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Investment
Strategy
Outlook Q2 2017
Table of Contents
Contents
Strategic Asset Class Views 4
Strategic Asset Allocation Views 5
Investment Strategy Views 6
Global Economic Environment and Prospects 8
Asset Class Performance 9
Bond Markets Performance 10
Equity Markets Performance 11
FX Market Performance 12
Commodities & Alternative Performance 13
Global Macro Outlook: Summary 15
US Macro 16
Eurozone Macro/ECB 18
Japan Macro 20
UK Macro 21
BRIC’s 22
Government Bonds 25
Periphery Bonds 27
Emerging Market Bonds 28
Credit Markets (IG & HY) 29
Global Equities 30
US Equity Markets 31
S&P 500 Valuation 32
US Equity Sectors 33
Cyclical Vs Non Cyclical 34
Equity Volatility 35
European Equities 36
European Equity Valuations 37
Asian, Emerging Markets & EU Periphery Markets 38
Commodities 39
FX 41
2
Source: Bloomberg, BOC Investment Strategy Team
Overview Q1 2017
Our Views
Global Macros
Outlook
3
Source: Bloomberg, BOC Investment Strategy Team
Bullish Bearish Bullish Bearish
Strategic Asset Class Views
Bullish Bearish
Global Equities Global Bonds Alternatives
Neutral
Commodities Cash Euro
Neutral Neutral
Neutral Neutral Neutral
Bullish Bearish Bullish Bearish Bullish Bearish
As of 31March 2017
4
Source: Bloomberg, BOC Investment Strategy Team
Strategic Asset Allocation Views Global Equities
--- -- - 0 + ++ +++
US Equities
Europe
Germany
UK Equities
Japan
BRICs
Russia
India
Brazil
China
Commodities
--- -- - 0 + ++ +++
GOLD
OIL
Cash
--- -- - 0 + ++ +++
CASH
Alternatives
As of 31March 2017
5
Currencies
--- -- - 0 + ++ +++
EUR/USD
EUR/GBP
EUR/CHF
USD/JPY
BASKET/RUB
Equity Sectors
Technology
Telecom
Energy
Industrials
Financials
Eurozone
US
Healthcare
Consumer Staples
Consumer Discretio.
Utilities
Materials
Underweight Neutral Overweight
Global Bonds
--- -- - 0 + ++ +++
Government US
Short Duration
Long Duration
Government EU
Short Duration
Long Duration
Investment Grade US
Investment Grade EU
High Yields Bonds US
High Yields Bonds EU
Emerging Markets
Current
Previous
Source: Bloomberg, BOC Investment Strategy Team
Investment Strategy Views
Equities
Current equity valuations are overextended, pointing to a period of below average returns, while the rally in the
first quarter has already discounted the positive impact from Donald Trump’s election victory. We take back our
upgrade in Global Equities in Q1 to move down one notch from – to - - for the second quarter. Geographically,
we continue to prefer US equities over European and Emerging Markets.
Bonds
We expect the Fed to raise interest rates a further two times in 2017 (by 25bps each time), and the latest Fed
“dot-plot” reveals Fed Funds at 3% by the end of 2019. As growth and reflation expectations are scaled back
we move Global Bonds and US Government Bonds up one notch from - to neutral. In the credit space
we prefer Investment Grade over High Yield.
Currencies
The US dollar uptrend while faltering at present due to falling yields is expected to strengthen in Q2 at a
moderate pace. EURUSD recent rally was an opportunity to go long the dollar for lower levels in the second
quarter, we remain negative on EURUSD and move USDJPY from positive to neutral. We also move
EUR/GBP to neutral from – due to uncertainty arising from the upcoming Brexit negotiations.
Commodities
Demand for Gold as a safe-haven asset is expected to continue throughout Q2, keeping our view positive,
Crude Oil has found its equilibrium after its recent decline and is supported by OPEC extending their
production cuts, we remain neutral.
Alternatives
We continue to favour non traditional asset classes, such as Alternative Investments since they have a low
correlation with the standard asset classes (equities, bonds) and are suitable for better diversification purposes.
Main positions and quarterly changes
6
Source: Bloomberg, BOC Investment Strategy Team
Overview Q1 2017
Our Views
Global Macros
Outlook
7
Source: Bloomberg, BOC Investment Strategy Team
Global Economic Environment and Prospects
First quarter main events at a glance
• Donald Trump was sworn in as the 45th President of the United States on Jan 20th, and in his speech
reiterated his campaign pledges to increase spending, cut taxes and reform regulations. However, in the
administrations first test to delivering on these policies, House Republican leaders were forced to
withdraw the GoP healthcare bill from consideration after the legislation failed to garner sufficient support
to pass. Financial markets immediate response was to revise their expectations for the prospects of other
campaign promises , with an immediate negative impact felt in equities and the US dollar, while bond
markets rallied driving yields lower across the curve.
• The US Federal Reserve in a widely anticipated move increased its benchmark interest rate 0,25% to a
0,75% - 1% range, for the third time in the cycle. US Equity markets were encouraged by Fed Chair Janet
Yellen’s less hawkish tone pointing to “gradual” increases in 2017 of two more hikes.
• In Europe, the ECB left its rate on main refinancing operations at 0%, while signalling policy continuity by
reiterating its commitment to a substantial degree of monetary accommodation, while at the same time
acknowledging an improvement in the economic outlook for the Eurozone. Whilst in the UK, the Bank of
England’s Monetary Policy Committee voted 8 – 1 to keep interest rates at 0,25% in March, the split of
opinion (8 – 1 vs. 9 – 0) was the first since July 2016, prompting a rally in the pound.
• The majority of commodity markets moved lower in Q1 with Crude Oil being hit particularly hard (WTI -
9,6% YTD to $50,5 per barrel) as data on US crude oil production (+9,1 m barrels) points to growing
inventories and increasing production capabilities, as the current active US rig count is at its highest level
since September 2015 (662). Meanwhile, Gold has rallied this quarter to $1.250 per ounce (+7,9% YTD)
buoyed by the uncertainty in the US and EU political arena, a reassessment of the pace of rate hikes
from the Fed and a weakening US dollar.
8
Source: Bloomberg, BOC Investment Strategy Team
Asset Class Performances
Asset Class Performance
• Equities in both US and Europe posted solid gains in Q1, Japan suffers, hit by strengthening Yen
• Bond markets recover from Q4 sell-off, encouraged by dovish Fed comments
• Crude down 9,6% on supply glut concerns, while Gold benefits from safe-haven status in first quarter
• Dollar depreciates vs. majors as investors scale back US rate hike expectations
9
18%
1%
-2% -6%
0%
12%
16% 14%
24%
20%
26%
16% 17%
-9,6%
7,9%
1,6% 1,5%
-4,7%
5,9%
11,1%
5,5%
2,1%
9,8%
7,6% 6,4%
-0,7%
CRUDE OIL GOLD GLOBALBONDS
EUR/$ $/JPY MSCI WORLD MSCI EM S&P 500 RUSSEL 2000 NASDAQ DAX EUROSTOXX600(Ex UK)
NIKKEI
1 YR CHANGE Q1 CHANGEAs at 31-03-2017
Source: Bloomberg, BOC Investment Strategy Team
Bond Indices Performances
Bond Markets Performance
• Overall positive quarter for bonds, Central Bank policy dominates market sentiment
• Eurozone Sovereign underperformed, in particular long-end
• Corporates in US & EU outperform, high yield favoured
• Emerging market bonds see inflows as investors attracted by higher yields
As at 31-03-2017
10
-1%
-4%
2%
8%
0%
-5%
3%
17%
7%
10%
-2% -1,1%
-3,2%
0,1% 1,4%
0,3% 1,4% 1,3%
2,9% 3,5% 3,5%
1,8%
Eurozone Sov 5-10
Eurozone Sov10+
EUR InvestmentGrade
EUR High Yields US Treasury 1-3 US Treasuries10+
USD InvestmentGrade
US High Yield Emerging MarketSov
Emerging MarketCorp
Barclays GlobalAggregate USD
(Uh)
1 YR CHANGE Q1 CHANGE
Source: Bloomberg, BOC Investment Strategy Team
Equity Indices Performances
• Equites posted solid gains across all regions in the first quarter (exception Russia)
• Russian stocks fall 10,6% in Q1 due to negative energy prices
• Technology favoured in US markets as Nasdaq (+9,8%) outperforms S&P (+5,5%) & Dow (+4,6%)
• Emerging Markets rally as fears over protectionist US policies subside
Equity Markets Performance
11
As at 31-03-2017
12% 14%
16%
24%
20% 19%
26%
19% 19% 17%
7%
16%
7,5%
19%
29%
5,9% 5,5% 4,6% 2,1%
9,8%
6,4% 7,6%
5,4%
2,6%
-0,7%
3,8%
11,1%
-10,61%
12,5%
7,9%
MSCI World S&P 500 Dow Jones Russell 2000 NASDAQ Eurostoxx50
DAX CAC FTSE 100 Nikkei Shanghai MSCIEmerging
Market
Russia India Brazil
1 YR CHANGE Q1 CHANGE
Source: Bloomberg, BOC Investment Strategy Team
Currency Performances
FX Market Performance
• US dollar down against the majors, depreciates 4,7% vs the Yen and 1,5% vs. the Euro as interest
rate differentials tighten
• Sterling stabilizes vs. the EUR and USD, even as UK formally triggers Brexit (article 50)
• Ruble falls 16% vs. USD driven by losses in Crude Oil
• Aussie dollar appreciates 5,5%, helped by rising metals prices
12
As at 31-03-2017
6%
-6%
-12%
0%
-4%
-2%
7%
-6%
-16%
-23%
7%
0%
-1,7%
1,5% 1,5%
-4,7%
-1,7% -0,3% -0,3%
-3,4%
-8,2% -7,3%
-0,8%
5,5%
Dollar Index EURUSD GBPUSD USDJPY USDCHF EURCHF EURGBP EURJPY RUBLE EURRUB USDCNY AUDUSD
1 YR CHANGE Q1 CHANGE
Source: Bloomberg, BOC Investment Strategy Team
Commodities Performances • Crude oil, down 9,6% in Q1, negatively impacted
by increasing US production and scepticism
surrounding compliance of OPEC production cut
deal
• Gold gains 7,9% in the first quarter, supported by
falling yields, a weaker US dollar and geo-political
risks
• Copper has increased 5,7% in Q1, adding to the
strong gains in the fourth quarter, albeit at a slower
pace. The advance in prices has been checked by
the spike in copper inventories on the LME
(London Metals Exchange), which reached their
highest level since February 2014.
• Event driven strategies continue their solid
performance in Q1 up 2,6% , taking advantage of
M&A activity and corporate restructurings
• Market neutral strategies rebounded in Q1 by 1,9%
• Macro and CTA’s (Commodity Trading Advisors)
continue to struggle in current markets which lack
clear direction
Commodities & Alternative Performance
Alternative Strategies Performances
13
22%
-5%
1%
20% 21%
18%
-8,9%
2,7%
7,9%
13,6%
5,7%
-9,6%
Natural Gas Corn Gold Silver Copper Crude Oil
1 YR CHANGE Q1 CHANGE
-5% -4%
16%
-1%
6% 6% 8%
9%
3% 1%
-0,8% -0,4%
2,6% 1,9% 1,6%
2,7% 1,0% 2,2%
0,0%
0,7%
Macro CTA Event Driven MarketNeutral
Global HedgeFund
Equity Hedge Credit ConvertibleArb
M&A AbsoluteReturn
1 YR CHANGE Q1 CHANGE
As at 31-03-2017
Overview Q1 2017
Our Views
Global Macros
Outlook
14
• OECD states that “global growth is set to pick up modestly, but remains too slow”
• Points to disconnect between financial markets and real economy as risk to growth
• Suggests policies that strengthen inclusive growth and manage risks, including maintaining open markets
• Raises GDP growth forecast for United Kingdom for 2017 by 0,4% to 1,6% on improved economic
outlook
• Maintains forecasts for World and Eurozone GDP in 2017
• Reduces US 2018 GDP by 0,2% to 2,8%
OECD Economic Outlook Forecasts
Source: OECD Interim Economic Outlook, Mar 2017
Previous refers to Nov 2016 estimates
Global Macro Outlook: Summary
15
2016 2017 2018
Previous New Previous New
World 3,0% 3,3% 3,3% 3,6% 3,6%
USA 1,6% 2,3% 2,4% 3,0% 2,8%
Eurozone 1,7% 1,6% 1,6% 1,7% 1,6%
United Kingdom 1,8% 1,2% 1,6% 1,0% 1,0%
Japan 1,0% 1,0% 1,2% 0,8% 0,8%
China 6,7% 6,4% 6,5% 6,1% 6,3%
India 7,0% 7,6% 7,3% 7,7% 7,7%
Brazil -3,5% 0,0% 0,0% 1,2% 1,5%
Source: Bloomberg, BOC Investment Strategy Team
GDP YoY %
US Macro
Unemployment Rate & Nonfarm Payrolls
CPI & Core CPI
16
-2,80%
2,50%
1,60%
2,20%
1,50%
2,40% 2,60%
1,60%
2,20% 2,30%
2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F
-0,5
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
%
CPI CPI Core FED Target
-400
-300
-200
-100
0
100
200
300
400
500
600
0
2
4
6
8
10
12
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6‘
T
h
o
u
s
a
n
d
s
%
Full employment Unemployment Nonfarm Payrolls
• US GDP for Q4 2016 came in at 2,1% boosted by
consumer spending. GDP annual growth rate
expanded by 2,0%
• Full employment for the US economy. Unemployment
fell to 4,7% in February, labour force participation rate
at 63 percent
• Despite the decline in the unemployment rate,
average hourly earnings are increasing slowly ( 0,2%
consecutive increase over the last 3 months)
• Headline inflation is on the rise, but core prices and
wages are moving slow. The Fed recognises that
“symmetric” inflation may temporarily go above the
2% level
Source: Bloomberg, BOC Investment Strategy Team
Consumer Confidence & Consumption
FED Balance Sheet
ISM Manufacturing PMI
9000
9500
10000
10500
11000
11500
12000
50
55
60
65
70
75
80
85
90
95
100
Ma
r-09
Se
p-0
9
Ma
r-10
Se
p-1
0
Ma
r-11
Se
p-1
1
Ma
r-12
Se
p-1
2
Ma
r-13
Se
p-1
3
Ma
r-14
Se
p-1
4
Mar-
15
Se
p-1
5
Ma
r-16
Se
p-1
6
%
Personal Consumption Consumer Confidence
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Jan
-08
Jul-0
8
Jan
-09
Jul-0
9
Jan
-10
Jul-1
0
Jan
-11
Jul-1
1
Jan
-12
Jul-1
2
Jan
-13
Jul-1
3
Jan
-14
Jul-1
4
Jan
-15
Jul-1
5
Jan
-16
Jul-1
6
Th
ou
sa
nd
s
$4,5 Trillion
US Macro and Federal Reserve
17
• Full employment, supports US consumption. Private
consumption accounts for over two thirds of the US
economy
• FED is expected to raise interest rates two more
times this year. However, looking ahead, we are
conscious of expected changes (reductions) in the
Fed’s balance sheet
• The Institute for Supply Management’s Manufacturing
PMI rose to 57,7 in February of 2017 above market
expectations of 56. It is the highest reading since
August of 2014
40
42
44
46
48
50
52
54
56
58
60
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
PMI 50 Level
> 50 Economy expanding
< 50 Economy contracting
Source: Bloomberg, BOC Investment Strategy Team
GDP YoY % & CPI
Eurozone Macro
Europe PMI Manufacturing
European Unemployment dips below 10%
6
7
8
9
10
11
12
13
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
%
PMI 10%
18
-0,9%
-0,3%
1,2%
2,0%
1,7% 1,6% 1,6%
2,5%
1,4%
0,4%
0,0%
0,2%
1,7% 1,5%
2012 2013 2014 2015 2016 2017F 2018F
GDP CPI
40
42
44
46
48
50
52
54
56
58
60
Ma
r-14
Jun
-14
Se
p-1
4
Dec-1
4
Mar-
15
Jun
-15
Se
p-1
5
Dec-1
5
Ma
r-16
Jun
-16
Se
p-1
6
Dec-1
6
Ma
r-17
PMI 50 Level
> 50 Economy expanding
< 50 Economy contracting
• Inflation in the Eurozone returned in Q1, increasing
1,8% in January and 2% in February (the highest
inflation rate since January 2013)
• Eurozone trade surplus is supported by
manufacturing PMI’s, as exports continue to
advance. Eurozone manufacturing PMI in March rose
to 56,2 (the highest reading since April of 2011)
• While political perils abated towards the end of Q1,
volatility from French and German elections still a risk
• Brexit negotiations commenced as UK Prime Minister
triggers Article 50
Source: Bloomberg, BOC Investment Strategy Team
ECB Deposit Facility
European Central Bank (ECB)
ECB Asset Purchased Breakdown
ECB LTRO
100
300
500
700
900
1100
1300
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
-0,6
-0,4
-0,2
0
0,2
0,4
0,6
0,8
1
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Dec-1
5
Dec-1
6
%
223218
22830
1254635
51069 102274
1654026
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
CoveredBond
ABS PublicSector
Corporate MarketSecurities
Total QE
19
• The ECB removed a reference to using all available
measures (to induce growth and inflation) “because
the sense of urgency is not there”, Mario Draghi
9/3/2017
• The ECB is less worried about Eurozone banking
sector as the last TLTRO finished in March
• Mario Draghi referred to inflation as “transient”
blaming high energy and food effects, and was clear
on future interest rate policy, stating that rates “to
remain at present or lower levels for an extended
period of time, and well past the horizon of the net
asset purchases”
Source: Bloomberg, BOC Investment Strategy Team
GDP YoY % & CPI
Japan Macro
Corporate profits and wage growth
Japan Tankan Survey
20
1,50%
2,00%
0,30%
1,20% 1,00% 1,10% 1,00%
0,00%
0,30%
2,70%
0,80%
0,40%
0,70%
1,00%
2012
2013
2014
2015
2016
2017F
2018F
GDP CPI
-15
-10
-5
0
5
10
15
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Diff Tankan Forecast
-10
-8
-6
-4
-2
0
2
4
6
4
6
8
10
12
14
16
18
20
22
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
%
Trilli
on Y
en
Corporate Profit Wages Growth
• Japan continues to grow at a moderate pace, 1,6%
in the fourth quarter of 2016 qoq
• BoJ Governor Kuroda appeared cautious on
Japan’s inflation outlook and provided little
guidance regarding future rate rises
• Private consumption remains weak, despite the on
going improvement in labour and income
conditions
• Yen strengthens as investors shun foreign assets
• We change our positive view to neutral on
Japanese equities
Source: Bloomberg, BOC Investment Strategy Team
GDP YoY % & CPI
UK Macro
UK Mortgage Approvals
UK Unemployment, Weekly Wages
21
• Uncertain future for the UK as PM, Theresa May
formally triggers article 50 (Brexit)
• Scottish Parliament votes for second independence
referendum
• A weak sterling and rising inflation will weigh on
private consumption (the pillar of UK growth in recent
years)
• Mark Carney (BOE’s governor) continues dovish
stance, in no hurry to raise interest rates, but ready to
act in either direction
0
1
2
3
4
5
6
7
8
9
-3
-2
-1
0
1
2
3
4
5
6
7
8
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
% %
Unemployment Weekly Earnings
8
18
28
38
48
58
68
78
Jan
-12
Jul-1
2
Jan
-13
Jul-1
3
Jan
-14
Jul-1
4
Jan
-15
Jul-1
5
Jan
-16
Jul-1
6
Jan
-17
Mill
ion
s Mortgage Approvals Average
1,3% 1,9%
3,1%
2,2%
1,8% 1,7%
1,3%
2,8% 2,6%
1,5%
0,0%
0,7%
2,6% 2,6%
2012 2013 2014 2015 2016 2017F 2018F
GDP CPI
Source: Bloomberg, BOC Investment Strategy Team
China GDP YoY % & CPI
China & India
India GDP YoY %
China PMI & Industrial Production
22
0
2
4
6
8
10
12
14
16
18
20
37
42
47
52
57
62
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
%
PMI Industrial Production
4,8% 4,7%
6,5%
7,2%
7,9%
7,0% 7,3%
2012 2013 2014 2015 2016 2017F 2018F
7,9% 7,8% 7,3%
6,9% 6,7% 6,5%
6,2%
2,7% 2,6%
2,0%
1,4%
2,0%
2,2%
2,3%
0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
6,00%
7,00%
8,00%
9,00%
2012 2013 2014 2015 2016 2017F 2018F
GDP CPI
• China’s transition into the “new normal” (weaker but
more sustainable growth) continues
• Potential “Trade Wars” – in April as Xi Jinping
(General Secretary) meets with Donald Trump
• China’s Caixin Manufacturing PMI, has been growing
for eight straight months, driven by new orders and
faster rises in output
• India’s demonetisation was a success for Modi’s
government, while household financial savings (in the
form of cash) are channelled towards financial assets
• No slowdown for India, as Modi rules after major
victories in state elections, pushing forward his
economic reform agenda
Source: Bloomberg, BOC Investment Strategy Team
Brazil GDP YoY %
Brazil & Russia Macro
Russia GDP YoY % & CPI
Brazil Industrial Production & PMI
23
1,90%
3,00%
0,50%
-3,80% -3,60%
0,70%
2,20%
2012 2013 2014 2015 2016 2017F 2018F
38
40
42
44
46
48
50
52
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
Dec-1
4
Mar-
15
Jun
-15
Se
p-1
5
Dec-1
5
Mar-
16
Jun
-16
Se
p-1
6
Dec-1
6
%
Industrial Production PMI
3,50%
1,30%
0,70%
-2,80%
-0,20%
1,10% 1,50%
5,10%
6,80% 7,80%
15,60%
7,10%
4,40% 4,30%
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
14,00%
16,00%
18,00%
-4,0%
-3,0%
-2,0%
-1,0%
0,0%
1,0%
2,0%
3,0%
4,0%
2012 2013 2014 2015 2016 2017F 2018F
GDP CPI
• Brazil suffers worst recession on record
• High unemployment, austerity measures, tight
monetary policy and political turmoil hinder Brazil’s
economy
• However, Brazil is expected to return to growth this
year due to improved confidence, a looser monetary
policy and lower inflation
• Higher oil prices in 2016 helped the Russian
economy to escape its prolonged recession
• Russia’s Central Bank surprised the markets by
cutting the interest rate by 25bps to 9,75% on March
24th
• Gradual GDP expansion with declining inflation are
expected to continue
Overview Q1 2017
Our Views
Global Macros
Outlook
24
Source: Bloomberg, BOC Investment Strategy Team
US 10Y Treasury Yield Vs German 10Y Bund Yield
Government Bonds
Spread Between US 10Y & GER 10Y
25
-0,5
0
0,5
1
1,5
2
2,5
3
3,5
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
US 10Y German 10Y
-1,5
-1
-0,5
0
0,5
1
1,5
2
2,5
3
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Spread Average
• We expect the Fed to raise interest rates two more
times in 2017 (by 25 bp each time)
• The latest “dot-plot” plan reveals Fed Funds at 3%
by the end of 2019
• Long-term inflation (5y5y inflation breakeven) are
decelerating. Since the US election the US 10 Yr
yield moved from 1,88% to 2,62%, currently at
2,39%
• US yields advanced as investors bet on
reflationary policies, focus has now turned to
timing, therefore we expect recent high in yields to
contain any rally in Q2
• We move US Government Bonds up one notch
from negative to neutral
• ECB will remain accommodative, until core
inflation and wage growth are clearly rising
• We move EM bonds up from , -- to - as
protectionist fears have subsided and economic
fundamentals have improved
Source: Bloomberg, BOC Investment Strategy Team
US Yield Curve
Government Bonds
German Yield Curve
US Inflation 5Y 5Y
26
1,5
2
2,5
3
3,5
4
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
5Y5Y Average
1,96
2,42
3,04
1,21
1,77
2,60
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
0 5 10 15 20 25 30
Years
Current 1 year ago
-0,36
0,34
1,10
-0,33
0,13
0,78
-1,00
-0,50
0,00
0,50
1,00
1,50
0 5 10 15 20 25 30
Years
Current 1 year ago
• US Treasuries have recovered from sell-off,
supported by scaling back of inflation and growth
prospects
• Although ECB, reiterated its accommodative stance,
there are rumours that a tapering process may play
out in the near future
• Eurozone risks involve political events (French and
German elections, early elections in Italy, Brexit
negotiations)
• Bund yields have escaped negative territory, however
“safe haven” flows into German bonds are likely to
continue
Source: Bloomberg, BOC Investment Strategy Team
Periphery 10Y Bond Yields
Periphery Bonds
Cyprus 10y Bond Yields
Spread between German & Italian 10 Year Yields
27
-1
1
3
5
7
9
11
13
15
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
%
Spain Portugal Italy Greece
3
3,2
3,4
3,6
3,8
4
4,2
Oct-
15
Dec-1
5
Fe
b-1
6
Ap
r-16
Jun
-16
Au
g-1
6
Oct-
16
Dec-1
6
Fe
b-1
7
%
0
0,5
1
1,5
2
2,5
3
3,5
4
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
%
Spread
• Yields in Italy stabilised in the first quarter following
political turmoil in Italy. The spread between the 10
Yr Bund and the 10 Yr Italian Btp widened to 202 bp,
before retreating to 169 bp
• Spanish and Portuguese government bonds have
firmed, 10 Yr yields at 1,64% and 3,9%, respectively
• Greece dominated by politics as second review
nears, 10 Yr yield has fallen from 7,8% in Jan to
current 6,98%
• Cyprus bond yields have fallen, Standard and Poor’s
rating agency recently upgraded Cyprus by one
notch to BB+
Source: Bloomberg, BOC Investment Strategy Team
Emerging Market Sovereign Bond Index
Emerging Markets Bonds
BRIC’s GDP Forecast
28
110
120
130
140
150
160
170
Ma
r-13
Jun
-13
Se
p-1
3
Dec-1
3
Ma
r-14
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-15
Jun
-15
Se
p-1
5
Dec-1
5
Ma
r-16
Jun
-16
Se
p-1
6
Dec-1
6
Ma
r-17
-3,8%
6,9%
-2,8%
7,2%
4,9%
-3,6%
6,7%
-0,2%
7,9%
5,2%
0,7%
6,5%
1,1%
6,8%
5,4% 2,2%
6,2%
1,5%
7,4%
5,5%
Brazil China Russia India BRIC
2014 2015 2016 2017
• We reiterate our negative view on EM bonds but to a
lesser extent, moving EM bonds to – from - -
• Although risks from protectionist US trade policies
and higher US rates are identified, currently they
appear less imminent
• In the event of a geo-political event, market
participants will seek “flight to safety” out of EM
• A strong dollar, is still a major source of concern
specifically for commodity related EM
• However, despite growing concerns on inflation and
event risks, EM bonds have been strong so far this
year
Source: Bloomberg, BOC Investment Strategy Team
US & EU Investment Grade
Credit Markets (IG & HY)
US & EU High Yield
Correlation of Investment Grades & World Equity
29
35
55
75
95
115
135
155
175
195
215
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
EU US
200
300
400
500
600
700
800
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6CDX US itraxx EU
-0,6
-0,4
-0,2
0
0,2
0,4
0,6
0,8
1
1,2
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
• US investment grade and high yield have generated
modest positive returns in Q1, despite the weakness
in March
• As the Fed is engaged in its normalisation process,
we are positive on US IG bonds as market
participants will seek safety in better credit
• We change our view on US HY bonds from neutral to
negative, HY has been weighed down by the recent
fall in commodities and Trump’s first Congress defeat
(ACA act bill)
Source: Bloomberg, BOC Investment Strategy Team
First Quarter Performance
Global Equities: Positive start to 2017
• Emerging Markets outperform in the first quarter, supported by better growth prospects and reduced fears
surrounding US protectionist policies
• US stocks post solid gains as investors focus on the reflation trade triggered by Donald Trump’s election
victory
• European equities rally as political risk subsides and improved economic data
• Nikkei posts Q1 decline, held back by renewed strength in the Yen
30
As at 31-03-2017
90
95
100
105
110
115
02
-Jan
-17
09
-Jan
-17
16
-Jan
-17
23
-Jan
-17
30
-Jan
-17
06
-Fe
b-1
7
13
-Fe
b-1
7
20
-Fe
b-1
7
27
-Fe
b-1
7
06
-Mar-
17
13
-Mar-
17
20
-Mar-
17
27
-Mar-
17
MSCI EM S&P 500 NIKKEI STOXX Europe 600
Source: Bloomberg, BOC Investment Strategy Team
US Equity Indices Performances
US Equity Markets
US Sectors Performances
31
• NASDAQ motors ahead (+9,8%), outperforms S&P
500 and Dow Jones Industrial Average during the
first quarter of the year
• S&P 500 and Dow Jones advance 5,5% and 4,6%,
respectively during Q1, supported by Trump
administrations rhetoric
• Healthcare sector gains 7,9%, despite failure to
reform Obamacare
• Technology best performing sector (+ 12,2%), while
Energy lags (-7,3%) as global oil supply glut weighs
on oil’s price
• Unsupported by flattening US yield curve, Financials
lag major US indices, while Utilities are posting solid
returns (+5,4%)
• Trump’s administration expected pro-growth policies
have already been discounted in the market, focus
now on implementation for promised/proposed tax
reforms, trade policies and infrastructure spending
• We change our view on US equities from positive to
neutral as we see limited upside potential
14%
24%
12%
20%
16%
5,5%
2,1%
5,9%
9,8%
4,6%
S&P 500 RUSSELL 2000 MSCI World USD NASDAQ DOW JONES
1 YR CHANGE Q1 CHANGE
22%
8%
2%
29%
-3%
16% 16%
3%
13% 11%
12,2%
7,9% 5,6%
2,1%
-5,1%
4,0% 5,3% 5,4%
-7,3%
8,1%
Tech Health Care ConsumerStables
Financials Telecom Industrial Materials Utilities Energy ConsumerDiscretionary
1 YR CHANGE Q1 CHANGE
As at 31-03-2017
Source: Bloomberg, BOC Investment Strategy Team
Next Year PE (Estimated) Current PE
Earnings & Dividend Yield (%) ROE (%) & P/Book Value Ratio
S&P 500 Valuation
32
10
15
20
25
30
35
Dec-9
8
Jun
-00
Dec-0
1
Jun
-03
Dec-0
4
Jun
-06
Dec-0
7
Jun
-09
Dec-1
0
Jun
-12
Dec-1
3
Jun
-15
Dec-1
6
PE Average
PE above long term average,
“Expensive”
8
10
12
14
16
18
20
22
24
26
Dec-9
8
Jun
-00
Dec-0
1
Jun
-03
Dec-0
4
Jun
-06
Dec-0
7
Jun
-09
Dec-1
0
Jun
-12
Dec-1
3
Jun
-15
Dec-1
6
PE Average
Forward PE ratio above its long term
average
14,7%
15,2% 15,0% 14,9%
15,3% 15,5%
15,3% 15,2% 15,4%
14,9% 14,9% 15,0%
16,3%
2,6 2,7 2,7 2,8 2,8 2,8
2,6
2,8 2,8 2,8 2,8 2,9
3,1
1,0
1,5
2,0
2,5
3,0
3,5
13,5%
14,0%
14,5%
15,0%
15,5%
16,0%
16,5%
Ma
r-14
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-15
Jun
-15
Se
p-1
5
Dec-1
5
Ma
r-16
Jun
-16
Se
p-1
6
Dec-1
6
Ma
r-17
ROE P/Book
1
2
3
4
5
6
7
8
9
Dec-0
8
Jun
-09
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Earnings Yield Average Earn Dividend Yield Average Div
Earnings Yield at 4,58%, below
average at 5,95%
S&P Dividend yield at 2,06%,
less than US 10yr bond yields
Source: Bloomberg, BOC Investment Strategy Team
US Equity Sectors View
• Using the BOC Equity Screening Model, that screens companies of the S&P 500 Index, using solid
fundamentals, we derive our sector preferences
• Quantitative criteria (such as profitability, valuation, dividends, liquidity, momentum, consensus) are
strictly used for the screening process
• Our screening model assesses companies cross-sectionally (peer and overall comparison) and
individually for the last 5 years.
• This bottom-up methodology, helps us formulate our likes and dislikes across all major US sectors.
We also formulate our preferences for some European sectors using a top-down approach
US Equity Sectors
33
1
Equity Screening Model excludes financials
1
Equity Sectors
Technology
Telecom
Energy
Industrials
Financials
Eurozone
US
Healthcare
Consumer Staples
Consumer Discretio.
Utilities
Materials
Underweight Neutral Overweight
Current
Previous
Source: Bloomberg, BOC Investment Strategy Team
Sectors Beta
Cyclical Vs Non Cyclical
• Cyclical stocks have performed strongly since
Trump’s election
• Sector performance has started to rotate from
cyclical to more defensive sectors.
• Cyclicals provide attractive dividend yield, at
upper range of S&P sectors
Sectors Performance since US Election
Sectors Estimate Dividend Yield %
1,12 1,19
1,08 1,03
0,97 1,03
0,81
0,30
0,60 0,60
-
0,20
0,40
0,60
0,80
1,00
1,20
1,40
Te
ch
Fin
ancia
ls
Industr
ial
En
erg
y
Consum
er
Dis
c
Ma
teria
ls
Health
Care
Utilit
ies
Te
lecom
Consum
er
Sta
ble
s
1,4%
1,9% 2,2%
2,8%
1,5%
2,1% 1,8%
3,6%
4,7%
2,7%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
5%
Te
ch
Fin
ancia
ls
Industr
ial
En
erg
y
Consum
er
Dis
c
Ma
teria
ls
Health
Care
Utilit
ies
Te
lecom
Consum
er
Sta
ble
s
14,8%
9,2%
6,0%
0,4%
10,3% 9,1%
5,9%
12,0%
8,9% 9,0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Te
ch
Fin
ancia
ls
Ind
ustr
ial
En
erg
y
Consum
er
Dis
c
Ma
teria
ls
Health C
are
Utilit
ies
Te
lecom
Consum
er
Sta
ble
s
34
Source: Bloomberg, BOC Investment Strategy Team
VIX
Equity Volatility
S&P 500 Historical Volatility (90D)
35
8
18
28
38
48
58
68
78
88
Dec-0
2
Jun
-04
Dec-0
5
Jun
-07
Dec-0
8
Jun
-10
Dec-1
1
Jun
-13
Dec-1
4
Jun
-16
VIX Average
VIX at historically low levels
0
5
10
15
20
25
30
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
HVOL Average
• No fear? The VIX (a.k.a. the fear gauge) is currently
hovering at 12, well below the long term average of
20
• Since the beginning of the year, the VIX remained in
check as it spiked momentarily at 15,11 (27/3/17)
following Trump’s administrations failure to reform
Obamacare
• Market participants seem content, in terms of risk, as
the VIX remained below 12 for most of the quarter
• However, as the Trump administration will try to push
forward its pro growth agenda, we expect VIX to
increase during Q2
• S&P 500 historical volatility for the first quarter of
2017 moved further away (below) from its long term
average
Source: Bloomberg, BOC Investment Strategy Team
European Equity Indices Performances
European Equities
European Sectors Performances
36
• Improving economic fundamentals in the Euro Area,
along with a weak euro, supported European equity
indices
• Spain outperforms European equities, on the back of
improving macro-economic data that support growth
dynamics
• Inflation dynamics in the Euro Area (2% in February)
and Germany (1,6% in March) are starting to kick in
• Technology (+13%) leads the European sectors while
consumer services lag
• The troubled banking sector is also posting decent
returns (+8,4%), despite the re-capitalisation process
that is under way
• However, political risks for the Euro Area remain
(Brexit, French, German elections)
• We keep our one-notch negative view on European
Equities
19%
26%
19% 19%
15%
22%
5,4% 7,6%
2,6%
6,4% 6,5%
11,9%
CAC DAX FTSE 100INDEX
EUROSTOXX50
MILAN SPAIN
1 YR CHANGE Q1 CHANGE
19%
12%
20%
26%
0%
16%
4%
20%
27%
7%
9,3% 8,1% 8,7%
13,0%
1,7%
4,5% 6,6%
7,6% 8,4% 7,9%
Financials ConsumerGoods
Healthcare Tech ConsumerServices
Auto Telecoms Industrial Banks Utilities
1 YR CHANGE Q1 CHANGE
As at 31-03-2017
Source: Bloomberg, BOC Investment Strategy Team
Eurostoxx 50 Current PE DAX Current PE
DAX Next Year PE (Estimated) Eurostoxx 50 Next Year PE (Estimated)
European Equity Valuations
37
6
16
26
36
46
56
66
Oct-
08
Ap
r-09
Oct-
09
Ap
r-10
Oct-
10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
Ap
r-13
Oct-
13
Ap
r-14
Oct-
14
Ap
r-15
Oct-
15
Ap
r-16
Oct-
16
PE Average
DAX PE is at its long term average
6
7
8
9
10
11
12
13
14
15
Oct-
08
Ap
r-09
Oct-
09
Ap
r-10
Oct-
10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
Ap
r-13
Oct-
13
Ap
r-14
Oct-
14
Ap
r-15
Oct-
15
Ap
r-16
Oct-
16
PE Average
6
11
16
21
26
31
36
41
46
Oct-
08
Ap
r-09
Oct-
09
Ap
r-10
Oct-
10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
Ap
r-13
Oct-
13
Ap
r-14
Oct-
14
Ap
r-15
Oct-
15
Ap
r-16
Oct-
16
PE Average
6
7
8
9
10
11
12
13
14
15
16
Oct-
08
Ap
r-09
Oct-
09
Ap
r-10
Oct-
10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
Ap
r-13
Oct-
13
Ap
r-14
Oct-
14
Ap
r-15
Oct-
15
Ap
r-16
Oct-
16
PE Average
Source: Bloomberg, BOC Investment Strategy Team
Asian & Emerging Markets Equity Indices Performances
Asian, Emerging Markets & EU Periphery Markets
European Periphery Performances
38
17%
1%
11%
7%
3,5% 2,5%
8,1%
2,3%
ASE CYPRUS CSE PORTUGAL IRELAND
1 YR CHANGE Q1 CHANGE
18%
7%
17% 16% 19%
29%
9,9%
-10,6%
-0,7%
11,1% 12,5%
7,9%
Hang Seng MICEX NIKKEI 225 MSCI EM INDIA BRAZIL
1 YR CHANGE Q1 CHANGE
• Relative growth in EM is picking up, World Trade
Organisation released its World Trade Outlook
Indicator (WTOI) in February with an increased
reading of 102 vs. November at 100,9
• EM equities have outperformed in Q1 supported by
better growth prospects and fear abating from US
protectionist policies
• Rising commodity prices will benefit EM equity
complex
• We are now less negative (one notch down) on EM
• “Yen sensitive” Nikkei, is down (-0,7%) on a quarterly
basis, as market participants flock into “safe-haven”
Yen. We change our positive view on Japanese
equities to neutral
• European Periphery equity markets were in the
green in Q1, Greece is in positive territory despite
the current bailout standoff
• Cyprus positive, better economic data and country
upgrade, Standard and Poor’s upgraded its
sovereign rating to BB+ with a stable outlook
As at 31-03-2017
Source: Bloomberg, BOC Investment Strategy Team
Gold Spot
Crude Oil Spot
• Gold’s stellar performance (+7,9%) in Q1,was
mainly driven by the increased geo-political risks
arising from the perception of global protectionist
policies, the rise of populist politics and a weaker
US dollar. We expect gold’s safe-haven status to
continue to support it through Q2, combined with
good demand from Emerging Markets. We keep our
positive view for gold.
• Crude Oil was sold aggressively throughout the
first quarter, falling from a high in Jan of $57,5 per
barrel to $47 per barrel ( -18%), managing to close
the quarter at $50,50 (-9,6%). The price decrease
is attributed to the increase in US crude oil
inventories and increasing US production
capabilities. Going forward, further losses for crude
look limited judging by comments from OPEC
members who are calling for a six-month extension
of the recent production cuts, we retain our neutral
stance.
Commodities
39
900
950
1000
1050
1100
1150
1200
1250
1300
1350
1400
Jan
-15
Ma
r-1
5
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-1
7
20
25
30
35
40
45
50
55
60
65
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-17
Source: Bloomberg, BOC Investment Strategy Team
Baltic Dry
Commodities Index
• The Baltic Dry Index has hit its highest level since
November 2014 buoyed by stronger global growth
forecasts (World Bank forecast global growth 2,7%
in 2017). The BDI Index, supported mainly by its
Panamax component (58% up on a ytd basis)
Trump’s pro-growth policies and specifically
infrastructure spending, has boosted the index this
year. Going forward, caution is advised as the new
US administration’s policy proposals remain
uncertain, along with a repetitive rhetoric on
protectionist measures.
• The Commodities Index has backed off from the
highs at the back end of 2016 to finish the quarter
down 2,7%. The sell-off in the energy complex was
partially offset by the gains in metals, in particular
the 7,9% increase in gold which makes up 11,97%
of the Index. The strongest performers within the
index were Aluminium (+15,5%) and Silver
(+13,6%), whilst the biggest losses came from
Sugar (-12,9%) and WTI Crude Oil (-9,6%).
Commodities
40
20
220
420
620
820
1020
1220
1420
Jan
-15
Ma
r-1
5
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-1
7
60
65
70
75
80
85
90
95
100
105
110
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-17
Source: Bloomberg, BOC Investment Strategy Team
EUR / USD
FX
USD / JPY
• The Euro performed well in Q1 gaining 1,5% vs. the
US dollar, benefitting from a tightening of the spread
between the US 2 Yr yield and the German 2 Yr yield
from a multi-year high of 223 bp down to current
levels at 200 bp. Euro bulls were encouraged by
Fed Chair Janet Yellen’s less hawkish stance
combined with a “less dovish” Mario Draghi as well
as a subsiding of political risk from elections in the
Netherlands and France. Going forward we see the
recent Euro rally faltering towards the 1,10 level to
return back for a test of the yearly lows. We maintain
our negative position for EUR/USD.
• Dollar Yen weakened in the first quarter, with the Yen
appreciating 4,7%, touching the 110 level for the first
time since November last year. The strength in the
Yen has emerged as investors begin to doubt
Trump’s ability to reflate the US economy and a
general cautiousness from Japanese investors
towards foreign assets in general. The BoJ’s Yield
Curve Control policy should keep Yen strength
contained, however any move away from their bond
purchasing programme will have a positive affect on
the currency. We expect the pair to grind lower in the
second quarter caught between US growth
expectations and positive Japanese macro data. We
therefore reduce our position from positive to neutral.
41
0,9
0,95
1
1,05
1,1
1,15
1,2
1,25
Jan
-15
Ma
r-1
5
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Mar-
17
90
95
100
105
110
115
120
125
130
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-17
Source: Bloomberg, BOC Investment Strategy Team
EUR / CHF
EUR / GBP
• The SNB (Swiss National Bank) remains on alert to
intervene in the FX markets at the first sign of any
geo-political event in order to prevent any excessive
strength in the Swiss Franc. The effect on EUR/CHF
trading is reduced volatility and volumes leading to
narrow trading ranges (Q1 range <2%). As long as
there is no change to the status quo we see the pair
holding steady at current levels (1,07), maintaining
our neutral stance.
• EUR/GBP has stabilized during the first quarter as
the market is focused on UK domestic politics,
digesting and analysing the potential impact of
Brexit. Although investors are fixated on “hard” vs.
“soft” Brexit, the only certainties are that neither
outcome can be quantified and negotiating the
multitude of treaties will be troublesome for both
parties. Due to the uncertainty we move EUR/GBP to
neutral from -.
FX
42
0,9
0,95
1
1,05
1,1
1,15
1,2
1,25
1,3
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-17
0,6
0,65
0,7
0,75
0,8
0,85
0,9
0,95
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-17
Source: Bloomberg, BOC Investment Strategy Team
Basket / RUB Spot
Dollar Index
• The Ruble has extended its gains seen at the back
end of 2016 into Q1 2017 for a gain of 8,2% vs. the
US dollar. All this against a backdrop of weakness in
the energy markets and a cut in the one-week repo
rate by 25 bp, to 9,75% from Russia’s central bank.
Investors have welcomed the transition from
recession to growth as the economy improves,
current forecasts point to real GDP at 1,1% in 2017
vs. -0,2% for FY 2016. We remain neutral on the
RUB.
Dollar Index Weights
FX
43
30
40
50
60
70
80
90
Jan
-15
Ma
r-1
5
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-1
7
80
85
90
95
100
105
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-17
57,6% 13,6%
11,9%
9,1%
4,2% 3,6%
Euro
Yen
Pound
Canadian $
Swedish Krona
Swiss Franc
Source: Bloomberg, BOC Investment Strategy Team
This report is intended for informative purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to
buy, any security. It is recommended that investors independently evaluate particular strategies and consult a financial adviser before proceeding to the
purchase or sale of any security or other financial instrument. Note also that past performance may not be a reliable indicator of future results, while financial
forecasts may not be a reliable indicator of future performance.
This report has been compiled based on information obtained from sources we believe to be reliable, but their accuracy, completeness, or correctness
cannot be guaranteed. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to
Change without notice.
The company, and/ or its affiliated companies or persons connected with it and/or directors and/or employees and/or clients may have a position, or engage
in transactions in any of the securities mentioned herein or any related investment, or solicit business from any company mentioned in this report.
Report © Bank of Cyprus. All rights reserved.
Investment Strategy Unit Georgios Lampros, Manager
Tel:22121809
Email:georgios.lampros@bankofcyprus.com
Tasos Hadjinicolaou, Head
Tel:22121853
Email: tasos.hadjinicolaou@bankofcyprus.com
Dr Marios Soupashis, Senior Officer
Tel:22121848
Email:marios.soupashis@bankofcyprus.com
Achilleas Petrides, Officer
Tel:22121856
Email: achilleas.petrides@bankofcyprus.com
44
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