TACTICAL ASSET ALLOCATION MONTHLY May 2016

In this number: REFLECTIONS OUR ALLOCATION NORDICS -Sweden -Norway -Finland -Denmark -Nordic fixed income EUROPE US JAPAN EMERGING MARKETS -Asia -Eastern Europe -Latin America ASSET CLASSES -Equities -Global fixed income -Alternatives --Hedge funds --Real estate --Commodities --Currency TABLES IMPORTANT INFORMATION

2 3 3 4 4 5 5 6 8 9 10 10 11 11 12 13 13 14 17 17 17 17 18 19 21

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This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

REFLECTIONS After a good run in equities as well as in bonds we are approaching the calmer season in the equity markets. If history is any guide we will see more of a sideway market. Since 1950 Dow Jones-index have averaged a meger 0,5 percent return between May-October, whereas November-April on average have returned 7,5 percent. Every year is of course different with its own set of settings, and we above emphesize average just to mark our belief that matters most probably will look different than one expects. Cyclewise we continue to argue for the world economy to be in a strengthening phase and are more mid cycle than late cycle, but in a phase that also is best described as muddling through. IMF just recently lowered estimates for global growth and as it looks now we should be fortunate to see a marginal improvement for 2016 driven by emerging markets. Developed markets are supposedly at a stand still when it comes to growth. US, Japan and Europe is experience no additional growth than was achived in 2015. The asset class performance since this years start have caught most investors by surprise with a low quality run. Themes comes and goes and one of the most prevailing have been - low rates for ever – combined with a strenghtening dollar which gave an easy conclusion – overweight developed markets against emerging markets. Then something happened. First markets became doubtful that monetary policy really was effective creating growth. Then growth dissapointed in the US at the same time we experianced turbulence in global financial markets, which made the FED delay their hikes, resulting in a weakening dollar. As a consequence to that emerging markets went ballistic paired with the hope that the bear market in commodities was coming to an end.

This rather quick rotation made investors adese, which is well pictured in Bank of America Merrill Lynch monthly Fund Manager Survey. There one can see that conviction is at an extreme low, that investors are hording to the middle applying one of the most important trading-rules – when in doubt – stay out. The million dollar question is if FED succeds in appreciating the dollar (by rasing rates) to any larger extent, given the hurdles so far in barely being able to talk about normalizing rates without spiking volatility. Interest rate differentials will in due time, most probably, play out in favour for the dollar. We expect the FED to be moving slowly but also try out the market occationally and seek “permission” to hike as soon as possible. The possibility of 2 hikes this year might not spur the dollar, but will eventually work as a gravitational force on the upside. Although the dollar is oversold it does not seem to stand for any immediate bull run, since FEDs lates communication was not as hawkish as expected, although moving in that direction. By not stepping up their rethoric more this will weight further on the dollar. This will benefit emerging markets as it will support commodities as well as highly debted countries. We hence make a tactical change and overweight emerging markets. To finance that we underweight Japan. We do this because we don´t believe that BoJ and the government will act forcefully enough against current negative trends. BoJ wants more time to evaluate the effects of negative rates, and will therefor not overshoot in QE-measures any time soon. Markets did speculate that more aid was going to be initiated as Japan anew has been struk by an earthquake, this time in Kumamoto (important industrial region). As we are not as positive on fixed income prospectus shortly and a bit wary on equity performance we downgrade fixed income to

2

This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

underweight. Although we see good value in alternatives we are a bit cautious on the short term potential there (commodities, REITS and hedgefunds). We are not to keen to raise equities to an overweight just now, hence resulting in an overweight in cash.

In Norway hopes are that the recent rebound in oil prices will mark the beginning of a better outlook for the Norwegian economy. Despite the deceleration in the Norwegian economy last year the economy has managed to handle the collapse of oil prices relatively well through a weakening krone and a more stimulative economic policy.

Allocation – May 2016 Nordic GDP, 7y

NORDICS – not too bad The Nordic economies have had a tepid development lately; Sweden though sticks out as the economy which is booming. An explosive mix of strong public and private finances and extremely expansionary monetary policy has fueled GDP-growth. The economic temperature is however considerably lower in the rest of the Nordics, where the Norwegian economy is suffering from the fall in oil prices and Denmark’s recovery is stalling. This does not mean that there is no investment opportunity in the region, on the contrary.

Source: Macrobond, Alfred Berg. Nordic inflation, -16y

The earlier underdog Finland is finally beginning to improve, even though it’s from low levels. Growth is picking up very gradual, also manufacturing sentiment is improving. Nordic consumers looking at the furure differently

Source: Macrobond.

Sweden – At full speed

Source: Macrobond, Alfred Berg.

The Danish economy was decelerating during the latter part of last year mainly due to weak exports, which reflected subdued global demand. Thanks to a firm private consumption growth that was still moderate last year.

The buoyant Swedish economy is supported by solid domestic demand and a surprising surge in exports. The uptick in domestic demand was buoyed by strong investment, particularly in the vibrant housing market. Many investors asks us if we are experiencing a real estate bubble in Sweden, and our take is that there is no bubble, but that politics needs to address current trends. There has been introduced an amortization clause, but that only applies to new

3 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

loans. There is a discussion on a roof of how much loan can be taken depending on income and also a discussion to reduce or remove the subsidized interest rate deductions. We believe that the politicians are addressing the issues in a pace that is politically possible. The Riksbank’s aggressive attempt to lift inflation has deliberately weakened the krona which in turn has led to a significant contribution to GDP-growth from net exports. The weakness in the krona has more than offset the negative impulse from weak global demand. Last fall Sweden had a migrant crisis in the respect that a considerably larger amount of migrants than foreseen came to Sweden. The inflow of migrants is now back to “normal” but the effect from last fall’s spike will have a lingering structural effect on Swedish economy for many years. In the shorter term it means more expansionary fiscal policy than otherwise, something we deem supportive for risky assets. The outlook for Swedish economy is favorable as growth is broad based, the krona undervalued and economic policy expansionary and likely to remain so for a longer period of time, not the least after the latest Riksbank-maneuver with extended and deepened QE. The biggest challenges for the Swedish economy is to lower the structural unemployment rate and hold the buoyant housing and credit market in check. The rise in bottlenecks in the labor market is worrisome and indicates that the economy is about to pass its peak. Swedish bottlenecks

Norway – Fine tuning The large dependence of oil prices and the extreme fluctuations of oil prices have made it very hard to forecast the outlook for the Norwegian economy. It’s hard to judge how substantial the lingering effects from last year’s collapse in oil prices have on the Norwegian economy. It’s also hard to determine the direction of oil prices going forward. We believe that oil prices have bottomed out and will fluctuate around $40-50/barrel for the coming year. We believe this will help the Norwegian economy to recover. What is worrisome is that inflation has not fallen, especially not core inflation, despite the weakness in activity and oil price deflation. We are though positive and think that inflation will decline despite an expected uptick in activity. We judge that delayed effects from previous periods with more upbeat activity and weakness in the currency is behind the relatively high inflation rate, something that we expect will normalize going forward. The effects from the oil price chock have increased the amount of slack in the economy. Exports recorded a double-digit yearly contraction in the first two months of the year and unemployment climbed to 4.8 percent in January, maintaining the upward trend that has persisted since May 2014. However, this rise in unemployment may not be as dire as it appears. The deterioration in employment is primarily the result of an increase in the working-age population. This suggests that the worst of the job losses related to the decline in energy investment may be in the past.

Source: Macrobond.

4 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

Core inflation in Norway & Sweden

Source: Macrobond

Finland – Struggling, but there is hope The recent improvement in Finnish economy is the first improvement for a very long time. It implies that the economy returned to mild growth in 2015, following three years of contraction during which economic activity suffered from deteriorations in key industries as well as economic struggles in Russia. Last year’s modest recovery was mainly driven by private consumption and exports, while fixed investment remained sluggish. Last month the government and trade unions reached a preliminary deal which aims to cut Finland’s high labor costs by taking measures such as increasing working hours and freezing wages. The agreement is a step in the right direction as it restores the competitiveness which has suffered from the depreciation by its largest competitors such as Sweden and Norway. The outlook for the Finnish economy is for once more positive than it has been for a long time.

Better times ahead

Source: Macrobond

Denmark – Domestic market the driver The Danish economy decelerated last year and especially during the second half. The weakness in net exports pulled down growth but thanks to firm private consumption growth during 2015 was relatively moderate, in line with its closest continental European peers. We expect growth to continue at the same pace that is a relative modest but improving growth momentum. One of the bright spots has been the improvement in the labor market, which have and are likely to continue to support private consumption. Despite the slowdown in exports, Denmark’s current account has recorded surpluses of over 7.0 percent of GDP in the last three years due to the strong foreign trade surplus. Data from the first quarter show that the economy failed to gain momentum. In March, consumer confidence dropped to a five-month low and business confidence remained in negative territory.

5 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

Forward 12m p/e, -10 years

Nordic Q1 estimates, Sales & pretax, -Q1 5% 0% Nordics

Denmark

Finland

Norway

Sweden

-5% -10%

-15% -20%

Sales Q1e Pretax Q1e

-25%

Source: SME Direkt, Alfred Berg Nordic pretax & sales estimates 16/15 & 17/16 140% Denmark

120%

Source: Macrobond

Finland

Valuation Nordics: The valuations in the Nordics have moved up during last month as markets have regained lost ground. This has left the valuation in the high end of the 10 year average, and gives more headwind than tailwind from a sentiment-perspective.

100%

Norway

80%

Sweden

60% 40%

20% 0% Pretax 16/15

0 2015-12-30 -2

2016-01-30

2016-02-29

2016-03-31

-4 -6

-14

SAX Index OSEBX Index HEX Index

-16

Sales 16/15

Sales 17/16

On pretax and sales estimates (SME Direkt) the Nordics stands out as a market with good potential. But beware of base-effects (Norway) which masks true development.

Nordic fixed income

-8 -10

-12

Pretax 17/16

Source: SME Direkt, Alfred Berg

Nordic equity-markets, -YTD

KAX Index

-18

Source: Alfred Berg, Bloomberg

Most of the Nordic companies are expected (SME Direkt) to show falling sales as well as earnings for the first quarter 2016. On margins they are however expected to remain on a high level.

The financial markets continue to recover mostly driven by successful policy support and dovish central banks. The sentiment has been very strong in Nordic credit markets over the past weeks. Rising commodities prices, especially the rising oil price, together with ECB’s corporate bond purchase program announced in March have resulted in gradual pick-up in risk-on behavior. That said, we continue to see the Nordic fixed income market mostly to be driven by outside risk factors. The main risk is a sharp slowdown in China connected to the reengineering of their growth model together with a growing list of political risks around the world.

6 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

Nordic policy rates and government bonds, 22nd April

Swedish break-even inflation

Nordic Policy Rates and Government Bonds Normalized Returns Regions 10 Year Ret (Loc) Adjusted Adj. Dur=4, Hedged EUR Policy Rate Yield Ytd Duration Mtd Ytd Denmark (DKK) -0,65 0,45 4,42% 8,77 -0,17% 1,91% Finland (EUR Dep Fac) -0,40 0,52 2,61% 6,73 -0,26% 1,54% Norway (NOK) 0,50 1,34 1,19% 4,77 -0,63% 0,65% Sweden (SEK) -0,50 0,64 2,09% 6,31 -0,54% 1,32%

Source: Alfred Berg, Bloomberg

Government bonds The long term commitment by the European central bank to continue its dovish stance is an important factor depressing Nordic interest rates for a foreseeable future. Despite this the long term interest rates in the Nordic area seem to have bottomed out and are most likely to gradually increase from current depressed levels. 5y Government bonds 1,50%

1,50%

1,25%

1,25%

1,00%

1,00%

0,75%

0,75%

0,50%

0,50%

0,25%

0,25%

0,00% 42004

42094

42184

42274

42364

42454

0,00% 42544

-0,25%

Source: Alfred Berg, Bloomberg

Mortgage covered bonds The low interest rates together with, especially in Sweden, demand that is exceeding supply continue to support house prices. The main risk in the mortgage sector is the households’ borrowing that is rising faster than their income. To stem the build-up in debt the Swedish FSA introduced new amortization requirements, which is set to take effect on 1 June. If this proves not to be sufficient the next step will be a debt-to-income cap.

-0,25%

-0,50%

-0,50% Sweden

Norway

Germany

Denmark

Finland

Source: Bloomberg, Alfred Berg

The central banks in the Nordics will keep its dovish stance. In Norway the Norges Bank is priced in to continue cut interest rate to near zero mitigating the effects of the contraction in oil-related activities. In Sweden the Riksbank, somewhat surprisingly, chose to continue and extend its bond purchasing program by also including inflationlinked bonds with a positive reaction in the pricing of inflation linked bonds (see picture). The main reason is the Riksbank commitment to meet the inflation target and resist currency appreciation.

Given the low or even negative government bond yields the covered mortgage bonds are attractive for the institutional investors. The covered bonds offer a quite safe and liquid investment with a substantial yield pick-up compared to government bonds. The European central bank buying of covered bonds also support the Nordic covered bonds even if they are not eligible for the purchase program. The Euro market is an important funding source for the Nordic covered bond issuers which decrease the need to use the local Nordic markets. The picture shows the credit spread above swap rates for a selection of Nordic Covered bond issuers in the Euro market. The Euro swap rate is around 40 basis points above the German government bond yields.

7 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

5Y Nordic Covered bond-spreads to EUR swap 20 18 16 14 12 10 8 6 4 2 0 -242004 -4 -6 -8 -10 -12 -14 -16 -18 -20 DANBNK

42094

42184

DNBNO

42274

LANSBK

NDASS

42364

SEB

42454

SHBASS

20 18 16 14 12 10 8 6 4 2 0 42544-2 -4 -6 -8 -10 -12 -14 -16 -18 -20

classes, such as bonds issued by offshore rigand oil service companies have lately increased in prices but are still quoted in price recovery terms rather than in credit yield spreads. The assumption is that the oil price needs to reach $50 to 60/barrel in order to improve the activity in the oil-related sectors. The main challenge going forward for the oil-related issuers is to find new funds to meet maturing debt and possible to negotiate new terms and conditions to current bond holders.

Credit spreads for a selection of Index

SWEDA

Source: Bloomberg, Alfred Berg

Nordic credit markets, 22nd April Nordic Credit Markets Segment SEK Mortgage Covered SEK Investment Grade SEK High-Yield NOK Investment Grade NOK High-Yield DKK Mort Covered (non-call)

Normalized Returns Index Spread to Ret (Loc) Adjusted Adj. Dur=4, Hedged EUR Yield Gov (bp) Ytd Duration Mtd Ytd 0,36 74 1,08% 2,74 -0,07% 1,73% 0,93 127 1,58% 3,03 0,23% 2,08% 4,29 434 0,59% 2,20 0,38% 0,67% 1,80 104 1,16% 3,82 -0,54% 0,76% 1125 -5,13% 2,73 2,13% -5,51% 1,20% 2,71 0,32% 1,23%

Source: Alfred Berg

Source: Alfred Berg

Credits The European central bank, ECB, buying of nonbank corporate bonds is bullish for all type of credits and is probably the main reason to the improved sentiment in the credit markets also in the Nordic area. In April the ECB clarified the details and surprised the market to be more generous than expected. The ECB will buy bonds also from issuers even when their parent companies are outside the Euro block which will support credit spreads all around the globe. The credit markets in the Nordic area have experienced inflows and the market dynamic has improved substantially. Demand for credit bonds is good and credit spreads are tightening which will improve the portfolio returns going forward. The new issue market has also reopened and has so far to a large extent been Swedish issuers. The Norwegian credit market is divided in a strong investment grade market and a still weak high yield market. The Norwegian high yield market consists 50 percent of oil and shipping sectors. The bonds in the more risky

EUROPE – ECB added stimulus The economic recovery continues in the Eurozone although growth remained soft overall. Growth is mainly driven by solid domestic demand, while the external sector is a drag on growth. It’s positive that investment is surging since it earlier has been slow and indicates that optimism finally is large enough to make companies confident enough to invest, despite a number of political uncertainties facing the European Union. On the negative side is that the previous driver, private consumption, has lost steam. The growth profile last year has been a deceleration throughout the year. Despite the deceleration the Eurozone has been relatively resilient to the weakness in global growth mainly coming from the slowdown in Emerging markets and weaker US growth during the second half of last year. Households are in the Eurozone like in most of the developed world benefitted from low inflation and plummeting oil prices. The labor market has also revived and the ultra-low interest rate environment has finally lifted credit

8 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

growth to positive numbers. Still the latest worries about euro zone banks are worrisome. The back side of low interest rates is that banks profit margins are under pressure hence they have a hard time to meet the higher capital ratio demands from the European Central Bank. This may pose a risk that the emerging credit expansion and even the recovery something the Central Bank (ECB) wanted to address in their last meeting. We believe ECB will be successful in this battle as ECB has sufficient with tools to handle this.

Unemployment vs average earnings, Europe

Source: Macrobond

Business survey’s trending sideways

of the business cycle. The strongest evidence comes from the labour market where unemployment is pressed to very low levels. Wage growth has been picking up which indicate that the central bank (Fed) will have to continue its hikes which eventually will revert the positive growth trend. Lately there has been some positive news as the inflow from people outside the labour market has increased and wage growth paused. We believe that the recovery will continue which will reduce the amount of slack in the economy and force the central bank to a series of hikes. This process is though likely to continue in a very gradual pace and take a couple of years. With a stronger labour market households and corporate finances strengthens. However, the U.S. economy has not been immune to the negative shocks that have emanated from global economic and financial market stress in the past months. Signs of weakness at the beginning of the year were concentrated in specific industrial sectors - manufacturing and those related to energy and mining - and in the export sectors. The weakness in the second half of 2015 was mainly due to a slump in fixed investment as energy firms reacted to low oil prices and a collapse in export growth due to a strong dollar. Also inventory liquidation suppressed growth especially in Q4. The first part of this year the economy has rebounded. We believe the US economy will continue to grow by some 2 percent both this and next year and that it will imply that Fed hikes rates at a gradual and slow pace. US ISM orders minus inventory

Source: Macrobond

US- Hikes delayed until further notice The US economy grew with a stable 2.4 percent 2015 similar to growth in 2014 but was the fastest-growing of the developed economies last year. There is some evidence the point towards that the US economy is getting closer to the end

S Source: Macrobond

9 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

region. PMI Manufacturing, -8 years

Yen and Nikkei moving in tandem 22000

20000

130 NKY Index (R1) 120

JPY Curncy (L1)

18000 110 16000 100 14000 90 12000

80

10000

8000 2011-04-11

2012-04-11

2013-04-11

2014-04-11

2015-04-11

70 2016-04-11

Source: Alfred Berg, Bloomberg

EMERGING MARKETS – paintrade

Source: Bloomberg, Macrobond

JAPAN – Fading, in the need of support The Japanese economy has faced several headwinds the last year. Weak private consumption combined with stronger USD and subdued global demand weighing on net exports. Collapsing oil prices gives on the one hand support to private consumption, however the recent financial turmoil has caused many to take home their foreign savings causing the currency to strengthen and weakening net exports and pressuring corporate earnings. In Q4, GDP fell 1.1 percent over the previous quarter. The economic weaknesses observed in 2015 are far from abating and have likely carried into this year. In February, consumer sentiment continued its downward trend and exports contracted for the fifth consecutive month. Moreover, the recent appreciation of the yen promises to further dampen the allimportant external sector. In an attempt to rekindle growth, Prime Minister Shinzo Abe instructed the finance minister to quickly roll out the record USD 852 billion budgets for the fiscal year 2016, which starts in April. Looking forward we believe the bank of Japan and the government will be forced to add further stimulus to lift inflation and growth. This might again turn investors’ eyes towards Japan, but until that happens the outlook for Japanese equities look less prosperous, which we will play out tactically by underweighting Japan as a

Last year and the beginning of this year’s worries that the Chinese economy was about to hard land has been reduced and even revered as indicatively signs of improving activity has raised hope that the region is about to recover. However, this is only very early signals and there remains still considerable risk to China and the overall region’s economic outlook. For example, if the United States Federal Reserve hikes rates again, it could trigger further volatility in the region’s financial and exchange rate markets. Moreover, scepticism is growing that Abenomics will not be able to rekindle Japan’s economic growth. Japan is one of the region’s key trade and funding partners, and if its economy enters into recession, it could further dampen regional growth. Even though the Indian economy lost steam towards the end of last year it has revived and is now on track to be one of the fastest-growing economies in Asia this year. Resilient domestic demand and a limited reliance on the external sector are expected to fuel a pickup in growth. Growth in South-Eastern Europe (SEE) accelerated notably lately and grew by a hefty 4 percent, which the fastest expansion in five years. Turkey is among the higher growth countries despite the high geopolitical tension in the area. The closeness to the Eurozone and a rebound in oil prices is likely to help the region going forward.

10 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

Performance in USD, YTD & 1 month. 50.00 Chg Pct 1M

40.00

chg pct ytd

30.00 20.00 10.00

MSCI POLAND

MSCI INDIA

MSCI CZECH REPUBLIC

MSCI MEXICO

MSCI FINLAND

MSCI NORWAY

MSCI CHINA

S&P 500 INDEX

MSCI JAPAN

MSCI AC ASIA x JAPAN

MSCI SWEDEN

MSCI NORDIC COUNTRIES

MSCI EM

MSCI WORLD

MSCI EUROPE

MSCI CANADA

MSCI ARGENTINA

MSCI EM LATIN AMERICA

MSCI BRAZIL

MSCI EM EASTERN EUROPE

-20.00

MSCI PERU

-10.00

MSCI RUSSIA

0.00

growth have started to bear fruit which has caused hope that the economy has put the worst behind. However, there are also signs showing that the economy continues to gradually decelerate. Taken all together we believe that the risk of a hard landing in China is remote and less likely today compared to a year ago. It’s also reassuring that the National People’s Congress as they will adopt a “more” proactive fiscal policy and a prudent monetary policy “with flexibility” although this means that the needed structural reforms are pushed further in the future.

Source: Alfred Berg, Bloomberg Declining GDP growth in BRIC

Performance has been best in Emerging Markets with Latin America and Russia in the lead. More developed markets have not had as good performance, although in positive territory. Forward earnings & forward p/e, -5 years

Source: Macrobond

Eastern Europe – bottoming out

Source: Macrobond

Asia – The worst is behind us Growth in East and South Asia continues to decline and is now at a 14-year low. Financial turbulence and weak global growth is causing headwinds for the region. However, the pain is unevenly distributed across economies. Countries that had benefited from being integrated into the expanding Chinese economy are now feeling the brunt of the pain as Chinese demand is decelerating. On the other hand, economies that are more reliant on internal demand managed to accelerate in the same period.

Resilient domestic demand and an improvement in the external sector’s has benefitted many of the countries in the region especially Turkey that also have benefitted from weak currency and low oil prices. Russia has been pressured by the collapse in oil prices hence the latest stabilization in oil prices are very welcomed. Russia has like Turkey got stimulus from a weaker currency but at a price of higher inflation and the risk of having to lift real interest rate for longer period of time. In Central and Eastern Europe solid domestic demand continues to drive the economy and provide a shield against external headwinds. Tighter labor markets, low oil prices and a lack of inflationary pressures have supported households in the region, while a number of economies received a boost to investment amid drawdowns on EU development funds.

Chinese’s policymakers attempt to support

11 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

In Poland the economy has picked up pace, supported by a healthy labor market and solid investment growth. Despite ongoing political uncertainties, economic data remains robust. Solid economic fundamentals should continue to propel strong growth despite downside risks from political uncertainty. Russian import and export

the end of the year. The weak development is expected to feed into this year and growth is expected to contract slightly this year. Overall, the economic outlook for Latin America remains bleak. Although a pick-up in commodities prices could provide some relief, the recession in Brazil and Venezuela, as well as tight fiscal and monetary policies across the region, will continue to weigh heavily on Latin America’s economy. Despite of all this, the rebound in commodity prices has triggered an increasing optimism that the region will experience an improvement. For the biggest economy, Brazil, the impeachment process of its president Dilma has raised hopes of a change in policy and that well needed economic reforms may come if the president is replaced. The president Dilma has suffered a number of setbacks and the probability that she will be impeached has increased.

Source: Macrobond Brazil hiking rates making inflation spur High correlation between oilprices and Russia 120 110 100 90 80 70 60

RTSI$ Index RUBUSD Curncy CO1 Comdty

50 40

Source: Alfred Berg, Bloomberg

Source: Macrobond

Latin America – a lot happening

Valuation in emerging markets: If we look at emerging market it looks attractive if we purely look at the pricing related to both expected earnings and book values. On the other hand, Russia and Brazil is affected by high risk free rates and a negative real growth in the economy making the expected premium on equities less attractive. If correcting for the cyclically effects on earnings Latin America is lagging the others.

Latin America has the weakest economic fundamentals among the largest regions but Latin American equities are the top performer so far this year. The reason for this development is a combination of political turbulence in the Brazil, the biggest Latin American economy, and a revival for commodity prices in general. As the region is very dependent on commodity prices and adds little value to them the profitability in the industrial sector is very sensitive to changes in global commodity prices and in the USD. The economic performance last year was very weak and the region fell into recession towards

12 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

Asset classes relative performance, -YTD Cyclically adjusted p/e, Asia ex Japan, 10Y

10

5

0 2015-12-31

2016-01-31

2016-02-29

2016-03-31

-5 World Stock Index World Bond Index -10

US dollar Index Commodity Index

-15

Source: Bloomberg, Alfred Berg Source: Macrobond

Although being more positive on Emerging Markets we tactically underweight the region again on the back of the high potential for a dollar-strengthening when FED steps up communication in a more hawkish tone. At the same time we expect Bank of Japan to increase efforts to weaken the Yen and spur Japanese equities again. Hence we overweight Japan.

As can be seen in below chart the relation between equities and bonds are closing into resistance after the good run in equities during April. MCSI World All countries, 5Y

ASSET CLASSES Equities – approaching resistance The good run in equities have continued during April and as we are approaching the slower, late spring/early, summer months we expect equities to experience more headwinds going forward. This makes us cautious in overweighting equities, which still are behind global bonds performance wise YTD. But since we expect global growth to pick up we also expect bond yields to strengthen. As the performance in bonds have been affected by both central bank intervention as well as growth scare we expect rates to pick up and hence pick some chip of the table, lowering fixed income to underweight. We tactically increase our cash-position in this environment, more as a precaution and also because we want fresh powder when we see a better entry point in Equities.

Source: Bloomberg, Alfred Berg

Risk sentiment has improved Risk assets have continued to recover in April. Sentiment has improved from the most negative levels in almost 5-years and has returned back to slightly positive. Improving economic data, rising commodity prices and central bank easing efforts have been supporting sentiment recently. Market participants still appear somewhat hesitant to taking risk, as almost 15 percent bounce from the bottom has not produced complacent risk sentiment, and we’re seeing outflows from equity mutual funds. The positive interpretation is that we still have room for more upside before the market gets complacent. Technically, many equity markets now have a declining longer-term trend, which is worrying. The short-term trend is still higher, but markets

13 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

are yet to break the pattern of lower highs and lower lows. Alfred Berg’s risk-indicator, -5 years Sentiment, z-score

Sentiment Index: 0.3

S&P 500 2300

the recent pick-up in inflation, it seems to us that the risk of the bearish bond market scenario has increased recently. This could overtime lead to a comparable abrupt sell-off in government bonds as witnessed last year.

2.00

2100

1.50

COMPLACENCY

1900

10 Year bond yields in US and Germany, -5y

1.00

1700

0.50

1500 0.00 1300 -0.50

1100 900

-1.00 FEAR

-1.50

700 Source: Alfred Berg Asset Management

500 2007

2008

2009

2010

-2.00 2011

2012

2013

2014

2015

2016

Source: Alfred Berg

Global fixed income Global rates have resisted the reflationary environment of the last two months surprisingly well. US dollar has weakened, global macro surprises have improved, equity markets and commodities have rallied and inflation expectations have crept higher, yet nominal government bond yields in the Eurozone and the US are higher by only 10-20 bps from the February lows. This has resulted in a notable decline in real yield, where for example in the US, 5-year real yield is lower by 0.7 percent and is again trading in a negative territory at -0.2 percent. Following strong performance by the fixed income markets, we have decided to take profits and downgrade the outlook from neutral to negative. At the same time, we upgrade our view of cash, which benefits from a rise in yields. In case the FED is trying to orchestrate higher inflation by weakening the dollar on purpose, it appears to be successful. At the same time the FED is risking to trigger a bond market sell-off and increase in rates in case the markets conclude that the central bank is falling behind the curve. This is not yet the case, but is an increasing risk if our expectation of an improving global economy turns out to be correct. Even if the US growth fails to markedly improve following the weak first quarter, the reflationary environment could continue due to dovish FED and a weaker USD resulting in higher rates. The most bearish scenario for bonds is an improving US economy coupled with a dovish FED. Looking at the FED communication and negligence for

Source: Alfred Berg, Bloomberg

Emerging markets fixed income together with the US high yield have been the biggest beneficiaries of the recent reflationary market. Emerging market currencies are higher by over 5 percent year-to-date versus the US dollar, and have rallied almost 10 percent from the bottom in January. In just two months, the US high yield spread has narrowed from almost 9 percent to 6.4 percent. We have been overweight EMD and US high yield, but have now decided to lower risk by downgrading them back to neutral. Both asset classes are very sensitive to the moves in the US dollar and commodities. Futures markets are currently pricing in only 1 rate hike in the US this year. We expect the US economy to pick-up going forward, which could bring back the rate hike fears and result in a stronger dollar. Should the FED however tolerate a stronger US economy and higher inflation, the reflation trade should continue. As said, this is an overall bearish scenario for bonds, but a scenario where the EMD and US HY would outperform in a relative sense.

14 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

Raw material prices and 5y5y fwd breakeven rates Raw Industrials

Financial condition-indexes

5y5y breakeven, %

700

4 US Spot Raw Industrials

3.5

600 3 2.5

500

2 400

1.5 US 5y5y forward Breakeven rate

1

300 0.5 Source: Bloomberg

Source: Alfred Berg, Bloomberg

200 2007

2008

2009

2010

2011

2012

Source: Alfred Berg, Bloomberg

2013

2014

2015

2016

0

Will the FED tolerate higher inflation in the US? Following some improvement in US economic data, and signs that inflation could finally be picking up, it was surprising to witness an extremely dovish FED meeting in March. FED kept rates unchanged in March, as expected, but somewhat surprisingly gave an extremely dovish message and cut back their estimate for the number of this year’s rate hikes to two. FED also generally dismissed the recent pick-up in inflation data as only transitory. Inflation about where FED wants it

Source: Alfred Berg, Bloomberg

This raises the question whether the FED has started to pay more attention to the negative impact of a strong US dollar, and is now looking to prevent further strength in the currency. This could be achieved for example by letting the inflation overshoot for a while. This should weaken the dollar and support commodity prices and inflation expectations. Obviously, this would be negative for rates over time. It should also be more negative to long-end of the curve, and thus we could be close to witnessing at least a shortterm bottom in the flattening of the US yield curve. Yieldspread 10Y vs 2Y, US 3.5

%

3.0 2.5

2.0 1.5 1.0

Source: Alfred Berg, Bloomberg

0.5 2008

2009

2010

2011

2012

Source: Alfred Berg, Bloomberg

In addition, the financial conditions have improved notably. Unless the US growth disappoints significantly, it will be more and more difficult for the FED to justify not raising rates in the coming summer without triggering a sell-off in rates.

2013

2014

2015

2016

Dovish FED puts pressure on Japan and Abenomics Japanese 10-year yield traded sideways in April but stayed in a negative territory. The currency markets have continued to defy the BOJ as Japanese yen has continued to see strength against the dollar, even though it fell back from the strongest levels towards the end of the month.

15 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

high yield, which were supported by rising commodity prices. We are taking some profits in US high yield and emerging markets bond, but maintain our positive view of global credits. Credits markets have seen an impressive move recently, so some pullback in spreads would not be surprising. Credit rating downgrades and default rates have been on the rise in the US, whereas in Europe defaults have stayed at low levels. The starting ECB’s corporate bond purchases will support the credit markets in Europe.

Will BoJ be able to alter YEN-trend? 130

120

110 USDJPY

100

BOJ implements negative rates Kuroda: "No limit to monetary easing"

90

80 Source: Alfred Berg, Bloomberg

70 09/2012 03/2013 09/2013 03/2014 09/2014 03/2015 09/2015 03/2016

Source: Alfred Berg, Bloomberg

Markets are again expecting more easing from the BOJ. A new rate cut, increase in equity ETF purchases or a negative rate lending scheme to the Japanese banks are potential tools, which have been suggested in market commentary. BOJ itself has clearly cut back their rhetoric for additional stimulus, as the previous easing effort obviously backfired. BOJ’s hurdle for new action is high, and the central bank must be afraid of another negative market reaction. A stronger yen in the face of new stimulus is sending a signal that the bond and currency markets are losing faith in the central bank’s ability to reach the inflation target. The economic outlook is offering no helping either, as 2016 GDP growth estimate has been cut from 1.1 percent to 0.5 percent since the beginning of the year. After the recent appreciation in the yen, the outlook for inflation in Japan is alarming. The need to curb deflation-trend is imminent 40

3 USDJPY 1y change (%)

Japan CPI ex food & energy (%)

30

2.5 2 1.5

20

1 10

0.5 0

0

-0.5 -10

Will BoJ be able to alter YEN-trend? HY, EMB, % 12

IG, % 3

10

2.5 US High Yield

8

2

6

1.5

Euro High Yield

4

1 Emerging Markets

2

Euro IG

0.5

Source: Bloomberg Source: Alfred Berg, Bloomberg

0 2010

2011

2012

2013

2014

2015

2016

0

Source: Alfred Berg, Bloomberg

In 2016 we have started to see the impact of falling oil and commodity prices as the number of defaults is picking up in the US. Credit spreads have not reacted negatively to the announced defaults, as spreads continued to tighten in the most distressed sectors of the market. The decline in spreads, especially in Energy, has been so violent that we could see at least a short-term increase in spreads in case the rally in oil and other commodities pauses. Oil prices have seen an impressive rally, but it is still more based on speculation about an output freeze, which is not likely to materialize until Iran has pumped up their production.

-1 -1.5

-20

-2 Source: Alfred Berg, Bloomberg

-30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-2.5

Source: Alfred Berg, Bloomberg.

Still positive on credits, despite profit taking Credit spreads continued to tighten in April especially in emerging markets bonds and US

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bear-cycle. We also see some potential in hedge funds, especially on diversification aspects.

Development of High yield market 2,000

OAS Spread, bps

1,800

Hedge funds

1,600 1,400 1,200 Energy

1,000

Industrials

800

Hedge funds have been up to a tough year but have been picking up steam. Best have the CTAfunds been whereas the Relative Value have had it more challenging.

Materials Communications

600

Cons.Discr. Financials

400 Source: Alfred Berg, Bloomberg

200 2010

2011

2012

2013

Source: Alfred Berg, Bloomberg.

2014

2015

2016 102

Chinese FX reserves stable in March/April One of the reasons behind the sell-off in risky assets early in 2016 can be attributed to the depreciation fears of the Yuan, and fears of a significant abrupt devaluation in the currency. Lately, we have seen yuan and the drawdown in FX reserves stabilize. Weaker dollar has definitely been a factor easing the pressure on Yuan, as we have seen the yuan usually strengthen during days of dollar weakness. In addition, Chinese authorities have clearly shown their willingness to defend the currency. The total estimated FX burn last year was around 1trillion USD. China is likely to hold Yuan stable over the short-term, and it will be an easier task as long as the dollar stays weak. Chinese FX reserves currently stand at 3.2 trillion USD. Chinese reserves are diminishing $bn 4500

Global Hedge fund styles, -YTD 104

China foreign exchange reserves

CNYUSD Index

0.17

100

98

96

94

92

90

88 42369 42376 42383 42390 42397 42404 42411 42418 42425 42432 42439 42446 42453 42460 42467 42474 42481 Macro/CTA

Real estates in US, EU & Nordics, -1y 120

3500

0.16

115

0.155

110

0.15

105

0.145

100

2000 1500 1000 500 Source: Alfred Berg, Bloomberg

0 1995

Global Hedge Fund

Real estates have fared well in the turmoil and are keeping their distance against most developed equity markets. We still favour this asset class amongst alternatives, although we are presently neutral to the subclass.

0.165

2500

Relative Value Arbitrage

Real estate

4000

3000

Event Driven

Source: Bloomberg, Alfred Berg, as of 20160329

0.14

95

0.135

90

0.13

85

0.125

80

Europé US Nordics

0.12 1997

1999

2001

2003

2005

Source: Alfred Berg, Bloomberg.

2007

2009

2011

2013

2015

ALTERNATIVES We are neutral towards alternatives. We however still see potential within Nordic Real Estate in this business cycle. On commodities our stance is still cautious/negative. Looking at base-metals there are good reasons to believe that we have reached the bottom in the 5-year

Source: Bloomberg, Carnegie, Alfred Berg.

Commodities – Pivot point Commodities have taken an upbeat path led by the comeback in oil-prices as well as gold. However, even industrial metals seem to have bottomed out after having been in a 5 years long

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bear market. Although we don´t expect prices to be a leading indicator to stronger global growth we acknowledge that the bounce in prices probably has some distance left.

Commodity-prices in USD, Yen & Euro. -1y 140

Commodities USD

130

Commodities YEN

120

Commodities EUR

quantative easing in other economies. The trade-weighted dollar-index is moving in a slowly upward-moving trend-channel since the beginning of 2015. Lately the dollar, although being oversold are showing increased weakness. Trade-weighted dollar-index, 5 y

110 100 90 80

Source: Bloomberg, Alfred Berg, as of 20160427.

We have carefully lifted our earlier underweight to a neutral stance. Although we remain indifferent between commodities, real estate and hedge funds we see both better potential but also risk in commodities. In total we have decided to remain neutral for now. Brent crude oil, -2 year

Source: Bloomberg, Alfred Berg.

The dollar/yen made a large move in the opposite direction to what the BoJ intended, leaving them off with a much stronger currency than before. Lately the Yen has made a rebound, probably on the possibility of a smarter set of QE initiated by BoJ any time soon. After the large appreciation, any weakening will be a positive for BoJ. YEN stronger than the BoJ finds comfortable

Source: Bloomberg

Currencies – Central bankers dominate The question for 2016 is how much, if any, the US-dollar will strengthen against other currencies. As the only major central bank pursuing a tightening policy the field lays open to a super-dollar, something we have difficulties anticipating will happen any time soon. The dovish US-central bank makes any strengthening challenging, despite massive

Source: Bloomberg, Alfred Berg

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Concerning euro/dollar a long term projection points towards 0.90, but last year dollarstrengthening has resulted in a rather strong support at around 1.05. For any major break of the strong support it will need joint forces between ECB and the FED. Then the currencypair could be targeting 0.90. We are not convinced about this possibility since the FED is taking its hiking in a slower pace at the same time as we receive better hard data from the Eurozone, putting upward pressure on the Euro. Closest move we anticipate will be a weakening of the Euro by a margin. Longer term the USDSEK is accumulating for a potential bigger $-strengthening (or weakening SEK) with a target of 13 SEK to the dollar. On the back of a strong Swedish economy it is difficult to see this unless the economy suddenly deteriorates.

IMFs forecasts World Advanced economies US EU Germany France Italy Spain Japan UK Cananda Emerging markets Russia China India Emerging Europé Latin America Brazil Mexico

2015 2016p 2017p Diff -16 Jan Diff -17 Jan 3.1 3.2 3.5 -0.2 -0.2 1.9 1.9 2 -0.2 -0.1 2.4 2.4 2.5 -0.2 -0.1 1.6 1.5 1.6 -0.2 -0.1 1.5 1.5 1.6 -0.2 -0.1 0.1 1.1 1.3 -0.2 -0.2 0.8 1 1.1 -0.3 -0.1 3.2 2.6 2.3 -0.1 0 0.5 0.5 -0.1 -0.5 -0.4 2.2 1.9 2.2 -0.3 0 1.2 1.5 1.9 -0.2 -0.2 4 -3.7 6.9 7.3 3.5 -0.1 -3.8 2.5

Source: IMF, April update

4.1 -1.8 6.5 7.5 3.5 -0.5 -3.8 2.4

4.6 0.8 6.2 7.5 3.3 1.5 0 2.6

-0.2 -0.8 0.2 0 0.4 -0.2 -0.3 -0.2

-0.1 -0.2 0.2 0 -0.1 -0.1 0 -0.3

We anticipated that the NOK would fare well against the dollar, which it did. Looking at the increased risk appetite and especially towards oil, we have experienced a large strengthening of the NOK. Target-wise the NOK now looks to head for 8 NOK.

19 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

Valuation table

Source: Macrobond, as of 2016-04-24.

20 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.

CONTACTS - TACTICAL ASSET ALLOCATION Stockholm Jonas Olavi Nordic & Swedish Head of TAA [email protected] +46 562 347 76 Twitter @j_olavi Nybrokajen 5 P.O. Box 70447 SE-107 25 Stockholm tel. +46 8 562 347 00 www.alfredberg.se

Helsinki Johannes Hyytiäinen Finnish Head of TAA, PM [email protected] +358 9 228 32 635 Keskuskatu 1B FI-00100 Helsinki tel. +358 9 2283 21 www.alfredberg.fi

Oslo Christian Grosch, CFA Norwegian Head of TAA [email protected] +47 22 00 51 51 Twitter @chgrosch Munkedamsveien 35 P.O. Box 1294 Vika NO-0111 Oslo tel. +47 2200 5100 www.alfredberg.no

IMPORTANT INFORMATION This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden. This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared solely for informational purposes and does not constitute any investment advice. Before investing in any product of BNP Paribas Investment Partners* or Alfred Berg**, you should inform yourself about the (financial) risks and possible restrictions to which you and your investment activities may be subject. You are also advised to read the KIID, information brochure and fund rules/prospectus that can be found at www.alfredberg.se before making any investment in an investment fund. The value of your investments may fluctuate. Past performance is no guarantee for future returns. It is possible that your investment will increase in value. It is also possible, however, that your investment will generate little or no income and that, if the asset price performs poorly, you will lose some or all of your initial outlay. The value of an investment in a fund can go up or down depending on market evolution and investors may not get back all of their initial investment. The value of a fund with risk class 6-7 can go up or down substantially, due to the composition of the fund and the methods used in managing the fund. BNP Paribas Investment Partners and Alfred Berg have taken all reasonable care to ensure that the information contained in this document is correct but does not accept liability for any misprints. The information and opinions contained herein can be changed without notice. BNP Paribas Investment Partners and Alfred Berg are not obliged to update or alter the information or opinions contained herein. * “BNP Paribas Investment Partners” is the global brand name of the BNP Paribas group’s asset management services. **Alfred Berg is the Nordic brand name of the Alfred Berg group, which consists of Alfred Berg Asset Management AB, Alfred Berg Kapitalförvaltning Finland Ab, Alfred Berg Rahastoyhtiö Oy, Alfred Berg Kapitalforvaltning AS, Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB. For information about the addresses and regulators, please refer to www.alfredberg.com .

21 This document contains information and considerations that analysts, strategists and portfolio managers at Alfred Berg use as a base for handling portfolios and mandates. This document has been prepared for information purposes only and does not constitute any investment advice. More important information can be found in the end of this document. This information constitutes marketing material issued by Alfred Berg Fonder AB and Alfred Berg Kapitalförvaltning AB in Sweden.