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Reassessing risk factors
Cross Asset Research 2 June 2013 Global Portfolio Manager’s Digest Reassessing risk factors • Continued rate volatility: We believe uncertainty around Fed tapering is likely to Best of Barclays remain elevated in the near term with the possibility of large moves in US rates in The Data Miner Positive Earnings Revisions 4 either direction. In addition, we continue to believe the curve looks too steep given Global Macro Daily modest inflation expectations and favor curve flattening strategies (page 5). Constructive on the US despite a weaker USD 5 • A bright spot in Europe: Although slumping global demand drives near term cuts Euro Themes to our German GDP forecast, our medium-term outlook remains constructive with Germany outlook: Global headwinds 8 robust labor and housing markets supporting consumption. Moreover, polls Quantitative Portfolio Strategy Managing Conflicting Views suggest that another term for the current government is the likely outcome, which in Asset Allocation Decisions 9 should lead to more stability in contrast to the rest of the region (page 8). Global Strategy & Economic Outlook • Improving portfolio management: It is common for actively managed portfolios to Equity Strategy have dissimilar views in the allocation process. These views can conflict with US: Revisiting our exit strategy from historical correlations, leading to concentrated risks and unrealistic return bond-like stocks 10 expectations. In our risk budgeting framework, we suggest that investors should Credit Strategy factor in underlying correlations into their information ratio (page 9). Americas: Higher Yields, Higher Anxiety 12 Europe: Discounting future expectations 14 Asia ex-Japan: Stay hunkered down 16 CHART OF THE WEEK Hawkish Fed, not underlying economic views driving current rates sell-off Rates Strategy Regime shift 17 120 Economic Outlook 100 The taper worm 20 Key Inflection Points 80 Equity 60 Select Rating Changes: Cheniere Energy Partners LP, Sempra Energy 23 40 Regulars 20 Barclays Macro, Commodities & FX Forecasts 2 Barclays Events 3 0 Summary of equity rating changes 22 -20 Summary of credit rating changes 24 Oct-Dec 10 Oct 11 Mar 12 July-Aug 12 May 13 Change in real yields, bp Change in breakevens, bp All research referenced herein has been previously published. You can view the full Source: Barclays Research, (see Global Rates Weekly: Regime shift, 30 May 2013) reports, including analyst certifications and other required disclosures, by clicking the hyperlinks in this publication or by going to our Research portal on Barclays Live. Barclays Capital Inc. and/or one of its affiliate does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. FOR ANALYST CERTIFICATION(S), PLEASE SEE PAGE 26. FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 26. FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 28. Barclays | Global Portfolio Manager’s Digest BARCLAYS MACRO, COMMODITIES AND FX FORECASTS More detailed global macro, commodities and FX forecasts can be viewed on the Global Forecasts page on Barclays Live. Real GDP Central Bank Rates 2012 2013 2014 Current 2Q 13 3Q 13 4Q 13 US 2.2 1.8 2.3 Fed funds rate 0–0.25 0–0.25 0–0.25 0–0.25 Brazil 0.9 2.5 3.5 BoJ overnight rate 0–0.10 0–0.10 0–0.10 0–0.10 Japan 2.0 1.9 2.2 ECB main refinancing rate 0.50 0.50 0.50 0.50 China 7.8 7.9 8.1 BOE bank rate 0.50 0.50 0.50 0.50 India 5.1 5.3 6.9 China: Working capital rate 6.00 6.00 6.00 6.00 Euro area -0.5 -0.4 1.4 India: Repo rate 7.25 7.00 6.75 6.50 United Kingdom 0.3 0.9 1.8 Brazil: SELIC rate 8.00 8.00 8.25 8.25 Russia 3.4 3.0 3.5 Russia: Refi rate 5.50 5.50 5.25 5.25 Consumer Prices Global Bond Yields 2012 2013 2014 2Q 13 3Q 13 4Q 13 1Q 14 US 2.1 1.6 2.2 US 10y 1.80 1.80 2.00 2.00 Brazil 5.4 6.4 5.7 US 10y RY -0.75 -0.80 -0.65 -0.75 Japan -0.1 0.0 2.3 Euro Govt. 10y 1.40 1.60 1.70 1.85 China 2.6 3.0 3.5 Euro Govt. 10y RY -0.15 -0.10 -0.10 0.00 India 7.5 5.6 5.5 UK 10y 2.00 2.10 2.20 2.30 Euro area 2.5 1.5 1.4 UK 10y RY -1.35 -1.30 -1.25 -1.15 United Kingdom 2.8 2.7 2.5 Japan 10y 0.65 0.60 0.55 0.55 Russia 5.1 6.6 5.6 Japan 10y RY 0.00 0.20 0.30 0.30 Commodity Prices Foreign Exchange 2013 2014 2015 Spot 1 Month 6 Month 1 Year Brent (US$/bbl) 112 130 135 EUR/USD 1.30 1.29 1.25 1.23 WTI (US$/bbl) 95 117 120 USD/JPY 100.5 103 103 98 US Natural Gas (US$/mmbtu) 3.90 4.10 N/A GBP/USD 1.52 1.53 1.47 1.47 Gold (US$/oz) 1483 1450 1375 USD/CHF 0.96 0.95 1.00 1.03 Copper (US$/t) 7920 7500 9500 USD/CAD 1.04 1.02 1.00 0.99 AUD/USD 0.96 1.00 0.96 0.93 USD/CNY 6.13 6.18 6.14 6.08 USD/BRL 2.14 1.95 2.00 2.00 Source: Barclays Numbers in bold indicate forecasts; non-bold numbers are actuals. 2 June 2013 2 Barclays | Global Portfolio Manager’s Digest BARCLAYS EVENTS Conference Calls & Webcasts Date Time Call/Webcast Please click on the links to view details of forthcoming conference calls and webcasts 4 June 7:45 am EST/12:45 pm GMT Barclays Tuesday Credit Call 4 June 1:00 pm EST Physician Check-up – Focus on the Orthopaedic Opportunity for PCRX’s Exparel 7 June 10:00 am EST / 15:00 GMT Big Data Series: The Disruptive Potential of Hadoop Conferences & Special Events Date Event Location Please contact your Barclays Sales representative for availability. 4 June NYU Lodging Conference Paris 5 June High Grade Consumer & Retail Conference New York 5 June Atlanta Financials IR Corporate Day Atlanta 5 – 6 June Barclays Nagoya Select Conference 2013 Nagoya, Japan 10 – 11 June Energy Debt Investor Field Trip Washington, DC 10 – 11 June Barclays Select Series 2013: Gems of GEMs Forum Boston and New York 13 – 14 June Barclays Select Series 2013: India Corporate Days London 17 – 18 Barclays Select Corporate Day 2013: Smart Mobility – The Rise Singapore and Hong Kong 17 – 19 June 50th International Paris Air Show – Barclays Hosted Events Paris 17 – 21 June U.S. Oil Services & Equipment Forum Europe 19 – 20 June Oil & Gas Canada Day for Debt Investors Calgary, Canada 19 – 21 June Barclays European Select Franchise Conference 2013 Yountville, California 24 – 25 June Barclays Select Series 2013: Internet in the Emerging World Corporate Days London 27 June High Yield Bond Roundtable Boston 9 – 10 July Toronto CFO Energy Corporate Day Toronto 2 September Barclays Select Series: European Media and Telecom Forum London 3 – 4 September Back-to-School Consumer Conference Boston 9 – 11 September Global Financial Services Conference New York 12 September European High Yield and Leveraged Finance Conference London 11 – 13 September CEO Energy-Power Conference New York 17 September Barclays Select Series 2013: European Payments Forum: Identifying the winners London 19 September Barclays Kansai Select Conference 2013 Kyoto, Japan 18 November Barclays Select Series 2013: Select Growth Conference New York 12 December Barclays Select Series 2013: Information and IT Services Forum New York Replays from the Past Week Date Conference Call/Webcast/Conference Please click on the links for select conference call replays and webcasts/podcasts from the past week. 29 May Barclays Tuesday Credit Call – Policy Palpitations 28 May Review of PJM Capacity Auction Results 2 June 2013 3 Barclays | Global Portfolio Manager’s Digest THE DATA MINER: POSITIVE EARNINGS REVISIONS Rob Rouse, +1 212 526 7323, firstname.lastname@example.org, BCI, New York Now that first quarter earnings season is largely past, we can step back and take stock of how US companies fared so far in 2013. As our last U.S. Earnings Scorecard showed, both sales and EPS growth were relatively weak, the positive surprise ratio was moderate and forward estimates continue to be revised lower. Over the eight weeks ending May 24, 2013, full year 2013 growth forecasts for the average company within the S&P 500 were revised down approximately 40 bp. This week’s screen looks to identify the US stocks that came through first quarter earnings season with the most improved growth outlooks within their sectors. Our screen considers the following factors: • Earnings revisions: We screened for the companies that scored in the top quartile on both earnings and sales estimate revisions over the past four weeks. Revisions were based on consensus estimates for the current fiscal year, considered on a percentage basis and ranked relative to the rest of the stock’s GICS sector. • Implied growth: We screened for companies that scored in the top quartile for implied growth in earnings and sales for the current fiscal year. Implied growth was based on consensus estimates for the current year and ranked relative to the rest of the stock’s GICS sector. Our screen found 18 names, presented in Figure 1 and ranked by implied EPS growth. The universe is the Russell 1000 Index. FIGURE 1: Top quartile in earnings revisions and implied growth Market Price Sales Revision, EPS Revision, FY1 Implied FY1 Implied Company Name Sector Cap (5/30/2013) 4 Weeks 4 Weeks Sales Growth EPS Growth Cabot Oil & Gas Corp Energy $15.2 bn $72.17 1.3% 4.5% 47.9% 128.9% Range Resources Corp Energy $12.4 bn $76.22 0.6% 2.4% 24.5% 67.2% AMC Networks Inc Discretionary $4.7 bn $65.42 0.6% 12.6% 14.1% 66.0% Continental Resources Inc/OK Energy $15.8 bn $84.86 1.6% 3.5% 48.2% 56.8% Palo Alto Networks Inc Tech $3.8 bn $54.39 0.3% 2.0% 55.2% 51.4% Mohawk Industries Inc Discretionary $8.2 bn $113.35 4.2% 4.4% 26.8% 50.7% Fortune Brands Home & Security Inc Industrials $7.0 bn $42.62 0.2% 0.3% 10.7% 49.7% Workday Inc Tech $10.9 bn $65.42 1.0% 9.2% 60.6% 44.0% Regeneron Pharmaceuticals Inc Healthcare $24.7 bn $252.18 0.3% 2.3% 40.8% 43.7% Flowers Foods Inc Staples $4.6 bn $33.63 2.6% 10.7% 20.7% 40.5% Cree Inc Tech $7.4 bn $63.63 0.1% 0.3% 19.1% 38.1% Michael Kors Holdings Ltd Discretionary $13.2 bn $65.68 3.6% 8.0% 31.6% 29.8% FleetCor Technologies Inc Tech $7.1 bn $87.39 0.2% 0.6% 17.4% 27.3% DaVita HealthCare Partners Inc Healthcare $13.4 bn $126.48 1.8% 2.8% 41.3% 23.4% Onyx Pharmaceuticals Inc Healthcare $7.1 bn $97.08 5.5% 14.4% 72.8% 23.2% QUALCOMM Inc Tech $110.9 bn $64.18 0.1% 0.1% 28.1% 22.3% Biogen Idec Inc Healthcare $56.7 bn $238.89 1.4% 2.7% 18.6% 20.9% National Fuel Gas Co Utilities $5.2 bn $62.14 0.2% 0.8% 12.5% 19.8% Source: Barclays, Bloomberg. This screen only takes into account the factors expressly stated above and does not necessarily represent the fundamental views of the analysts. For more details on our analyst views on individual names please find the latest research on Barclays Live or contact the relevant analyst. Please contact the U.S. Equity Product Management Group if you are interested in any customized revisions to the criteria used. 2 June 2013 4 Barclays | Global Portfolio Manager’s Digest BEST OF BARCLAYS: GLOBAL MACRO DAILY Constructive on the US despite a weaker USD CROSS ASSET RESEARCH Excerpted from Global Macro Daily: Constructive on the US despite a weaker USD, Guillermo Felices published on May 30, 2013 +44 (0)20 3555 2533 email@example.com Rates: This time is different Over the past few years, we have consistently viewed every inordinate rate sell-off as an Rajiv Setia opportunity to “buy the dip.” We are no longer in that camp. Our base view has always been +1 212 412 5507 that rates would start to rise on a sustainable basis, as growth accelerated to above trend, firstname.lastname@example.org most likely in 2014. While we still expect this to be the case, our change of stance on duration to neutral last week (see Unusually uncertain, May 23, 2013) was not driven by a Anshul Pradhan fundamental shift in our economic outlook. Rather, it was driven purely by our view that the +1 212 412 3681 market’s perception of the Fed’s reaction function has shifted quite dramatically following email@example.com mixed messages from Fed leadership. Specifically, unless Fed speakers clarify what metrics they are looking at to gauge the appropriate timing of the withdrawal of stimulus, volatility is likely to remain elevated in the months ahead. Over the past week, the violent sell-off has caused carry trades of all flavors to be punished. Given current rate levels, we are getting close to where it might be worth outright longs on a tactical basis. From our vantage point, longer-term forwards already reflect any likely taper. The only question is how much more the hiking cycle can be pulled forward. With the market still pricing in the first Fed hike in mid-2015, the market can “reasonably” price to early 2015 (after all, the unemployment rate could be at 6.5% by late 2014 if recent trends continue). This could push 10y rates to ~2.25% in the near term. We therefore maintain our neutral duration view for now. On the other hand, if consumption data surprise to the downside and payrolls disappoint, 10y rates could rally to the levels of early May as hike expectations are pushed out and the term premium declines. Given the possibility of large moves in either direction, we continue to recommend being long gamma on mid-tails. While 1m7y has richened to 88bpv annualized (from 73bpv at the time of recommendation), it is still trading cheap to delivered vol. We also maintain our 7s30s/10s30s curve flattener view. While the 10s30s curve has flattened 7bp since mid- FIGURE 1 FIGURE 2 In contrast to prior rate sell-offs, this one has been driven Fed’s forecasts have consistently overestimated growth and only by real yields, signaling a hawkish Fed underestimated the drop in the unemployment rate 120 2010 2011 2012 2013* 100 Real GDP growth , 1y ahead 3.0 3.3 2.7 2.55 Fed forecast, Q4/Q4, % 80 Realized 2.4 2.0 1.7 – 60 Unemp. rate , 1y ahead 9.5 9.0 8.6 7.4 40 Fed forecast, %, Q4 average 20 Realized 9.5 8.7 7.8 – 0 -20 Oct-Dec 10 Oct 11 Mar 12 July-Aug 12 May 13 Change in real yields, bp Change in breakevens, bp Note: We use Fed CMT data for all the episodes, with the exception of the most Note: 2013 forecasts are the latest and not from 1y ago. recent one, where we use OTRs. Source: Federal Reserve, Barclays Research Source: Federal Reserve 2 June 2013 5 Barclays | Global Portfolio Manager’s Digest May, when concerns about tapering were picking up, we believe curve flatteners still offer attractive risk-reward. In our view, the curve continues to look too steep, given modest inflation and inflation expectations. What has changed? Not the economic outlook Has the sell-off been driven by expectations of a better economic outlook? We do not think so. While consumer confidence has been higher than expected, manufacturing surveys and industrial production have surprised to the downside. Our economists’ tracking estimate of Q2 real GDP growth has actually fallen from 1.7% in mid-May to 1.4%. Similarly, consensus and Barclays’ forecasts for H2 real GDP growth have barely budged at 2.4% and 2%, respectively. Inflation data have also surprised to the downside and market expectations of CPI inflation 1y and 2y ahead are at the lower end of the range. Hence, it does not seem that expectations of the economy have suddenly shifted to justify the rate move. In past sell-offs, which have resulted from improving fundamentals, real yields and breakevens have participated. In the recent move, only real yields have moved higher (Figure 1); breakevens have actually tightened. This is another sign that the move is not a reflection of better economic outlook, but rather a hawkish Fed. Mainly the perception of the Fed’s reaction function So what changed? In our view, the market’s perception of the Fed’s reaction function has changed, given mixed messages from key Fed officials. New York Fed President Dudley noted that he would wait for 3–4 months to decide whether to taper; St. Louis Fed President Bullard noted that he wanted to wait for inflation to rise before tapering; the May FOMC minutes showed that “views differed about what evidence would be necessary” to gauge substantial progress and, hence, to commence tapering. At the same time, Chairman Bernanke said the Fed may begin to taper at the next few meetings and also did not rule out the possibility before Labor Day, i.e., at the June or July meeting. The exact timing of the taper should not have much of an effect on the term premium at the long end of the curve, especially if the taper is gradual and halting, as the stock of Fed purchases may not end up being different than what the market was expecting prior to the recent Fedspeak. However, the conditions under which the Fed will begin to taper convey what metrics it is looking at to judge the appropriateness of monetary policy and, therefore, its reaction function. This should have significant implications for the hiking cycle. Until a few weeks ago, we assumed that the Fed would look at not only the partial progress made in the labor market since the launch of QE3, but also the modest growth and inflation backdrop. This is where there has been a change in market perception. For instance, were the Fed to begin tapering at one of the next few meetings despite data that only match consensus (e.g., modest growth in Q2/Q3, a slowdown in payroll growth vs. the past six months, below- target inflation), that could convey that the Fed is focused on the unemployment rate. This is relevant because the forward guidance is explicitly linked to the unemployment rate, which has been steadily falling faster than Fed’s forecast despite growth being consistently lower than its forecast (Figure 2). Were the unemployment rate to keep dropping at the current pace (driven by modest job gains/a continued decline in LFPR), it could get to 6.5% by the end of 2014 and investors would price in a high chance of a Fed hike in early 2015. While the Fed has stressed that the 6.5% is a threshold, not a trigger, it has also been non- committal on how it views declines in the unemployment rate to the extent they are driven by a drop in the LFPR. At the March FOMC press conference, Chairman Bernanke noted that the drop was mostly structural, but at the latest testimony, he characterized that as a sign of a weak labor market. Hence, there is now considerable confusion on how investors are supposed to judge the progress in the economy in the context of the outlook for monetary policy. 2 June 2013 6 Barclays | Global Portfolio Manager’s Digest Market implications What is the near-term outlook for rates? We believe volatility is likely to remain high over the coming weeks. Since it established forward guidance, the Fed has been able to suppress the transmission of economic uncertainty into interest rate volatility. However, with its reaction function becoming uncertain, interest rate volatility should remain elevated, and there could be large moves in either direction. The market still expects the first hike around mid-2015. If the Fed intends to focus on the unemployment rate, then the hiking can still be pulled forward. A re-pricing to Q1 15 could result in another 10–15bp rise in 10y rates. This would mainly affect the intermediate sector, as longer-term forward rates have also risen enough to compensate for the smaller- than-expected Fed balance sheet; 10y10y swap rates are already at 4.1%. On the other hand, if labor market data weaken materially or the Fed re-emphasizes the modest growth and inflation backdrop, hikes should be pushed out the and term premium should decline. For instance, Vice Chair Yellen has argued that to compensate for the zero lower bound, the Fed should keep rates on hold till mid-2016, after unemployment has dropped to about 6%. Even if the market were to push out the Fed hikes to say Q3 15, 10y rates could decline to early May levels. Hence, while we maintain our neutral duration view, we continue to recommend long gamma on mid-tails. While 1m7y has richened to 88bpv (from 73bpv at the time of recommendation), it still looks attractive on both un-delta hedged and delta hedged bases. We also maintain our 7s30s/10s30s curve flattener view. While the 10s30s curve has flattened 7bp since mid-May, when concerns about tapering were picking up, we believe curve flatteners still offer attractive risk-reward. Further repricing of the hiking cycle should result in the underperformance of the belly in a sell-off, as falling long-term inflation expectations and the negative reaction of risk assets should support the long end. On the other hand, dovish Fedspeak or weak data should result in a decline in the term premium as well and the long end may not underperform in a rally. In our view, the curve continues to look too steep, given modest inflation and inflation expectations. 2 June 2013 7 Barclays | Global Portfolio Manager’s Digest BEST OF BARCLAYS: EURO THEMES Germany outlook: Global headwinds ECONOMICS RESEARCH Excerpted from Euro Themes: Germany outlook – Global headwinds, published on Thomas Harjes May 28, 2013 +49 69 716 11825 firstname.lastname@example.org • The German economy suffered a soft start into 2013, with GDP expanding by a mere 0.1% q/q in Q1 13 following the sharp contraction in Q4 12 (-0.7% q/q), which was caused by a slump in external demand. Private consumption was strong but exceptionally cold weather weighed on construction activity earlier this year. Growth should accelerate markedly in Q2 but owing to the weak economic performance over the past couple of quarters, we have revised down our annual 2013 GDP forecast to 0.5%. The strength of global demand, both from Europe and overseas, remains a concern in the near term. • Our medium-term outlook remains relatively bullish for Germany’s economy in view of its sound domestic fundamentals and export strength. Robust labour and housing markets, which are benefitting from low interest rates and strong net immigration flows, continue to support consumption. Corporate investment declined again in Q1 but the pace of contraction is moderating and the latest factory orders imply that a turn in the domestic investment cycle is near. • Federal elections (22 September) dominate the political agenda over the next few months. A new euro-critical party (AfD) has emerged but is unlikely to gain major support this fall. The SPD/Green party opposition is campaigning for higher taxes and social benefits, tighter financial regulation, and has endorsed a common debt redemption fund for euro area countries proposed by the government’s Council of Economic Experts. Current polls suggest that another term for the current CDU/CSU/FDP government is still the most likely outcome of the elections. FIGURE 1 Actual and forecast of quarterly GDP growth and its contributors 1.00 0.75 Projections 0.50 0.25 0.00 -0.25 -0.50 -0.75 -1.00 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 E Q3 E Q4 E 2011 2012 2013 Net exports Inventories Fixed investment Consumption Real GDP Source: Destatis, Barclays Research 2 June 2013 8 Barclays | Global Portfolio Manager’s Digest BEST OF BARCLAYS: QUANTITATIVE PORTFOLIO STRATEGY Managing Conflicting Views in Asset Allocation Decisions QUANTITATIVE RESEARCH Excerpted from Managing Conflicting Views in Asset Allocation Decisions, published on Albert Desclée May 28, 2013 +44 (0)20 7773 3382 email@example.com • Investors often formulate active views that conflict with historical correlations of underlying assets. A combination of bullish credit and bearish equity views is an example of such a conflict. Anando Maitra +44 (0)20 3134 0091 • While conflicting views appear to diversify portfolio risk, their contribution to portfolio firstname.lastname@example.org returns may be insignificant because the disagreements with historical correlations make their joint successful realisation unlikely. Simon Polbennikov +44 (0)20 3134 0752 • How should investors allocate the risk budget when their active views conflict with simon.polbennikov historical correlations? We suggest a simple technique that incorporates conflicting @barclays.com views into a risk budgeting framework by adjusting individual strategy information ratios according to the payoff correlation structure. • Our proposed adjustment generally improves diversification and provides more conservative performance estimates. The methodology can be applied in a broader portfolio management context than just tactical risk budgeting. • We use historical simulations with imperfect foresight to illustrate how our proposed adjustment helps improve realised portfolio performance. 2 June 2013 9 Barclays | Global Portfolio Manager’s Digest U.S. EQUITY STRATEGY Revisiting our exit strategy from bond-like stocks Barry Knapp Excerpted from U.S. Portfolio Strategy Weekly, published on May 31, 2013 +1 212 526 5313 email@example.com • Monetary policy expectations have been substantially reset since the April employment report. The equity market has not been immune; stocks with bond-like characteristics BCI, New York have performed poorly over the last month. • From a strategic perspective, we are leaning toward believing this is indeed the beginning of the end for bond-like stocks. However, from a tactical perspective even If we have reached the monetary policy inflection point, history suggests the window was missed to sell bond-like stocks at their maximum point of outperformance and making a wholesale allocation shift now means paying too much for cyclicals as they’re not immune to monetary policy related equity market corrections. Getting your hand slapped in the reach for yield Monetary policy expectations have been substantially reset since the April employment report; for evidence, look no further than 10 year real yields (TIPS), which have shot up from -0.72% in late April to -0.08% on Friday morning. As our colleagues in interest rates strategy point out in this week’s report titled “Regime Change,” this is different from most Treasury market corrections this cycle, which generally were driven by a combination of higher inflation expectations (inflation breakevens) as well as growth and policy (real rates). Economically sensitive The equity market has not been immune, as our stocks with bond-like characteristics theme sectors and stocks that we had a bad month. Our game plan was always to wait for the clear signal of a policy shift and want exposure to after the the related equity market correction to exit this theme, in part because history tells us the monetary policy normalization more economically sensitive sectors and stocks that we want exposure to after the related correction will also monetary policy normalization related correction will also come under pressure in the come under pressure second stage of the adjustment. In other words, rushing to sell defensive dividend paying FIGURE 1 FIGURE 2 Monetary policy expectation policy expectations have been … But, unlike most treasury market corrections this cycle substantially reset with 10 year real yields rising steeply … inflation expectations are falling % % 0.0 3.0 -0.1 2.9 -0.2 2.8 -0.3 -0.4 2.7 -0.5 2.6 -0.6 2.5 -0.7 2.4 -0.8 -0.9 2.3 -1.0 2.2 May-12 Aug-12 Nov-12 Feb-13 May-13 May-12 Aug-12 Nov-12 Feb-13 May-13 10y UST Real Yield Barclays 5y5y Fwd Inflation BEs Source: Bloomberg, Barclays Research Source: Barclays Research 2 June 2013 10 Barclays | Global Portfolio Manager’s Digest stocks to buy cyclicals prior to the Fed-related corrections that occurred in 1983, 1994 or 2004 was tactically difficult and, therefore, likely expensive. The tapering talk has been A week from today one of the most widely anticipated monthly employment reports in quite highly conditional on some time will be released. It appears the six-month average increase in payrolls of 208,000 employment data is approaching the FOMC’s threshold for a substantial improvement in the labor market at least in terms of level, if not consistency. The latest significant example came from the generally dovish Boston Fed President Rosengren who noted he would like to see growth above 200,000 and that asset purchase reductions might make sense later this year. Since the beginning of 2012, payrolls have exceeded 300,000 in two months, but neither appeared on your screen in the initial print. The latest was the 332,000 increase in February; the original report was only 236,000. The tapering talk has been highly conditional on employment data; so, if our economics team’s forecast of 175,000 proves correct, we suspect the “reach for yield” will at least stabilize, if not resume. On the other hand, a 250,000 report along with positive revisions to March and April, as has been the pattern the last two months ,could be a significant step along the path toward slowing the rate of purchases this fall. FIGURE 3 It seems the 6 month average increase in payrolls of 208,000 is approaching the FOMC’s threshold for substantial improvement, at least in terms of level, if not consistency thous, m/m chg 400 300 200 100 0 -100 -200 -300 -400 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Nonfarm Payrolls, 6mma SA Source: BLS, Haver, Barclays Research 2 June 2013 11 Barclays | Global Portfolio Manager’s Digest AMERICAS CREDIT STRATEGY Higher Yields, Higher Anxiety Jeffrey Meli Excerpted from U.S. Credit Alpha, published on May 31, 2013 +1 212 412 2127 Continuing the trend from last week, risk assets remained volatile, driven by the selloff in firstname.lastname@example.org Treasuries. 10y yields spiked 16bp on Tuesday – the largest single-day move in more than a year – before retracing part of the move later in the week. The S&P 500 index was up more Bradley Rogoff, CFA than 1% on Tuesday but gave up those gains on Wednesday. The CDX HY index was down +1 212 412 7921 $0.30 for the week as of Wednesday’s close, while high yield cash spreads were 10bp wider, email@example.com leading to a 24bp increase in the yield of the Barclays High Yield Index. The move in investment grade credit spreads was more muted, with the CDX IG index widening 2bp, while the Barclays Corporate Index was unchanged. The selloff in Treasuries has once again brought to the fore concerns about the effect of rising rates on credit spreads. As we discussed in The Great Rotation: Myth or Reality? February 1, 2013, we continue to believe that in a rising rate environment, investment grade spreads are likely to be supported by increased buying from insurance companies, which should be enough to offset any selling driven by mutual fund outflows. Indeed, investment grade spreads across the ratings spectrum have tightened since May 2 (the start of the rates move higher), even though total returns have been negative (Figure 2). Although high yield spreads have widened during the recent Treasury selloff, we believe that given the wider spread cushion, high yield is better positioned to absorb a rate increase as long as it is accompanied by at least a moderately improving macroeconomic environment. We continue to forecast total returns of 6–8% for high yield in 2013 (please see The Year of the Coupon Return, May 17, 2013). Despite the recent increase in volatility, M&A activity picked up, with three deals in the $5– 10bn range announced this week. Berkshire Hathaway’s purchase of NV Energy, Valeant’s acquisition of Bausch & Lomb, and Shuanghui International’s takeover of Smithfield Foods added another $26bn of deal volume to this year’s activity. However, even after these deals, M&A volumes remain significantly below their 2006–07 levels. We find this somewhat surprising, given that conditions for M&A growth are no worse, and in some ways better, FIGURE 1 FIGURE 2 Weekly Index Changes Spread and Yield Changes by Rating: May 2–29 (bp) Wednesday Last Week 4-week 80 Close Close Average 70 Credit Index (bp) 124 123 122 60 CDX.IG.20 (bp) 77.0 75.8 72.5 50 High Yield Index ($ Price) 105.33 106.04 106.70 40 CDX.HY.20 ($ Price) 105.44 105.75 106.60 30 Leveraged Loan Index ($ Price) 98.45 98.62 98.74 20 LCDX.20 ($ Price) 104.38 104.38 104.38 10 0 -10 AAA AA A BBB BB B CCC OAS YTW Source: Barclays Research Source: Barclays Research 2 June 2013 12 Barclays | Global Portfolio Manager’s Digest than they were pre-crisis: valuations remain modest, margins seem to offer more room for large companies to find synergies by acquiring smaller firms, and declines in expectations for growth should be more than offset by drops in funding costs. In fact, as we discuss in the Investment Grade section, M&A levels in terms of number of deals rather than dollar volumes have picked up and are close to all-time peaks. Away from M&A, Sallie Mae’s announcement that it will split into two entities and Alcoa’s downgrade to high yield by Moody’s led to significant spread moves in those credits and highlighted the prevalence of idiosyncratic risks in the market. Sallie Mae was downgraded to high yield by Fitch after the announced split; as a result, its bonds will enter the High Yield Index at the end of the month. SLMA CDS widened sharply on the news; however, fundamental bank analyst Brian Monteleone remains Overweight SLMA senior unsecured debt (please see his note for details). Moody’s decision to downgrade Alcoa to below investment grade was prompted in large part by the recent declines in the price of aluminum and continuing headwinds pressuring the aluminum industry. We believe that other credits remain vulnerable to continuing weakness in commodity prices amid lackluster global economic growth. In this week’s focus section, we take a deep dive into iron ore and met coal producers, which are among the widest trading groups in the U.S. Credit and High Yield Indices, respectively, but which are still likely to underperform, in our view. While the prices of iron ore and met coal have already declined sharply in 2013, we believe that significant new capacity poised to enter the market between now and the end of 2014 will put even more pressure on iron ore prices and limit the room for met coal to rally. In our view, this is not yet priced fully into spreads, and there remains room for broad underperformance across the sectors’ credits. 2 June 2013 13 Barclays | Global Portfolio Manager’s Digest EUROPEAN CREDIT STRATEGY Discounting future expectations Søren Willemann Excerpted from European Credit Alpha, published on May 31, 2013 +44 (0) 20 7773 9983 Volatility persisted this week, as limited market liquidity exacerbated price moves firstname.lastname@example.org across asset classes. European credit was not immune to the sharp rise in treasury yields or the weakness in equities (particularly in Japan). We expect that spreads will remain Zoso Davies sensitive to Fed speakers and US data in the coming weeks, as expectations of Fed +44 (0)20 7773 5815 tightening are recalibrated. Sentiment appears to be changing with signs of de-risking email@example.com in cash potentially setting us up for some weakness in the short term. Our economists remain of the view that the Fed will continue to expand its balance sheet at a rate of $85bn through year end. Assuming that is the case, monetary policy should remain very supportive for fixed income markets, including European credit. However, the corollary to this view is that both spreads and yields would suffer if the Fed were to tighten sooner than our economists forecast. Indeed, this view is probably the consensus among investors and expectations of a sell-off in response to Fed tapering could be self-fulfilling. However, if participants believe that tapering of asset purchases will result in a period of financial market volatility then those expectations should be priced in now. In our view, this is the driver of recent market weakness. Recalibration of expectations as to when, and how, the Fed will begin to tighten monetary policy is already underway. JGBs have also sold off as markets have adjusted their forecasts; inflation expectations appear to be the key driver of that market. If we are correct, then US data and Fed speakers should have an exaggerated influence on European markets until there is more confidence in the path of policy. Once tapering has been “priced in”, the actual announcement of Fed tightening may have only a muted impact. This would mirror the price action before QE2, and “Operation Twist”. Focusing on the specific issue of rising rates, this should only be a temporary headwind for credit spreads, in our view. As discussed in “The shifting relationship of spreads and rates across the cycle” (European Credit Alpha, 15 February 2013), it is rare for spreads to widen during periods in which government bond yields are rising. The key exceptions are: when government bond yields increase due to credit concerns (as happened for the European periphery); and at the start of tightening cycles. Indeed, we noted that increased uncertainty at the start of policy tightening by the Fed would likely cause an uptick in volatility and FIGURE 1 FIGURE 2 Generic 10y US Treasury and JGB yields Volatility indices when markets anticipate Fed tightening Yield (%) Yield (%) Units 1.0 2.2 50 0.9 2.1 45 End of QE1 approaching Uncertainty 2.0 40 over QE3 0.8 End of QE2 1.9 35 approaching 0.7 1.8 30 0.6 1.7 25 0.5 1.6 20 0.4 1.5 15 Jan-13 Feb-13 Mar-13 Apr-13 May-13 10 10Y JGB (LA) US 10Y Treasury (RA) Dec-09 Dec-10 Dec-11 Dec-12 Source: Barclays Research Source: Bloomberg, Barclays Research 2 June 2013 14 Barclays | Global Portfolio Manager’s Digest moderate weakness in risk assets. This appears to be playing out, even if we do not agree with the markets’ assessment of when tapering is likely to commence. Another way of thinking about this is to say that if the Fed begins to tighten policy because of improvements in economic growth, then those fundamental positives should counterbalance the negative of monetary policy tightening. However, economic data are reported over a period of months and quarters, meaning that it takes time before markets are convinced that growth is firmly entrenched. Before that, volatility could rise, which in itself would weigh on spreads. Indeed, when we look at intraday volatility of iTraxx Main, it currently appears high relative to spread levels, reflecting a general skittishness in the market (see the Index Relative Value section for more details). In terms of positioning, we are seeing tentative signs of de-risking in cash (profit-taking). While this selling is currently being met by buyers, it could lead to short-term weakness if the de-risking continues along with heightened intraday CDS index volatility and continued volatility out of Japan. If the growth outlook in the US has improved, this may also be matched by developments in Europe where the focus on austerity has slipped away as quickly as the market pressure on Spanish and Italian bond yields. This week the European commission granted extensions to several countries’ deficit reduction targets, albeit in return for increased delivery on structural reforms. Further, Germany appears to be willing to support programmes aimed at targeting SME financing and youth unemployment in the periphery. Reducing the pace of austerity should be positive for the growth outlook in Europe, particularly if coupled with long-term structural reforms. However, if governments drag their feet on reforms as well as fiscal tightening, then the risk of the “bond vigilantes” returning to Spain and Italy could begin to rise again. 2 June 2013 15 Barclays | Global Portfolio Manager’s Digest ASIA CREDIT STRATEGY Stay hunkered down Krishna Hegde, CFA Excerpted from Asia Credit Alpha, published on May 31, 2013 +65 6308 2979 Emerging market risk assets underperformed significantly, with US Treasury yields rising firstname.lastname@example.org further as a result of a perceived shift in policy by the US Federal Reserve. We expect markets to remain volatile in coming weeks as participants gauge the Fed’s reaction Avanti Save function. The vulnerability of EM assets in general has increased against a backdrop of +65 6308 3116 negative growth surprises, higher US Treasury yields and crowded positioning in some email@example.com segments. That said, the technicals for Asian corporate credit are likely to be better than for other segments of EM and Asia sovereigns/quasi-sovereigns owing to the different pockets of in-region demand. For the past two weeks, we have been recommending that investors move towards a neutral stance. We recommend keeping beta close to benchmark levels, while having less-than-benchmark exposure to Chinese state owned enterprises. Some of the EM underperformance this week can be attributed to weak data. Brazil GDP grew only 0.6% q/q in 1Q13, and our economists now project developed-market-like growth of 2.5% y/y for 2013. Despite weak growth, the Brazilian central bank hiked the policy rate by 50bp to address high inflation. South Africa also posted weaker-than- expected 1Q GDP growth. The Philippines was a spot of strength; GDP growth accelerated to 7.8% y/y in 1Q13. We recommend using Philippines sovereign CDS as a funding leg for any shorts and believe any spread widening versus Thailand/Malaysia should be faded. Within Asian credit markets, long-tenor bonds lagged as investors shunned duration. Indonesian bonds were also clear underperformers with sovereign/quasi-sovereigns and corporates – all widening. We note that investor concern over Indonesia’s macro backdrop has increased in recent days. Outside Indonesia, segments that have seen significant supply in recent weeks have widened the most – for example, Chinese state-owned enterprises. Investment grade spreads are now back to their March levels, but the selloff in US Treasuries pushed YTD total returns into negative territory. The outperformers this week were short-tenor high yield paper and Indian bank bonds. Most investors we spoke to in May have been underweight India, and supply from financials has not been excessive. The relative lack of negative headlines in India and wider-than-benchmark spreads also helped performance, in our view. For Asian credit, we believe that staying close to benchmarks remains appropriate as inflows/in-region demand offset the increased risks. FIGURE 1 FIGURE 2 High Grade Excess Returns by Geography High grade excess returns by tenor (YTD and last week) % Excess return YTD Excess return MTD % 3.5 YTD 1 wk 1.5 3.0 2.5 1.0 2.0 0.5 1.5 1.0 0.0 0.5 -0.5 0.0 -0.5 -1.0 -1.0 -1.5 -1.5 -2.0 -2.0 -2.5 -2.5 -3.0 <5 yr 5-10 yr 10-20 yr 20-30 yr Source: Barclays Research Source: Barclays Research 2 June 2013 16 Barclays | Global Portfolio Manager’s Digest RATES STRATEGY Regime shift Rajiv Setia Excerpted from Global Rates Weekly, published on May 30, 2013 +1 212 412 5507 We are neutral on duration in developed rates and long US gamma, given our belief that firstname.lastname@example.org markets are likely to remain volatile and sensitive to US labor metrics over the summer. We maintain our US 7s30s curve flattener view, given the drop in inflation expectations. Laurent Fransolet +44 (0)20 7773 8385 Global rates endured another week of high volatility. 10y Treasuries sold off 9bp through email@example.com Thursday, but this masks the intraday volatility that characterized much of the week, on little fundamental news. It remains clear that the market believes that US monetary policy Amrut Nashikkar has taken a hawkish turn, while the increase in volatility in the bond and stock markets in +1 212 412 1848 Japan has market participants questioning the efficacy of the BoJ’s monetary expansion. firstname.lastname@example.org Meanwhile, inflation expectations in the US have continued to decline through the rate sell- off, and real rates have to risen to levels not reached since early 2012, even as the incoming data have remained decidedly mixed (Figure 1). It is not just the level of real rates that suggests that there has been a policy change in the market’s mind; a look at carry trades in several other markets corroborates such a belief. By definition, an investor in a carry trade looks to earn a risk premium with a view that markets will remain range-bound; ie, forward prices are not realized, but roll to spot prices instead. The fact that carry-trades across asset classes performed poorly over the past month suggests that the market perceives such a regime shift. Carry trades across In Figure 2, we have chosen a few carry trades that were popular at the end of April. Some asset classes were likely of these are rates trades, such as receiving 3y1y rates, long the belly of the curve, 7s30s stopped out in May, suggesting steepeners, short 1y10y straddles and long 10y JGBs. Others are non-rates trades such as that a reversal may be slow long AUD and long agency mortgage REITs. With the exception of the 7s-30s steepener and in coming. selling rates vol, the other trades have given up more than a year’s worth of carry. Clearly, the past month has been brutal for carry trades; we did not see such broad-based losses in carry trades across asset classes in the January rate sell-off. Faced with large losses, leveraged money will likely be hesitant to position for a reversal anytime soon. FIGURE 1 FIGURE 2 Sell-off in rates continues to be real yield driven, while With the exception of 7s30s curve steepeners, popular carry inflation expectations are falling trades have severely underperformed over the past month 120 1y expected Carry/ Months of carry 100 Trade carry , 30-Apr vol lost in May 80 Receive 3y1y 50 bp 1.05 14 Receive 7s 38 bp 0.91 13 60 7s30s steepener 26 bp 0.64 1.5 40 Short 1y10y 270 – 5 20 straddle (cnts) Long AUD (cnts) 2.6 0.27 32 0 Long agency 1.73 0.75 12 -20 REIT ETFs ($) Oct-Dec 10 Oct 11 Mar 12 July-Aug 12 May 13 Buy 10y JGB 15 bp 0.23 25 Change in real yields, bp Change in breakevens, bp Source: Barclays Research Source: Barclays Research 2 June 2013 17 Barclays | Global Portfolio Manager’s Digest Adding fuel to the fire, there are emerging signs of instability in Japanese markets, potentially signalling the constraints of unconventional monetary policy at the zero lower bound. Despite the BoJ’s stated intention to lower long-term interest rates, 10y JGBs now trade nearly 35bp higher than they did before the BoJ’s QQE announcement. The Nikkei has been extremely volatile, already having lost over 2,000 points after rising to a local peak of 15,627. This rise in volatility, along with the increase in rates, means that financial conditions in Japan have tightened over the past few days, quite the opposite of the BoJ’s intention. Volatility in Japanese equity As our Japanese economists have argued, it will be extremely difficult for the BoJ to meet its and rates markets means that stated inflation target of 2% (see Long and winding road to inflation, April 25, 2013). This is it may be difficult for investors compounded by the fact that wealth effects, if any, from the rise in the stock market are to position for a rally likely to be small, given the low levels of stock ownership in Japan (only 7% in Japan, vs 33% in the US, Figure 3). Further, Japanese depository institutions hold over JPY300trn of government bonds, which means that any large rises in interest rates could also lead to losses on their holdings; capital losses could crimp credit creation, implying an indirect tightening of policy. Our Japanese strategists believe that 0.8% on 10y JGBs is an attractive level for the long term. But it is unclear how the BoJ, which has already announced a massive bond purchase program, could push rates lower in the face of rising volatility. This leads us to take a cautious stance on outright duration in Japan. Volatility is likely to remain elevated In the US, we are neutral We are neutral on duration in developed markets. Over the past few years, we have on duration, but maintain consistently viewed every inordinate rate sell-off in the US as an opportunity to “buy the our long gamma and dip.” We are no longer in that camp. Our base view has always been that rates would start curve flattener views. to rise on a sustainable basis, as growth accelerated to above trend, most likely in 2014. While we still expect this to be the case, our change of stance on duration to neutral last week (see Unusually uncertain, May 23, 2013) was not driven by a fundamental shift in our economic outlook. Rather, it was driven purely by our view that the market’s perception of the Fed’s reaction function has shifted dramatically following mixed messages from Fed leadership. Specifically, unless Fed speakers clarify what metrics they are looking at to gauge the appropriate timing of the withdrawal of stimulus, volatility is likely to remain elevated in the months ahead. In the US Rates Strategy section of this publication, we argue FIGURE 3 FIGURE 4 Equity ownership by households in Japan is much lower than The Fed has typically turned dovish whenever in the US or even Europe the unemployment rate has stalled 100% 0.4 Dovish 80% 0.2 0.0 60% -0.2 40% -0.4 20% -0.6 0% -0.8 Japan United States Euro Area Hawkish Currency & Deposits Bonds -1.0 Investment Trusts Shares and equities Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Insurance andPension Reserves Others Change in Unemployment Rate, 6 months Source: Bank of Japan Source: Barclays Research 2 June 2013 18 Barclays | Global Portfolio Manager’s Digest that while the Fed has typically tended to overestimate growth, it has underestimated the drop in the unemployment rate. With the market already pricing in the first hike in mid- 2015, there is probably some more room for expectations to be pulled forward to early 2015 if the unemployment rate continues to drop because of modest job growth and a fall in the participation rate. Such a scenario would imply 10s trading at 2.25% in the near term. On the other hand, if the decline in the unemployment rate stalls (Figure 4), the Fed could turn increasingly dovish. This leads us to be neutral on duration unless the Fed clarifies otherwise. We are also maintaining our long gamma and 7s30s flattener views going into payrolls. For a list of trade ideas to implement our views or to position for either a continuation of the sell-off or for a reversal, please refer to the US Rates Strategy section. Our European rates strategists believe that rates in core European countries are likely to be driven largely by US rate moves over the near term. Given the recent stabilization in European data, in the Euro Rates Strategy section of this publication we suggest that the recent sell-off in core European rates should not be faded. 2 June 2013 19 Barclays | Global Portfolio Manager’s Digest ECONOMIC OUTLOOK The taper worm Julian Callow Excerpted from Global Economics Weekly, published on May 31, 2013 +44 (0)20 7773 1369 Recent price action demonstrates the skittishness of financial markets in an environment email@example.com dominated by Fed and BoJ asset purchases. Our view remains that the sheer scale of this dominance (with central banks essentially vacuuming up all net issuance of ‘safe’ assets, forcing substantial portfolio re-balancing by the private sector, which itself still needs trillions of dollars of ‘safe’ assets) is likely to continue to support valuations, while also leaving markets sensitive to any perceived shift in the flow of central bank asset purchases. As one example of this, the US real 5y5y forward rate has risen significantly (Figure 1). In this week’s US Outlook we explain why we expect the Fed to refrain from tapering its $85bn monthly pace of asset purchases during the rest of this year, given our view that US GDP expansion will be less than that expected by the Fed and consensus. Additionally, the latest weak core PCE deflator (1.1% y/y in April) also offers leeway for the Fed to persist with aggressive QE, even as it refines its communication around the conditionality of future exit measures. Anxiety about tapering Anxiety about a potential tapering has been amplified by sensitivity to any signs that the coincides with a reassessment pace of expansion in emerging economies could be weaker than expected. In this context, of growth prospects in 2013 China’s next batch of monthly data, starting with the imminent NBS PMI reports, and in emerging economies… including the next (May) reports for IP, FAI and retail sales (due on June 9th) will be crucial to forthcoming Chinese data determining potential downside risks to GDP growth expectations (at a time when the IMF will be crucial has trimmed its 2013 GDP forecast from 8% to 7 ¾%). China, and other EM The sensitivity of global markets to even small signs of disappointing activity in emerging economies, accounted for economies is attributable to the very strong contribution to global expansion made by this group nearly half of G20 fixed asset since the crisis. As an indication, gross fixed capital formation (GFCF) by China and Hong Kong capital formation (economic last year amounted to $3.9trn, outstripping the US ($2.5trn) and EU ($3.0trn). Indeed, this investment) last year measure of ‘economic’ investment was very strong in the remainder of the G20 (which is dominated by emerging countries), at $3.2trn (Figure 2). Concerns that the EM economies may report disappointing economic data this year have recently come into sharper focus with the release of Q1 GDP statistics. For example, Brazil’s growth slowed further, to 2.2% q/q (saar, 1.8% y/y in Q1 (from 2.6% in Q4, and was below the consensus/our forecast). Several factors help to explain this, including a sharp drop in net exports and static consumption. Q1 GDP reports this past week from South Africa FIGURE 1 FIGURE 2 Real forward rates have risen despite ongoing “QE3” China and other EM countries dominate global investment 4.0 120 GFCF $bn QE1 QE2 Op. QE3 3.5 Twist 4000 115 US 3.0 3500 China (inc HK) 2.5 110 3000 2.0 EU 27 105 2500 1.5 Japan 1.0 100 2000 Rest of G20 0.5 1500 95 0.0 1000 -0.5 90 500 07 08 09 10 11 12 13 5y5y forward real rate (%) 0 5y5y forward breakeven (%) 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 US dollar TWI (broad index, RHS) Source: Barclays Research, Haver Analytics Source: CEIC, Haver Analytics GFCF = gross fixed capital formation 2 June 2013 20 Barclays | Global Portfolio Manager’s Digest (0.9% q/q saar), and Thailand (-8.4%) were also significantly weaker than our and the markets’ expectations. That said, India’s GDP (at factor cost) grew by 4.8% y/y, in line with forecasts (corresponding to c. 4% saar q/q), while GDP in the Philippines surprised on the upside (see Emerging Asia Outlook). China dominates global Despite the surge in Chinese investment, it is noteworthy that at the aggregate G20 level, investment, and excessive the ratio of economic investment (GFCF) to GDP has risen only gradually, reaching 23.0% in investment there may even 2012 from 22.5% in 2011 and 22% in both 2009 and 2010. The average ratio for the US, EU be muffling an investment and Japan was stuck at a relatively low 17.6% in both 2011 and 2012, however, which we recovery in the advanced calculate to be their lowest levels ever (Figure 3). Hence, growth in global investment economies continues to be dominated by China and, since the financial crisis, has been soft in the advanced economies. This has stemmed in part from weakness in the construction sector and associated de-leveraging but still suggests that an excessive pace of investment in China may have crowded out potentially profitable investment opportunities elsewhere. US economy shows signs of At the same time, there is evidence of a nascent improvement in US corporate investment, firming business investment, feeding off very strong corporate balance sheets and retained earnings, as well as the ongoing bank lending and residential spending associated with the shale gas revolution. Whereas bank loans account for only a real estate portion of total financing of the US corporate sector, solid expansion continues in US C&I (commercial and industrial) loans, which rose by 10% y/y in the first half of May (and by 11% YTD). The repair of US balance sheets, in conjunction with the Fed’s asset purchases, has helped improve credit supply (Figure 4), a development also supported by improvement in residential markets (with April pending home sales and the March Case-Shiller house price index both up 10% y/y). Japanese inflation forecast We continue to expect Japanese corporate investment to rise in response to the profitability revised higher surge generated by the sharp yen depreciation, even though the initial estimate for Q1 GDP recorded a further contraction in private sector investment in plant and equipment. This week we have revised up our Japanese inflation profile following the May data (see Japan Outlook), suggesting that the BoJ’s new strategy may be having some early impact. Euro area bank lending By contrast, the euro area is likely to continue to suffer, with investment constrained by weak remains weak profitability and demand, an ongoing contraction in the real estate sector, and shortages in the supply of bank credit. This downbeat message was reinforced by the latest data for MFI loans to non-financial corporations, which fell at a new record pace of contraction of 1.9% y/y in April, with particular (record) weakness apparent in Italy (-4.0%) and Spain (-8.8%). This implies that, when it comes to the future scope of central banks in advanced economies to announce new stimulus measures, the ECB is likely to remain uppermost in investors’ minds. FIGURE 3 FIGURE 4 Investment/GDP ratios: Is China crowding out the rest? US commercial bank balance sheet GFCF % $trn 50% GDP 4 45% China EM G20 ex China Cash & interbank loans (inc. Fed reserves) G20 3 40% Comm. & industrial loans US-EU-Japan 35% Real estate loans 2 Consumer loans 30% 25% 1 20% 15% 0 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: Barclays Research, CEIC, Haver Analytics Source: Barclays Research, Haver Analytics 2 June 2013 21 Barclays | Global Portfolio Manager’s Digest EQUITIES: SUMMARY OF RATING CHANGES Rating Changes Industry Old New Security Ticker Analyst Industry View Date Rating Rating Basic Industries SunCoke Energy, Inc. SXC David Gagliano, CFA North America Metals & Mining Pos 28-May-13 RS EW Consumer Kikkoman 2801.T Takayuki Hayano Japan Food, Beverages & Tobacco Neu 30-May-13 NA EW Toyo Suisan Kaisha 2875.T Takayuki Hayano Japan Food, Beverages & Tobacco Neu 30-May-13 NA OW Energy Cheniere Energy Partners LP CQP Christine Cho, CFA U.S. MLPs Neu 30-May-13 EW OW Financial Services GLP J-REIT 3281.T Junichi Tazawa Japan REITs Neu 29-May-13 NA EW Nippon Prologis REIT, Inc. 3283.T Junichi Tazawa Japan REITs Neu 29-May-13 NA EW Wing Hang Bank Ltd. 0302.HK Sharnie Wong, CA Asia ex-Japan Banks Neu 29-May-13 UW OW Industrials Daimler AG DAIGn.DE Kristina Church European Autos & Auto Parts Neg 24-May-13 EW UW Doosan Heavy Industries & 034020.KS HJ Moon Asia ex-Japan Capital Goods Neu 26-May-13 NA OW Construction Internet & Media GMO Internet Inc. 9449.T Keiichi Yoneshima Japan Internet Pos 31-May-13 EW OW Power & Utilities Sempra Energy SRE Daniel Ford, CFA North America Utilities Pos 28-May-13 EW OW Retail SeaWorld Entertainment Inc. SEAS Felicia R. Hendrix U.S. Leisure Neu 31-May-13 NA OW Stock Rating: OW: Overweight EW: Equal Weight UW: Underweight RS: Rating Suspended Industry View: Pos: Positive Neu: Neutral Neg: Negative For a definition of our rating system, please see the equity disclosure section at the end of this report. 2 June 2013 22 Barclays | Global Portfolio Manager’s Digest EQUITIES: SELECT RATING CHANGES Single-stock Cheniere Energy Partners LP (CQP; OW/Neu) Upgrade to Overweight Sabine Liquefaction has secured $5.9 billion through a $4.4 billion Term Loan A credit facility and $1.5 billion from Korean financial institutions. The interest rates for the various 30 May 2013 credit facilities range between LIBOR + 230 bp and LIBOR + 325 bp, which is lower than Christine Cho, CFA what we were modeling. The company has also been awarded equity credit of $1.4 billion Richard Gross for Trains 3–4 and has no requirements to raise any more equity for Trains 1–4. With all of Kannan Venkat the funding in place for Trains 3 and 4, the company issued a full notice to proceed with US MLPs construction for these trains to Bechtel. CQP also disclosed that it entered into an at-the- market program whereby the partnership will be able to issue up to $500 million of common units, which caused some confusion among investors as to whether or not the MLP would be issuing equity. We believe the company put the program in place as a “nice to have” option, which may provide them with some flexibility for any future projects, but we don’t expect them to draw down on it in the near term. While we typically base valuation on a target yield and a 12-month distribution run rate for all the MLPs in our universe, we don’t think this method captures the ability and the likelihood that the partnership will do a large step-up in the distribution by 2018. As a result, we derive our price target of $34 by capitalizing the 2018 distribution of $3.05 with a 7% yield, which gets us to $43.50, and discounting it back to the appropriate timeframe. We are upgrading the stock as this implies approximately 15% potential upside from current levels on top of 5.7% yield for a potential total return of more than 20%. Single-stock Sempra Energy (SRE; OW/Pos) Getting on Board the Train(s): Raising SRE to Overweight, Price Target to $90 We are using the recent pullback in SRE shares as an opportunity to upgrade SRE to Overweight from Equal Weight. We are increasingly comfortable with the prospect of the 28 May 2013 Department of Energy issuing a non-free trade agreement export license for the Cameron Daniel Ford, CFA liquefaction project, and believe the growth from this business justifies a long-term OW Theodore W. Brooks, CFA position on the stock. We view this as a binary outcome – without DOE approval and the North America Utilities growth that Cameron represents, SRE is fairly valued at current levels; with DOE approval, the stock is a good value, with further potential upside to our price target represented by the probability of an MLP structure following approvals. Consistent with this point of view, we are raising our price target to $90 from $85, as we have taken away any discount for probability of obtaining the non-FTA license, and are only discounting for time to full earnings in 2019. 2 June 2013 23 Barclays | Global Portfolio Manager’s Digest CREDIT: SUMMARY OF RATING CHANGES US High Grade Sector Issuer From To Date Changed Electric Utilities NV Energy, Nevado Power, Sierra Pacific Market Weight Overweight 30-May-13 US High Yield Sector Issuer Security From To Date Changed Retail Bon-Ton 2021s Initiating Coverage Overweight 30-May-13 Healthcare Valeant Pharmaceutical 2018, 2020, 2021 Market Weight Underweight 30-May-13 Food B&G Foods 4 5/8% 2021 Initiating Coverage Market Weight 29-May-13 Europe Sector Issuer Security From To Date Changed TMT Sunrise 8.750% PIK 2019 Initiating Coverage Overweight 28-May-13 TMT Sunrise CHF 7.0% sr sec 2017 Market Weight Underweight 28-May-13 TMT Orange/Mattherhorn 9.0% PIK 2019 Initiating Coverage Overweight 28-May-13 Asia Ex-Japan Sector Issuer From To Date Changed India Banks Indian Overseas Bank Initiating Coverage Market Weight 29-May-13 India Banks Syndicate Bank Initiating Coverage Overweight 29-May-13 Chinese Oil & Gas China Petroleum & Chemical Initiating Coverage Market Weight 29-May-13 Chinese Oil & Gas China National Petroleum Initiating Coverage Market Weight 29-May-13 Chinese Oil & Gas CNOOC Market Weight Overweight 29-May-13 Diversified Industrials Fosun International 2016s Underweight Market Weight 28-May-13 Diversified Industrials Fosun International 2020s Overweight Market Weight 28-May-13 Real Estate Central China 6.5% 2018 Initiating Coverage Market Weight 28-May-13 For a definition of our ratings system, please see fixed income disclosure section at the end of this report. 2 June 2013 24 Barclays | Global Portfolio Manager’s Digest PRODUCT MANAGEMENT GROUP Global Rob Rouse Head of Global Product Management +1 212 526 6156 firstname.lastname@example.org Equities Penn Egbert Rex Feng Terence Malone Head of U.S. Equity U.S. Equity U.S. Equity Product Management Product Management Product Management +1 212 526 0685 +1 212 526 6114 +1 212 526 7578 email@example.com firstname.lastname@example.org email@example.com Rob Bate Alex Stewart, CFA Head of European Equity European Equity Product Management Product Management +44 (0)20 777 33576 +44 (0)20 355 54957 firstname.lastname@example.org email@example.com Marcus Gunn Sue Ho Head of Asia Equity Asia Equity Product Management Product Management +852 290 34620 +852 290 34518 firstname.lastname@example.org email@example.com Credit Joanie Genirs Head of Global Credit Product Management +1 212 412 7678 firstname.lastname@example.org. Emerging Markets Katie Tomlinson Emerging Markets Product Management + 1 212 412 7934 email@example.com Macro Namita Dhariwal Sangeet Batra Macro Research Macro Research Product Management Product Management +1 212 526 6841 +65 6308 3718 firstname.lastname@example.org email@example.com 2 June 2013 25 Barclays | Global Portfolio Manager’s Digest ANALYST CERTIFICATION I, Rob Rouse, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Each research publication excerpted herein was certified under Reg AC by the analyst primarily responsible for such report as follows: I hereby certify that: 1) the views expressed in this research report accurately reflect my personal views about any or all of the subject securities referred to in this publication and; 2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURES: FIXED INCOME RESEARCH Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, “Barclays”). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 212-526-1072. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). Barclays trading desks may have either a long and / or short position in such securities, other financial instruments and / or derivatives, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, Barclays fixed income research analysts regularly interact with its trading desk personnel regarding current market conditions and prices. Barclays fixed income research analysts receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income, Currencies and Commodities Division and the potential interest of the firm’s investing clients in research with respect to the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Unless otherwise indicated, Barclays trade ideas are provided as of the date of this report and are subject to change without notice due to changes in prices. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. Explanation of the Barclays Research High Grade Sector Weighting System Overweight: Expected six-month excess return of the sector exceeds the six-month expected excess return of the Barclays U.S. Credit Index, the Pan- European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Market Weight: Expected six-month excess return of the sector is in line with the six-month expected excess return of the Barclays U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Underweight: Expected six-month excess return of the sector is below the six-month expected excess return of the Barclays U.S. Credit Index, the Pan- European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Explanation of the Barclays Research High Grade Credit Rating System The High Grade Credit rating system is based on the analyst’s view of the expected excess returns over a six-month period of the issuer’s index-eligible corporate debt securities relative to the Barclays U.S. Credit Index, the Pan-European Credit Index or the EM Asia USD High Grade Credit Index, as applicable. Overweight: The analyst expects the issuer’s index-eligible corporate bonds to provide positive excess returns relative to the Barclays U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Market Weight: The analyst expects the issuer’s index-eligible corporate bonds to provide excess returns in line with the Barclays U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Underweight: The analyst expects the issuer’s index-eligible corporate bonds to provide negative excess returns relative to the Barclays U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating. For Australia issuers, the ratings are relative to the Barclays U.S. Credit Index or Pan-European Credit Index, as applicable. Explanation of the Barclays Research High Yield Sector Weighting System Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. 2 June 2013 26 Barclays | Global Portfolio Manager’s Digest IMPORTANT DISCLOSURES CONTINUED: FIXED INCOME RESEARCH Explanation of the Barclays Research High Yield Credit Rating System The High Yield Credit Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to either some or all of the company’s debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertain the application of the rating system to that company. Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total return of the Barclays U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected total return of the Barclays U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total return of the Barclays U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating. 2 June 2013 27 Barclays | Global Portfolio Manager’s Digest IMPORTANT DISCLOSURES: EQUITY RESEARCH Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, “Barclays”). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.com or call 212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm’s total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the “industry coverage universe”). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Distribution of Ratings: Barclays Equity Research has 2,371 companies under coverage. 43% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of companies with this rating are investment banking clients of the Firm. 41% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Firm. 14% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 42% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst’s expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst’s price target over the same 12-month period. 2 June 2013 28 Barclays | Global Portfolio Manager’s Digest Barclays offices involved in the production of equity research: London Barclays Bank PLC (Barclays, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Securities Japan Limited (BSJL, Tokyo) São Paulo Banco Barclays S.A. (BBSA, São Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCCI, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore) 2 June 2013 29 DISCLAIMER This publication has been prepared by the Corporate and Investment Banking division of Barclays Bank PLC and/or one or more of its affiliates (collectively and each individually, “Barclays”). It has been issued by one or more Barclays legal entities within its Corporate and Investment Banking division as provided below. It is provided to our clients for information purposes only, and Barclays makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to Barclays, the information contained in this publication has been obtained from sources that Barclays Research believes to be reliable, but Barclays does not represent or warrant that it is accurate or complete. Barclays is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference. The views in this publication are those of the author(s) and are subject to change, and Barclays has no obligation to update its opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. 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