Investment Commitee June 2016

Executive Summary • Market action since the last Investment Strategy • Current Asset Class Valuations 

Economic cycle: fragile growth without inflation, Fed in waiting mode, ECB proactive



Asset Allocation: the asymmetric reaction expectations to the Brexit referendum suggest keeping the strategic equity underweight to be increased immediately in case of a Leave victory or to be quickly but temporarily reduced in case of a Remain victory.  US Equities: some low quality upside  EZ Equities: moderate upside with Brexit risk  EM Equities: not currently attractive



Bonds:

 Govies core: risk-reward not attractive  Govies EZ periphery: spread sensitive to Brexit vote  HY: short-term vulnerability, partially to be reduced  EM: risk-reward attractive, accumulate 

Commodities:

 Gold: valuations are rich, with limited upside depending on Brexit  Oil: a trading range is appearing 

Currencies:  In waiting mode on Brexit, both in the developed and emerging space

Investment Committee – June 2016

2

Recent market action in equities A mixed period in equity markets. Amongst the causes: the waiting mode approach of some central banks (Fed and BoJ), uncertainties on the economic cycle fueled by fiscal policy actions (e.g., VAT increases in Japan postponed), some weakness in macro data (US payrolls unexpected drop), political uncertainty (Brexit referendum and Eurogroup pending decision on the next round of financial help for Greece). Highlights include: • US outperforming EZ, reinforcing the year-to-date trend • Emerging outperforming Developed • Japan is the worst market due to Yen strength • Italy worst in EZ due to weakness of its banking sector • Italy and China worst markets ytd, followed by Japan • Brazil holding up and best market by a wide margin. Variaz. (%)

prezzo Indici Azionari S&P 500 Nasdaq C omposite Eurostoxx 50 Stoxx Europe 600 FTSE MIB C AC 40 DAX 30 IBEX 35 FTSE 100 Swiss Market NIKKEI 225 HANG SENG Shanghai C omposite India Sensex 30 Russian Micex Index Brazil Bovespa Varsavia Stock Exc. Msci Developed Msci Emerging Msci World High Dividend Msci Us Reit Fonte: Bloomberg

20 giu/16

18mag-20giu

Ytd 2016

2015

2099,1 4877,7 2941,6 337,0 17351,2 4342,5 9966,8 8639,4 6201,2 7909,7 15965,3 20510,2 2888,8 26866,9 1896,8 50593,0 45421,4 1635,8 806,2 1044,0 1185,7

+2,5 +2,9 -0,5 -0,2 -2,0 +0,5 +0,2 -1,5 +0,6 -0,8 -4,1 +3,4 +2,9 +4,5 -1,1 +0,1 -2,5 -0,3 +1,5 -0,0 +4,5

+2,7 -2,6 -10,0 -7,9 -19,0 -6,4 -7,2 -9,5 -0,7 -10,3 -16,1 -6,4 -18,4 +2,9 +7,7 +16,7 -2,3 -1,6 +1,5 +2,6 +7,7

-0,7 +5,7 +3,8 +6,8 +12,7 +8,5 +9,6 -7,2 -4,9 -1,8 +9,1 -7,2 +9,4 -5,0 +26,1 -13,3 -9,6 -2,7 -17,0 -6,1 -1,5

Investment Committee – June 2016

Stima PE rolling12m S&P 500 16,8 Nasdaq C omposite 19,5 Eurostoxx 50 12,8 Stoxx Europe 600 14,7 FTSE MIB 12,7 C AC 40 13,7 DAX 30 11,9 IBEX 35 13,5 FTSE 100 15,4 Swiss Market 16,1 NIKKEI 225 15,2 HANG SENG 10,7 Shanghai C omposite 12,5 India Sensex 30 15,6 Russian Micex Index 6,7 Brazil Bovespa 11,7 Varsavia Stock Exc. 11,8 Msci Developed 15,6 Msci Emerging 11,6 Msci World High Dividend14,9 Msci Us Reit 33,9

3

Stima dvd 2016 2,20% 1,27% 4,13% 3,74% 4,40% 3,85% 3,35% 4,54% 4,25% 3,67% 2,08% 3,86% 2,16% 1,66% 4,43% 3,45% 3,74% 2,74% 2,83% 3,99% 4,29%

Stima ROE 2016 +15% +22% +8% +7% +6% +8% +11% +7% +7% +12% +9% +12% +12% +14% +4% +8% +7% +10% +9% +11% +7%

Stima P/B 2016 2,7 3,4 1,3 1,6 0,9 1,3 1,5 1,2 1,7 2,3 1,4 1,0 1,4 0,0 0,7 1,3 1,1 2,0 1,4 2,2 2,2

Vol. 90gg 11,9 14,7 21,8 19,2 27,9 20,8 22,2 23,8 17,8 17,2 30,3 20,4 24,0 17,2 15,7 30,7 15,9 11,3 15,7 11,0 14,8

Stima eps 16/15 +0% +4% -6% -6% -1% -2% -3% -11% -6% -10% +6% -9% -8% +12% -5% +13% -9% -1% -0% +3% +20%

Recent market action in bonds Variaz. (bp)

tasso

A positive period for government bonds, especially core markets, with yield compression. Best performance by Treasuries, due to the Fed’s waiting mode and disappointing monthly payrolls, followed by Bund thanks to safe haven status and ECB purchases. Periphery yields lower as well after Greece’s help package is approved, but political uncertainty reduces the size of the movement. Breakeven rates falling again due to growth concerns.

HY and EZ spreads are falling as well, despite equivalent CDS rising, while the opposite happens in EM debt, with yields rising and CDS falling.

Investment Committee – June 2016

Tassi Benchmark 20 giu/16 Euribor 3 mesi -0,27% Treasury US 2-anni US$ 0,71% Bko 2-anni EUR -0,59% BTP 2-anni EUR 0,00% Bonos 2-anni EUR -0,02% Treasury US 10-anni US$ 1,67% Bund 10-anni EUR 0,06% BTP 10-anni EUR 1,43% Bonos 10-anni EUR 1,48% Spread 10-anni BTP-Bund 1,38% Spread 10-anni Bonos-Bund 1,42% EuroMTS Eurozone Gov Broad 3,40% Us Breakeven Inflation 5 Year 1,46% Italy Breakeven IT infl. 04/23/20 -0,08% Italy Breakeven Eur inflat. 5 Year 0,48%

18mag-20giu -1 -18 -8 +5 +5 -18 -11 -6 -12 +5 -1 -1 -8 -10 -14

2015 -21 +38 -25 -56 -39 +10 +9 -29 +16 -38 +7 -21 +7 -28 +39

Variaz. (bp)

basis point Corporate & Emergenti

Ytd 2016 -13 -33 -24 +3 -3 -60 -57 -16 -29 +41 +28 -9 +18 -22 -27

20 giu/16

18mag-20giu

Ytd 2016

Euro swap 5 anni

-5

-9

-38

-3

OAS Euro Investment Grade (avg)

65

-4

-16

+27

EUR C ORPORATE IG

60

-13

-54

+24

OAS Euro High Yield (avg)

421

-6

-66

+123

415

-15

-104

+120

Usd swap 5 anni

113

-18

-57

-5

OAS Usd Investment Grade (avg)

157

-2

-11

+50

USD C ORPORATE IG

271

-20

-68

+45

612

-9

-107

+187

725

-27

-165

+182 +22

EUR C ORPORATE HY

OAS Usd High Yield (avg)

USD C ORPORATE HY

2015

US average treasury yield

173

-24

-58

Embi Global vs All Treasury

429

+22

-17

+41

EMERGING DEBT

602

-2

-75

+63

Ytd 2016 +2 +6 +44 +11 +12 +26 -72 +1 +28 -9 -36

2015 +18 +13 +97 +26 +90 +39 +359 +77 +315 +88 +472

basis point CDS 5YR USA Germania Italia Francia Spagna Irlanda Emg Debt C orp Inv Grade Europe C orp High Yield Europe C orp Inv Grade US C orp High Yield US Fonte: Bloomberg

20 giu/16 20 18 141 37 102 65 287 78 343 80 436

4

Variaz. (bp) 18mag-20giu +0 +0 +16 -1 +8 +0 -12 +1 +14 -3 -17

swap spread bp 20 giu/16 -16 -40 +19 +17 +12 -43 +95 +100

Commodities, volatility and currencies prezzo

Recent trends:

• generalized rally in commodities, due also to a decline in extraction activity; copper in counter-trend due to high inventories • volatility rallying towards the end of the period save for US equities •US Dollar weakness (Fed and macro concerns), Yen strength (risk-off and carry trade unwinding). Euro broadly weak, against the Swiss Franc Franco but especially against the Brazilian Real and the Australian Dollar.

Investment Committee – June 2016

Commodity C RB Index Brent C rude Oil (US$/BBL) Gold (US$/oz) Grano C opper (US$/MT)

20 giu/16 193 50 1.280 492 4.552

Volatility Eurostoxx 50 Volatility Index SPX Volatility Index Treasury Volatility Index (MOVE) C urrency Volatility Index Fonte: Bloomberg

20 giu/16 33,89 16,88 82,58 12,00

Forex US DOLLAR INDEX JPM Asian Dollar Index JPM EM C urrency Usd USD/Yen Giapponese EUR/Dollaro Usa EUR/Yen Giapponese EUR/C hf Franco svizzero EUR/Sterlina inglese EUR/Dollaro Australiano EUR/Dollaro C anadese EUR/C orona Norvegese EUR/C orona Svedese EUR/C orona Danese EUR/Dollaro di Singapore EUR/Renminbi (yuan) C inese EUR/Rupia indiana EUR/Real Brasiliano EUR/Rublo russo EUR/Zloty polacco EUR/Peso Messicano EUR/Lira Turca Fonte: Bloomberg

20 giu/16 93,568 107,160 68,059 104,500 1,134 118,500 1,089 0,774 1,518 1,451 9,347 9,339 7,436 1,523 7,462 76,267 3,840 72,714 4,391 21,162 3,292

prezzo

prezzo

5

Variaz. (%) 18mag-20giu +4,3 +2,4 +1,7 +0,3 -1,3

Ytd 2016 +9,7 +34,4 +20,6 -0,2 -3,3

2015 -23,4 -35,0 -10,4 -18,0 -25,3

Variaz. (%) 18mag-20giu +45,5 +5,8 +18,2 +10,1

Ytd 2016 +52,8 -7,3 +21,7 +27,1

2015 -15,3 -5,2 -1,6 -0,7

Variaz. (%) 18mag-20giu -1,6 +0,7 +2,2 -5,2 +1,1 -4,1 -1,7 +0,7 -2,1 -0,8 +0,2 -0,3 -0,0 -1,8 +1,1 +0,9 -4,0 -2,1 -0,2 +2,3 -1,8

Ytd 2016 -5,1 +0,6 +3,6 -13,1 +4,4 -9,3 +0,0 +5,0 +1,8 -3,5 -2,7 +1,8 -0,4 -1,2 +5,2 +5,7 -10,7 -7,8 +3,1 +13,2 +3,8

2015 +9,3 -5,5 -15,8 +0,4 -10,2 -9,8 -9,5 -5,1 +0,8 +6,9 +6,6 -2,9 +0,2 -3,9 -6,0 -5,9 +33,7 +7,3 -0,6 +4,8 +12,2

USA: mixed signals from the real economy The FED has refrained from rising rates despite a recovery in consumption. It is clearly concerned by the international situation, by some recent weakness in domestic data (payrolls, capital accumulation, inflation) and by Brexit. Despite acknowledging that growth «appears to have accelerated» it has chosen to wait before acting. The Fed remains constructive on the incoming data, despite lowering its growth forecast. It has reiterated that rates normalization will be dependent on the data and the pursuit of its dual objective -- full employment and 2% inflation. 8.0 USA: Creazione di Posti di Lavoro non-agricoli (000)

500

6.0

400

5.0

300

4.0

200

3.0 2.0

100

1.0

0

0.0

-100

-1.0

-200

-2.0 mag.98 feb.99 nov.99 ago.00 mag.01 feb.02 nov.02 ago.03 mag.04 feb.05 nov.05 ago.06 mag.07 feb.08 nov.08 ago.09 mag.10 feb.11 nov.11 ago.12 mag.13 feb.14 nov.14 ago.15 mag.16

mag.16

set.15

gen.16

mag.15

set.14

gen.15

gen.14

mag.14

set.13

mag.13

set.12

gen.13

mag.12

set.11

gen.12

gen.11

mag.11

set.10

mag.10

-300

75

US: Inflation escl Food&Energy var. % a/a US: Inflazione totale % a/a (sx) Target Fed

7.0

600

US: ordini beni durevoli (ex-dif e Aerei) (mld)

8.0

US Consumi Pers. var. % a/a US: Fiducia Cons. Conf. Board media 3 mesi (dx)

130

Investment Committee – June 2016

6

apr.16

30 gen.16

-4.0 ott.15

45

lug.15

50

apr.15

-2.0

gen.15

50

ott.14

70

lug.14

0.0

apr.14

55

gen.14

90

ott.13

2.0

lug.13

60

apr.13

110

gen.13

4.0

ott.12

65

lug.12

6.0

apr-06 set-06 feb-07 lug-07 dic-07 mag-08 ott-08 mar-09 ago-09 gen-10 giu-10 nov-10 apr-11 set-11 feb-12 lug-12 dic-12 mag-13 ott-13 mar-14 ago-14 gen-15 giu-15 nov-15 apr-16

70

Eurozone: uncertaintes persist First quarter GDP is growing faster than expected and at the fastest pace in a year, driven by industrial production and investments, but especially by consumption (albeit a slowdown from Q4). The ECB is nonetheless expecting a slowdown in Q2, with low or negative inflation. Amongst the main drivers mentioned by President Draghi are a low prospects for Emerging Markets, the slow progress in structural reforms and the forthcoming Brexit referendum on June 23rd. UE: Produzione Ind. Indice

108

4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 -7.0

Eurozona PIL trim

Var. % t/t

UE: PIL Var. % a/a 106

104 102 100 98 96 apr.16

gen.16

ott.15

apr.15

lug.15

ott.14

apr.14

lug.14

ott.13

gen.14

mag.16

feb.16

lug.13

apr.13

ott.12

gen.13

apr.12

lug.12

ott.11

gen.12

apr.11

lug.11

gen.11

gen.15

ago.15

ago.11

7

nov.15

-0.6 mag.15

96

feb.15

-0.1 nov.14

97

ago.14

0.4

Eurozona: Totale Inflazione var. % a/a

mag.14

98

feb.14

0.9

nov.13

99

ago.13

1.4

mag.13

100

feb.13

1.9

nov.12

101

ago.12

2.4

mag.12

102

Eurozona: Inflazione Core var. % a/a

feb.12

2.9

apr.06 set.06 feb.07 lug.07 dic.07 mag.08 ott.08 mar.09 ago.09 gen.10 giu.10 nov.10 apr.11 set.11 feb.12 lug.12 dic.12 mag.13 ott.13 mar.14 ago.14 gen.15 giu.15 nov.15 apr.16

103

Investment Committee – June 2016

ott.10

lug.10

set.15

mar.15

set.14

mar.14

set.13

mar.13

set.12

mar.16

3.4

Eurozona: vendite al dettaglio (Index)

nov.11

104

mar.12

set.11

mar.11

set.10

mar.10

set.09

mar.09

set.08

94

RoW: UK (=), China (=), Japan (-), Russia (=) In the UK, the labor market is showing resilience in the run-up to the Brexit referendum. The statements from the BoE have reinforced the opinion that in case of Brexit future rate rises will be postponed for this year and next and that a rate cut cannot be excluded. In case of a «remain» victory, monetary policy should move in the opposite direction. In China the data suggests a stabilization in economic output which could continue in Q2, despite challenges to the overall scenario. The government is for the moment in a waiting mode whilst assessing the effects of past interventions. In Japan the economy is struggling due to Yen appreciation. The BoJ has postponed any decision to after the forthcoming elections in July and wants to assess the impact of the previous interventions. Despite the worst recession for twenty years Russia is expecting a further slowdown due to the sanctions, only partially softened by a recovery in oil prices. Only domestic demand has underpinned the economy. 9.0

UK: Tasso di disoccupazione media 3 mesi

8.5

19

8.0

17

7.5

15

7.0

13

6.5

11

6.0

9

5.5

7

5.0

Cina Produzione Industriale var. % a/a

5

4.5

15

Giappone: Produzione Ind var. a/a % (sx)

56

var. m/m %

Russia: PMI Manifatturiero

feb.16

mag.16

nov.15

ago.15

feb.15

Russia: PMI Servizi

mag.15

nov.14

ago.14

feb.14

mag.14

nov.13

ago.13

feb.13

mag.13

ago.12

nov.12

feb.12

mag.12

ago.11

nov.11

feb.11

mag.11

gen.07 mag.07 set.07 gen.08 mag.08 set.08 gen.09 mag.09 set.09 gen.10 mag.10 set.10 gen.11 mag.11 set.11 gen.12 mag.12 set.12 gen.13 mag.13 set.13 gen.14 mag.14 set.14 gen.15 mag.15 set.15 gen.16 mag.16

3

Russia: PMI Composto

54

10

52

5

50 48

0

46 44

-5

42 -10

40 38

apr.16

dic.15

feb.16

ott.15

giu.15

ago.15

apr.15

feb.15

ott.14

dic.14

ago.14

apr.14

giu.14

feb.14

ott.13

dic.13

ago.13

apr.13

giu.13

dic.12

feb.13

mag.16

feb.16

nov.15

ago.15

mag.15

feb.15

nov.14

ago.14

mag.14

feb.14

8

nov.13

Investment Committee – June 2016

ago.13

-15

Monetary policiy: Fed in waiting mode, ECB proactive The Fed has refrained from raising rates on 6/15 and has lowered its forecasts, signaling lower confidence in the strength of the economic cycle. The «dots» however remain at higher levels than market consensus (top left) thus portraying a Fed more willing to act than the market expects.

2.9

EUR Inflation Swap Forward 5Y5

ECB proactivity persists, and now includes the purchase of (non-financial) corporate bonds. Despite this inflation expectations remain at historical lows (bottom left) and have prompted the Bank to repeat its commitment to the 2% inflation target and to the use of further tools at its disposal.

2.7

Both central banks have expressed concerns about a possible Brexit vote and have reiterated their readiness to inject liquidity to maintain an orderly functioning of the financial markets.

2.5 2.3 2.1 1.9 1.7 1.5

Investment Committee – June 2016

feb.16

feb.15 giu.15 ott.15

feb.14 giu.14 ott.14

feb.13 giu.13 ott.13

feb.12 giu.12 ott.12

feb.11 giu.11 ott.11

feb.10 giu.10 ott.10

feb.09 giu.09 ott.09

feb.08 giu.08 ott.08

feb.07 giu.07 ott.07

giu.06 ott.06

1.3

9

Leave/Remain (1/5): a crucial juncture As this document has been prepared before the vote, we will analyze the impact of both outcomes. The result of the referendum is still extremely uncertain and will undoubtedly affect market actions. In case of a «Remain» vote with a reasonable majority, a relief rally in risky assets is to be expected; following that however, it is difficult to envisage further inner strength in the market.

In case of a «Leave» vote a short term shock on growth is to be expected, accompanied by higher «risk premiums» and a fall in risky asset despite intervention by the authorities. Negative impacts should affect the UK, the Eurozone and the US with decreasing force. Indeed looking at the UK export breakdown we find: • 45% of UK exports go to the EZ; • 10% of EZ exports go to the UK; • 4% of US exports go to the UK. In addition to the economic linkages, correlations suggest a similar pecking order in the financial fallout. 5%

0%

-5%

-10% S&P 500 INDEX YoY in eur Euro Stoxx 50 Pr YoY in eur FTSE 100 INDEX YoY in eur

-15%

Investment Committee – June 2016

10

17.06.16

10.06.16

03.06.16

27.05.16

20.05.16

13.05.16

06.05.16

29.04.16

22.04.16

15.04.16

08.04.16

01.04.16

25.03.16

18.03.16

11.03.16

04.03.16

26.02.16

19.02.16

12.02.16

05.02.16

29.01.16

22.01.16

15.01.16

08.01.16

01.01.16

-20%

Leave/Remain (2/5): a crucial juncture - equities

2.0 var%mkt da 01/01 a 20/06/16

var%exp eps'16 da 01/01 a 20/06/16

The stock markets dynamic YTD has markedly reflected the evolution of earnings’ expectations, rather than the concerns relative to the risk of Brexit.

0.0

The US index has outpaced the eps growth because of his safe haven status. Also the UK index has surprisingly outpaced the eps fall. In the opposite, the EZ index followed the eps decline based on its different pending problems.

-2.0

-4.0

-6.0

-8.0

-10.0

-12.0 MSCI ACWI

S&P 500 INDEX

Investment Committee – June 2016

Euro Stoxx 50 Pr

FTSE 100 INDEX

11

Therefore: • in case of a Leave victory equities can fall even further. • in case of a Remain outcome equities may have little room for a relief rally.

Leave/Remain (3/5): a crucial juncture – government bonds

0.4 var bp tassi10y da 01/01 a 20/06/16

var bp bei da 01/01 a 20/06/16

0.2

0.0

The govies behavior YTD didn’t reflect the Brexit-related concerns, but has been mainly led by inflation expectations, apart from a research for safety towards the US, therefore: • in case of Brexit, divergent trends may appear between different geographical areas, with UK (because of double deficit) and Eurozone periphery underperforming compared to the core (US and Bund). • in case of Remain, the US (and the Bund) may underperform because of waning safety motives.

-0.2

-0.4

-0.6

-0.8 US

Investment Committee – June 2016

EZ swap

GB

12

Leave/Remain 4/5: a crucial juncture – foreign exchanges

20.0 var %fx da 01/01 a 20/06/16

var bp differenziali cds da 01/01 a 20/06/16

The forex market reflected the fears deriving from Brexit referendum more intensely than other markets, though to a different extent from currency to currency. The sterling and the yen have partially followed the CDS differentials’ trend, while the Swiss franc has almost ignored it because of the potential action of the SNB.

15.0

10.0

5.0

0.0

-5.0

-10.0

In case of Brexit, the sterling may sharpen its weakness mainly against the USD and the yen and, to a lesser extent, against the CHF as well.

-15.0

-20.0 gbp vs usd

eur vs usd

Investment Committee – June 2016

eur vs gbp

eur vs yen

eur vs chf

13

In case of Remain, the sterling may recover part of the recent losses especially against the yen.

Leave/Remain (5/5): a crucial juncture - reactions The sterling depreciation of 9% since November 2015 (the time of Mr. Cameron letter to Mr. Tusk), according to the BoE May Inflation Report, was thought to be partially due to Brexit fears. The BoE didn’t otherwise detect significant impacts neither on the stock exchange nor on Gilts. At that time, polls revealed on average a 40% probability of Brexit, thus indicating that the BoE was estimating for the possible Brexit an impact of roughly 11%, at least in the short period. According to a research of the UK Treasury, notoriously Eurosceptical, Brexit may reduce the country GDP by -3,6% in two years, it may create 520.000 unemployed and precipitate a 12% GBP depreciation. Those hypotheses, taken to the extreme scenarios, may lead to a GDP contraction by 6%, 820.000 more unemployed and a GBP depreciation by 15%. Leave: the indications above provide some parameters to identify the enduring impacts on the asset classes, the already hit sterling excepted (see previous slides). They may suffer significantly in case of Brexit (somewhat -11%), independently from temporarily excesses or reassuring authorities’ interventions. Remain: the indications above provide also some reference points to identify the amount of the recent decrease in sterling that may be recovered in case of Bremain (around +5%), whilst the other asset classes may derive benefits only from the higher level of optimism, which is however difficult to be quantified and exploited because of its unstable nature. The asymmetric reactions to the opposite results of the referendum may suggest keeping the strategic underweight in equity as well as promptly reacting to both the outcomes, with further sales in case of Brexit, to be reversed only after clear market excesses, and with temporary purchases in case of a remain outcome.

To conclude, whatever assumption is purely hypothetical since the detailed impacts of Brexit are difficult to be foreseen.

Investment Committee – June 2016

14

Momentum: technical attraction but Referendum as game changer Citi overbought/sold EU index (sn) soglia segnale vendita - 3gg su 4 (sn) soglia segnale acquisto - 3gg su 4 (sn) STXE 600 € Pr (ds)

200 150

420 400

100 380

50 0

360

-50

The growing concerns due to the increasing number of supporters of Brexit, revealed in polls, have created tensions in the equity markets, mainly in the European ones.

340

-100 320

-150

1

mag.16

apr.16

mar.16

feb.16

gen.16

dic.15

nov.15

ott.15

set.15

ago.15

lug.15

300 giu.15

-200

450

Citi Macro Risk Index (sn)

440

MSCI ACWI last_price (ds) 0.9

430 420

0.8

410 0.7

400 390

0.6

380 370

0.5

360 mag.16

apr.16

mar.16

feb.16

gen.16

dic.15

nov.15

ott.15

set.15

ago.15

lug.15

350 giu.15

0.4

Investment Committee – June 2016

The technical Citigroup model (top right) has given Thursday 16/6 a rare purchase signal. Also other technical indicators are reaching extreme levels in several geographical areas. Many equity markets have reached the oversold level based on the 14-days RSI and the lower bands of the Bollinger curves, as highlighted also by the hike of the Citi Global Risk Aversion indicator (bottom right graph).

15

In normal conditions, that may suggest a rebound in the weeks following the referendum, but in this case the result of the vote may modify the conditions and, in case of Brexit in particular, the significance of the models may vanish.

US Equities: potential upside but of low quality data

20-giu-16

Analisi regressione 2 anni azioni-bond e loro vol. a 90gg

S&P 500 INDEX regressione 2095 di 2 anni P/E

17,81

target

delta

2283

9%

volatility_90d

eps

2015

117,57

crescita attesa 2016

0%

eps

2016

Expected eps 2016

117,65

step

10%

85,77

95,30

105,89

117,65

129,42

142,36

156,59

8,62

-13%

-4%

7%

19%

31%

44%

58%

9,58

-16%

-6%

4%

16%

27%

40%

54%

10,65

-18%

-9%

1%

12%

24%

36%

50%

S&P 500 INDEX regressione 11,83 di 2-21% anni

-12%

-2%

9%

20%

32%

45%

media 14,22

13,01

-23%

-14%

-5%

6%

16%

28%

41%

last 11,83

14,31

-25%

-17%

-8%

2%

13%

24%

36%

15,75

-28%

-20%

-11%

-1%

9%

20%

32%

data

20-giu-16

Analisi regressione 2 anni azioni-bond e loro vol. a 90gg

S&P 500 INDEX regressione 2095 di 2 anni P/E

17,81

target

delta

2283

9%

eps 31/12/2015

117,57

crescita attesa 2016

0%

eps

2016

Expected eps 2016

step

117,65 10%

85,77

95,30

105,89

117,65

129,42

142,36

156,59

1,22

-15,8%

-6,4%

4,0%

15,5%

27,1%

39,8%

53,7%

1,36

-17,3%

-8,1%

2,1%

13,5%

24,8%

37,3%

51,0%

1,51

-18,9%

-9,9%

0,1%

11,3%

22,4%

34,6%

48,1%

US Generic Govt 101,6748 Year Yield -20,6%

-11,8%

-2,0%

8,9%

19,8%

31,8%

45,0%

media 2,13

1,84

-22,2%

-13,6%

-4,0%

6,7%

17,4%

29,1%

42,0%

last 1,67

2,03

-23,9%

-15,5%

-6,1%

4,4%

14,8%

26,3%

38,9%

2,23

-25,7%

-17,5%

-8,3%

1,9%

12,1%

23,3%

35,6%

Investment Committee – June 2016

16

Regardless of the impacts of a possible Brexit, the US equities show some upside, which however is considered of low quality because it depends on: - a collapse in the 0-days volatility of equites (top right) - a concomitant further fall in government bond yields (bottom right). Both elements may have a non persistent nature. They would in addition react in opposite ways following the referendum result. Their combined impacts can be read by moving downwards from the white cells in the middle of both tables.

Eurozone Equities: moderate upside with Brexit risk Eurozone equities highlight a moderate upside. data

20-giu-16

Analisi regressione 2 anni azioni-bond e loro vol. a 90gg

Euro Stoxx 50 Pr regressione 2943 di 2 anni P/E

13,62

target

delta

3153

7%

eps

2015

229,98

crescita attesa 2016

-6%

eps

2016

Expected eps 2016

216,00

step

10%

157,46

174,96

194,40

216,00

237,60

261,36

287,50

15,87

-12%

-2%

9%

21%

33%

46%

61%

17,63

-15%

-6%

5%

16%

28%

41%

55%

19,59

-19%

-9%

1%

12%

23%

35%

49%

Euro Stoxx 50 Pr regressione 21,77 di-22% 2 anni

-13%

-4%

18%

30%

43%

media 21,68

23,95

-25%

-17%

13%

25%

37%

last 21,77

26,34

-28%

-20%

7% Area -7% 3% Brexit

-11%

-1%

8%

19%

31%

28,98

-31%

-24%

-15%

-6%

4%

14%

26%

volatility_90d

data

20-giu-16

Analisi regressione 2 anni azioni-bond e loro vol. a 90gg

Euro Stoxx 50 Pr regressione 2943 di 2 anni P/E

13,62

target

delta

3153

7%

eps 31/12/2015

229,98

crescita attesa 2016

-6%

eps

2016

Expected eps 2016

step

216,00 10%

157,46

174,96

194,40

216,00

237,60

261,36

287,50

0,35

-21,6%

-12,9%

-3,3%

7,5%

18,2%

30,1%

43,1%

0,39

-21,7%

-13,0%

-3,3%

7,4%

18,1%

29,9%

42,9%

0,44

-21,8%

-13,1%

-3,4%

7,3%

18,0%

29,8%

42,8%

EUR SWAP ANNUAL 0,4860 10 YR -21,9%

-13,2%

-3,6%

7,2%

17,9%

29,7%

42,6%

media 0,89

0,53

-22,0%

-13,3%

-3,7%

7,0%

17,7%

29,5%

42,5%

last 0,49

0,59

-22,1%

-13,4%

-3,8%

6,9%

17,6%

29,3%

42,3%

0,65

-22,2%

-13,5%

-3,9%

6,7%

17,4%

29,1%

42,1%

Investment Committee – June 2016

17

The result of the UK referendum will contribute to deeply modify the input variables of the valuation model. In case of Brexit, the target should be looked for in the first table in the cells to the bottom left of the central white one (reflecting higher volatility and lower earnings) and, in the second table, in the cells to the top links of the central white one (reflecting both lower 10-year yields and earnings). In case of Remain, the highlighted upside may be rather protected from the possible rates’ increase (in the second table the cells below the central white one) and it may benefit from a likely reduction in the volatility levels (in the first table the cells above the central white one). In any case, earnings’ growth will remain a crucial point. At the moment, prospects aren’t comforting.

Emerging Markets equities: not currently attractive The emerging equity markets are relatively expensive on the whole compared to the developed ones (top right), even if some, as the Russian equity market, are attractive or show a better outlook (BOR: inflation from 7.3% expected to decrease to 4% in one year with room for lowering the reference rate now at 10,5%, GDP YoY -0.70.3% in 2016 then rebound from 2017, with oil prices prudently set at $40). The Indian equity market, on the other hand, has to deal with Mr. Rajan succession. Moreover, the recent decease in prices in the emerging equity markets only partially reflects both the increase in volatility levels (bottom left) and the decline of the Economic Surprise Index (bottom right). In case of Brexit, EM equities would suffer from the general risk-off and in case of Remain would derive relief less than the areas more directly involved. For the mentioned reasons, emerging equities are not currently attractive.

MSCI EM/MSCI ACWI - Ratio P/E media 2 anni Ratio P/E +2 STD -2 STD

80% 79% 78% 77% 76% 75% 74% 73% 72% 71%

1000

17-giu-16

17-apr-16

17-feb-16

17-dic-15

17-ott-15

17-ago-15

17-giu-15

17-apr-15

17-feb-15

17-dic-14

17-ott-14

17-ago-14

17-giu-14

70%

MSCI EM last_price (sn) CBOE EM ETF Volatility last_price (ds)

56 51

950

20

1'000

Citi Economic Surprise Index - Emg (sn) MSCI EM (ds)

15

950

10 46 900

5

900

41 0

21

-20

16

-25

750

Investment Committee – June 2016

18

mag.16

apr.16

mar.16

feb.16

gen.16

dic.15

nov.15

700 giu.15

giu.15 lug.15 lug.15 lug.15 ago.15 ago.15 set.15 set.15 ott.15 ott.15 nov.15 nov.15 dic.15 dic.15 dic.15 gen.16 gen.16 feb.16 feb.16 mar.16 mar.16 apr.16 apr.16 mag.16 mag.16 giu.16 giu.16

700

-15

800

ott.15

750

-10

26

set.15

31

800

850 -5

ago.15

36

lug.15

850

Core Govies: unattractive risk/opportunity profile 6

tasso 10 anni teorico (base confidence), aggiornato al 31-03-16 (2,89)

5.5

US Generic Govt 10 Year Yield aggiornato al 20-06-16 (1,67) tasso 10 anni teorico (base swap), aggiornato al 31-03-16 (2,07)

5 4.5 4 3.5 3 2.5

2

set.04 gen.05 mag.05 set.05 gen.06 mag.06 set.06 gen.07 mag.07 set.07 gen.08 mag.08 set.08 gen.09 mag.09 set.09 gen.10 mag.10 set.10 gen.11 mag.11 set.11 gen.12 mag.12 set.12 gen.13 mag.13 set.13 gen.14 mag.14 set.14 gen.15 mag.15 set.15 gen.16 mag.16

1.5

The 10 year Treasury price was supported by the Fed hesitations and by the UK referendum worries. Its yield currently lies well below its theoretical level as calculated by the Laubach and Williams model (top left). Only a Brexit decision or an unexpected marked slowdown in the US could justify such a depressed yield. Treasuries are therefore unattractive. In the Eurozone, core govies yields have also been compressed by the Brexit uncertainties, whose impact was compounded by the ECB purchases. Yields fell to zero following:: - scarcity (bottom left) - safe haven investments as hedge against possible dislocations within the EU - banks’ short term investments as alternative to the more expensive ECB cash balances. Nevertheless, zero yields give core govies an asymmetric and unattractive risk profile.

Fonte: Jefferies

Investment Committee – June 2016

19

Euro peripheral govies: spreads to move according to the UK referendum 170

spread rendimento 10 anni Bonos-BUND bp

spread rendimento 10 anni BTP-BUND bp

160

The Brexit debate generated a spread widening of the Eurozone peripheral government bonds.

150 140

Spain and Italy were also hit by electionrelated strains, namely the administrative election in Italy and the coming general election in Spain (top left).

130 120 110 100

The current level of the Btp-Bund spread exceeds the credit premium differential, but it don’t factor a possible dislocation of the Eurozone / European Union (bottom left).

mag.16

apr.16

mar.16

feb.16

gen.16

dic.15

nov.15

ott.15

set.15

ago.15

lug.15

giu.15

90

A «remain» outcome coupled with easing political tensions in the peripheral countries would create room for a spread contraction.

Premio di credito IT vs GER spread Btp-bund diff.credito+teorica svalutazione

210 190 170

In case of Brexit, peripheral spreads would suffer from a further widening.

150 130 110 90 70

Investment Committee – June 2016

giu.16

mag.16

apr.16

mar.16

feb.16

gen.16

dic.15

ott.15

nov.15

set.15

ago.15

lug.15

giu.15

mag.15

apr.15

feb.15

mar.15

dic.14

gen.15

ott.14

nov.14

set.14

lug.14

ago.14

50

20

HY: take some profits 650

The Option Adjusted Spread (OAS) of the Euro high yield sector doesn’t adequately reflect the corresponding CDS rise, one reason being the limited liquidity of the cash market (top left). High yields issues didn’t in addition follow the recent decline recorded by the equity markets. As a result, the Earning Yield to OAS widened markedly (bottom right). The OAS finally didn’t react to the equity volatility peaks (bottom left).

Cds generico HY EUR

600

EUR HY All Sectors OAS 550 500 450 400 350 300 250 giu.15 lug.15 lug.15 lug.15 ago.15 ago.15 set.15 set.15 ott.15 ott.15 nov.15 nov.15 dic.15 dic.15 dic.15 gen.16 gen.16 feb.16 feb.16 mar.16 mar.16 apr.16 apr.16 mag.16 mag.16 giu.16 giu.16

200

VSTOXX Index (sn) EUR HY All Sectors OAS (ds)

45

Notwithstanding the outcome of the UK referendum and the more so in case of Brexit, the exposure in high yield issues should adequately be reduced.

650

40

600

35

550

30

500

25

450

20

400

bp earning yield Euro Stoxx 50 Pr (sn) 825

EUR HY All Sectors OAS bp (ds)

650 600 550

775

500 725

450 400

675

Investment Committee – June 2016

350 625

300 giu.15 lug.15 lug.15 lug.15 ago.15 ago.15 set.15 set.15 ott.15 ott.15 nov.15 nov.15 dic.15 dic.15 dic.15 gen.16 gen.16 feb.16 feb.16 mar.16 mar.16 apr.16 apr.16 mag.16 mag.16 giu.16 giu.16

giu.16

mag.16

apr.16

mar.16

feb.16

gen.16

dic.15

nov.15

ott.15

set.15

300 ago.15

10

lug.15

350

giu.15

15

21

Emerging debt: attractive return to risk profile J.P. Morgan EMBI Global Spread / VOLATILITY_90D media 5 anni -2 dev std +2 dev std

24 22

The emerging debt remains an attractive asset class, from the carry, spread and issuers’ credit risk point of views. However, the macro conditions still are challenging in part of the emerging economies.

20 18 16

The spread per risk unit lies at high levels (top left), as the spread to Treasury yields (bottom left). Emerging debt spreads have in addition already factored the recent rise of the equities’ volatility, more than the high yield sector (see previous page).

14 12 10 8

3.5

giu.16

mar.16

dic.15

set.15

giu.15

mar.15

dic.14

set.14

giu.14

mar.14

dic.13

set.13

giu.13

mar.13

dic.12

set.12

giu.12

mar.12

dic.11

set.11

giu.11

6

In case of Brexit, the emerging debt would certainly suffer from a general risk off adjustment, but less than the other riskier assets. A «remain» outcome would in the opposite reduce the risk perception and support the emerging issues.

J.P. Morgan EMBI Global Spread / US Generic Govt 10 Year Yield media 5 anni -2 dev std +2 dev std

3

2.5

2

1.5

1

Investment Committee – June 2016

giu.16

mar.16

set.15

dic.15

giu.15

mar.15

dic.14

set.14

giu.14

mar.14

dic.13

set.13

giu.13

mar.13

dic.12

set.12

giu.12

mar.12

dic.11

set.11

giu.11

0.5

22

Gold: on the higher end of the trading range, limited upside The Gold investment case remains unconvincing. As safe haven instrument, Gold is unlikely to find support in recession or large shocks on the financial system in the foreseeable future, both in Europe and in the US. As diversification instrument of the US Dollar cash balances, Gold will hardly benefit from another decline of the US real rates (bottom left). The US economy is in full employment and already entered the second stage of the economic cycle, leading at the end to more inflation and the normalization of the monetary policy. Finally, the US Dollar has no reason to suffer from a marked depreciation as long as the ECB carries out its ultra-expansionary policy, whose end is still totally out of the investors’ radar. The Gold rise YTD is therefore unlikely to mark a trend reversal. Risks tilt rather on the downside. In case of Brexit, the mentioned rationale would not be structurally upset, but the Gold price would benefit from a temporarily further appreciation fueled by its safe haven status (bottom right).

-0.6%

GOLD SPOT $/OZ (sn) Us: tasso reale 5y (ds, invertito)

1290 1265

-0.4%

1240 -0.2%

1215

1340

100

GOLD SPOT $/OZ (sn) Japanese Yen Spot (ds invertito)

1290

105

1240

110

1190

23

giu.16

apr.16 mag.16

feb.16 mar.16

gen.16

nov.15 dic.15

set.15 ott.15

ago.15

giu.15 lug.15

giu.16

mag.16

apr.16

mar.16

feb.16

gen.16

dic.15

nov.15

ott.15

set.15

ago.15

giu.15

lug.15

Investment Committee – June 2016

125 1040 apr.15 mag.15

0.6%

1040

1090

feb.15 mar.15

1065

120

gen.15

0.4%

1140

nov.14 dic.14

1090

115

set.14 ott.14

0.2%

1115

1190

ago.14

1140

giu.14 lug.14

0.0%

1165

Crude Oil: shaping a «trading range» Based on both the IEA (International Energy Agency) and EIA (US-Energy Information Administration) forecasts, the supplydemand equilibrium will be reached during H2 2017, given a further decline of the shale extraction in the US, a rising Iranian production and assuming that growth in China corroborate the current expectations. The crude oil upside is limited in both the short and medium run because:(1) the already high inventories are expected to rise even more into 2017 (bottom right), (2) an agreement between the OPEC members remains quite unlikely, (3) the expected rise of the US Dollar real rates represents an incitation for increasing production, (4) the US shale production is particularly elastic to the oil price. The June EIA monthly report notices the positive impact on the crude oil price of the recent outages occurred in Canada, Nigeria, Iraq and Libya. The EIA also considers the forecasts implied in the futures market as particularly uncertain. (bottom left). We maintain a sideways outlook on the oil price (WTI). The 45-52 $ range can be used as reference for building short term trades.

Investment Committee – June 2016

24

Forex: Should I stay? Our long term valuation metric highlights a general US Dollar overvaluation, as well as a marked Euro undervaluation (bottom left table), suggesting a limited downside as far the Euro/Dollar is concerned (bottom left). Assuming a «remain» outcome of the British referendum, the macro environment would not contemplate radical monetary policy changes, in the US as in the Eurozone, recessions or systemic crisis. The corresponding yield curves doesn’t factor significant moves in the short term (bottom left). Barring an unlikely inflation acceleration in the US leading to a quicker than thought Fed normalization, the Forex market is likely to lack of catalysts for dramatic moves. The Euro/Dollar should therefore fluctuate again within the usual 1.051.16 range. Hit by the coming Brexit referendum, the British Pound should recover about half of the ground lost from November in case of «remain». Both the Franc and the Yen would then fall towards their beginning of June levels (see next page).

Valutazione di lungo periodo delle principali valute in termini reali / usd usd

/ eur 1.7

/ chf

/ gbp

/ jpy

/ aud

/ nzd

/ cad

/ nok

/sek

0.4

1.3

1.0

1.6

0.7

2.0

2.8

1.3

-1.6

-0.3

-0.4

-0.5

-1.1

0.1

0.6

-0.6

0.7

1.0

1.5

0.7

2.1

3.0

1.5

0.1

0.6

-0.1

1.0

1.4

0.4

0.3

-0.1

0.6

0.8

0.2

eur

-1.0

chf

-0.4

2.2

gbp

-1.2

0.8

-0.7

jpy

-0.6

0.5

-0.7

0.0

1.3

Tasso di cambio reale EUR / USD

1.2 1.1

Distanza al trend di lungo periodo (PPP stimata) in scarti quadratici medi

1

0

Differenziale atteso di tasso Swap 3 anni su USD

0.9 0.8

-0.5 EUR

GBP

JPY

CHF

-1

0.7

-1.5

0.6

-2 17.06.16

16.09.16

Investment Committee – June 2016

16.12.16

17.03.17

16.06.17

0.5 01.09.75

25

REER Eur/Usd - Sqm PPP stimata + Sqm 01.09.85

01.09.95

01.09.05

01.09.15

Forex: …or should I go? After having ascribed to the Brexit referendum about half of the Pound decline from November (May Inflation Report), the June 15 BOE Minutes gave an increasing probability of a further fall in case of a «leave» outcome, as the fundamentals of the UK economy would materially be impacted the Brexit. The Continent would also be hit: uncertainty, division within the European Union, impossibility to replicate the City on the Continent, small reduction of the already low growth potential. The Euro would therefore also pushed down, though less than the Pound. Far away from the problem and safe haven currency, the US Dollar would appreciate. The Japanese Yen would also rise as carry trades would be unwound in the resulting risk off environment. The hardly avoidable Swiss Franc appreciation would be actively fight by the SNB (June 16 Conference). The emerging currencies would suffer given the general US Dollar strength. A significant Euro / Dollar decline would be consistent with a reduction of the Dollar exposure (bottom right). British Pound purchases on a trading basis would require a significant further fall of the British currency (bottom left).

Tasso di cambio EUR / GBP

1

1.7

Tasso di cambio EUR / USD

1.6

0.95 Euro / Sterlina

0.9

1.5

- Sqm 0.85

1.4

PPP stimata 1.3

+ Sqm

0.8

1.2 0.75 1.1 0.7

1 0.65

0.9

Euro / Dollaro

0.6

0.8

- Sqm

0.55

0.7

PPP stimata

0.5 01.10.75

01.10.85

Investment Committee – June 2016

01.10.95

01.10.05

01.10.15

0.6 01.10.75

26

+ Sqm 01.10.85

01.10.95

01.10.05

01.10.15

Asset Management & Products

Disclaimer

The information and opinions contained in this report have been obtained from public sources believed to reliable. No representation or warranty is made or implied that is accurate or complete. Any opinions expressed in this report are subject to change without notice. This report has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.

Sources

PKB / Cassa Lombarda calculations on Bloomberg data, unless otherwise specified.

Investment Committee – June 2016

27