FINCOR Outlook 2013 Welcome To The QE Planet

Global Outlook:Welcome to the QE Planet

(December 17th, 2012)

For important disclosures, refer to the Disclosure Section, located at the end of this report.

n

Outlook

2013

For important disclosures, refer to the Disclosure Section, located at the end of this report.

• The macro picture is supportive: Global real GDP growthin 2013 is expected to be quite similar to 2012. Recentmeasures have contained the euro area crisis. This hasdecreased the risk of financial spillovers from Europe toother regions;

• Central banks are helping too: Quantitative Easing shouldremain a key theme in 2013, involving central bankbalance sheet expansion in the US (QE3), the euro area,the UK and in Japan (the country is moving to a currentaccount deficit);

• QE should continue to be positive for equities (growthplays, companies with an inflation‐link, GEM consumerplays), real estate (Germany property, Japanese REITS andUS housing) and commodities (mainly precious metals,including gold);

• Although there remain risks to the macro outlook (e.g. USfiscal consolidation), DM governments bond yields aretoo low. Bonds are likely to underperform equity.However, a large rise in yields is not expected due tocontinued easy monetary policy by central banks andfinancial repression;

• A still high equity risk premium suggest that equitiescould outperform credit in 2013.

Outlook 2013Executive Summary and Asset Allocation

Asset Classes Benchmark Current AllocationEquities 45.0% 47.5% UK 3.0% 3.2% Europe 7.0% 8.0% North America 24.5% 24.5% Japan 3.0% 4.0% Asia 5.5% 5.5% Global Emerging Markets 2.0% 2.3%Government Bonds 27.5% 24.5% UK 2.0% 1.5% Europe 9.0% 8.0% United States 7.0% 6.0% Japan 3.5% 2.0% Dollar Bloc 1.0% 1.0% EM Local Currency 3.0% 3.5% EM Hard Currency 2.0% 2.5%Inflation Indexed Bonds 2.5% 2.5% UK 1.0% 1.0% Europe 0.5% 0.5% United States 1.0% 1.0%Corporate Bonds 10.0% 10.5%Sterling IG 0.5% 0.5%Euro IG 2.0% 2.0%US inv grade 6.0% 6.0%US high yield 1.5% 2.0%Commodities 5.0% 5.0% Agriculture 1.0% 0.5% Livestock 1.0% 1.0% Energy 1.0% 1.0% Industrial Metals 1.0% 1.0% Precious Metals 1.0% 1.5%Total Real Estate 5.0% 5.7% UK 0.5% 0.5% Europe 0.5% 0.4% United States 2.5% 2.5% Japan 0.5% 0.8% Asia 1.0% 1.5%Cash 5.0% 4.4%Volatility 0.0% 0.5%

0

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60

70

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90

200

600

1000

1400

1800

2200

2600

90 91 92 93 94 95 96 97 99 00 01 02 03 04 05 06 07 08 09 10 12 13

Housing Starts & NAHB Homebuilders' Index

Housing Starts (000s Annualized, LHS)

NAHB Housing Index (Adv. 4m, RHS)

US: Private sector vs. Government sector• 2013 is expected to show a pace of growth very similar

to 2012. Even considering that the fiscal cliff is mostlyaverted, the government sector is expected to continueto contract;

• However, the private sector in the US should be able tosupport growth at around 2%. Bank credit is rising,activities measures of US housing are recovering fast(important for household wealth and banks’ balancesheets) and some pent‐up demand release could help tooffset the fiscal retrenchment;

• The uncertainty generated by the fiscal cliff hit businessspending. If the Congress reaches an agreement, arebound in business investment is likely;

• The FOMC central tendency of 2013 annual averageGDP growth is 2.3%‐3.0%, with core PCE inflationremaining below 1.9%. So, monetary policy is expectedto remain accommodative, as the Fed continues tofocus on growth;

• The US economy is expected to continue outperformingEurope, reflecting different policy choices in managingthe deleveraging process, provided near‐term fiscaltightening is gradual. Source: National Association of Home Builders and US Census Bureau

Outlook 2013 ‐Macro OverviewUS

2.1%

3.5% 3.3%2.5%

1.5% 1.3%

4.8%

10.4%

8.7%8.2%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US Fiscal Deficit (% of GDP)“Fiscal cliff”: Negotiations are still ongoing • The economy has continued to grow at a modest

annualized rate of around 2.0% to 2.5%, despite massivemoney printing and large budget deficits. A deal to avertthe “fiscal cliff” would remove the risk of the USeconomy falling back into recession. November´selections didn’t change the political landscape much.Nevertheless, both the Democrats and Republicansagree that, unless they change the current law, a hugetightening in fiscal policy will push US back intorecession;

• The bulk of the tax cuts bill is likely to be renewed andthe bulk of the spending cuts will probably bepostponed. However, some measures are still expectedto expire, which means that a tightening in fiscal policyis likely next year (extending the contraction that beganin 2011). The government cannot run massive budgetdeficits indefinitely. Even if the “cliff” is avoided,Congress will need to agree on a package that wouldput the budget on a sustainable medium‐term path, toprevent the markets from losing patience and avoid anew round of credit rating downgrades. This is expectedto happen sometime in 2013.

Source: Bloomberg


Source: Congressional Budget Office

7.4

7.5

7.6

7.7

7.8

7.9

8.0

8.1

1.0

1.5

2.0

2.5

3.0

3.5

Dec 12 Sep 12 Jun 12 Apr 12 Jan 12 Nov 11

Fed's Economic Projections (Central Tendency mid‐point)

Change in Real GDP (%, LHS) Core PCE Inflation (%, LHS)

Unemployment Rate (%, RHS)

The Fed’s balance sheet is set to keep expanding in 2013• In 2012, the Fed announced an open‐ended QE3

focused on MBS purchases ($40bn per month or$480bn per year) until it judges that the outlook for thelabor market has improved substantially;

• Moreover, the Fed replaced the expiring OperationTwist with an expansion of QE3. It will continue buying$45bn of Treasuries securities per month in 2013 (27%will have maturities of between 20 and 30 years);

• The two added means that the Fed’s balance sheet willkeep expanding in 2013. The purchase of securities willboost the monetary base ($85bn per month or$1,020bn per year). However, up to now, it has had littleimpact on broad money or prices;

• At the end of its mid‐December meeting, the Fed alsoannounced the adoption of numerical thresholds. Rateswill be held at near‐zero as long as the unemploymentrate remains above 6.5% and as long as projectedinflation is expected to remain below 2.5%;

• As 2013 progresses, focus will likely switch to whetherBernanke will retire in January 2014. If so, who willPresident Obama choose as his candidate to replacehim as Chairman of the Fed?


Source: Board of Governors of the Federal Reserve System

Source: Board of Governors of the Federal Reserve System

‐4

‐3

‐2

‐1

0

France Germany Greece Ireland Italy Netherlands Portugal Spain

Change in Cyclically Adjusted Budget Balance in 2013, % of GDP

Euro‐zone: A modest recovery is expected in 2013• Recession in the Euro‐zone started at Q4 2011 and

persisted through 2012, with a severe contraction ofGDP in the southern European countries;

• Data for November brought some evidence that thegrowth of output is stabilizing in Europe. Leadingindicators bottomed and have risen recently. However,they remain in contraction territory. The Euro exchangerate appreciation since July’s lows could be a cause forsome concern;

• A modest “U‐shaped” recovery in growth is expected in2013. Nonetheless, the Euro area economy shouldstagnate next year. Core economies such as Germanyand France (although fiscal consolidation is a key risk inthe case of the latter) should avoid recession in 2013;

• By contrast, Italy, Greece, Spain and Portugal shouldcontinue to contract, reflecting a combination of privatesector deleveraging, austerity measures and toughfinancing conditions;

• A successful OMT implementation will probably bedecisive to ease financial conditions. The outcomes inthe Italian and German elections could be importantsources of political risk in 2013.

Source: OECD Economic Outlook Nov 2012 Preliminary Version; EC Forecasts Autumn 2012; IMF WEO Oct 2012; Consensus from Bloomberg

Source: European Commission, National Governments

European GDP Growth Forecasts (%)IMF OECD EC Consensus IMF OECD EC Consensus

2011 2012e 2012e 2012e 2012e 2013e 2013e 2013e 2013eEuro area 1.4 ‐0.4 ‐0.4 ‐0.4 ‐0.5 0.2 ‐0.1 0.1 0.1France 1.7 0.1 0.2 0.2 0.1 0.4 0.3 0.4 0.2Germany 3.0 0.9 0.9 0.8 0.9 0.9 0.6 0.8 1.0Greece ‐7.1 ‐6.0 ‐6.3 ‐6.0 ‐6.5 ‐4.0 ‐4.5 ‐4.2 ‐3.4Ireland 1.4 0.4 0.5 0.4 0.1 1.4 1.3 1.1 1.1Italy 0.4 ‐2.3 ‐2.2 ‐2.3 ‐2.3 ‐0.7 ‐1.0 ‐0.5 ‐0.7Netherlands 1.0 ‐0.5 ‐0.9 ‐0.3 ‐0.6 0.4 0.2 0.3 0.3Portugal ‐1.7 ‐3.0 ‐3.1 ‐3.0 ‐3.2 ‐1.0 ‐1.8 ‐1.0 ‐1.8Spain 0.4 ‐1.5 ‐1.3 ‐1.4 ‐1.5 ‐1.3 ‐1.4 ‐1.4 ‐1.5

Outlook 2013 ‐Macro OverviewEuro‐zone

European Politics: The path to greater integration will be a long one• At the last EU Summit of 2012, European leaders

endorsed the compromise on the single bankingsupervisory mechanism. However, the ECB will onlyassume its supervisory tasks on 1 March 2014 or 12months after the entry into force of the legislation,whichever is later. Moreover, all decisions on closerfiscal and economic integration were postponed to June2013;

• Meanwhile the Eurogroup’s decision on Greece lowerits debt‐servicing costs and its stock of debt, and hasremoved a significant risk factor from the market in theshort‐term. However, the risk is that Greek programmeprojections prove optimistic once again, which wouldput debt‐sustainability target into jeopardy;

• 12 elections are scheduled to take place in 2013.However, Italy and Germany’s election are likely to playa key role in the Euro‐zone debate. The main electionissue in Italy will probably be the nation’s austerityprogramme. In Germany, the debate will likely focus onhow much the country should give up (in terms ofmoney and sovereignty) to save the currency union.


Source: IMF, European Commission

Key Eevnts in 2013US Europe Rest of World

January 2013 Israeli ElectionsFebruary 2013 US Forecast to hit Debt CeilingMarch 2013 US Emergency 6‐month Budget ExpiresApril 2013May 2013June 2013July 2013August 2013September 2013October 2013November 2013December 2013

Italian Elections

German Elections

Source: Fincor

2012 2013 2014 2015 2016Real GDP (% y/y)Troika Mar 2012 ‐4.8 0.0 2.5 3.1 3.0Troika Nov 2012 draft ‐6.0 ‐4.2 0.6 2.9 3.7Primary Budget Balance (% of GDP)Troika Mar 2012 ‐1.0 1.8 4.5 4.5 4.5Troika Nov 2012 draft ‐1.5 0.0 1.5 3.0 4.5

Greece ‐ Main Macroeconomic Projections

ing Operations (Fixed Rate)

0

1

2

3

4

5

1998 2000 2002 2004 2006 2008 2010 2012

ECB Key Interest Rates (%)

Deposit Facility Main Refinancing Operations (Fixed Rate)

Will the ECB ease policy further in 2013?• The ECB has shown its ability to evolve during the euro

area crisis. It has expanded its balance sheet as apercentage of GDP since 2007;

• At its December meeting, growth projections werelowered markedly again. GDP is expected to fall by 0.3%next year. Nonetheless, the ECB expects a recovery toset in H2 2013;

• Given the weak economic outlook in Europe, the ECBhas left the door open to further Repo Rate cuts.Negative deposit rates are also being discussed;

• For now, the ECB is likely to hold steady. Monetaryconditions have already been eased considerably sincethe OMT was announced. Moreover, some leadingindicators, such as purchasing managers’ indices havestabilized recently;

• The near‐term focus will be on the Outright MonetaryTransactions programme, as a measure to reducemarket rates and effectively deal with one of thesymptoms of the Euro‐zone crisis: high borrowing costs;

• The Spanish government is still expected to request aprecautionary programme, which would enable the ECBto start its bond purchase in 2013.


Source: Bloomberg

Source: Bloomberg

Emerging Markets: Pace of structural reform is key• Given weak consumers in developed markets, emerging

markets needs structural reforms. More importanceshould be given to the sources of domestic demand;

• China is expected to show a moderate cyclical reboundin 2013. China´s leading indicators are pointing to fastergrowth over the next few months. Chinese policymakerswill continue rebalancing the economy towards a moresustainable growth model. With the political transitionout of the way and the new leadership in place,delivering the structural reforms previously outlined willprobably take centre stage;

• In Brazil, an acceleration in growth is likely as thesignificant monetary stimulus boosts privateconsumption and fiscal policy consolidates at a looserstance. However, GDP growth could disappoint if theinvestment cycle remains sluggish;

• Central and Eastern Europe is expected to lag, given theproximity to the weak Euro‐zone. Monetary policyshould stay accommodative (excl. Russia), with furtherrate cuts expected for e.g. in Poland. The Euro‐zonecrisis is likely to remain the dominant theme. Anypositive news should benefit this region strongly. Source: Bloomberg, OECD Nov 2012 Preliminary Version; IMF WEO Oct 2012

Outlook 2013 ‐Macro Overview

IMF OECD Consensus (*) IMF OECD Consensus (*)2011 2012 2012 2012 2013 2013 2013

Brazil 2.7 1.5 1.5 1.5 4.0 4.0 4.0Russia 4.3 3.7 3.4 3.6 3.8 3.8 3.5China 9.3 7.8 7.5 7.7 8.2 8.5 8.1India 6.9 4.9 4.4 5.5 6.0 6.5 5.8

Brazil 6.6 5.2 5.3 5.3 4.9 5.3 5.5Russia 8.4 5.1 5.0 5.2 6.6 6.4 6.7China 5.4 3.0 2.6 2.7 3.0 1.5 3.1India 8.9 10.2 10.0 7.6 9.6 7.7 8.5

(*) Consensus from Bloomberg(*) Bloomberg, OECD Economic Outlook Nov 2012 Preliminary Version, IMF WEO Oct 2012

Real GDP growth (%)

Inflation (CPI) (%)

Emerging Markets

94

96

98

100

102

104

94

96

98

100

102

104

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

Quarterly Unit Labor Costs Q2 2009 ‐ Q2 2012

Portugal Spain Euro area

Portugal: GDP is expected to contract for the third year in a row• The economy is expected to continue in recession,

reflecting the fiscal consolidation (heavy fiscaltightening expected in 2013), and ongoing bankdeleveraging (private debts remain at high levels).However, net trade should provide some support;

• The plunge in domestic demand is expected to continueand should contribute to a fall in imports (and to a tradebalance improvement as % of GDP);

• The unemployment rate is likely to continue rising.OECD expects the unemployment rate to increasetowards 16.9% at the end of 2013 (OECD EconomicOutlook, Nov 2012, Preliminary version);

• The economy will probably remain sensitive to a furtherdeterioration in domestic credit conditions and lowerdemand growth in other euro area economies andexport markets;

• The authorities have announced new measures in thesupplementary budget law for 2012 and the 2013budget law. However, given the economic backdrop, afurther deficit overshoot seems likely. On a morepositive note, the current account should continue toimprove, reflecting some competitiveness gains.

Source: OECD

Bank of Portugal: 2012‐13 Projections (annual rate of change; %)Weights2011 2011 2012 P 2013 P 2011 2012 P 2013 P

GDP 66.3 ‐1.7 ‐3.0 ‐1.6 ‐1.6 ‐3.0 0.0Private consumption 20.1 ‐4.0 ‐5.8 ‐3.6 ‐4.0 ‐5.6 ‐1.3Public consumption 18.1 ‐3.8 ‐3.9 ‐2.4 ‐3.8 ‐3.8 ‐1.6Gross fixed capital formation 103.8 ‐11.3 ‐14.9 ‐10.0 ‐11.3 ‐12.7 ‐2.6Domestic demand 35.5 ‐5.7 ‐6.8 ‐4.5 ‐5.7 ‐6.4 ‐1.4Exports 39.3 ‐5.3 ‐4.7 ‐2.3 ‐5.3 ‐6.2 1.5Imports

Contribution to GDP growth (in p.p.)Net exports 4.5 4.0 2.8 4.6 3.6 1.4Domestic Demand ‐6.2 ‐7.0 ‐4.5 ‐6.2 ‐6.6 ‐1.4

Current account + Capital account (% of GDP) ‐5.3 ‐0.2 4.0 ‐5.2 ‐1.7 0.8Trade balance (% of GDP) ‐3.3 0.8 4.5 ‐3.2 0.4 2.5Sources: Bank of Portugal, Economic Bulletin, Autumn 2012

Summer 2012Autumn 2012

Outlook 2013 ‐Macro OverviewPortugal

Spain: 2013 should be a challenging year• Spain returned to recession in 2012, albeit the rate of

contraction has been probably less than was expected;• The country faces a difficult adjustment phase and

structural shifts are required to restructure theeconomy (i.e. less domestic demand and more exports).But, important tough these reforms are, they do little tosupport output or employment in the near‐term;

• The combined effects of fiscal austerity and privatedeleveraging should keep consumer spending weak in2013. With bank deleveraging and credit tightness,economic growth and public revenues are expected toremain subdued. Fiscal policy should remaincontractionary in 2013, even though fiscal budget arelikely to miss targets;

• Like Portugal, Spain is improving its competitiveness,which should help its already positive exportperformance;

• Spain´s external rebalancing is proceeding, as shown bythe fast narrowing of its current account deficit.However, the stock of external debt is one of Spain’s keyweaknesses and is still expected to lead the country torequest for sovereign support.

Source: OECD Economic Outlook Nov 2012 Preliminary Version; EC Forecasts Autumn 2012; IMF WEO Oct 2012

Source: Bank of Spain

Outlook 2013 ‐Macro OverviewSpain

1.2

1.4

1.6

1.8

2.0

2.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Spain Loan‐to‐Deposit Ratio

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2007 2008 2009 2010 2011 2012 2013

US CPI vs. 5y Breakeven Inflation

5y Breakeven Inflation (%, LHS) US CPI (% yoy, RHS)

US Rates: Between the risk of a fiscal accident and a highly accommodative Fed• At its December meeting, the Fed announced a

replacement of the expiring Operation Twist and furtherbalance sheet expansion. Monetary policy (via assetpurchase programmes) should continue to be used tomaintain the current low rate environment;

• Further into 2013, a gradual move higher in yields isexpected, as easy financial conditions lifts nominalgrowth expectations;

• However, to trigger a sell‐off, it would probably take anacceleration of growth, accompanied by higher inflationexpectations. This would led to a re‐allocation ofinvestors into more risky assets. It would also reduce theincentive for the Fed to continue with its QEprogrammes;

• Where the US economy to enter a recession because ofthe fiscal cliff, yields could decline further;

• 2012 was a good year to TIPS. Real yields continued theirdownward trend and are now negative through the 20‐year sector. The Fed plans to maintains itsaccommodative stance until economic conditionsimprove, which is likely to keep real yields at low levels.

Outlook 2013 – Sovereign Bonds

Source: Bloomberg, Bureau of Labor Statistics

Source: Bloomberg

US

‐2.0

‐1.5

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0.0

0.5

1.0

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2.0

2.5

‐1.5

‐1.0

‐0.5

0.0

0.5

1.0

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2.5

2010 2011 2012 2013

US 5‐year, 10‐year, and 30‐year TIPS Real Yields (%)

10Y30Y5Y

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan‐12 Mar‐12 May‐12 Jul‐12 Sep‐12 Nov‐12

Core/Semi‐core Government Bond Yields (%)

10yr Germany 10yr France

10yr Belgium 10yr Holland

‐0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0


Core/Semi‐core Government Bond Yields (%)

2yr Germany 2yr France

2yr Belgium 2yr Holland

Trapped in a low yield environment• The euro area sovereign crisis has now endured for more

that two years. Its impact on sovereign bond marketsdiminished in 2012 due to the 3y LTROs first and thendue to the OMT programme;

• The modus operandi of European authorities are nowbetter understood by the markets;

• Short rates in most countries are likely to remain low.Another refi rate cut by the ECB is possible in Q1 2013(and possibly bringing the deposit facility into negativeterritory). The short end of the curve is likely to remainanchored at very low levels, especially in the first part of2013;

• Long‐end rates are at very low levels, reflecting safe‐haven flows and low nominal potential growth rates.There doesn´t seem to have much room for a furtherrally from current levels. However, a large sell‐off is notexpected, given current 2013 macro expectations;

• Core/semi‐core EGBs – While fundamentals, mainly inFrance, are still weak, the yield pick‐up theme willprobably still dominate in the current low yieldenvironment.


Source: Bloomberg

Source: Bloomberg

Euro‐zone

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3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 30Y

Portuguese Sovereign Curve (YTM in %)

30 Dec 2011 11 Dec 2012

Is further de‐risking possible in 2013?• 2012 was a great year for Portuguese sovereign risk;• Portugal is supposed to go back to the markets in Q3

2013 and to regain full access to funding by mid‐2014;• However, it could be difficult for Portugal to be

completely independent from some sort of officiallender’s support, given poor economic prospects andhigh debt and fiscal deficit;

• Portugal could increase the use of T‐Bills. However, thatwill reduce the average maturity of the stock of debt.Moreover, it would probably be interpreted as a negativeby markets as it will probably make bond holders junior;

• Further debt swaps could be announced in 2013 to helpalleviate refinancing pressures in 2014 and 2015. Thisliability management could pave the way to marketaccess;

• Further sovereign de‐risking will probably be news flowdependent: Will Spain lose market access? Will OMT (ifactivated) be able to bring peripheral yields lower?

• Portugal is likely to need more support, relative to thecurrent adjustment programme. The ECB and the ESMwill probably be brought to the final decision on asecond programme.


Source: Bloomberg

Source: Bloomberg

Portugal

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7


Spain's 2‐year and 10‐year Sovereign Spreads (%)

10‐year Bond Spread2‐year Bond Spread

Will Spain ask for further support in 2013?• Spain is still weighing its options on a possible bailout.

2013 Fiscal tightening is quite significant. However, the4.5% of GDP target for next year seems too ambitiousand will likely be missed. Moreover, some Spanishofficials have hint that the country could miss this year’sgeneral government deficit target (7.4% of GDP). OfSpain’s 8.5% 2011 budget deficit, 2.9% came fromregional governments. Will Spain’s regions be able tomeet their deficit targets?

• Spain has formally requested €39.5bn of European fundsto recapitalize its banks. Addressing convincingly thebanking problems would be positive for the sentimenton the sovereign;

• Given Spain’s large financing needs and external debtproblem, Spain is still expected to request for furtherexternal support. But, will the return of market pressuresbeing applied to Spain be the trigger? In 2013, supplypressures will be notable for Spain. Furthermore, 2013regional issuance could be merged with that of centralgovernment. Spain’s sovereign is not far from HY(Baa3/BBB‐/BBB). Further rating downgrades wouldmake a benchmark exit a distinct possibility.


Source: Bloomberg

Source: Spanish Treasury Estimates

Spain

Spanish 2013 bond issuance estimatesNet bond Total bond

in €bn Redemptions issuance issuanceGovernment base case 62 28 90

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

Q12006

Q32006

Q12007

Q32007

Q12008

Q32008

Q12009

Q32009

Q12010

Q32010

Q12011

Q32011

Q12012

Q32012

Median EBITDA/Interest Expense

More modest returns are expected in 2013 (mostly driven by carry) • In 2012, US high grade corporate credit achieved strong

returns. Fed policy was supportive to IG credit sentiment.The Fed doesn’t buy corporate bonds, but its ongoingpurchases of Treasury, agency and mortgage securitiesare also intended to push investors to pursue higheryields via risk assets such as corporate bonds. This isexpected to keep the demand for investment grade creditsupportive in 2013. Nevertheless, supply should alsomaintain a robust pace, given the current low yieldenvironment;

• As long as central banks keep their supportiveprogrammes and the US economy avoid recession, themain concern are risks that could increase volatility.Macro concerns have led to high correlations. 2013 canshow a more differentiate credit performance, whichwould increase the importance of sector and single nameselection. US financials have improved their fundamentals(e.g. higher capital ratios), but their spreads remain widerelative to historical levels. Credit fundamentals in non‐financials seem to be weaker (decline top‐lineexpectations and increasing return of cash toshareholders) when compared to financials.

Outlook 2013 – Corporate High Grade Credit

Source: Bloomberg

US

Source: Bloomberg

Low credit spreads in a low volatility regime• In 2012, spreads tightened amid declines in sovereign

spreads and a lower equity volatility. European credit hashad a strong run in 2012, reflecting the outperformanceof European credits trading at very wide levels (mainlyperipheral names). At a sector level, Financialsoutperformed;

• Fiscal austerity and deleveraging (mainly in theperiphery) still poses downside risks to growth. Politicalaction will probably remain a key driver;

• The search for yield could lead to tighter investmentgrade corporate credit spreads, in an environment whereeither growth begins to improve or policy makersprovide more stimuli. However, spikes in volatility areexpected, given the current low growth environment;

• Peripheral vs. core and financials vs. non‐financials willprobably be key on positioning for 2013;

• With the bulk of bank rating changes likely behind us,and given the increase in capital ratios, IG financialscould be a less volatile sector. Subordinated instrumentsstill offer a significant premium to senior bonds. In thenon‐financial area, the growth outlook will be decisive totake exposure to more cyclical sectors/names.

Outlook 2013 – Corporate High Grade Credit

Source: Bloomberg

Source: Fincor

Euro‐zone

200

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500

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700

800

900

1000

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013

iTraxx Indices

iTraxx Europe (LHS)

iTraxx Sr Financial (LHS)

iTraxx Crossover (RHS)

0

5

10

15

20

25

0

5

10

15

20

25

2010 2011 2012 2013

Portugal / Germany Government Bond Spreads (%)

2‐year

5‐year

10‐year

Political and ECB actions will remain the main drivers• The environment has been benign for the Portuguese

corporate bond market since the ECB’s OutrightMonetary Transactions programme was announced;

• Portuguese credits remain exposed to a weak economicbackdrop (GDP is expected to fall again in 2013) andsovereign credit rating risk;

• Moreover, bank deleveraging remains an importantchallenge, with shrinking credit supply;

• The ECB is expected to continue providing liquidity forbanks and focus on the OMT programme;

• Given the growth outlook, we prefer to take exposure toless cyclical credits and those names where restructuringand consolidation are already under way. We prefer EDP(defensive profile and expected B/S deleverage over thecoming years) and Portugal Telecom (high quality assetsand fully financed until mid 2016);

• Portuguese banks have showed improving solvencyratios and better funding condition. Banks continue tofocus on B/S deleveraging (lower LTD ratios). Earningsare subdued and asset quality pressures are expected tocontinue. Portuguese sovereign spreads will probablyremain the main driver in 2013 for the sector.

Outlook 2013 – Peripheral Corporate Credit

Source: Bloomberg

Source: Bloomberg

Portugal

2

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6

8

10

12

14

16

18

Jan‐12 Mar‐12 May‐12 Jul‐12 Sep‐12 Nov‐12 Jan‐13

Portugal Telecom vs. BES (YTM %)

Portugal Telecom 5.625% 2016

BES 5.625% 2014

0

100

200

300

400

500

600

700

2010 2011 2012 2013

Telefonica vs. Spain 5Y CDS (bp)

Telefonica 5Y CDS

Spain 5Y CDS

At the mercy of the Sovereign…• Growth in Spain is projected to be negative again in

2013. Fiscal multiplers has been greater‐than‐expected;• Spanish banks will need to continue to reduce private

sector loan‐to‐deposit ratios. Loans would have to keepdecreasing, in a country where credit transmission isheavily dependent on bank lending;

• Spain’s sovereign rating stands at Baa3/BBB‐/BBB(outlook negative). A downgrade to junk status is a keyrisk and would mean that nearly all banks will move instep. Moreover, a material subset of the corporateuniverse would probably be downgraded to high yield(Utilities are deemed the sector with the highestexposure to country risk according to the agencies). Themagnitude of the economic recession, the progress inrestoring confidence in Spain’s banking sector and theability of the Sovereign to maintain market access (in ayear of strong debt issuance) should be decisive;

• With Spain risk premium having declined in 2012, a morecautious approach could be justified. Short‐dated issuesare preferred;

• We prefer to take exposure to credits with restructuringpotential and geographically diversified (e.g. Repsol).

Outlook 2013 – Peripheral Corporate Credit

Source: Bloomberg

Source: Bloomberg

Spain

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2005 2006 2007 2008 2009 2010 2011 Jan‐Oct2012

Dividends and Stock Repurchases in the HY Bond Market ($bn)

Welcome to the low yield world• Reduced tail risks from lower fears of a disorderly EMU

breakup (LTROs and OMT), Fed policy action (open‐endedpurchases of MBS and Treasuries), and yield‐starvedinvestors have helped high yield bonds in 2012. However,weak Q3 earnings and post‐election “fiscal cliff”uncertainties have weighed on valuations at the end ofthe year;

• A higher demand for yield in 2012 led to a fall in volatility;• Given a still favorable default outlook, 2013 could show

investors still seeking current income;• Key risks for 2013: (a) re‐leveraging or a slower de‐

leveraging, given the easy access to low yields; (b)downside to US growth (driven by fiscal retrenchment); (c)a systematic shock from Europe (despite the efforts of theECB);

• The upgrade to downgrade ratio for BB rated issuersremains at solid levels and is even increasing;

• Notwithstanding the low volatility and yield environment,overleveraged balance sheets still face several headwinds,given the sluggish economic recovery. In that sense, agreater improvement in the macro outlook would stronglysupport the performance of CCC issuers.

Outlook 2013 – High Yield

Source: Bloomberg

US

Source: Bloomberg

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60

Upgraded Unchanged Downgraded

Pan European HY (excl. Financials): Net Rating Moves (%)

2011 2012

Demand is supportive but… there´s some potential downside risks• Pan European High Yield posted a robust performance in

2012, reflecting a huge contribution from financials andthe performance of non‐financial peripheral credit;

• Given central bank support from the ECB and the USFederal Reserve (which help easing lending standards),strong demand dynamics are still expected to be a supportin 2013;

• Euro HY default rates remain low, despite the weakeconomic backdrop. However, the downgrade of Spanish /Italian corporates from IG to HY could be a key concernnext year;

• Moreover, call constraints can limit the upside, given thecurrent low yield environment. Re‐allocation into equitiescould also be a possible concern in 2013;

• Re‐leveraging strategies are possible, given low interestrates. Nonetheless, issuers should remain cautious due tothe many uncertainties at the macro level. A reverse inEuro‐zone progress, a weaker euro area economy or newsovereign downgrades represent downside risks;

• Risk/reward seems attractive in single‐Bs. Prospects fortriple‐Cs could improve during the year if economicgrowth in the Euro area improves.

Outlook 2013 – High Yield

Source: Bloomberg

Europe

Source: Bloomberg

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35

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35

1988 1991 1994 1997 2000 2003 2006 2009 2012

S&P 500: Trailing P/E vs. Forward P/E

Trailing P/E Forward P/E

S&P 500 in 2013: Earnings will be key…• The market’s multiples has fallen. Multiples continue to

be constrained by investors’ high level of uncertaintyabout the future direction of the economy, the impact offiscal imbalances on long‐term growth and thesustainability of corporate profits. Moreover, anunprecedented monetary easing creates additionaluncertainties (what will be the central bank’s exitstrategy?);

• Stocks could react positively (multiple expansion) if USpolicymakers can negotiate a plan that crediblyaddresses long‐term tax, spending, and entitlementreforms;

• Unfortunately, even considering that the “fiscal cliff” isaverted, the most important structural issues willprobably be pushed into the future;

• Bottom‐up consensus continues to fall. Companies havepiled up cash during the earnings recovery. A strongerbuyback activity would be a strong support for equityindices;

• Given the expected macro backdrop and low marketmultiples, stocks should be able to outperformTreasuries. Source: Standard & Poors

Outlook 2013 – Equity MarketsUS

Source: Standard & Poors

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

MSCI EMU and S&P 500 Price Performance

S&P500 MSCI EMU

Has the ECB made the Euro‐zone investable again? • European equities have done well in 2012 (were you

surprised?), with total returns not bad for a region incrisis and going through a recession;

• In 2013, a further re‐rating for European shares isexpected based on lower macro risks (i.e. no Chinesehard landing and no US “fiscal cliff”);

• Nevertheless, 2013 doesn´t look great for earnings (eurostrength could be a concern). Even considering that theeuro area could start exiting its current recession,nominal GDP growth should be modest. However,downgrades to 2013E estimates have already besignificant;

• Thematic views for 2013: (a) Increase in corporateaction/restructuring (driven by low funding costs); (b)Long banks (still under owned?); (c) Tilt towards strongbalance sheet (in a de‐leveraging world); (d) high‐yieldcompanies with the capacity to grow dividends; (e)companies with stable top‐line growth; and (f) consumerplays into China/EM (but cautious on Chinainfrastructure plays);

• The equity risk premium is still high. If the ECB’s OMT issuccessfully activated, the risk premium could be lower. Source: Bloomberg

Outlook 2013 – Equity MarketsEurope

Source: Bloomberg

“North” = France, Germany and Holland ; “South” = Portugal, Spain and Italy

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2009 2010 2011 2012

Trailing P/E: China vs. India

Shanghai Stock Exchange Composite BSE India Sensitive

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China Industrial Production vs. MSCI EM ($)

Chinese Industrial Production (% y/y, LHS) MSCI Emerging Markets (US$, RHS)

China is still expected to dominate the EM outlook• Easier financial conditions in many EM economies could

have created the backdrop for a rebound in domesticdemand. Some acceleration in growth is likely in 2013;

• Key concerns are related to the pace of credit creation orhousing imbalances (China and Brazil), current accountdeficits (India, Turkey) and a strong increase in foodprices (potentially leading to a tightening of monetarypolicy);

• The economic outlook for China remains uncertain.Many investors seem to believe that China´s demand forcommodities may be in secular decline and they are nowfewer bulls on Chinese economic growth. Meanwhile,recent economic data pointed to a (modest) economicimprovement and provided support for a rally. However,investors will probably continue to track the data closelyand focus on any change in policy by the new leadership;

• 2013 will be all about the confirmation of the economicrecovery in Brazil. Both fiscal and monetary policy shouldhelp. Investors have been frustrated with the wait for arecovery. Activity data should be at a center stage. Therecould be room for a re‐rating considering that localinterest rates are at a historical low. Source: Bloomberg

Outlook 2013 – Equity MarketsEmerging Markets

Source: Bloomberg, National Bureau of Statistics of China

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86


JPY / USD Exchange Rate (JPY per US$)2013: the year of the snake• Real GDP decelerated sharply in H2 2012 (July‐

September growth came at ‐3.5% q/q annualized).Reconstruction works are gradually starting and willprovide a support to the economy. 2013 could provide amore favorable backdrop to Japanese equities;

• We assume a LDP‐led government from the December16th Lower House elections (as current opinion pollssuggest is likely). Policies aimed at combating deflationare expected to be announced, such as public worksinvestment and corporate tax cuts, given the weakeconomic conditions;

• The upcoming leadership transition at the Bank of Japancould lead to additional monetary easing (explicitinflation target of 2%, the resumption of a zero interestrate policy and the potential establishment of a public‐private investment fund to buy foreign bonds);

• Most foreign investors have a light positioning to Japan.Macro and micro fundamentals improvement could leadto potential foreign purchases;

• Further yen weakness (amid a persistent trade deficit)would be supportive to growth. It would also underpinthe Topix and help earnings revision momentum.

Source: Bloomberg

Source: Fincor

Outlook 2013 – Equity MarketsJapan

Key events in Late‐2012 and in 2013Dec 16 Lower House ElectionsDec 19‐20 BOJ Monetary Policy MeetingDec 17‐ Jan 15 New PM appointed and new Cabinet formedJanuary Supplementary Budget DiscussionJan‐Mar FY13 Budget Deliberations and PassageFeb‐Mar Selection Process of BOJ Governor and two Vice GovernorsMarch Submission of Preparatory Bill for Consumption Tax Hike to DietMar 19 2 BOJ Deputy Governors' terms endApril 8 BOJ Governor's term endsJuly Upper House Elections

Still addicted to lower sovereign yields?• The market now trades at 14.4x the consensus 2013 EPS forecast;• PSI 20 sales are expected to rise by 4% in 2013. EBITDA margins will

remain static;• The economic backdrop will remain weak, with Portuguese real GDP

expected to contract again in 2013. The government continues to makeits best efforts to contain public deficit, imposing austerity measures.Sovereign yields declined as the ECB’s decision to engage in outrightmonetary transactions provided a turning point for sentiment;

• BES (strong presence in the corporate segment) and Sonae (leveragedB/S and almost fully exposed to Iberia) are our preferred vehicles toplay further sovereign de‐risking next year;

• International footprint, restructuring appeal, attractive valuations andsolid balance sheet are key investment themes to select our preferredstock list: Galp, EDP Renovaveis, Portucel and ZON.

Outlook 2013 – Equity Markets

PSI 20(€mn) Consensus (**) y/yRevenues (*)2011 64,106 2012 F 68,161 6%2013 F 70,878 4%EBITDA (*)2011 11,347 2012 F 11,724 3%2013 F 12,237 4%Net profit2011 1,687 2012 F 2,069 23%2013 F 3,058 48%Net debt (*)2011 40,998 2012 F 40,883 0%2013 F 39,961 ‐2%(*) Excluding financial stocks

(**) According to Bloomberg

Source: Bloomberg

Portugal

PSI 20: Large caps vs. Small capsCAGR 2013‐11 (Excl. EBITDA mg) ‐ Consensus (**)

EBITDA mg EBITDA mgRevenues (*) EBITDA (*) 2012 F (*) 2013 F (*) Net profit Net debt (*)

Large Caps 6% 4% 17% 17% 7% ‐1%Small Caps 2% 4% 19% 19% n.m. ‐3%(*) Excluding financial stocks

(**) According to Bloomberg

Source: Bloomberg

Stock picking is decisive given macro challenges• With the ECB reducing the tail risks, the risk‐reward of

the Spanish equity market has improved;• However, the macro backdrop for Spain remains

challenging. GDP is expected to decline again in 2013.The retrenchment in activity was already severe andconsumer spending has also taken a significant step back;

• Although it is far from over, structural adjustment isongoing. There is probably still a tough road ahead, giventhe magnitude and duration of past excesses;

• Spanish corporate 12‐month forward earnings have beendowngraded significantly lower by analysts and are nowwell below their peak;

• The focus will probably remain on whether Spain willfinally ask for further assistance to the ESM;

• Stocks with geographic diversification, attractivevaluation, with growth opportunities and a solid B/S arepreferred, such as Ebro Foods (defensive profile), Almiralland Tecnicas Reunidas (growth opportunities);

• We remain cautious on Spanish banks due to B/Sdeleverage. We’ll prefer to play Sovereign de‐riskingthrough Antena 3 (restructuring potential), Enagas (stablegrowth) and Acerinox (recovery in profitability).

Outlook 2013 – Equity MarketsSpain

Spanish companies least exposed to Iberia (% sales)Company Sector Iberia Latam N.America OthersEbro Foods Food 6 0 52 42Amadeus Travel & Leisure 6 8 7 79Acerinox Cap. Goods 8 0 51 41Grifols Healthcare 13 4 63 21Viscofan Food 17 14 28 41Abengoa Utilities 22 36 18 24Santander Financials 23 54 6 17OHL Infrastructures 27 39 14 21Telefónica Telecoms 29 47 0 24BBVA Financials 30 52 11 7Prossegur Ind. Services 31 59 0 10Repsol Oil & Gas 32 38 15 15Ferrovial Infrastructures 37 0 26 73Iberdrola Utilities 37 17 9 37Source: Financial Statements

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Santander, BBVA, Popular and IBEX 35 Price Performance in 2012

BBVA Banco Popular Ibex35 SantanderSource: Bloomberg

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Gold Price vs. Size of Fed Balance Sheet

Size of Fed Balance Sheet ($bn, RHS)

Gold Bullion US$/Troy Ounce (LHS)

Commodities should remain a hedge against supply disruptions• With commodity supply constraints easing and China´s

potential growth expected to decrease over thefollowing years, a more cautions opinion could bewarranted;

• However, we believe that commodities could still besupported in 2013 by more QE policies and by somecyclical pick‐up expected for next year. Brent crude oilprices continue to trade in a trading range. Thisrepresents a change from the upward trend of 2008 ‐ H12011. Prices are expected to be capped by theperception that oil prices above $125/bbl represent asignificant threat to economic growth and theperception that policymakers will respond with for e.g.the release of strategic oil reserves;

• The low level of volatility seen in all asset classesprobably explain why gold prices have remained rangebound since October 2011. However, we expect goldprice to remain supported by a negative real Fed Fundsrate (a proxy of the opportunity cost of holding gold),and the continuing expansion of Central Bank’s balancesheets (hedge against the possible inflationaryconsequences of policy actions).

Outlook 2013 – Commodities

Source: Bloomberg, 2012 refers to Jan‐Nov return

Source: Bloomberg, Federal Reserve

Disclosure Section

This research report is based on information obtained from sources which we believe to be credible and reliable, but isnot guaranteed as to accuracy or completeness. All the information contained herein is based upon informationavailable to the public.The recipient of this report must make its own independent assessment and decisions regarding any securities orfinancial instruments mentioned herein.This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or relatedfinancial instruments. The investment discussed or recommended in this report may be unsuitable for investorsdepending on their specific investment objectives and financial position.The material in this research report is general information intended for recipients who understand the risks associatedwith investment. It does not take account of whether an investment, course of action, or associated risks are suitablefor the recipient.Investors should seek financial advice regarding the appropriateness of investing in any securities or investmentstrategies discussed or recommended in this research report and should understand that the statements regardingfuture prospects may not be realized. Investors may receive back less than initially invested. Past performance is not aguarantee for future performance.Fincor – Sociedade Corretora, S.A. accepts no liability of any type for any indirect or direct loss arising from the use ofthis research report.Recommendations and opinions expressed are our current opinions as of the date referred on this research report.Current recommendations or opinions are subject to change as they depend on the evolution of the company or maybecome outdated as a consequence of changes in the environment.Fincor ‐ Sociedade Corretora, S.A. provides services of reception, execution, and transmission of orders.

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