INSIGHTSINVESTMENT OPPORTUNITIES

APRIL 2017

2

CONTENTS

3 Editorial

4 Overview

6 Investment view

8 Technical analysis

10 Next Generation

12 Economics

13 Currencies

14 Fixed income

16 Equities

18 Commodities

19 Important legal information

INSIGHTS APRIL 2017

ImprintPublication date

29 March 2017

Current prices27 March 2017, unless specified otherwise

JULIUS BAER NEXT GENERATION INVESTMENT THEMES

ARISING ASIA DIGITAL DISRUPTION ENERGY TRANSITION

FEEDING THE WORLD SHIFTING LIFESTYLES

3

Christian GattikerHead of Research & Investment Solutions

EDITORIAL

INSIGHTS APRIL 2017

Dear Reader

“Everybody is a political analyst these days”, said an expert who does political analy-sis for a living recently. This reminds me of everybody being a technology analyst in 2000 and a copper specialist in 2005. Not to speak of having been a specialist in credit meltdowns in 2009 or emerging market crises in 1997. It is hard to take the similarity as a clear signal for action. Yet it seems to me that these hot-button issues resonated with the investment community at the time – after they had moved financial markets.

For the current political markets, the broad-based interest would imply that politics is well on the radar of global investors by now. A lot more so than back in 2016 before Brexit. This would mean that there is a risk of politics – both European and US – being a red herring, a distractor from what is really driving markets.

In this issue we will therefore contrast the political risk landscape with the broad-based economic recovery we register globally and the related end of a two-year corporate earnings recession.

4

OVERVIEW

INSIGHTS APRIL 2017

Investment view: Page 6• Stock markets hit all-time highs while the political

arena is still giving headaches. This remains the most prominent feature of 2017 to date.

• In financial markets the conundrum coincides with an end to the protracted earnings recession. Hence, we recommend adding stocks from cyclical areas and upgraded banks.

Technical analysis: Page 8• Envy explains to a large extent the shift of endow-

ments and pensions towards US equities. • This behaviour can only be observed in the early

stages of secular bull markets – stay long US equities.

Next Generation: Page 10• Advances in electric car and autonomous driving

technology, as well as the rising Asian middle class and ongoing urbanisation will shape the future of mobility and impact the auto business.

• The vision of shared, self-driving cars looks ever more possible and heralds the age of electric mobility, peaking car sales and peaking oil use by 2035. There are few winners and many potential losers.

Economics: Page 12• The US Federal Reserve continues normalising its

interest rates. We expect two more hikes after the March hike. In the other major economies, core in-flation and wage dynamics are still too weak for central banks to become active.

• China remains focused on maintaining economic stability in this important year of leadership change.

Currencies: Page 13• The USD continues to enjoy support from an ex-

pansionary fiscal policy and rising interest rates at home. We still see room for rate-hiking expecta-tions to drift higher, which justifies holding on to our bullish USD view.

• The euro is getting ready for a comeback. Money outflows are already less of a headwind and the European Central Bank (ECB) is tolerating specu-lations that it might increase the negative deposit rate in the not so distant future.

Fixed income: Page 14• The bond market is returning to its old pattern

where good economic news is the harbinger of higher policy rates. Anxiety ahead of central bank meetings is the new (old) reality, and no longer the hope for more stimulus.

• The transition back to the old pattern is a slow but painful process in which we prefer the segments that have been distorted the least by central bank purchases, such as subordinated bank debt in Europe or US leveraged loan funds.

Equities: Page 16• We are now fully Overweight in financials after

upgrading banks and diversified financials.• Banks have the highest cyclical exposure and are the

most value-tilted of all industry groups. Conse-quently, they benefit from a robust macroeconomic backdrop. Drivers include the credit environment, an improving earnings picture and still-attractive valuations.

Commodities: Page 18• Concerns over surplus supply have resurfaced and

put pressure on commodity prices. The reflation euphoria got its overdue reality check. Further downside is looming as sentiment remains overly bullish.

• The oil market surplus is unlikely to shrink signifi-cantly anytime soon and prices should trade below USD 50 per barrel. USD strength and solid eco-nomic growth should continue to pressure gold.

5

INSIGHTS APRIL 2017

INVESTMENT IDEAS: EQUITIESTopic CompaniesPolitical uncertainty in France

Societe Generale, LVMH, Schneider Electric

Swiss smaller caps Helvetia, Lindt & Sprüngli, LonzaOverweight Malaysia IHH Healthcare Berhad, Bumi Armada,

British American Tobacco Malaysia

For further information about the mentioned companies, please refer to page 17 or the respective Baer Insight Equity/Fixed Income Fact Sheet. Please note that these publications may have a different distribution scope.

Source of all tables and graphs: Julius Baer

CURRENCIESSpot 3m 12m

EUR/CHF 1.07 1.07 1.07USD/CHF 0.98 0.99 1.00JPY/CHF 0.89 0.86 0.83GBP/CHF 1.24 1.20 1.16EUR/USD 1.09 1.08 1.07EUR/GBP 0.86 0.89 0.92USD/JPY 110.1 115.0 120.0GBP/USD 1.26 1.21 1.16

PREFERRED BOND ISSUERSRisk category IssuersQuality Abu Dhabi, Caterpillar, General Electric, Rabo-

bank, Santander, Saudi Arabia, Siemens, UBSOpportunistic Barry Callebaut, BBVA, Cielo, Commercial

Bank of Qatar, Credit Agricole, CRH, Hungary, Oman, Orange, Pernod Ricard

Speculative Argentina, Bahrain, Bombardier, Levi Strauss, Smurfit Kappa, YPF

EQUITY INDICES (local currency)Value 12m

SMI 8595 8750Eurostoxx 50 3437 3700S&P 500 2342 2400Nikkei 225 18986 20000

COMMODITIESPrice 12m

Oil Brent (USD/bbl) 55.6 47.5Gold (USD/oz) 1254 1150Corn (cts/bushel) 356 400Copper (USD/t) 5737 5400

CENTRAL BANK RATES (%, p.a.) Year-end 2016 2017E 2018EUSA 0.75 1.50 2.50Eurozone 0.00 0.00 0.00UK 0.25 0.25 0.25Switzerland -0.75 -0.75 -0.75Japan -0.10 -0.10 -0.10E = Estimate

10-YEAR GOVERNMENT BOND YIELDS (%, p.a.)Year-end 2016 2017E 2018EUSA 2.49 2.65 2.40Eurozone 0.20 0.75 0.50UK 1.39 1.20 1.00Switzerland -0.13 0.10 0.00Japan 0.06 0.00 0.00

GLOBAL BUSINESS CYCLE OVERVIEW

GROWTH (real GDP y/y, %)Average 2016 2017E 2018EUSA 1.6 2.5 2.3Eurozone 1.7 1.6 1.5UK 1.8 1.4 0.6Switzerland 1.3 1.4 1.4Japan 1.0 1.2 1.0China 6.7 6.5 6.0World 3.1 3.3 3.4GDP = gross domestic product

INFLATION (CPI y/y, %)Average 2016 2017E 2018EUSA 1.3 2.4 2.5Eurozone 0.2 1.9 1.6UK 0.6 2.0 1.6Switzerland -0.4 0.8 0.8Japan -0.1 0.5 0.1China 2.0 2.0 1.6World 2.8 3.3 3.0CPI = consumer price index

Business cycle

Canada

China

Japan

EM Asia

FranceWorld

ItalyEurozone

SwitzerlandSouth Korea

Germany

Australia

UKUSA

Long-term potential growth rate

ASSET CLASS VIEWView Asset class Risk category Focus on … Avoid …

CashBonds Conservative Treasury inflation-protected securities (TIPS) Core European government bonds

Quality USD money market instruments EUR high-grade non-financial bondsOpportunistic Subordinated bank debt, Asia’s real estateSpeculative USD senior loan funds

Equities Conservative Healthcare Consumer staples, utilities; USA, US dividend growers, US large caps

Medium Chile, eurozone, Hong Kong, Japan, Malaysia; energy, information technology, consumer discretionary, financials; European small caps, US small caps, European high dividend

Singapore, South Africa; industrials, real estate; European large caps

Opportunistic China, India, Philippines, Vietnam TurkeyCommodities Cyclical metals, oil, soybeans Currencies CZK, INR, MXN, SEK, USD GBP, HUF, JPY, TRYNext Generation Thematic Asian tourism, automation & robotics, animal health,

cybersecurity, clean energy, digital content, digital commerce, digital health, digital payments (FinTech), education, future mobility, genomics 2.0, healthy China, New Silk Road

Vietnam: Julius Baer makes no offering in local markets; Philippines: For residents of the Philippines, investments into the local market are bound by legal restrictions.

positive view  neutral view  negative view

6

INVESTMENT VIEW

INSIGHTS APRIL 2017

HUNTING HIGH AND LOW

Stock markets hit all-time highs while the political arena is still giving headaches. This remains the most prominent feature of 2017 to date. In stock markets the conundrum coincides with

an end to the protracted earnings recession. Hence, we recommend adding stocks from cyclical areas and upgraded banks.

A contrast between politics and the economyWhen assessing global financial markets in spring 2017, the contrast between the economic and the political situation could not be starker. The economic recovery is at an ‘as good as it gets’ stage. At the same time, politics is feeling shaky in this super elec-tion year in Europe and with so much uncertainty around the policy mix in the US. Looking also at cen-tral banks rather than just political authorities, the shift in monetary policy perception has been quite pronounced year-to-date: from rather bond-friendly to rather hawkish when it comes to the potential for interest-rate normalisation. Hence, investors are confronted with the challenge of striking a balance between the strong economic data and the current political risks.

Good things first – economy back on trackBut let us first start with the positive: growth is back and the global economy is recovering from an indus-trial recession in 2016. Moreover, looking at leading indicators, the recovery does not seem to have al-ready run its course – see chart 1. Indeed, the trend over the next six months is still steeply up, which points towards a further improvement of both the industrial and the services sectors over the summer.

Chart 1: Up, up and away – growth is accelerating globally

Source: JP Morgan, Datastream, Julius Baer

2012 2013 2014 2015 2016 2017484950515253545556Index

Manufacturing PMI Services PMI6-month trend (+2.3) 6-month trend (+2.5)

Leading indicators point towards a further

improvement of the global economy over

the summer.

Political risks not disappearing anytime soonLooking at the flipside of the coin, many of the politi-cal milestones in 2017 still lie ahead – be it the final decision on the French presidency, French parliamen-tary elections in June, German elections in Septem-ber or greater clarity on the new US government’s pol-icy implementation. Not to speak of the uncertainty around monetary policy, which saw quite a change in perception lately: while entering the year with a sce-nario of an accommodative Fed eral Reserve and a generous ECB and Bank of Japan, investors are now fearing a Fed erring on the hawkish side and the ECB at risk of entering a ‘stealth tapering’.

TERM OF THE MONTH: Earnings recession

Though the National Bureau of Economic Research makes official calls on recession dates, a common generalisation used by markets is that two consecu-tive quarters of negative economic growth indicate an economic recession. Similarly, two quarters of negative year-over-year earnings growth is generally interpreted as an earnings recession.

Source: Financial Advisor Magazine, June 2016, Julius Baer

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INSIGHTS APRIL 2017

Chart 2: Equities – earnings revisions positive for the first time in years

Source: Datastream, Julius Baer

−20−15−10

−5

−35−30−25

05

1015

2025

1992 1997 2002 2007 2012 2017

%

6-month earnings revisionsEarnings optimism

The end of the global earnings recession

is confirmed.

Stocks – exiting an earnings recessionYet despite all the caveats, the most prominent fea-ture of the current environment is mirrored on the equity side at this stage: the end of the global earn-ings recession (see term of the month) is confirmed when looking at the latest earnings revisions. For the first time in almost four years, analysts started to re-vise their earnings expectations upwards compared to six months ago. This shows that the economic en-vironment is starting to echo in global corporates, and the possibility of a sizeable increase in earnings to the tune of 10% or more is in the cards. This is what has been driving and what will in all likelihood continue to drive global equity markets in 2017. In terms of industry groups this means allocating some funds to beneficiaries of this earnings expansion. We show our current stance in chart 3. Given the cyclical nature of the earnings increase, we view most industry groups on the right-hand side as most attractive. To mirror this improvement, we upgraded global banks as well (see page 16). Some of the less-cyclically tilted sectors on the growth bucket such as pharma & biotech also look attractive. In contrast, some of the less cyclically exposed stocks, such as utilities and telecoms, should be avoided at this stage.

Chart 3: Equities – sector strategy at a glance

Value/Growth: weight differential between value and growth stocks within the industry group. Defensive/Cyclical: correlation of the industry group to USD 10-year and EUR 10-year government bond yields (monthly relative returns over 10 years); Comm. = Commercial; Cons. = Consumer; E+S = Equipment & Services; HH = HouseholdSource: Datastream, Julius Baer

Energy

Tran

spor

t

Automobiles/Components

Consumer Durables & Apparel

Pharma Biotech

Banks

Div. Financials

Insurance

Software

HardwareSemiconductors

Materials

Cons. Services

Media

Food

Sta

ples

Ret

ail

Hea

lthca

re E

+S

Capital Goods

Com

m. S

ervic

es

Food

/Bev

/Tob

acco

HH Pers. Prod

Real Estate

Telecom

Utilities

Valu

e <

> G

rowt

h

Defensive < > Cyclical

Overweight Neutral Underweight

Retailing

ConclusionIn the first quarter of 2017 good growth has been paired with sizeable swings both in terms of politics, i.e. election risk and monetary policy. We think it makes sense for investors to stay the course and re-main invested until there is a real game changer at hand. Game changers could either be major political events or a clear change of central bank policy. In the absence of either of the two, investors had best buckle up for higher interest rates via floating-rate fixed-income instruments, or by buying again (i) un-loved bank stocks that benefit most from a rate normalisation around the globe or (ii) other cyclical stocks in sectors such as technology or automobiles.

Christian Gattiker, CFA, CAIA

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TECHNICAL ANALYSIS

INSIGHTS APRIL 2017

Envy Envy, we can all agree, is not the best feeling to have. Especially not when faced with investment decisions. Nevertheless, envy was most likely involved in what happened around 2006. Memories of the tech bub-ble were still fresh and the S&P 500 had increased by only 3% p.a. since 1999 and was flat since its peak in the year 2000. In contrast, alternative assets were performing well, with annual gains of around 10%. In chart 1 you can see the magic of compounding. At the same time, the asset allocation of the Yale and Harvard endowment funds became public. In the previous seven years they had outpaced other en-dowment funds by a wide margin as they held a lot more foreign equities and alternative assets. Given the historical returns and the widely published suc-cess story of the Yale and Harvard endowments, it is not surprising that most other investors envied these historical returns.

Chart 1: 2006 – year of envy

Source: Bloomberg Finance L.P., Julius Baer

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

25

50

75

100

125

150

S&P 500(+3% p.a.)

HFRI Equity Hedge(+11% p.a.)

HFRI Global(+9% p.a.)

HFRI Macro(+9% p.a.)

Walk the talkAfter seeing these returns, combined with a wave of publications on the success of the high allocation of alternative assets, most investors unsurprisingly agreed to shift towards the Yale/Harvard asset allo-cation. The envy of this success led most investors to accept the high allocation of alternative assets as the cure for disappointing performance and as the new truth. As seen in chart 2, equities and alterna-tives did indeed trade places. Equities went from 48% to 35% and alternatives from 35% to 53%. It al-most reminds us of the 1983 movie ‘Trading Places’, where Eddie Murphy, a homeless con artist, becomes a successful commodity broker, taking over Dan Aykroyd’s life, who himself turns into a criminal.

Envy pushed most investors into alternative assets.

Chart 2: Trading places

Source: Bloomberg Finance L.P., Julius Baer

0

20

40

60

80

100

%

Mid-2006 Mid-2016

Endowment funds: asset allocationas of mid-2006 and mid-2016

Alternatives EquitiesFixed income Cash and others

Equities−13%

Alternatives+18%

ENVY

Secular bull market for US equities – make no mistake.

9

INSIGHTS APRIL 2017

When in trouble – of course double down It might seem that only endowment funds have shunned equities. However, US pension funds are also at secular lows in equity allocation, indicating that they are still in the denial phase of the secular bull market – a good indicator that a bull market is actually under way. As seen in chart 3, they held 25% in equities in 2016. This is comparable to the average of 25% of the last three secular lows. Unbe-lievable but true, a Greenwich Associates survey found that over the next three years institutional in-vestors and endowment funds plan to shift further out of US equities and into alternative assets. Thus, while since 2006 the Yale/Harvard asset allocation has lagged the buy-and-hold strategy of 60% equi-ties and 40% bonds by 3% per annum, they prefer to double down on their mistake and still not buy US equities.

It is a secular bull market – do you see it?

Chart 3: Allocation of US pension fund to equities

Source: Bloomberg Finance L.P., Julius Baer

1960 1970 1980 1990 2000 2010 2020

0.15

0.20

0.25

0.30

0.35

0.40

0.45

25%(2016)

21%(2009)

30%(1990)

25%(1974)

Secular bull market – make no mistakeStudying chart 4, we ask ourselves if we are really looking at a new secular bull market for US equities. We have the evidence of the indicator, as the secular momentum is bottoming. Nevertheless, in order to be a truly secular bull market it must be met with a giant wall of worry, the wall of worry we describe in our weekly Technical Investment Strategy publica-tion. Looking at the allocation of endowment funds and US pension funds, it helps us to better under-stand that yes, this bull market is met with an unbe-lievable wall of resistance. Thus, yes, this is a secular bull market and will remain so for years to come. In-vestors are well advised to take a hard look at chart 4 and ask themselves if they can envision a secular bull market.

Chart 4: Dow Jones Industrial Average

Source: Bloomberg Finance L.P., Julius Baer

1930 1940 1950 1960 1970 1980 1990 2000 2010 20200

1020

10,00020,00030,000

Index

Momentum

25 years16 years

12 years

400

1,000

Mensur Pocinci, MFTA

10

NEXT GENERATION

INSIGHTS APRIL 2017

FUTURE MOBILITY: EVOLUTION OR REVOLUTION

Advances in electric car and autonomous driving technology, as well as the rising Asian middle class and ongoing urbanisation will shape the future of mobility. The vision of

shared, self-driving cars looks ever more possible and heralds the age of electric mobility, peaking car sales and peaking oil use by 2035. The auto business will likely see few

winners and many potential losers.

Status quo: Driving into a dead end Cars dominate our mobility and represent more than 90% of passenger mileage in North America and more than 80% in Europe. While buses and two-wheelers are more prominent in Asia, car usage is slowly catch-ing up with western world standards. However, to-day’s mobility is a dead end. Congestion, pollution and dire public finances are becoming ever more press-ing issues. Traffic jams weigh on economic activity and road-related air pollution raises health care costs. These issues are particularly evident in the world’s metropolitan regions, which have become the global growth engines.

Trends: Asia’s growth and technology The rising Asian middle class brings a deep pool of first-time buyers and this trend is set to dominate car markets in the foreseeable future. That said, the narrative of Asia following in the western world’s footsteps and one day reaching similar car owner-ship rates is too simplistic. Urbanisation and histori-cally high-dense city centres limit the structural growth potential for cars.

Technology trends are set to profoundly impact the future of mobility. Engines are becoming ever more fuel efficient due to government intervention. Emission regulation lowers fuel use to curb greenhouse gases and air pollutants. There has been a significant pick-up in momentum of electric cars since 2016. Battery technology evolves faster than expected and auto makers are introducing more and more electric cars to their line-up. At the same time, the Silicon Valley is working hard to turn the vision of self-driving cars into reality. Being popular with consumers and prom-ising business opportunities, the question is when rath-er than if the vision will become reality.

Talk urban mobility, think global economy.

Chart 1: Car ownership and use (2015)

Source: US Energy Information Administration, International Organizationof Motor Vehicle Manufacturers, Julius Baer

United States

EuropeJapan

BrazilChina

India0100200300400500600700800

0 4 8 12 16

Cars per capita (1000 inhabitants)

Thousand car miles per capita p.a.

11

INSIGHTS APRIL 2017

Scenarios: Evolution or revolution The future mobility could follow an evolutionary sce-nario characterised by Asian growth, fuel efficiency and connected cars. Western world car ownership would plateau as the population ages, developing world car ownership would expand on the back of rising incomes, and hybrid and electric cars would gain market share as the technology evolves and its costs drop.

Or the scenario could be revolutionary as today’s trends develop disruptive strength and turn the vi-sion of on-demand, self-driving cars into reality. Namely, the advances in electric mobility, autono-mous driving and the younger generation’s prefer-ence to use rather than own could together lend strong support to this scenario. This vision heralds the age of electric mobility, peaking car sales and peaking oil demand by 2035. Asia’s metropolitan re-gions could become the breeding ground for this scenario given the urban congestion and pollution challenges and the open-mindedness towards tech-nology. Electric mobility and autonomous driving see strong momentum with many companies em-bracing these technologies, which shifted the odds marginally in favour of a revolutionary scenario. His-tory shows that trends are hardly ever constant.

Chart 2: Global car sales scenarios

Source: International Organization of Motor Vehicle Manufacturers, Julius Baer

0

20

40

60

80

100

120

2005 2010 2015 2020 2025 2030 2035

Million units

Evolution vs. Revolution Totalcars

Electriccars

Plug-in hybrids

The winners and losers Today’s car market provides a living for various in-dustries and thousands of companies, including the automobile makers and suppliers as well as the energy and insurance businesses. The future entails large shifts of value pools across these industries with few winners and many potential losers. Simply put, the low mileage costs related to the vision of self-driving taxis is a boon for consumers but entails a shrinking automobile business. Structural change tends to be deflationary.

There are more threats than opportunities for the automobile makers. Slowing market growth and in-creased competition in emerging markets suggest that the industry’s cash flows will trail global growth over the coming decades. The auto suppliers mean-while should benefit from growing technology con-tent. The electronics used in autonomous driving systems and hybrid and electric drivetrains are the most promising growth niche. The future of lithium looks bright but the hype needs a sanity check. Cars consume roughly a third of global oil, but the conse-quences for the energy industry are not unequivo-cally negative. Threats on the oil side are offset by opportunities on the natural gas side. For more in-formation, please refer to our Research Focus report “Future mobility: Evolution or revolution”, published in early March.

Chart 3: Business implications of future mobility scenarios

Growth (market size)

TodayStatus quo

2015–2020 Trends

2020–2035 Evolution

2020–2035 Revolution

Auto makers

5% p.a.(USD1.8trn)

3-5% p.a. (USD2.1trn)

<2% p.a. (USD2.7trn)

<1% p.a. (USD2.3trn)

Auto suppliers

7% p.a.(USD450bn)

>5% p.a. (USD625bn)

<5% p.a. (USD800bn)

<2.5% p.a. (USD700bn)

Batteries 40% p.a. (<USD5bn)

30% p.a. (USD20bn)

10% p.a. (USD100bn)

15% p.a. (USD170bn)

Source: Bernstein, Goldman Sachs, UBS, Citigroup, Exane, Julius Baer

Norbert Rücker

12

ECONOMICS

INSIGHTS APRIL 2017

CYCLICAL UPTURN AND RATE NORMALISATION

The broadening cyclical upturn provides a good backdrop for the US Federal Reserve to continue normalising its interest rates. We expect two more hikes after the March hike.

In the other major economies, core inflation and wage dynamics are still too weak for central banks to become active. Meanwhile, China remains focused on maintaining economic

stability in this important year of internal leadership change.

Fed profits from the cyclical upturnThe world economy is still enjoying a cyclical upturn. Latest leading indicators reached new highs, thus signalling that good momentum will last in the sec-ond quarter. At the same time, headline inflation surged in many economies as a result of higher oil prices. In most economies, however, this will likely be a transitory high, with core prices remaining stable and much lower. The main exception is the US, where economic data was particularly strong. With a labour market close to full employment, rising wage growth will exert pressure on inflation. The Federal Reserve had thus every reason to continue to raise its target rate in March, keeping the total number of projected hikes at three for this year. Although expectations for an upcoming tapering of asset purchases or even less negative interest rates have also risen for the eurozone, it is yet too early for the European Central Bank to start the process. It is even more remote in the case of the Bank of Japan, given Japan’s modest cyclical growth with lower core inflation.

Chart 1: Wage growth – pressure on inflation only in the USA

Source: Datastream, Julius Baer

2010 2011 2012 2013 2014 2015 2016 2017−2−1

01234

% y/y

Japan Eurozone USA

Brexit, the only exit from the eurozoneThe results of the Dutch elections were hailed as a first victory against populism in Europe. We expect France to follow the same path, thus reducing uncer-tainty with regard to political surprises. The UK, on the other hand, is preparing its exit negotiations af-ter handing in its official request to withdraw from the European Union. An imminent slowdown in the UK’s economic growth due to Brexit is foreshadowed in the latest leading indicators.

Good momentum will last in Q2.

China only slightly lower this yearRobust economic momentum in Q1 allows Chinese leaders to focus on debt risks. Overall, however, a stable economy will be a key factor for this year’s im-portant internal leadership transition. The slightly lower growth target of 6.5% for 2017 reflects this, together with the goal of doubling the gross domestic product between 2010 and 2020.

Chart 2: China – mildly lower growth target in 2017

Source: The People’s Bank of China, National Bureau of Statistics of China, Julius Baer

51015

2025303540

56789

101112

2010 2011 2012 2013 2014 2015 2016 2017 2018

Bank loans (r.h.s.) Real GDP (with JB forecast, l.h.s.)Total social financing (r.h.s.)

% y/y % y/y, 4-month lead

Susan Joho

13

CURRENCIES

INSIGHTS APRIL 2017

THE EURO IS MAKING A COMEBACK

Our bullish USD view is still justified as rate-hiking expectations in the US still have not caught up with economic realities. Yet competition never sleeps and the euro

is getting ready for a comeback. Money outflows are already less of a headwind for the euro and the ECB is tolerating speculations that it might increase the negative

deposit rate in the not so distant future.

The comeback of the euro will be a lengthy processThe USD continues to enjoy support from an expan-sionary fiscal policy and rising interest rates at home. The major issue with these USD tailwinds is that they are well understood by markets. Hence, it is justified to ask to what degree this insight is already reflected in current exchange-rate levels. We still see room for rate-hiking expectations to drift higher, which justifies holding on to our bullish USD view. Nevertheless, the euro is getting ready for a comeback. Money flows are already less of a headwind and the balances of announced cross-border merger-and-acquisition (M&A) deal flows are shifting slowly in favour of the euro. Most importantly, there is a shift in the ECB’s interest-rate outlook. The ECB has begun to signal its readiness to scale down its unconventional policy measures, which include a forward guidance, a nega-tive deposit rate of minus 0.4% and asset purchases. While caution prevails when it comes to tapering asset purchases, there seems to be some degree of recep-tiveness when it comes to adopting less negative de-posit rates. This would pull up money market rates. However, ECB action in this direction remains large-ly in the sphere of speculation, preventing us from having significant conviction regarding a comeback of the euro in the coming months. We put a stronger emphasis on exploring future USD strength by buy-ing USD/JPY, while having significantly less convic-tion that EUR/USD will move towards lower levels like parity.

Chart 1: Market expectations still trail FOMC intentions

* median of ‘dots’, ** implied by the overnight index swaps (OIS) curve Source: Bloomberg Finance L.P., Julius Baer

2011 2012 2013 2014 2015 2016 2017 20180.00.51.01.52.02.53.0%

FOMC rangeFederal Open Market Committee (FOMC) forecast*Fed funds rate

Market implied**

The ECB started to signal its readiness to scale down its

unconventional policy measures.

Chart 2: Announced cross-border M&A flows and EUR/USD

* based on the ratio of the announced cross-border M&A dealsin euro and USDSource: Bloomberg Finance L.P., Datastream, Julius Baer

0.80.91.01.11.21.31.41.51.6

2003 2005 2007 2009 2011 2013 2015 2017−1.5−1.0−0.5

0.00.51.01.52.0

EUR/USDZ score

Indicator based on M&A deal flows* (l.h.s.)EUR/USD (r.h.s.)

David Kohl

14

FIXED INCOME

INSIGHTS APRIL 2017

RETURNING SLOWLY BUT SURELY TO THE OLD NORMAL

The bond market is returning to its old pattern where good economic news is the harbinger of higher policy rates. Anxiety ahead of central bank meetings is the new (old) reality,

and no longer the hope for more stimulus. This transition is a slow but painful process in which we prefer the segments that have been distorted the least by central bank purchases, such

as subordinated bank debt in Europe or US leveraged loan funds.

A painful return to the old patternFor years and years, the bond market had taken it for granted that global growth and inflation would re-main benign and that central banks were doomed to support the economy with ever-falling interest rates. As a consequence, a wealth of liquidity was created that chased investment opportunities at any price. All these pillars of the ‘new normal’ seem to crack under the evidence of better growth prospects, the rebound in headline inflation, and last but not least, the liquidity shortage on the US money market. In other words, the bond market is in the painful transi-tion back to the old orthodoxy that good economic news is bad news for interest rates.

Central banks, lately bond investors’ new best friends,

are reverting to their old habit of being the party pooper.

Avoid what is most distortedGiven their success at reviving global growth and inflation, central bankers are – to a varying degree – scaling back their ‘unconventional measures’. We have seen in 2013 what this translates to on the bond market. Back then, the simple announcement that the Federal Reserve would consider the tapering-off of its bond purchases was sufficient to boost govern-ment bond yields in a most material way. Therefore, it pays to evaluate the bouts of weakness, i.e. to define the segments of the bond market that have benefit- ed the most from central bank purchases. We figure that core government bonds and non-financial cor-porate bonds are the most vulnerable segments at this juncture, particularly as the latter are trading at a minimal markup to German government bonds. Our first chart depicts the decline of the German

government bond in 2014, long before the ECB had announced its decision to purchase government bonds in January 2015. Similarly, the yields on non-financial corporate bonds began to fall way ahead of the ECB’s announcement to also buy such instru-ments in March 2016. It is thus most likely that we will see these bond yields rise long before the ECB officially ends its purchases.

Chart 1: Focus on the bond yields least distorted by the ECB

Source: Bank of America Merrill Lynch, Datastream, Julius Baer

−1

0

1

2

3

4

2013 2014 2015 2016 2017

Yield, %

Subordinated bank debtFinancials

Non-financialsGerman 2-year government bonds

Subordinated bank debt* remains on the menuWe reckon that subordinated bank debt has never benefited from ECB purchases and offers one of the least distorted yields. At the same time, we project that the fundamental factors of the issuing banks will improve in line with the better economic outlook for Europe. Historically, a cyclical improvement has trans-lated into lower credit losses, better asset quality and ultimately tighter credit spreads. We maintain our re-commendation for subordinated debt of European banks.

15

INSIGHTS APRIL 2017

Searching to benefit from rising Fed ratesOur focus in the USD segments remains on the finan-cial instruments that benefit from rising policy rates. We expect two more rate hikes this year and three further hikes in 2018, boosting the USD money mar-ket rate in the vicinity of 2%. To remain competitive with the safe and liquid money market instruments, the yield on the riskier and less liquid instruments will have to increase accordingly. The adjustments might take some time. Nevertheless, we decided last month to scale back our recommendation for US high-yield bonds to Neutral and to focus on US leveraged loan funds, i.e. instruments that bundle risky US bank loans. The latter are floating-rate debt, ensuring that investors will not suffer but benefit from the upward move of US policy rates.

Chart 2: US leveraged loans have room to catch up

Source: Bank of America Merrill Lynch, S&P, Julius Baer

90100110120130140150160170180190

2010 2011 2012 2013 2014 2015 2016 2017

Total return, Jan 2010 = 100

US high-yield bondsUS leveraged loansUSD money market

Combine quality with inflation protectionRecent experience shows that investors accept low or even negative yields for ‘safe assets’ such as Swiss, German or US government bonds for a lack of alter-natives in the low-risk space. As soon as money mar-ket rates surpass a certain threshold, however, this mechanism implies a massive outflow from these gov-ernment bonds. At this juncture, we see this trend evolving in the US: investors seeking an ‘all-weather investment’ in US government debt are better off holding inflation-protected securities, or TIPS (Treas-ury inflation-protected securities). Investors have to pay a future inflation rate (breakeven inflation rate) that is below the current level of the core inflation. In the top quality segment, we stick to our preference for TIPS over nominal bonds.

Chart 3: US breakeven inflation rate below core inflation

Source: Datastream, Bloomberg Finance L.P., Julius Baer

0.00.51.01.52.02.53.03.5

1998 2001 2004 2007 2010 2013 2016

%

Core inflation rateBreakeven inflation rate

Time to consolidate gains on EM bond marketRegular readers will recall our call for the riskier seg-ments of the bond market, even during the stormy days of February 2016. After enjoying the rally in re-cent months, however, we have scaled back our rec-ommendation not only for USD high-yield bonds but also for emerging market (EM) debt last month. We reckon that gains have gone too far too fast, mean-ing that there was a record inflow of ‘hot money’ into these segments. Given the rise in USD money mar-ket rates described before, we cannot rule out a peri-od of consolidation or even correction. We wait for a rebound in credit spreads before adding new posi-tions to our current allocation.

Chart 4: Credit spreads have only been lower in pre-Lehman euphoria

Source: JP Morgan, Julius Baer

0123456789

10

2005 2007 2009 2011 2013 2015 2017

Spread above US Treasury

EM corporate bondsEM sovereign bonds

Markus Allenspach

* According to the Product Intervention (Contingent Convertible Instruments and Mutual Society Shares) Instrument 2015, enact-ed by the U.K. Financial Conduct Authority (“FCA”), this/these product(s) must not be distributed to retail investors domiciled in the European Economic Area (“EEA” – EU, Liechtenstein, Nor-way and Iceland). Investors who intend to buy this/these product(s) must have an annual income of at least GBP 100,000 (or equiva-lent) or net assets (excluding property, insurance and other ben-efits) of at least GBP 250,000 (or equivalent) at their disposal.

16

EQUITIES

INSIGHTS APRIL 2017

SUPPORTIVE ENVIRONMENT FOR BANKS

We are now fully Overweight in the financial sector after upgrading banks and diversified financials. Banks have the highest cyclical exposure and are the most value-tilted of all

industry groups. Consequently, they benefit from a robust macroeconomic backdrop. Drivers include the credit environment, an improving earnings picture and still-attractive valuations.

In a nutshellPreconditions for an Overweight stance on banks are looking good. Along with rising long-term govern-ment bond yields, global financials have started to outperform global equities and have consequently undergone some consolidation in recent weeks. On an industry group level, diversified financials and banks are the segments with the highest sensitivity to changes in bond yields. Given that we are close to the trough of the bond-yield cycle against a con-structive macroeconomic backdrop, we have recently upgraded the banking segment to Overweight. In fact, we had already upgraded the more defensive insurance segment a few weeks ago. Banks are the more cyclical and riskier part of the financial sector while insurance represents the lower-risk segment.

We are now fully Overweight in the financial sector.

Chart 1: Favourable bond-yield environment

Source: Datastream, Julius Baer

1

2

3

4

5

6

2

3

4

5

6

Mar 2007 Mar 2009 Mar 2011 Mar 2013 Mar 2015 Mar 2017

%Index

Global banks vs. MSCI World (l.h.s.)US 10-year government bond yield with forecast (r.h.s.)

A number of supportive factorsThe credit environment represents an important factor for banks. On current levels the situation still looks more constructive in the US, but overall we also ex-pect the development in Europe to improve. After still-negative earnings growth in 2016, the picture has completely changed this year, with European finan-cials having the strongest delta. From an earnings perspective, banks have substantially improved in recent months. Both earnings revisions and earnings optimism (the breadth of revisions) have substan-tially turned to the better. Despite the impressive re-bound in relative performance since mid-2016, global banks remain attractively valued at current levels and might see more tailwinds from that perspective. The direct comparison between European and US banks shows a US advantage for the time being. Apart from credit conditions, the currency developments as well as the political situation remain important. However, we believe that the preconditions for an improvement in Europe are already set.

Chart 2: Improving earnings picture (three-month earnings revision)

AC = All CountrySource: Datastream, Julius Baer

−10−8−6−4−2

024

Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017

%

Global banks MSCI AC World

Christoph Riniker, CEFA

17

INSIGHTS APRIL 2017

MALAYSIA: FROM NEUTRAL TO OVERWEIGHT

Source: Datastream, Julius Baer

2.72.93.13.33.53.73.94.14.34.50

20406080

100120140

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CcyUSD

Generic oil futures (l.h.s.)USD/MYR exchange rate, inverted scale (r.h.s.)

Stock recommendations:IHH Healthcare Berhad (Buy, price/target: MYR 5.99/7.10)Bumi Armada (Buy, price/target: MYR 0.73/0.80) British American Tobacco Malaysia (Buy, price/target: MYR 47.98/55)

We upgraded Malaysia from Neutral to Overweight with an upside potential of 10%–15% over the next 6 to 12 months. Recently, developed and emerging markets have performed well. In such an environ-ment, we focus on markets that have been lagging but with triggers in place to re-rate. Key reasons for our upgrade include: 1) the lagging performance, 2) the depressed currency, 3) the improving return on equity, and 4) the purchasing managers’ index.

Heinz Rüttimann, CAIA

POLITICAL UNCERTAINTY IN FRANCE

Source: Datastream, Julius Baer; MAV = moving average

Stock recommendations:Societe Generale (Buy, price/target: EUR 47.13/50)LVMH (Buy, price/target: EUR 201.55/215) Schneider Electric (Buy, price/target: EUR 66.34/50)

050

100150

200250300350400

8090

100110120130140

Mar 2008 Mar 2011 Mar 2014 Mar 2017

IndexIndex

France: mid vs. large caps (l.h.s.)French economic policy uncertainty, 6-month MAV (r.h.s.)

There is a significant correlation between French policy uncertainty and the performance of French smaller caps vs. large caps. Rising policy uncertainty causes smaller caps to outperform and vice versa. Political uncertainty is widely perceived as a negative factor among international investors who generally prefer large caps, which explains the pressure seen on them in this environment. Holdings in smaller caps are probably more concentrated among French investors, who can handle the political environment more precisely than foreigners. We expect a friendlier environment for large caps again after the elections.

Christoph Riniker, CEFA

SWISS SMALLER CAPS: HIGHER AND HIGHER

Source: Datastream, Julius Baer

Stock recommendations:Helvetia (Buy, price/target: CHF 552.5/600)Lindt & Sprüngli (Buy, price/target: CHF 5615/6300) Lonza Group (Buy, price/target: CHF 181.80/200)

791113151719

1997 2000 2003 2006 2009 2012 2015

Index

SMIM vs. SMI

Comparing the large-cap vs. the smaller-cap seg-ment in Switzerland clearly leaves us with a prefer-ence for the latter. Smaller caps are more cyclical (overall backdrop for equities) and more domestically oriented (a strong CHF helps). Despite the good outperformance, the relative valuation remains in line with large caps as earnings are growing stronger as well. We keep our preference for smaller caps for the time being.

Christoph Riniker, CEFA

18

COMMODITIES IMPORTANT LEGAL INFORMATION

INSIGHTS APRIL 2017

REFLATION EUPHORIA GETS REALITY CHECK

Concerns over surplus supply have resurfaced and put pressure on commodity prices. The reflation euphoria got its overdue reality check. Further downside is looming as

sentiment remains overly bullish. The oil market surplus is unlikely to shrink significantly anytime soon and prices should trade below USD 50 per barrel. USD strength and

solid economic growth should continue to pressure gold.

Further downside loomingCommodities experienced the expected setback. Concerns over surplus supply resurfaced and put pressure on prices across the board, namely oil, cop-per and agricultural commodities. The reflation eu-phoria got its overdue reality check. That said, over-hyped fundamentals remain under scrutiny and the still-bullish sentiment and stretched hedge fund fu-tures positions bear further setback risks. We stick to our Underweight stance, seeing further downside risk to prices and an uptick in rollover losses as the energy and agriculture futures curves steepen.

OPEC is at odds with shale.

Chart 1: Asset class performance

Source: Bloomberg Finance L.P., Julius Baer

6.9%1.7%

80

90

100

110

120

130

Mar 2016 Jun 2016 Sep 2016 Dec 2016 Mar 2017 Jun 2017

Spot Total return

Bloomberg Commodity Index

Optimism prevails for metalsChinese heavy-industry commodities including steel, iron ore and coal surged as the early-year data showed that the old economy remains strong. Meanwhile, copper sentiment remains supported by the ongoing supply disruptions. Ample supplies and profit-taking from still-overly bullish hedge funds warrant price

pressure going forward. For gold, our expectations of solid growth, a stronger USD and rising interest rates still call for fading investment demand and lower pric-es, not least as soft Asian buying does not support tailwinds.

Shale versus sheikhScepticism about the imminent market rebalancing is growing in the oil market. The past months’ elevat-ed oil prices have been fuelling shale-drilling activity, and increasing output is offsetting the Middle East-ern supply restriction efforts. The shale-versus-sheikh debate is reviving and the pendulum has swung back in favour of the former. Petro-nations remain at odds with the shale industry’s responsiveness and com-petitiveness in today’s price environment. In sum, the debate is a clash of market philosophy where shale represents the free-market and the Middle East the governed-market spirit. We believe that costs dic-tate volumes and thus prices. We do not see the oil market’s surplus shrinking significantly anytime soon. Oil prices should trade below USD 50 per barrel.

Chart 2: US and OPEC oil production

(OPEC: Organization of the Petroleum Exporting Countries) Source: US Energy Information Administration, Bloomberg Finance L.P.,Julius Baer

0510152025303540

2005 2009 2013 2017

Million barrels per day

3456789

10

2005 2008 2011 2014 2017

Million barrels per day

United States OPEC

Norbert Rücker

19

IMPORTANT LEGAL INFORMATION

INSIGHTS APRIL 2017

This publication constitutes investment research and has been pro-duced by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This publication series is issued regularly. Information on financial instruments and issuers is updated irregularly or in response to important events.

IMPRINTAuthors:Christian Gattiker, Head of Research, christian.gattiker@juliusbaer.com 1)

Mensur Pocinci, Head of Technical Analysis, mensur.pocinci@juliusbaer.com 1) Susan Joho, Macro Research, susan.joho@juliusbaer.com 1)

David Kohl, Head of Currency Research, david.kohl@juliusbaer.com 2)

Markus Allenspach, Head of Fixed Income Research, markus.allenspach@juliusbaer.com 1)

Christoph Riniker, Head of Strategy Research, christoph.riniker@juliusbaer.com 1)

Heinz Rüttimann, Strategy Research, heinz.ruettimann@juliusbaer.com 1)

Norbert Rücker, Head of Macro & Commodity Research, norbert.ruecker@juliusbaer.com 1)

1) This analyst is employed by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

2) This analyst is employed by Bank Julius Bär Europe AG, which is authorised and regulated by the German Federal Supervisory Authority (BaFin).

APPENDIXAnalyst certificationThe analysts hereby certify that views about the companies discussed in this report accurately reflect their personal view about the companies and securities. They further certify that no part of their compensation was, is, or will be directly or indirectly linked to the specific recommendations or views in this report.

MethodologyPlease refer to the following link for more information on the research methodology used by Julius Baer analysts: www.juliusbaer.com/research-methodology

StructureReferences in this publication to Julius Baer include subsidiaries and affiliates. For additional information on our structure, please refer to the following link: www.juliusbaer.com/structure

Price informationUnless otherwise stated, the price information reflects the closing price of 27 March 2017.

DisclosureJulius Baer and/or its affiliates have managed or co-managed a public of-fering of securities for the subject issuer UBS within the past 12 months.

Frequency of rating updatesAn update on Buy-rated equities is provided on a quarterly basis. An up-date for Hold and Reduce-rated equities is provided semi-annually or on an ad-hoc basis. An update on issuers is provided semi-annually, on a rat-ing change or on an ad-hoc basis.

Julius Baer does not provide investment banking services to the companies covered by Research.

Rating allocation as of 27/03/2017Equities Buy 31.4% Hold 65.7% Reduce 2.9%Issuers Buy 53.4% Hold 42.7% Reduce 3.9%

Equity rating history as of 27/03/2017Company Rating SinceBritish American Tobacco Malaysia

Buy 24/02/2017

Hold 28/07/2016Buy 04/05/2016Hold 30/07/2015

Bumi Armada Buy (initiation of coverage) 08/06/2016Helvetia Buy 26/09/2007IHH Healthcare Berhad Buy 22/09/2016

Hold (initiation of coverage) 03/12/2014Lindt & Sprüngli Buy 20/01/2015Lonza Group Buy 30/01/2017

Hold 30/09/2014LVMH Buy 16/08/2016

Hold 15/04/2014Schneider Electric Buy 30/10/2015Societe Generale Buy 19/12/2012

Issuer rating history as of 27/03/2017Issuer Rating SinceAbu Dhabi Buy (initiation of coverage) 29/11/2016Argentina Buy 14/04/2016

Hold (initiation of coverage) 26/02/2016Bahrain Hold (initiation of coverage) 22/12/2016Barry Callebaut Buy 22/07/2009BBVA Buy 23/01/2013Bombardier Hold 04/11/2013Caterpillar Buy (initiation of coverage) 21/05/2015Cielo Buy 08/08/2013Commercial Bank of Qatar Buy (initiation of coverage) 21/01/2011Crédit Agricole Buy 13/08/2009CRH Buy 08/12/2009General Electric Buy 13/07/2009Hungary Buy 13/10/2016

Hold 17/05/2013Levi Strauss Buy (initiation of coverage) 28/07/2013Oman Buy (initiation of coverage) 21/10/2016Orange Buy 10/09/2009Pernod Ricard Buy 15/07/2009Rabobank Buy 28/08/2012Santander Buy 23/01/2013Saudi Arabia Buy (initiation of coverage) 30/01/2017Siemens Buy 07/07/2009Smurfit Kappa Buy 15/05/2013UBS Buy 09/05/2012YPF Buy (initiation of coverage) 06/02/2017

20

INSIGHTS APRIL 2017

Equity researchRating system for global equity research (stock rating)

Buy Expected to outperform the MSCI regional industry group by at least 5% in the coming 9–12 months, unless otherwise stated.

Hold Expected to perform in line (±5%) with the MSCI regional industry group in the coming 9–12 months, unless otherwise stated.

Reduce Expected to underperform the MSCI regional industry group by at least 5% in the coming 9–12 months, unless otherwise stated.

Strategy researchCountries, sectors and investment styles are rated ‘overweight’, ‘neutral’ or ‘underweight’. These ratings are based on our expectations for relative performance versus regional and global benchmark indices.

Overweight Expected to outperform regional or global benchmark indices in the coming 9–12 months, unless otherwise stated.

Neutral Expected to perform in line with regional or global benchmark indices in the coming 9–12 months, unless otherwise stated.

Underweight Expected to underperform regional or global benchmark indices in the coming 9–12 months, unless otherwise stated.

Equity investments are divided into three different risk segments. Risk here is defined as the historical five-year volatility based on monthly returns in CHF. Based on the data of all segments considered (developed markets, emerging markets, global sectors, investment styles) the following distinction is made:

Conservative Investments whose historical volatility is in the bottom quartile of the universe described above.

Medium Investments whose historical volatility is in the middle two quartiles of the universe described above.

Opportunistic Investments whose historical volatility is in the top quartile of the universe described above.

Fixed income researchRisk categories for fixed income research

Conservative Incorporates supranational issuers, top-rated sovereign issuers and bodies that are directly and fully guaranteed by these institutions. These issuers are most likely to preserve their top rating throughout the business cycle.

Quality Incorporates sovereigns and corporate issuers that are very likely to service and repay debt within a five-year credit scenario. They are likely to preserve their investment grade rating throughout a normal business cycle.

Opportunistic Incorporates issuers that are quite likely to service and repay debt within the five-year credit scenario. Such issuers have an attractive risk/return profile in the current credit scenario but are subject to rating downgrade risk and, thus, might be exchanged periodically.

Speculative Incorporates sub-investment-grade issuers in Europe and the USA as well as local issuers in emerging markets. Issuers are likely to ser-vice and repay debt in the current credit scenario. Investors must note that these issuers are subject to a higher downgrade and default frequency and that an active management of these positions is crucial.

Credit rating definitionsCredit ratings used in our publications follow the definitions and systematic of Moody's (www.moodys.com).

 

Moody’s Standard & Poor's

Fitch/IBCA Credit rating definition

Inve

stm

ent-

grad

e

Aaa AAA AAA Bonds rated Aaa are judged to be of the highest quality, with minimal credit risk.

Aa1 Aa2 Aa3

AA+ AA AA-

AA AA-

Bonds rated Aa are judged to be of high quality and are subject to very low credit risk.

A1 A2 A3

A+ A A-

A+ A A-

Bonds rated A are considered upper-medium grade and are subject to low credit risk.

Baa1 Baa2 Baa3

BBB+ BBB BBB-

BBB+ BBB BBB-

Bonds rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.

Non

-inve

stm

ent-

grad

e

Ba1 Ba2 Ba3

BB+ BB BB-

BB+ BB BB-

Bonds rated Ba are judged to have speculative elements and are subject to substantial credit risk.

B1 B2 B3

B+ B B-

B+ B B-

Bonds rated B are considered speculative and are subject to high credit risk.

Caa1 Caa2 Caa3

CCC+ CCC CCC-

CCC+ CCC CCC-

Bonds rated Caa are judged to be of poor standing and are subject to very high credit risk.

Ca CC C

CC+ CC CC-

Bonds rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

C D DDD Bonds rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

21

INSIGHTS APRIL 2017

Technical analysisThe information and opinions expressed were produced by Julius Baer Technical Analysis as of date of writing and are subject to change without notice. Julius Baer conducts primary technical analysis aimed at creating value through investment recommendations. Technical Analysis uses historic market prices in order to assess market conditions. The historic data is analysed by chart reading i.e. by following chart patterns and interpreting indicators calcu-lated from historic price movements. Technical Analysis may be inconsistent with and reach different conclusions to fundamental analysis. It may vary at any time due to the different tools used to assess market conditions and recommendations. Besides individual investment recommendations, Technical Analysis also publishes technical indicator readings, which are mechanically calculated and only provide additional information to large sets of data, and are not intended as investment recommendations. These tables show current trends on an absolute price or relative basis using up, flat and downward pointing arrows. At the same time, support and resistance levels might be displayed which are calculated using Bollinger Bands.

Rating system for global technical analysis (absolute)

Buy Expected to advance by at least 10% in the coming 3–12 months, unless otherwise stated.

Hold Expected to perform in line (±5%) in the coming 3–12 months, unless otherwise stated.

Reduce Expected to decline by at least 10% in the coming 3–12 months, unless otherwise stated.

Rating system for global technical analysis (relative)

Overweight Expected to outperform its benchmark by at least 5% in the coming 3–12 months, unless otherwise stated.

Neutral Expected to perform in line (±5%) against its benchmark in the coming 3–12 months, unless otherwise stated.

Underweight Expected to underperform its benchmark by at least 5% in the coming 3–12 months, unless otherwise stated.

For the history of Technical Analysis equity recommendations over the previous 12 months please view the document at: http://www.juliusbaer.com/tech-analysis-recom-history

DISCLAIMER

General: The information and opinions expressed in this publication were produced as of the date of writing and are subject to change without notice. This publication is intended for information purposes only and does not constitute an offer or an invitation by, or on behalf of, Julius Baer to buy or sell any securities or related financial instruments or to participate in any particular trading strategy in any jurisdiction. Opinions and comments of the authors reflect their current views, but not necessarily of other Julius Baer entities or any other third party. Other Julius Baer entities may have issued, and may in the future issue, other publications that are inconsistent with, and reach different conclusions from, the information presented in this publica-tion. Julius Baer assumes no obligation to ensure that such other publications are brought to the attention of any recipient of this publication.

Suitability: Investments in the asset classes mentioned in this publication may not be suitable for all recipients. This publication has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Before entering into any transaction, investors should consider the suitability of the transaction to individual circumstances and objectives. Any investment or trading or other decision should only be made by the client after a thorough reading of the relevant product term sheet, subscription agreement, information memorandum, prospectus or other offering document relating to the issue of the securities or other financial instruments. This publication should not be read in isolation without reference to the full research report (if available) which may be provided upon request. Nothing in this publication constitutes investment, legal, accounting or tax advice, or a repre-sentation that any investment or strategy is suitable or appropriate to individual circumstances, or otherwise constitutes a personal recommendation to any specific investor. Any references to a particular tax treatment depend on the individual circumstances of each investor and may be subject to change in the future. Julius Baer recommends that investors independently assess, with a professional advisor, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.

Information/forecasts referred to: Although the information and data herein are obtained from sources believed to be reliable, no representation is made that the information is accurate or complete. In particular, the information provided in this publication may not cover all material information on the financial instruments or issuers of such instruments. Bank Julius Baer & Co. Ltd., its subsidiaries and affiliated companies do not accept liability for any loss arising from the use of this publication. Important sources for the production of this publication are e.g. national and international media, information services (e.g. Thomson Reuters, Bloomberg Finance L.P.), publicly available databases, economic journals and newspapers (e.g. Financial Times, Wall Street Journal), publicly available company information, publications of rating agencies. Ratings and appraisals contained in this publication are clearly marked as such. All information and data used for this publication relate to past or present circumstances and may change at any time without prior notice. Statements contained in this publication regarding financial instruments or issuers of financial instruments relate to the time of the production of this publication. Such statements are based on a multitude of factors which are subject to continuous change. A statement contained in this publication may, thus, become inaccurate without this being published. Potential risk regarding statements and expectations expressed in this publication may result from issuer specific and general (e.g. political, economic, market, etc.) developments.

Risk: The price and value of, and income from investments in any asset class mentioned in this publication may fall as well as rise and investors may not get back the amount invested. Risks involved in any asset class mentioned in this publication may include but are not necessarily limited to market risks, credit risks, currency risks, political risks and economic risks. Investments in emerging markets are speculative and may be considerably more volatile than investments in established markets. Past performance is not a reliable indicator of future results. Performance forecasts are not a reliable indicator of future performance. The Julius Baer fixed-income ratings apply exclusively to bonds of the specific issuer ranked senior unsecured or higher. They are therefore not valid for debentures junior to the mentioned ranking unless mentioned explicitly. Particular risks in connection with specific investments featured in this publication are disclosed prominently hereinabove in the text of this publication. Any investment should only be made after a thorough reading of the current prospectuses and/or other documentation/information available.Miscellaneous: We are required to disclose important information about our interests and potential conflicts. In order to prevent conflicts of interest from adversely affecting the interests of its clients, Julius Baer has implemented the necessary organisational and administrative arrangements to manage conflicts of interests. Julius Baer's arrangements include putting in place information barriers that ensure the separation of its research departments from other areas of the business so that no other area of the business will know the contents of any planned research until the research has been distributed to clients. Adherence to these procedures is monitored by the Julius Baer Compliance Department. Unless explicitly stated in this publication, its informa-tion and analysis has not been disclosed to the issuer of the securities referred to herein or a Julius Baer entity before the publication has been published or disseminated.A Julius Baer entity may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the securities referred to herein, perform services or solicit business from such issuers, have a position or effect transactions in the securities or options thereof, have any other significant financial interest regarding the issuers of the securities referred to herein and/or may have done so in the past. For further information about our interest in the investments featured in this publication, see the company-specific disclosures above.

22

INSIGHTS APRIL 2017

IMPORTANT DISTRIBUTION INFORMATIONThis publication may only be distributed in countries where its distribution is legally permitted. This information is not directed to any person in any juris-diction where (by reason of that person’s nationality, residence or otherwise) such publications are prohibited.External Asset Managers/External Financial Advisors: In case this research publication is provided to an External Asset Manager or an External Financial Advisor, Julius Baer expressly prohibits that it is redistributed by the External Asset Manager or the External Financial Advisor and is made available to their clients and/or third parties. By receiving any research publication the External Asset Managers or the External Financial Advisors confirm that they will make their own independent analysis and investment decisions, if applicable.

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Pursuant to Israeli law, "Investment Marketing" is the provision of advice to clients concerning the merit of an investment, holding, purchase or sale of securities or financial instruments, when the provider of such advice has an affiliation to the security or financial instrument. Due to its affiliation to Bank Julius Baer & Co. Ltd., JBFS is considered to be affiliated to certain securities and financial instruments that may be connected to the services JBFS provides, and therefore any use of the term "investment advice" or any variation thereof, in this publication should be understood as Investment Marketing, as explained above. This publication does not constitute investment advice and has been prepared by Bank Julius Baer & Co. Ltd. and distributed by JBFS for information purposes only, without taking into account the objectives, financial situation or needs of any particular client, and does not constitute an offer, a recommendation or an invitation by or on behalf of JBFS to make any investment. Japan: This publication may have been distributed by or on behalf of a member company of Julius Baer Group for the sole purpose of advertisement of Julius Baer.Kingdom of Bahrain: Julius Baer (Bahrain) B.S.C.(c), an investment firm business, which is licensed and regulated by the Central Bank of Bahrain (CBB), distributes this publication to its accredited investor clients. Please note that Julius Baer (Bahrain) B.S.C.(c) offers financial products or services only to expert and accredited investor clients in line with the definition of the CBB’s rulebook that contains regulations, directives and rules pursuant to the CBB rulemaking powers under the CBB law. 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The information contained herein is as of the date referenced and Julius Baer (Lebanon) S.A.L. shall not be liable to periodically update said information. The quotes and values provided herein are for indicative purpose only and shall in no way refer to tradable levels.

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Panama: The relevant services and/or products mentioned in this publication shall only be provided in Panama by a Julius Baer entity authorised to provide such services/products in Panama. This publication is for the intended recipient only. Financial instruments mentioned in this publication are neither registered with nor under the supervision of the Superintendence of the Securities Market (formerly the National Securities Commission). The exemption from registration is based on Article 129 of Decree Law 1 of 8 July 1999 as amended and organised into a single text by Title II of Law 67 of 2011 (the “Securities Law”). In consequence, the tax treatment established in Articles 334 to 336 of the Securities Law does not apply to them.

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INSIGHTS APRIL 2017

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