THE WORSE IS NOT - Banca March · 2019-07-12 · variable income whilst the European banks will continue to suffer the most. Although we are still in the phase of celebrating the

THE WORSE IS NOT ALWAYS THE BETTER

HOUSE VIEWJULY 2019

HOUSE VIEW. JULY 2019

THE WORSE IS NOT ALWAYS THE BETTER 2

THE WORSE IS NOT ALWAYS THE BETTER

This expression, which at times like these suddenly makes so much sense again, originally had nothing to do with the financial markets. It is attributed to Russian writer and revolutionary Nikolái Chernyshevski, who inspired Lenin amongst others. His idea, based on the class struggle and the “reform or revolution?” dilemma, was not very pacific: the harder the living conditions of society’s poorest, the more likely they were to start a revolution.

A century after the Russian revolution, the recent commitment made by the central banks to once again increase stimulation, whilst the economy is slowing down and the environment deteriorating, has brought this idea back to the forefront, although for very different reasons.

Just days after the most recent “trade truce” between the US and China (not the first, nor will it be the last before they reach a real, definitive agreement), assets are all rising whilst the fundamentals are deteriorating. Yes, all of them; risk assets like the stock markets, credit and industrial commodities, but also defensive assets like sovereign bonds and gold. The return of liquidity is being positively received by the markets, overshadowing both the most recent worst macroeconomic figures and the deteriorated profit estimates which, on a global scale, are at 3.8% for this year compared to 14.6% in 2018.

Very low interest rates will facilitate the financing capacity of companies and eventually improve the financial conditions, stimulating the economy, which is why we cannot be too negative about such measures. Additionally, the best news is that both in the world as a whole and the US in particular, the longest cycle of all time is still in progress. With estimated global growth of 3.3% for this year, two decimal points less than its historical average, the cruising speed does not seem to be an immediate threat. That is why Powell’s latest message indicating that the first lowering of interest rates of this cycle will occur at the end of this very month has come as a surprise. A measure that has not been taken since 2008 and the purpose of which is purely preventive to attempt to slow the loss of momentum of the leading indicators.

From our point of view, the North American economy is not only feeling the effects of the trade war but also the effects of the far from insignificant rise in the price of money of 225 base points implemented by the Federal Reserve over the last 3 years, and the 800 billion dollars it has withdrawn from the system, a reduction of 19% of its balance.

At times like these, one of the best ways to measure the degree of deterioration of the economy and investment is the evolution of business confidence. As can be seen in the image, this is one of the indicators that best matches the S&P 500. The deterioration of the component of new orders to its lowest levels since 2016 and the measurement of the ISM manufacturing index may be some of the FED’s main reasons to take action but...this much action?



Over the next few months, as the effect of the inventories dissipates and the economy continues to deteriorate, the Federal Reserve will have to be able to precisely calibrate how much more liquidity it needs to avoid entering in recession. Our impression is that, for the time being, the market is discounting much more aggressive rate falls than the weakness we are seeing in the data. The fixed income market was quick to discount a cut of 100bps, from now until the end of 2020, which is unlikely to occur unless the economic climate deteriorates a lot more. Further on in this document (on page 6), we will talk about this situation in more detail and explain how Christine Lagarde, the future new Chairwoman of the ECB, lacks the margin the FED has.

For its part, variable income at its highest is interpreting that the central banks, with more expansive monetary policies, will be capable of managing the situation and avoiding a recession, as occurred in 1984 and during the 90s. The problem is that more recent history has shown us that the solution is not always that simple.

2. EVOLUTION BEFORE AND AFTER THE FIRST INTEREST RATE FALL OF EACH BUSINESS CYCLE..

1984

1989

1995

1998

1981

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2007

80

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105

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115

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130

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6

(%)

Months

Average if there is no recession (1984, 1989, 1995, 1998)

Average if there is a recession (1981, 2001, 1995, 2007)

1. BUSINESS CONFIDENCE COMPARED TO S&P 500 (%)

Source: Bloomberg and Banca March

Manufacturing ISM

S&P 500 a/a (Der)

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-30%

-10%

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1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019



The last two occasions on which the Federal Reserve reduced interest rates (in 2001 and 2007) led to the certification of the end of the business cycle and, just over a year later, the economy entered a recession and the markets suffered sharp falls. In the last 50 years, contrary to what many think, during the seven periods in which the Federal Reserve raised the interest rates, the stock markets have always risen, accompanied by the recovery of business profit. On the other hand, when the rates have gone down, despite this supporting more favourable liquidity conditions, the result has not always been so benign. Unfortunately, despite their good intentions, the central banks do not always react in time and in 5 of the last 8 cycles, they were too late.

So, what is to be done? This exact question was the title of one of Chernyshevski’s most important works in 1863 in which, amongst other ideas, the philosopher described the dream of a character in a society that obtains the “eternal joy” of a global class.

Our conclusion, far from the ideas of this revolutionary Russian, is that, in the current climate, despite the maturity of the cycle, it is still too soon to forecast a global recession in the next 6/12 months, particularly while the credit spreads continue to hold fast. But, in the same way that “eternal joy” is difficult to achieve, the markets do not rise in an undefined or linear manner. It is difficult to put ourselves in the “eternal better” if we have not seen such a bad “worse”. We should better hope that the implicit rate falls discounted by the fixed income curves do not come to pass. This would be the best sign that the weakness of the economy is not advancing as fast as some people think. For now we need to remain cautious: with exposure to the market but with liquidity ready to take advantage of episodes of volatility. Low rates in the US will continue to favour both emerging fixed and variable income whilst the European banks will continue to suffer the most. Although we are still in the phase of celebrating the return to liquidity, the idea of things having to “get worse before they get better” will not last forever, even if the central banks are able to save the cycle.

Joan Bonet MajóChief Investment Strategist

JULY 2019

HOUSE VIEW

THE CENTRAL BANKS COME TO THE RESCUE. WHAT RESCUE?


THE CENTRAL BANKS COME TO THE RESCUE. WHAT RESCUE? 6

HOW SHOULD WE POSITION OURSELVES IN THE CURRENT ENVIRONMENT?

The Central Banks come to the rescue. What rescue?

MACROECONOMIC SCENE

The economic slowdown goes on. Despite its deterioration, the macroeconomic data does not show signs of an imminent recession.

After a negative May, the global stock markets have once again gained ground. Indexes like the S&P 500 have returned to all-time highs. In this context, you might well ask: what has changed? Have the economic expectations really improved or is it just that confidence in the monetary stimulation measures has returned?

The economic data published and in particular, the business owner confidence leading indicators predict that the economic slowdown will continue its course. The global economy is in the middle of an industrial recession and despite the fact that this is not moving at a steady pace, the leading indicators show less dynamism for the next few months. Specifically, in June the global manufacturing PMI was below the activity shrinkage threshold for the second month in a row, signalling future drops in industrial production (image 1).

STRATEGIC POSITIONASSET CLASS -2 -1 NEUTRAL +1 +2

LIQUIDITY

BONDS

EQUITIES

ALTERNATIVES

BONDS -2 -1 NEUTRAL +1 +2

SOVEREIGN DEBT

High quality (AAA)

Peripheral

CORPORATE BONDS

Investment grade

High yield

EMERGING DEBT

CONVERTIBLE BONDS

EQUITIES -2 -1 NEUTRAL +1 +2

EUROPE

UNITED STATES

EMERGING

JAPAN



5-year-inflation expectations (U. Michigan Consumer Confidence; 6m Mov. Av.)

3,6

2,2

8,2

0

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4

6

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16

AUG.-14 MAR.-15 OCT.-15 MAY.-16 DEC.-16 JUL.-17 FEB.-18 SEPT.-18 APR.-19

2. RETAIL SALES (REGIONS)


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Eurzone

China

Beyond the industrial sector, we should point out that consumption is showing more stable fundamentals: the creation of employment has been sustained and the growth of salaries is moving at a reasonable pace. In this context, we think that the global economy will continue to slow down, but that the current data shows no signs of an imminent recession.

3. INFLATION EXPECTATIONS Source: Bloomberg and Banca March Although we already find ourselves

in a very advanced phase of the economic cycle, in which the recovery of employment is already clear in the world’s main economies, inflation has once again slowed down. What is more concerning are the falls in the expectations regarding its future evolution which can be seen not only in the listing of financial instruments (like swaps linked to inflation), but which are also reflected in recent consumer surveys (see image 3).

1. CONFIDENCE AND INDUSTRIAL ACTIVITY


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03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Global Manufacturing PMI

Global Industrial Production (Interannual; Derech)

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5,0

90 92 94 96 99 01 03 05 08 10 12 14 17 19

United States

Even in economies like that of the United States, where the unemployment rate is at its lowest in over 50 years (in May it was at 3.6%), the expectations are that the growth of consumer prices will continue to slow over the coming quarters. This apparent disconnection of inflation expectations is a new concern for the monetary authorities which, after years of stimulation measures, have not managed to sustainably keep inflation at the target levels.



FIXED INCOME AND CENTRAL BANKS

Despite the slowing of inflation, the conclusive message from the Central Banks in June was surprising, but it also generates doubt regarding the real sustainability of the cycle.

Indeed, in this context of the absence of clear signs of economic recession, the latest announcements by the Central Banks generate doubt regarding the real sustainability of the economic cycle. Despite the slowing of inflation, the conclusive nature of the messages from the main monetary authorities, which in June opened the door to the adoption of new stimuli in the short-term, is surprising.

The clear change in direction of the monetary policy comes from the drop in inflation expectations, but it could also be a warning in relation to other risk factors in relation to which the financial markets are currently showing greater complacency (the effects of protectionism and the lack of a trade agreement between China and the US, amongst others).

These messages produced a swift reaction in the fixed income markets which are already discounting further reductions of the official interest rates on both sides of the Atlantic. As we can see in the following images, in the case of the United States, the markets have already priced cuts of 75bps of the price of money before the end of this year, thus positioning themselves well below the indications of the members of the FED themselves: in its June meeting, only 8 of its 17 members signalled the need to lower rates this year, the most aggressive placing this between 1.75% and 2%, 50bps below the current levels, at the end of the year. Likewise, as regards the ECB, the market is already incorporating a drop in deposit rates of at least 10bps to levels of -0.5%. A decision that will push the short-term euro interest rates even further into negative terrain. On top of this is the fact that the market even expects the ECB to reopen its debt purchase programmes (sovereign and corporate).

In this context, we believe that the capacity of the Central Banks to positively surprise us through new stimulation measures is now very reduced, as are its options to really act as a driving force for change for global activity given the already low current interest rates.

4. FED VS FUTURES MARKET FORECASTS Source: Bloomberg and Banca March

5. EURIBOR RATES IMPLICIT IN FUTURES Source: Bloomberg and Banca March

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2019 2020

Fed vs Futures Market Forecasts

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Euribor 3 months ratesimplicit in futures

Fed Members (Sept-18) Fed Members (June-19)

Fed Members (Dec-18)

Futures Members

Fed Members (Mar-19)

Dec 19 Dec 20



What room for manoeuvre do the Central Banks still have? Will they be a determining factor in avoiding greater deceleration this time?

O�

cial

Inte

rest

Rat

es

-0,75% -0,65%-0,40% -0,25% -0,10%

0,75%

1,25%

2,50%

Switzerland Denmark ECB Sweden Japan Bank of England

Australia Fed

Balance (%GDP)

117% 22% 40% 19% 103% 28% 9% 19%

6. RATES AND BALANCE COMPARISON (%GDP) Source: Bloomberg, Citigroup and Banca March

7. EVOLUTION OF BALANCE AND RATES Source: Bloomberg and Banca March

Over the last decade, monetary stimulation policies have spread amongst the major economies. As illustrated by image 6, the price of money is at very low levels (even negative levels in several economies), whilst the size of the balances of the Central Banks compared to the GDP has also increased. The possibility of further monetary stimuli is therefore now more reduced and possibly with lower marginal effects, but overall, in many cases they will once again lead to the adopting of previously unexplored measures.

In this scenario, the room for manoeuvre currently available to the main monetary authorities is smaller, one exception being the US Fed, which has managed to reverse some of the stimulation measures implemented to come out of the great recession of 2008-09. In this particular case, the official rates have a descent margin and as announced in its last meeting, we expect to see a cut of at least 25bps in the price of money on the part of the Fed over the next few months.

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JAN.-06 JAN.-07 JAN.-08 DEC.-08 DEC.-09 DEC.-10 DEC.-11 DEC.-12 DEC.-13 DEC.-14 DEC.-15 DEC.-16 DEC.-17 DEC.-18

We cannot rule out the possibility that this reduction decision may be made as soon as July, although we think the Fed will prefer to wait and see the activity data of the third quarter and see how the new rounds of trade negotiations go before adopting this change in its monetary policy. The United States economy has continued in expansion during the first half of the year and inflation is not too far off target, therefore, the central scenario continues to be that of a preventive cut in interest rates and only a marked deterioration of the activity would lead the Fed to now start a more aggressive cycle of interest rate cuts.

More complex is the scenario the ECB faces, with interest rates already in the negative and with a balance that has continued to rise and is now at 40% of the region’s GDP, but which is nonetheless failing to sustainably position inflation close to its target of 2%. In this context, the chairman of the ECB himself made it clear at the annual forum held in Sintra (Portugal) that the monetary authority is open to new measures, but; what new measures can it take and how effective will they be in relaunching growth and inflation in the euro zone?

FED total assets Fed Official Rates (Derch.)



According to the conclusive words of the chairman of the ECB, we can expect further monetary stimulation measures during the third quarter of this year which will include injections of liquidity and a further deposit rates cut. Additionally, the reopening of the public and corporate debt purchase programme will also be on the table, but in this case this would be announced later given the need to revise some of the technical aspects. However, the effects of these measures on growth and inflation will be less effective than in the past given their current lesser potential.

Using the estimates published by the ECB itself, the monetary stimulation measures introduced since 2014 boosted the growth of the GDP and inflation of the region to just less than 1.6% accumulatively over three years (2016 – 2018, which would mean a average annual contribution of approximately +0.5%), as since 2014, asset purchases reached 2.6 billion euros, deposit rates were reduced by 40bps and the TLTRO, measures which as we will now see will be difficult to repeat on this occasion, were introduced.

1,11,9 1,6

-0,7

1,01,6

0,8

0,50,3

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-1

-0,5

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2016 2017 2018 2016 2017 2018

Contribution of Monetary Stimuli(Impact of measures implemented since 2014)

P IB IPC

8. EFFECTS OF MONETARY STIMULISource: Bloomberg, ECB and Banca March

All this makes us think that these new monetary stimulation measures will not in themselves be able to change the trend of deceleration and slowing of inflation in the region.

As we can see in image 9, since monetary stimuli began to be adopted, the public debt crisis of 2011 - 2012 together with the low inflation recorded in the euro zone led to an ultra-accommodative monetary policy which, on the positive side, managed to keep the Monetary Union and defend the stability of the euro but also now reduces the tools available to combat this new deceleration of activity.

Growth

Effect of Monetary Boost

9. EVOLUTION OF BALANCE AND RATES (ECB)Source: Bloomberg and Banca March

10. ECB: PUBLIC DEBT HELD BY COUNTRYSource: Bloomberg, Capital Economics and Banca March

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06 07 08 09 10 10 11 12 13 14 15 16 17 180%

5%

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20%

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35%

Germany France Italy Spain Holland Belgium Ireland Portugal

Current limit(total % holding of sovereign debt)

ECB Total Assets (Derch.)

Official rates (ECB)

Credit Facility

Deposit Facility



Despite this, and taking into account the words of M. Draghi, the ECB is prepared to adopt new measures. Additionally, the appointment of C. Lagarde as the new chairwoman of the ECB is perceived as a continuist decision and one that further opens the possibilities of the introduction of new monetary stimuli. In recent months, C. Lagarde has defended the need for further action by the Central Banks to support economic growth and she is also an advocate for tax stimulation measures.

We would also highlight that she is an experienced communicator, which will be relevant in this new monetary policy cycle which we believe will be characterised by greater verbal involvement on the part of the central bankers. The communication of decisions and perspectives will be yet another tool available for monetary policy. Below we will recap the main options the ECB is currently considering:

1. Injections of Liquidity (TLTRO): the ECB has already announced this programme and we are not expecting any further changes. These loans will be granted for a period of 2 years and will be available to commercial banks from September to March 2021 on a quarterly basis. The maximum cost of this liquidity will be 10bps above the official rate (currently 0%) and the minimum cost +10bps above the deposit rate which is currently -0.4%. The main intention of this measure is to cushion the scheduled maturity of previous liquidity programmes (TLRO I and TLTRO II). Taking into account the current excess liquidity in the financial system of the euro zone and the less favourable conditions to access this liquidity facility compared to previous programmes, the banks of the region do not expect high demand for this.

2. Cutting of deposit rates and strengthening of its communication policy: the ECB’s message in its next meeting in July will probably emphasise that the euro interest rates will remain at the current low levels or drop even further for an extended period of time, this being yet another sign that the authority is planning an additional cut of deposit rates by another 10bps at the end of the summer (September). This first stimulation measure is more easy to adopt given its less controversial nature compared to the direct purchasing of debt, for example. However, its effectiveness also seems to be reduced given that the rates of the euro monetary market are in the negative and, additionally, a further cut of deposit rates will increase the costs for the European banking sector of the excess liquidity it deposits into the vaults of the ECB. For this reason, alongside this measure we also expect the additional announcing of a system to allow the cost of these deposits to be lightened for the banks. As with other Central Banks with negative rates like Switzerland or Denmark, the ECB would implement a second, less penalising deposit rate for part of the reserves the banks deposit. The difficulty will lie in finding a balance between the interest rate and the amount of reserves allowed which will not penalise the maintaining of the excess liquidity of the sector but at the same time, will not raise the interest rates of the monetary market.

3. Debt purchasing programme: the last tool the ECB could use again would be the reopening of its asset purchases and consequent continued growth of the size of its balance. Although this measure would be that which would theoretically have the greatest stimulating effect, it is also the one that generates the most controversy within the ECB as it intervenes directly through the purchasing of sovereign and corporate debt. One of the main difficulties is the already high amount of public debt in the hands of the ECB (see image 10), which in many cases is close to 33% of the total public debt of an issuer, which is the maximum established during the public sector purchase programme (PSPP). Should this programme be reopened, negotiations would be required to modify these technical clauses. For its part, the ECB could also pick back up on its purchasing of corporate debt (the previous programme, CSPP, was announced in March 2016 but had a reduced weight, representing only 7% of a total of 2.6 billion euros which was the asset purchases total).



The fixed income market has priced the change in direction of the monetary policy, which reduces its capacity for surprise.

The fixed income markets have quickly reflected the messages of the Central Banks and have even priced more aggressive stimulation measures than those indicated by the monetary authorities. Although the return of monetary stimuli is in clear support of sovereign debt, a large part of the expected appreciation has already taken place. We would therefore recommend maintaining underweighting in the exposure to sovereign debt of greater credit quality where in the case of euro-denominated debt, practically all the issues due to reach maturity in less than 5 years list in negative figures (the Spain 5 year bond has a required rate of return of -0.25%).

As regards the United States sovereign debt curve, we have also seen a sharp drop in the 10 year rates. Historically, the fixed income market has got ahead of the interest rate cut cycles and on average, after the first cuts in the price of money, the improvement in the expectations for growth and inflation tends to limit the drop in long-term interest rates, but can also place an upper limit on the possible recovery of the required rates of return. In this context, the United States 10 year rates should move within a range of 1.75% - 2.25% over the coming quarters (image 11).

11. EVOLUTION BEFORE AND AFTER THE FIRST CUT OF THE FED’S OFFICIAL RATES (IRR OF US 10 YEAR BOND IN BPS).




13. S&P 500, EXPECTED QUARTERLY EVOLUTION OF PROFIT AND INCOME Source: Refinitiv and Banca March

VARIABLE INCOME

The possible resolution of the trade war has been postponed although there are signs of greater understanding.

The United States and China showed signs of cooling off when they agreed a truce to the trade war in Osaka, with three main points as a framework to the agreement:

1. Both parties will return to the negotiations table although no fixed deadline has been given to finalise the agreement.

2. The United States will temporarily and partially lift the ban on Huawei. In practice this will allow United States companies to sell products by the Chinese technological giant but Huawei’s 5G technology will continue to be banned in United States territory. In return, China has promised to increase imports of United States agricultural products.

3. The United States will not apply further customs duties to Chinese products with a value of $325 billion that remain outside the trade war. However, the current customs fees on Chinese and United States products recording goods with a value of $200 billion and $60 billion, respectively, will not be lifted.

Attention will be focussed on the 2Q19 results publication season.

In just two weeks, the quarterly publication of results, corresponding to the April-June period, which will continue to show signs of depletion, has taken on particular interest. In the case of the S&P 500, the estimates for this quarter point to there being practically no growth in profit, whilst sales will increase by 3.7%. In the case of the Stoxx 600, the expected growth of profit will come close to 2% and will exceed 1% in income.

12. EMERGING DEBT SPREADS (BPS) Source: Bloomberg and Banca March

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Within fixed income, we will continue to trust in the potential of emerging debt in external currencies, this being the main asset where we can capture attractive levels of IRR, despite the strong return accumulated during recent months. This asset has benefited from the lowering of the base rates but the spreads offered by these issues are still attractive to us, given that the risk premiums paid are still higher than their historical average (image 12).

Emerging Debt Spreads (EMBI Global) Historical Average

ProfitIncome



By sector, the two sides of the Atlantic agree on the good forecasts for the health sector but disagree in relation to the accounts to be submitted in another recommended sector, the technological sector, (good for Europe and less favourable for the US). We would also highlight the good forecast for communication services in the United States and industrial services in Europe.

We will maintain our tactical underweighting in variable income begun in March while we wait for new opportunities.

After a positive first half of the year for the stock markets, the main indexes are close to annual highs. In the case of the S&P 500, we have just seen the best year half since 1997 with a rate of return of +17.4%, marking record highs. Although it is true that, in the short-term, the recent turnaround in the monetary policies of the central banks is generating expectations of increased liquidity, which acts as support for the stock markets, the absence of catalysts surrounding quarterly profit, multiples paid in certain demanding cases and the lack of definitive resolution of the trade war and Brexit lead us to maintain our tactical underweighting approach, in the hope of better opportunities.

There are no big changes in relation to the geographic positioning and we continue to prioritise relative exposure to emerging stock markets, taking into account their greater potential for growth and more attractive valuations in the case of the Asian stock markets, particularly China.

By sector, our approach continues to be focussed on technology, energy and health, all of which are listing at a historical discount compared to the MSCI Europe and S&P 500 indexes. In the case of technology, we insist that, despite its good accumulated stock market behaviour, this is still listing below its historical average, particularly in the US.

OIL

La OPEP y Rusia pactan mantener el recorte de la producción de crudo durante nueve meses más. La actual coyuntura de oferta y demanda mantendrá limitado el aumento del precio del petróleo. Mantenemos el rango objetivo 60-70 dólares/barril.

The Organisation of Petroleum Exporting Countries (OPEC) and non-member countries like Russia, Mexico and Kazakhstan have agreed to extend the oil production cut of 1.2 million barrels/day (mb/d), which had been due to expire on 30 June, to 31 March 2020. The purpose of the organisation is to sustain the price of crude oil which, following the end of the first half of the year, is on course to position itself below the average recorded in 2018, despite the cuts in force.

14. EUROSTOXX 600, EXPECTED QUARTERLY EVOLUTION OF PROFIT AND INCOME Source: Refinitiv and Banca March

ProfitIncome



Amongst the conditioning factors we would highlight the following on the supply side:

- Reduced production by countries like Iran and Venezuela, both affected by sanctions imposed by the United States administration and unfavourable economic climates. In the case of Iran, production has fallen by around 40% in the last year, with current pumping of around 2.4mb/d. As for Venezuela, the economic collapse and lack of investment have led production to fall by 33% just from January to May accumulatively to reach its current level of 0.8mb/d.

- Geopolitical tensions between the United States and Iran, which call into question the security of the Strait of Hormuz and may increase the volatility of crude oil, following the recent attacks on two oil tankers. 15% and 50% of the world’s and OPEC’s daily production, respectively, passes through this strait, which has never once suffered a close.

- The high degree of compliance of the organisation’s petroleum production quotas. The OPEC’s production ended May on a low for the last five years; 29.95 million barrels/day. In total, the OPEC’s production has dropped by 1.4 million barrels/day since Nov-18 and by 2mb/d since May of last year.

- Strength of production in the United States which could counteract the OPEC’s cuts. The forecasts of the International Energy Agency point to the US producing an average of 12.45mb/d and 13.38mb/d in 2019 and 2020 respectively, in addition to supplying 70% of the total increase in the production of crude oil expected in the next five years.

15. THE OPEC REDUCES ITS SUPPLY Source: Bloomberg, ICE, CFTC and Banca

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On the demand side the focus is on the following aspects:

- The International Energy Agency (IEA) slightly cut its forecast for an increase in the demand for crude oil for 2019, by 100,000 barrels/day. The trade war, the organism maintains, has therefore reduced the forecast growth to 1.2 million barrels. Despite all this, looking to 2020, the growth in demand will accelerate to 1.4 million barrels, as a result of the economic stimuli applied and the demand of the emerging countries.

- In line with the cuts of the IEA, the OPEC symbolically lowered its growth forecast for the global demand for petroleum due to the escalation of the trade disputes and indicated the future risk of a further reduction. Specifically, the global petroleum demand will increase by 1.14mb/d, 70,000 barrels less than its previous estimate.

- In parallel to the sharp falls seen in the price of crude oil at the beginning of June (up to 12% in three sessions), there has been the recent greater weakness of the refining margins and drops in the crack spread, (spread between the price of crude oil and the derivative products extracted from this). On previous occasions, this scenario has pointed to a greater weakness of the demand which on many occasions has been a reliable leading indicator of a recession.

USA (Left)

RUSSIA (Left)

SAUDI ARABIA (Left)

OPEC (Right)



CURRENCIES

The Fed’s expected rates drop has reduced the attractiveness of the dollar. The Euro-Dollar exchange rate will trend towards a target range of 1.15 - 1.20 EUR/USD.

Over recent months, it was confirmed that levels of 1.11 EUR/USD will continue to act as a support and the euro received buyer interest in this area allowing June to be closed at levels close to 1.14 EUR/USD.

The Fed’s change in direction reduces the attractiveness of the dollar rates spread compared to other world currencies, for which reason its main support factor in the first half of the year is starting to lose influence. In this context, we maintain our perspective that the euro-dollar exchange rate should list within a range of 1.15 - 1.20 EURO/USD by the end of the year.

We still trust that a no-deal Brexit is an option that will be avoided. We see the adopting of positions in pounds as an opportunity, taking advantage of a possible appreciation to 0.85 EUR/GBP.

Political uncertainty continues to be on the rise in the United Kingdom and with it, the pound sterling is once again listing at the top of the target range (0.85 - 0.90 EUR/GBP). We are reaffirming our expectations that a no-deal Brexit would be an option both parties will try to avoid and for this reason, we still believe it to be a good idea to take advantage of falls in the pound sterling and levels close to the top of the range are an opportunity to add positions that benefit from possible appreciation to levels of 0.85 EUR/GBP and which also allow us to capture the interest spread of short-term British public debt, thus avoiding the negative rates of the euro-denominated curves.

Banca March Market Strategy Team:Joan Bonet MajóPedro SastreLuis CoelloPaulo Gonçalves, CAIA

To sum up, the prices of petroleum should continue to maintain themselves within the same target range of $60-70/barrel. As regards supply, increased production in the United States will counteract the potential increase in geopolitical tensions (Iran and the outcome of the trade war) and the extension of the cuts by the OPEC and other countries. Meanwhile, the global demand is showing certain symptoms of weakness within its notable resilience but without conclusive results. The Brent reference accumulated a rise of 3.1% to reach $66.5/barrel in June, having cut by 11% in May and risen 11% from the recent lows of June. During the year, the reference has accumulated rises of 21%, almost completely recovering from the fall seen in the last two months of 2018.

16. GASOIL-BRENT CRACK SPREAD Source: Bloomberg, Banca March

15

16

17

18

19

20

JAN.-18 MAR.-18 MAY.-18 JUL.-18 SEPT.-18 NOV.-18 JAN.-19 MAR.-19 MAY.-19 JUL.-19



EURIBOR 12 MONTHS (3 YEARS)

EUR/USD (3 YEARS)

TEN YEAR GOVERNMENT YIELDS (SPAIN VS GERM.)

IBEX (3 YEARS)

COMMODITIESLAST 1 MONTH YTD 1 YEAR

BRENT 66,55 64,49 53,80 77,62

GOLD 1409,5 1305,5 1282,5 1252,3

CORPORATE BONDS (1 YEAR SPREAD)

LAST 1 MONTH YTD 1 YEAR

AA -0,29 -0,21 -0,18 -0,24

A -0,24 -0,15 -0,09 -0,19

BBB -0,13 -0,04 0,05 -0,07

EURIBORLAST 1 MONTH YTD 1 YEAR

1 MONTH -0,39 -0,38 -0,36 -0,37

3 MONTHS -0,35 -0,32 -0,31 -0,32

6 MONTHS -0,31 -0,25 -0,24 -0,27

12 MONTHS -0,21 -0,17 -0,12 -0,18

DIVISASLAST 1 MONTH YTD 1 YEAR

EUR/USD 1,1373 1,117 1,145 1,158

EUR/GBP 0,896 0,884 0,898 0,881

EUR/CHF 1,110 1,118 1,126 1,154

EUR/JPY 122,7 121,0 125,6 127,8

GOVERNMENT BONDSLAST 1 MONTH YTD 1 YEAR

USA

2 YEARS 1,75 1,92 2,49 2,51

5 YEARS 1,77 1,91 2,51 2,71

10 YEARS 2,01 2,12 2,68 2,84

30 YEARS 2,53 2,57 3,01 2,97

GERMANY

2 YEARS -0,75 -0,66 -0,61 -0,67

5 YEARS -0,66 -0,58 -0,31 -0,30

10 YEARS -0,33 -0,20 0,24 0,32

30 YEARS 0,27 0,43 0,88 1,06

SPAIN

2 YEARS -0,43 -0,38 -0,24 -0,22

5 YEARS -0,16 -0,02 0,34 0,45

10 YEARS 0,40 0,72 1,42 1,37

30 YEARS 1,38 1,86 2,61 2,58

UK

2 YEARS 0,62 0,60 0,75 0,71

5 YEARS 0,63 0,64 0,90 1,01

10 YEARS 0,83 0,89 1,28 1,26

30 YEARS 1,47 1,47 1,82 1,73

EQUITY INDICESLAST 1 MONTH YTD 1 YEAR

MSCI WORLD* 523,44 6,36% 14,88% 30,02%

SP500 2941,76 6,89% 17,35% 40,29%

EUROSTOXX50 3473,69 5,89% 15,73% 13,39%

TOPIXX 1551,14 -4,13% 3,82% 11,46%

IBEX35 9198,8 2,16% 7,72% 1,82%

FOOTSIE100 7425,63 3,69% 10,37% 19,18%

MSCI BRAZIL 2218,85 6,09% 14,14% 77,08%

MSCI CHINA 79,25 6,88% 11,31% 41,37%

MSCI EMERGING 1054,86 5,70% 9,22% 30,64%

Source: Bloomberg* All Countries

0

-0,25

-0,20

-0,15

-0,10

-0,05

JUL.16 OCT.16 JAN.17 APR.17 JUL.17 OCT.17 JAN.18 APR.18 JUL.18 OCT.18 JAN.19 APR.19

1,00

1,05

1,10

1,15

1,20

1,25

1,30



-0,5

0

0,5

1,0

1,5

2,0


11M

10,5M

10M

9,5M

9M

8,5M

8M



EQUITY INDICES PERFORMANCE (3 YEARS)Source: Bloomberg

IBEX REL

MSCI EMERGENTES REL

SP500 REL

140%

160%

120%

100%

80%

60%AUG.16 NOV.16 FEB.17 MAY.17 AUG.17 NOV.17 FEB.17 MAY.18 AUG.18 NOV.18 FEB.18 MAY.19

DATA AS OF 30TH JUNE 2019

RETURN DURATION PORTFOLIO DISTRIBUTION CURRENCY EXP. (NO EUR)

MONTH YTD 1 YEAR AGO CURRENT 1 MONTH AGO LIQUIDITY DEPOSITS FI EQUITY ALTERNATIVE

INV. TOTAL USD

MARCH MONETARIO F.I. -0,05% -0,20% -0,30% 0,156 0,165 73,41% 0,00% 26,96% 0,00% 0,00% 0,00% 0,00%

MARCH RENTA FIJA CORTO PLAZO F.I. 0,06% 0,46% -0,63% 0,474 0,469 21,67% 0,00% 78,41% 0,00% 0,00% 0,00% 0,00%

MARCH PREMIER R.F.C.P. F.I. 0,09% 0,69% -0,32% 0,446 0,450 23,05% 0,00% 77,01% 0,00% 0,00% 0,00% 0,00%

MARCH PATRIMONIOC.P. F.I. 0,06% 0,64% -0,60% 0,665 0,676 20,85% 0,00% 80,30% 0,00% 0,00% 0,00% 0,00%

FONMARCH F.I. 0,48% 1,98% 0,76% 2,039 2,044 2,63% 0,00% 97,06% 0,00% 0,00% 0,01% 0,00%

MARCH EUROPA F.I. 2,35% 8,77% -10,76% 0,003 0,003 -0,99% 0,00% 0,00% 98,59% 0,00% 50,50% 4,55%

MARCH INTL - VALORES IBERIAN EQUITY 3,31% 12,90% -5,09% 0,000 0,000 0,00% 0,00% 0,00% 82,39% 0,00% 0,00% 0,00%

MARCH GLOBAL F.I. 3,62% 16,52% -3,90% 0,003 0,003 9,71% 0,00% 0,00% 88,77% 0,06% 57,77% 16,16%

MARCH INTL - MARCH VINICATENA 2,21% 9,47% -3,48% 0,000 0,000 0,00% 0,00% 0,00% 80,51% 0,03% 0,00% 0,00%

MARCH INTL - THE FAMILY BUSINESSES FUND 4,59% 15,15% 0,83% 0,000 0,000 0,00% 0,00% 0,00% 80,22% 0,00% 0,00% 0,00%

MARCH NEW EMERGING WORLD F.I. 4,29% 8,03% -6,57% 0,003 0,003 17,90% 0,00% 0,00% 102,21% 0,00% 28,44% 3,52%

MARCH INTL - TORRENOVA LUX 1,05% 4,42% 0,68% 1,1 1,1 0,00% 0,00% 68,83% 16,91% 0,00% 0,00% 0,00%

TORRENOVA DE INVERS. S.I.C.A.V. S.A. 1,06% 4,44% 0,85% 1,125 1,132 6,61% 0,00% 75,72% 18,35% 0,00% 6,13% -0,09%

CARTERA BELLVER S.I.C.A.V., S.A. 2,35% 8,18% -1,34% 0,887 0,911 12,95% 0,00% 38,67% 48,00% 0,00% 27,13% 4,21%

LLUC VALORES S.I.C.A.V., S.A. 4,10% 11,49% -3,84% 0,003 0,003 15,72% 0,00% 0,00% 83,57% 0,00% 48,48% 8,66%

MARCH PATRIMONIO DEFENSIVO FI 0,52% 2,41% -0,74% 0,003 0,003 4,88% 0,00% 75,72% 10,08% 6,97% 1,26% 0,89%

MARCH CARTERA CONSERVADORA FI 1,13% 4,78% -0,96% 0,003 0,003 5,99% 0,00% 62,12% 25,67% 6,94% 1,15% 0,67%

MARCH CARTERA MODERADA FI 1,79% 7,21% -1,44% 0,003 0,003 7,47% 0,00% 43,94% 43,57% 6,67% 4,68% 4,06%

MARCH CARTERA DECIDIDA FI 2,72% 10,33% -3,13% 0,003 0,003 10,58% 0,00% 17,21% 65,68% 9,52% 6,95% 6,13%

PLAN PENSION CRECIENTE, F.P. 0,29% 1,17% -0,53% 1,531 1,542 4,80% 0,00% 95,18% 0,00% 0,00% 0,00% 0,00%

MARCH PENSIONES 80/20, F.P. 1,51% 5,66% 0,01% 2,277 2,258 1,00% 0,00% 72,65% 25,53% 0,01% 16,36% 5,43%

MARCH PENSIONES 50/50, F.P. 2,59% 9,22% -0,46% 2,085 2,077 -0,02% 0,00% 49,50% 49,38% 0,01% 31,89% 10,16%

MARCH ACCIONES, F.P. 4,74% 18,00% -1,45% 0,003 0,003 6,33% 0,00% 0,00% 92,62% 0,03% 59,03% 17,46%

MARCH AHORRO, F.P. 1,80% 6,77% -0,49% 2,239 2,330 2,84% 0,00% 64,62% 31,56% 0,01% 20,00% 6,18%

PLAN OPTIMO, F.P. 1,63% 6,31% -0,10% 2,448 2,365 2,11% 0,00% 65,67% 30,40% 0,01% 18,84% 5,82%

MARCH MODERADO EPSV 1,54% 5,82% -0,45% 1,690 1,844 14,34% 0,00% 60,89% 26,02% 0,01% 15,87% 4,68%

MARCH ACCIONES EPSV 4,80% 17,25% -0,85% 0,007 0,006 5,08% 0,00% 0,00% 93,68% 0,02% 61,03% 18,97%



IMPORTANT REMARK:

The contents of this document are merely illustrative and do not pretend, are not and cannot be considered under any circumstances as an investment recommendation towards the contracting of financial products. This document has only been prepared to help the customer make an independent and individual decision but does not intend to replace any type of advice needed for the contracting of such products. The terms and conditions described in this document are to be viewed as preliminary terms only, subject to discussion and negotiation as well as to the agreement and final drafting of the terms affecting the transaction, which will appear in the contract or certificate to be issued. Consequently, Banca March, S.A.. and its customers are not bound by this document unless both parties decide to embark on a specific transaction and agree on the terms and conditions concerning the final documents to be approved. Banca March, S.A.. does not offer any guarantee, expressly or implicitly, in relation with the information shown in this document. All terms, conditions and prices contained in this document are merely informative and subject to modifications depending on the market circumstances, changes in laws, jurisprudence, administrative procedures or any other issue which may affect them. The customer should be aware that the products mentioned in this document may not be appropriate for his/her specific investment targets, financial situation or risk profile. For this reason the customer must make his/her own decisions by taking into account such circumstances and by obtaining specialised advice in tax, legal, financial, regulatory, accounting issues or any other type of information required. Banca March, S.A.. does not assume any responsibility for any direct or indirect costs or loss which may result from the use of this document or its contents. No part of this document can be copied, photocopied or duplicated in any way or through any means, redistributed or quoted without a previous written authorisation by Banca March, S.A.

Please note this document has been translated for your information only. In case of any errors or misinterpretations, the Spanish text will always prevail.

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