonetheless is important also to note that

reforms and debt sustainability are still a work in

progress for some countries.

The long term implications are uncertain: a precedent

is opened in exiting the euro area could be used more

vehemently by extreme left and right wing parties,

although at the same time it can illustrate how

disruptive leaving the euro can be for the economy.

Geo-political ties between Russia and Greece could

cause more instability.

Graphs source: RBS and DB.

19

China


What is happening in the Chinese stock market?

After rallying from mid-2014 to May-2015, the Chinese stock market dropped significantly. Some deregulation

allowed for more retail investors to enter into the market earlier in the year, and many stocks were bought on debt,

while a tightening of regulation regarding margin calls have led to a correction from extremely expensive

valuations. Meanwhile, the government has intervened to try to soften the free fall, with caps on short selling,

suspension of initial public offerings, leading brokers to set a fund to buy shares (backed by central bank cash) and

even introducing some prohibitions on trades.

The stock market is not as relevant in China as in developed economies. The free float in Chinese capital markets is

about 30% of GDP (~100% for developed economies), less than 15% of household financial assets are invested in

stocks, and 1.5% of total assets in the banking system are linked to loans to buy stocks.

We then see this as a correction from extreme valuations. Nonetheless, there are risks to the Chinese economy,

steaming from the credit and real estate boom that followed the government’s stimulus plan of 2009 and the move

from an investment based growth model to a more balanced one.

Chinese stock performance

(base Sep2014)

Chinese equities valuations

(PERs)

20

China (cont.)


Background on Chinese Stock Market

China’s 2 main mainland stock exchanges are Shangai and Shenzhen, which are still not entirely open to foreign

investors. There are A-shares, only quoted in Chinese renminbi and available mostly only to mainland citizens. Most

companies listed on Chinese exchanges also offer “B-shares” quoted in foreign currencies and available to both

domestic and foreign investors.

There are also “H-shares”, which are shares of a company from Chinese mainland that is listed on the Hong Kong

stock exchange and denominated in HK dollars and are included in the Hang Seng Index. Mainland investors are also

allowed to invest in the HK exchange since 2007.

“A-shares” are not included in the MSCI China index and although there are plans to do so gradually, the decision to

include them was postponed in June 2015. If included fully, Chinese “A-shares” could represent c.10% of the MSCI

Emerging Markets index, and China’s weight increase from c. 19% to c. 28%.

21

Market outlook: interest rates & FX

US Interest Rates:

EUR Interest Rates:

EUR-USD Forecasts:

UK Interest Rates: Rates at record lows; QE on hold.

BoJ policy: Large balance sheet expansion under way.

Last (9/Jul/15) Dec-15 Jun-16

Fed Funds Rate 0-0.25 0.50 1.00

3M Libor Rates 0.28 0.50-0.75 1.00-1.50

2yr Bond Yield 0.57 1.00-1.50 1.25-1.75

10yr Bond Yield 2.27 2.25-2.75 2.50-3.00

Avg 2-10yr Spread, bp 170 125 125

Avg FDRT-10y Spread, bp 215 200 175


ECB Refi Rate 0.05 0.05 0.05

3M Euribor Rate -0.02 0.00-0.10 0.00-0.10

GE 2yr Bond Yield -0.26 0.00 0.00

GE 10yr Bond Yield 0.72 0.75-1.25 1.00-1.50

Avg 2-10yr Spread, bp 98 100 125

Avg ECB Rate-10yr Spread, bp 67 95 120


WMU 1.10 1.05-1.15 1.00-1.15

Consensus from Bloomberg 1.05 1.05

22

Market outlook: government bonds


Underweight Government bonds, given that returns should be low and

yields have upside potential in the US

We maintain the underweight to government bonds, given that returns should be low or negative.

We are maintaining the tilt towards European government bonds against US government bonds

given the differences in monetary policy bias and balance sheet expansion, with the US having

stopped asset purchases and having a tightening bias, while the ECB is expanding its balance sheet

and reference rates should stay low for an extended period of time.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

02

-Jan

-92

02

-Jan

-93

02

-Jan

-94

02

-Jan

-95

02

-Jan

-96

02

-Jan

-97

02

-Jan

-98

02

-Jan

-99

02

-Jan

-00

02

-Jan

-01

02

-Jan

-02

02

-Jan

-03

02

-Jan

-04

02

-Jan

-05

02

-Jan

-06

02

-Jan

-07

02

-Jan

-08

02

-Jan

-09

02

-Jan

-10

02

-Jan

-11

02

-Jan

-12

02

-Jan

-13

02

-Jan

-14

02

-Jan

-15

US government bond yields

US average bond yields >1yr

UST 10yr bond yields

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

02

-Jan

-00

02

-Ju

l-0

00

2-J

an-0

10

2-J

ul-

01

02

-Jan

-02

02

-Ju

l-0

20

2-J

an-0

30

2-J

ul-

03

02

-Jan

-04

02

-Ju

l-0

40

2-J

an-0

50

2-J

ul-

05

02

-Jan

-06

02

-Ju

l-0

60

2-J

an-0

70

2-J

ul-

07

02

-Jan

-08

02

-Ju

l-0

80

2-J

an-0

90

2-J

ul-

09

02

-Jan

-10

02

-Ju

l-1

00

2-J

an-1

10

2-J

ul-

11

02

-Jan

-12

02

-Ju

l-1

20

2-J

an-1

30

2-J

ul-

13

02

-Jan

-14

02

-Ju

l-1

40

2-J

an-1

50

2-J

ul-

15

Euro area government bond yields

EU average bond yields >1yr

GE 10yr bund yields

23


(cont.)

Data source: Fed.

US Treasury yields stand at relatively low levels and

should head marginally higher:

Macro data continues to suggest ongoing economic

recovery, the unemployment rate stands at 5.3%

and, going forward, wage pressures could become

more relevant, although the fall in energy prices

and USD appreciation put a temporary downward

pressure on prices.

The Fed has a tightening bias, signalling the

possibility of tightening from the summer on, but

at the same time underlined that any decision is

data dependent, any rate increases will be gradual

and the terminal rate lower than in previous

expansions.

In risk aversion periods US government bonds

provide one of the most effective buffers to

portfolios.

Underweight US government bonds given the Fed’s tightening bias

Core inflation at 1.7%,

headline at +0.0%

US Government bond yields

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

01

-Jan

-10

01

-Ap

r-1

0

01

-Ju

l-1

0

01

-Oct

-10

01

-Jan

-11

01

-Ap

r-1

1

01

-Ju

l-1

1

01

-Oct

-11

01

-Jan

-12

01

-Ap

r-1

2

01

-Ju

l-1

2

01

-Oct

-12

01

-Jan

-13

01

-Ap

r-1

3

01

-Ju

l-1

3

01

-Oct

-13

01

-Jan

-14

01

-Ap

r-1

4

01

-Ju

l-1

4

01

-Oct

-14

01

-Jan

-15

01

-Ap

r-1

5

01

-Ju

l-1

5

US Government bond yields

US 2yr yields UST 10yr yields

-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.54.04.55.05.5

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

May

-13

May

-14

May

-15

CPI CPI core target

24


(cont.)

Data source: Bloomberg. Bottom graph source: Blackrock and Citi.

Yields have increased significantly from all time

exceptionally lows, and in some countries/maturities,

from negative levels.

Non-cores spreads widened, impacted by concerns of

contagion from Greece. However, given that (i) the

ECB said it would do everything necessary to

guarantee stability, (ii) most vulnerable countries have

already implemented reforms and improved their

fundamentals, we belief that contagion should be

limited.

On core yields, we also think the upside is limited

given (a) that European growth potential is limited,

(b) inflation is low and (c) the ECB is purchasing a

large amount of government bonds.

Hence we are maintaining the moderate

overweight.

Volatility could increase given uncertainty regarding

Greece and elections in Spain and other countries, but

the ECB QE said it would limit contagion.

Maintaining a moderate overweight to European government bonds, given

public sector QE, low growth and low inflation Eurozone average bond yields >1yr

Eurozone inflation at 0.2%

and core inflation at 0.8%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Jun-

13

Jun-

14

Jun-

15

Germany Italy France

Spain Portugal EZ

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

CPI

CPI target

CPI core

25

Market outlook: corporate debt


Tactically reinforcing US and European High Yield

positioning (and moving US high yield to moderate

overweight), given that spreads widened on risk

aversion and the underlying yield also increased. Given

the ample liquidity environment provided by the ECB

we believe that spreads will tighten back, and hence

are reducing government debt and increasing high

yield to take advantage of this opportunity.

High yield stances are supported by economic growth,

low default rates, the search for yield environment

and QE.

We maintain the neutral stance to European

Investment Grade credit, given that growth should

continue improving and the ECB has 3 asset purchase

programmes (ABSs, covered bonds, sovereign bonds)

supporting credit markets. However, spreads are at

post crisis lows and the underlying yields are low,

providing unattractive returns.

Growth and QE in Europe is credit supportive, although spreads are already

at low levels and the energy sector is creating uncertainty in the US EUR High yield spread (bp)

US High yield spread (bp)

100

300

500

700

900

1100

1300

1500

1700

1900

2100

31-D

ec-

01

14-O

ct-0

2

30-J

ul-

03

12-M

ay-0

4

23-F

eb

-05

07-D

ec-

05

28-S

ep

-06

17-J

ul-

07

05-M

ay-0

8

16-F

eb

-09

01-D

ec-

09

16-S

ep

-10

30-J

un-1

1

13-A

pr-

12

29-J

an-1

3

12-N

ov-1

3

28-A

ug

-14

08-J

un-1

5

100

300

500

700

900

1100

1300

1500

1700

1900

2100

31-D

ec-

01

14-O

ct-0

2

30-J

ul-

03

12-M

ay-0

4

23-F

eb

-05

07-D

ec-

05

28-S

ep

-06

17-J

ul-

07

05-M

ay-0

8

16-F

eb

-09

01-D

ec-

09

16-S

ep

-10

30-J

un-1

1

13-A

pr-

12

29-J

an-1

3

12-N

ov-1

3

28-A

ug

-14

08-J

un-1

5

26

Market outlook: emerging markets

sovereign debt

Source: Bloomberg. JPM Emerging Markets Bonds Index (EMBI Global Diversified).

The ongoing slowdown in emerging markets, with some countries entering into a recession, the

deterioration of fundamentals in many countries, in part associated with the significant drop in

commodity prices which implies lower fiscal revenues for producing countries, but also related

with tensions around Russia and Ukraine, on top of risk from higher UST yields justify a moderate

underweight to EMD in USD.

On the other hand, the search for yield environment and the increase in spreads in 2014, provide

some support.

Moderate Underweight EM debt in USD

012345678910111213141516

0100200300400500600700800900

1000110012001300140015001600

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

EM sovereign yields and spreads

Spread (bp) Yield (%)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

700

800

900

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

EM DebtIndex % ch

27

Market outlook: equities

The outlook for equities continues to be supported by:

Ongoing economic recovery in the US and improving growth in Europe.

Central Banks supportive policies and crucial role in stabilising markets.

Ample liquidity, with the ECB and BoJ increasing liquidity.

Ultra low interest rates, motivating investors to search for higher yielding assets such as

equities, and allowing corporates to refinance cheaply and favouring share buy backs, M&A

activity and dividend increases.

On corporates profitability, costs have been benefiting from low wage pressures, cost cutting

initiatives, and recently significantly lower commodity prices, although revenue growth has

lagged in this recovery.

Attractive valuations relative to other asset classes, such as government bonds or credit,

although price to earnings ratios are already well above average in most geographies.

Risks include political risk in Europe (eg. Greece), geopolitical instability (eg. Russia), risk of a

mismanagement of Fed’s exit policy and a hard landing by China.

We hence still expect equities to outperform and maintain the overweight to

equities, although we have moderated the size of the overweight position in the past

couple of months.

Market outlook: equities

Data source: Bloomberg and Datastream.

Euro area equities dividend yield vs

government bond yields

Regional earnings-per-share growth Regional equity price-to-earnings

5

10

15

20

25

30

Jun

-90

Jun

-91

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

US 12m fwd PE EMU 12m fwd PE UK 12m fwd PE

JPN 12m fwd PE EM 12m fwd PE

-40

-30

-20

-10

0

10

20

30

40

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

US EMU local currency UK JAPAN EMERGING MARKETS

0%

1%

2%

3%

4%

5%

6%

7%

8%

Jun-0

1

Jun-0

2

Jun-0

3

Jun-0

4

Jun-0

5

Jun-0

6

Jun-0

7

Jun-0

8

Jun-0

9

Jun-1

0

Jun-1

1

Jun-1

2

Jun-1

3

Jun-1

4

Jun-1

5

10 Yr. Bund Yield EMU equities div. yield

Yield Euro Gov 5-10yrs

29

Market outlook: Euro area equities


Overweight Euro area equities

Macro data continues to point to ongoing recovery

in Europe;

A lower fiscal drag, the correction of macro

imbalances and improved financing conditions were

the first supporters of the recovery;

This year, the significant depreciation of the euro

and the sizeable fall in energy prices are major

supportive factors, on top of improving credit

dynamics.

The ECB continues to play a crucial role in the

stabilisation of financial conditions in Europe with

ultra low rates, ample liquidity for banks and €60bn

monthly purchases of bonds under its asset purchase

programmes and a compromise to maintain financial

stability even amidst the Greek crisis.

Although valuations are above average, the

significant depreciation of the euro and economic

recovery should support EPS going forward.

Risks: Greece. Still high debt levels, sluggish potential

growth and elections in some countries.

Euro area confidence surveys (PMI)

Euro area earnings per share growth

40

45

50

55

60

65

Jun

-12

Sep

-12

De

c-12

Mar-

13

Jun

-13

Sep

-13

De

c-13

Mar-

14

Jun

-14

Sep

-14

De

c-14

Mar-

15

Jun

-15

Eurozone FranceGermany SpainItaly

-35

-25

-15

-5

5

15

25

35

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

12m Fwd EPS Growth YoY 12m Trailing EPS Growth YoY

30

Market outlook: US equities


Neutral stance on US equities

The economy continues to recover and employment

to improve, and there are signs that the

manufacturing weakness seen in Q1 is improving.

There have also been improvements in housing

investment.

Significantly lower energy prices boost households ex-

energy disposable income and corporates lower cost

base, although investment related to oil is stalling.

The Fed has a bias to tighten, although it has revised

down the expected end rate and reinforced that

tightening will be very gradual and data dependent.

Given that the tightening bias comes from better

growth and not inflationary pressures it should not

derail the recovery.

Corporate sector with earnings resilience and equities

are also supported by share buybacks and M&A

activity, but valuations are above average and

stronger USD may impact earnings growth.

Risks: Fed’s mismanagement of its exit strategy. Impact

of energy sector and higher USD on profits and

growth.

US confidence indicators (ISMs)

US earnings per share growth

US ISM manufacturing and services

35

40

45

50

55

60

65

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

ISM non-manufacturing ISM manufacturing

-35

-25

-15

-5

5

15

25

35

Jun

-90

Jun

-91

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15


31

Market outlook : UK equities


Moderate underweight UK equities

Ongoing recovery in economic activity.

The referendum on European membership

announced for 2016/17 may create some

uncertainty to business decisions.

There are growing concerns about the high

budget deficit (-5.7% of GDP) and current

account deficits (-5.5% of GDP). S&P recently

put UK’s AAA rating on negative outlook.

The BoE has a tightening bias, but lower

inflation and pound appreciation are delaying

the tightening.

UK quoted companies profitability continues to

be impacted by their global exposure

(slowdown in EM, lower commodity prices),

and pound appreciation (+11% in past 12

months) is also not supportive. Valuations

stand at above neutral levels.

UK weekly earnings (3mma)

UK quoted companies EPS growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Ap

r-01

Ap

r-02

Ap

r-03

Ap

r-04

Ap

r-05

Ap

r-06

Ap

r-07

Ap

r-08

Ap

r-09

Ap

r-10

Ap

r-11

Ap

r-12

Ap

r-13

Ap

r-14

Ap

r-15

-35

-25

-15

-5

5

15

25

35

Jun

-90

Jun

-91

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15


32

Market outlook: Asia Pacific equities


Moderate overweight Asia Pacific

through Japanese equities

In Japan, after the disruptive impact of the hike in

the sales tax in 2014, there have been signs of

improvement in 2015.

The economy has benefited from lower oil prices

and business friendly measures, such as the cut in

the corporate tax rate, the postponement of the

second sales tax hike and reforms in the corporate

governance code.

The BoJ has been decisive in depreciating the yen

and boosting exporters profits. The Japanese public

pension fund is significantly increasing its

allocation to Japanese equities and foreign assets.

Corporate profitability continues to improve and

valuations are at the historical average.

Risks: sustainability of yen depreciation; impact of a

significant regime shift on economic stability.

Japan confidence survey (Tankan)

Japan earnings per share growth

-50

-40

-30

-20

-10

0

10

20

30

40

50

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

Tankan lge manufacturing outlook

Tankan lge services outlook

-100

-75

-50

-25

0

25

50

75

100

Jun

-90

Jun

-91

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15


33

Market outlook: Emerging markets

equities

Data source: Bloomberg and Datastream. EPS=Earnings per share.

Neutral EM equities

We maintain the neutral stance to EM equities, although

there is a large disparity of outlooks.

Emerging economies are slowing down and have

significantly increased their leverage in the past years.

Some face the challenges of lower commodity export

revenues, weak growth potential, and other structural or

geopolitical challenges.

Some others benefit from lower commodity prices on

their imports and from the implementation of structural

reforms. Lower global inflation has also allowed for EM

central banks to ease.

China has so far managed the slowdown driven by its real

estate sector and credit boom through fiscal stimulus

and monetary easing, but the slowdown has intensified

this year and its stock market has been volatile.

PERs are not as high as developed markets, but EM are

ahead of the business cycle and face challenges.

Adjusted for growth, PEGs are more expensive.

Risks: China’s deceleration dynamics; impact of higher USD

on EM currencies.

China’s Industrial production (yoy)

EM PEG ratio (PER ajusted for growth)

0

5

10

15

20

25

May-

04

May-

05

May-

06

May-

07

May-

08

May-

09

May-

10

May-

11

May-

12

May-

13

May-

14

May-

15

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

Jun

-90

Jun

-91

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

PEG 10yr historical average

34

Market outlook: equity sectors

Sector wise, we are maintaining:

Moderate overweight to healthcare,

given resilient revenue growth and

adding a defensive touch to the

sectorial stances;

Moderate overweight to industrials and

consumer goods, due to the ongoing

economic recovery;

Neutral stance on IT;

Neutral telecoms and utilities;

Neutral energy;

Moderate underweight to financials;

Underweight materials.

Off-benckmark exposure to gold miners.

Sector stances

OverweightUnderweight Neutral

Materials

Energy

Information Tech

Financials

Healthcare

Telecoms

Consumer Goods

Utilities

Industrials

35

Market outlook: commodities

Neutral stance on commodities

We maintain a neutral stance on commodities,

although still having a short term overweight to

the asset class, while moving an hedge

commodities exposure to an unhedged one.

The correction in energy prices was significant and

investment cuts will eventually lead to a

moderation of supply and stabilisation or recovery

in oil prices.

However, industrial metal prices still have

downside pressure from the slowdown in

construction in China.

Precious metal prices have on the one hand (i)

downside pressure from ongoing economic recovery

amid low inflation and the appreciation of the

USD, while on the other hand (ii) the price has

corrected significantly in the last couple of years

and gets support in risk aversion periods.

World oil production

Unconventional oil production

Graphs source: EIA, SYZ.

36

Risk appetite

Risk appetite is slightly above neutral levels, although not in euphoric levels.

37

Appendix

WMU Discretionary Management Funds Matrix

WMU Allocation Matrix – changes

38

WMU Discretionary Management Funds

Matrix

The recommendations are based on the assumption a diversified portfolio, composed of both equities and bonds, is held.

ASSET CLASS FUND OFFERING PROPOSED

Jun-15

FIXED INCOME Global - Wellington Global Bond Portfolio, Julius Baer Absolute Return Bond Fund Plus Underweight

US Bonds

Aggregate Investment Grade T.Row e Price US Aggregate Bond, JP Morgan US Aggregate, PIMCO Total Return Bond Underw eight

High Yield Neuberger Berman US High Yield Fund, ING L Invest Senior Bank Loans EUR Mod. Overw eight

Euro Zone

Government Parvest Bond Euro Govt, Schroder ISF Euro Short-Term Bond Mod. Overw eight

Corporate Morgan Stanley Euro Corporate Bond, Bluebay Investment Grade Neutral

High Yield Fidelity European HY Fund EUR Mod. Overw eight

Emerging Markets Hard Currency: MFS Meridian Funds EMD, Old Mutual EMD; Local currency: Pictet Emerging Markets LC, UBS Emerging Economies Latin American, UBS (Lux)

Bond Brazil Sicav.Mod. Underw eight

EQUITY Global - JPMF Global Dynamic Overweight

US Wellington US Research Equity, JPMF US Select, JPMF US Value, Threadneedle American Smaller Co's Neutral

Europe ex UK Lazard Global Active European Equity, Schroder ISF Euro Equity, BGF European Focus (Pan European), Franklin Mutual European (Pan European), BNP Paribas

Smallcap EurolandOverw eight

UK Threadneedle UK Equity Mod. Underw eight

Asia Pacif ic Invesco Japanese Value Equity, Pictet Japanese Equity Index, JPMorgan Asia Pacif ic Strategic Equity Mod. Overw eight

Emerging Markets Comgest Emerging Markets, Pictet Emerging Market Index, BGF Emerging Europe, Schroder Greater China, JPMF JF India, BGF Latam, BNY Mellon Brazil Neutral

Equity sectorial

Information Technology Janus Global Tech Fund Neutral

Health Care Fidelity Global Healthcare, Pictet Biotech Mod. Overw eight

Financials JPMF Global Financials Mod. Underw eight

Energy BGF World Energy, BGF New Energy Neutral

Telecom Fidelity Funds - Telecommunications Neutral

Materials BGF World Mining, BGF World Gold Underw eight

Consumer Goods Fidelity Funds - Consumer Industries Mod. Overw eight

Utilities Parvest Equity World Utilities Neutral

Industrials Fidelity Industrials, ING L Invest Industrials Fund Mod. Overw eight

ALTERNATIVES Overweight

Real Estate Morgan Stanley Property Funds Neutral

Commodities Vontobel Belvista Commodity Fund Neutral

Listed Private Equitiy Partners Group Listed Private Equity

Hedge Funds Permal Macro Holdings, FRM Sigma, ING L Invest Alternative Beta

Equity Hedge GLG European Alpha Alternative, Henderson Horizon Pan European Alpha

Volatility Amundi Absolute Volatility Euro Equities, Amundi Absolute Volatility World Equities

39

WMU Allocation Matrix: recent changes

ASSET CLASS Jul-14 Aug-14 Sep-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

FIXED INCOME Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight

US Bonds

Aggregate Investment Grade Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight

High Yield Overw eight Overw eight Mod. Overw eight Mod. Overw eight Neutral Mod Underw eight Neutral Neutral Neutral Neutral Mod. Overw eight

Euro Zone

Government Neutral Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight

Corporate Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral

High Yield Overw eight Overw eight Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight

Emerging Markets Neutral Neutral Neutral Neutral Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight

EQUITY Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight Overweight

US Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Neutral Neutral Neutral Neutral Neutral

Europe ex UK Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight

UK Neutral Neutral Neutral Neutral Neutral Neutral Neutral Mod Underw eight Mod Underw eight Mod Underw eight Mod Underw eight

Asia Pacif ic Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight

Emerging Markets Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral

Information Technology Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight Overw eight Neutral Neutral Neutral Neutral

Health Care Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight

Financials Neutral Neutral Neutral Neutral Mod Underw eight Mod Underw eight Mod Underw eight Mod Underw eight Mod Underw eight Mod Underw eight Mod Underw eight

Energy Underw eight Underw eight Underw eight Underw eight Underw eight Neutral Neutral Neutral Neutral Neutral Neutral

Telecom Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral

Materials Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight Underw eight

Consumer Goods Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight

Utilities Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral

Industrials Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight Mod. Overw eight

ALTERNATIVES

Real Estate Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral

Commodities Underw eight Underw eight Underw eight Underw eight Underw eight Neutral Neutral Neutral Neutral Neutral Neutral

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