flows & assets report - bbva research€¦ · flows and assets report: q1 2016 1. key messages...

Flows & Assets Report The Big Emerging Markets Short First Quarter 2016

BBVA Research

Gonzalo De Cadenas & Alvaro Ortiz (Cross EM Unit)

Julián Cubero & Sara Baliña (Economic Scenarios)

Sonsoles Castillo & Cristina Varela (Financial Scenarios)

Flows and Assets Report: Q1 2016

1. Key Messages

2. Portfolio Flows & Asset Prices: stylized facts, drivers and now-casts

3. Scenarios: Macroeconomic and Monetary Policy and Flows Scenarios

4. Hot Topic: Liquidity Risk & FX

5. Useful Information: Methodological Appendix

Index

2


Summary

3

Main drivers

• Global growth concerns led by China’s policy

shifts and inability to sooth investor concerns

heightened risk off-mood particularly by year-

end.

• Global monetary policy easing bias that

initially prevented further deterioration lost

effect. The short recess in financial volatility

was followed by a relapse. Unlike previous

episodes, the trigger was not in the Fed

policy but China, EM vulnerabilities and

potential impact of EM & DM.

(Review of previous quarter events & insight into 2016 on behalf of the information collected

as of January 30th 2016)

Portfolio Flows

• EM Portfolio flows in Q4-15 were similar to

Tantrum times (~ $ -65 Bn.). Since the Taper

it was ~ $ -350 Bn. Very much the Lehman

times alike. This happens in a context of

much lower weight of EM assets in global

portfolios.

• Selective and strong flow reallocation away

from EMs remains with little discrimination.

Increased active portfolio management and

retail investor base warrant higher flow

volatility and sensitivity to global financial

conditions.


Summary

4

Asset prices

• Financial tensions: EM financial tensions failed

to recede. China’s contagiousness unveils

EM’s cyclical fragility. Divergent monetary

paths in DM are also a source for volatility.

• Risk premia: the stint of financial tensions and

worrying outlook brought a moderate risk re-

pricing that derailed some EM from

Investment Grade (Brazil)

• FX: currencies best gauge the negative

sentiment towards EM financial assets. Global

factors weighted in all currencies depreciation,

intensity will vary on vulnerabilities and

funding structure (more on bonds).

(Review of previous quarter events & insight into 2016 on behalf of the information collected

as of January 30th 2016)

Forecasts & Analysis

• Baseline scenario is for EM flows steadily to

run below long term trend reallocating from

EMs to DMs.

• Our forecasts carry a strong tilt to the

downside for EM capital flows and assets

valuations amid the array of risk factors

ahead (doubts about China growth, spillovers

RMB devaluation, corporate debt overhang in

some key EM, geopolitical tensions) and the

lack of policy room to maneuver. In a risk

scenario it shouldn't be discarded an

enhanced activism from EM Central Banks to

avoid domestic balance sheet mismatches.

Capital flows Quarterly assessment


Cumulated Portfolio Flows to Emerging Markets

using High Frequency Data

(Flow in US$ Tn)

Source: BBVA Research & FMI

Events unfolded as envisaged in our negative scenario

(bringing flows below the previous base scenario)

6

The China triggered sell off continues generalized by private balance sheet vulnerabilities in a context of uneven global monetary policy (in line with negative scenario)

A sell-off episode that reminds early Lehman times

In both cases flows went down -50% from equilibrium

levels and along the same period

EM Portfolio flows in Q4-15 were similar to Tantrum

times (~ $ -65 Bn.)

Since Taper it was ~ $ -350 Bn.

-600

-400

-200

0

200

2013 2014 2015 2016

0.0

0.5

1.0

2006 2008 2010 2012 2014 2016

High Frequency

Imbalance

Assessment (Deviations from

Long Term Trend in

%. Portfolio Flow

Excess in % )


BBVA High Frequency Portfolio Flows Map (% monthly change in net liabilities measured as net flows to total assets under management)

Source: BBVA Research 7

Countries orbiting the oil setback and those caught in geopolitical conflicts and strongest macro vulnerabilities register the largest net portfolio outflows

USA # # # # # # # # # # # # #

Japan # # # # # # # # # # # # #

Canada # # # # # # # # # # # # #

UK # # # # # # # # # # # # #

Sweeden # # # # # # # # # # # # #

Norway # # # # # # # # # # # # #

Denmark # # # # # # # # # # # # #

Finland # # # # # # # # # # # # #

Germany # # # # # # # # # # # # #

Austria # # # # # # # # # # # # #

Netherlands # # # # # # # # # # # # #

France # # # # # # # # # # # # #

Belgium # # # # # # # # # # # # #

Italy # # # # # # # # # # # # #

Spain # # # # # # # # # # # # #

Ireland # # # # # # # # # # # # #

Portugal # # # # # # # # # # # # #

Greece # # # # # # # # # # # # #

Poland # # # # # # # # # # # # #

Czech Rep # # # # # # # # # # # # #

Hungary # # # # # # # # # # # # #

Turkey # # # # # # # # # # # # #

Russia # # # # # # # # # # # # #

Mexico # # # # # # # # # # # # #

Brazil # # # # # # # # # # # # #

Chile # # # # # # # # # # # # #

Colombia # # # # # # # # # # # # #

PeruPeru # # # # # # # # # # # # #

Argentina # # # # # # # # # # # # #

China # # # # # # # # # # # # #

IndiaIndia # # # # # # # # # # # # #

Korea # # # # # # # # # # # # #

Thailand # # # # # # # # # # # # #

Indonesia # # # # # # # # # # # # #

Philippines # # # # # # # # # # # # #

Hong Kong # # # # # # # # # # # # #

Singapore # # # # # # # # # # # # #

2016

Asi

a

2014 2015

G4

Wes

tern

Eu

rop

eEM

Eu

rLA

TAM

2011 2012 2013

<-2% +2%> 0%

*BBVA Research Portfolio Flows Map: The Flows Map show the monthly evolution of net inflows with

Darker blue colors representing sharp net outflows and lighter colors standing for net Inflows

• Reallocation and flight to quality supported DMs (mainly, Japan). Oil concerns also strike Norway

• Discrimination in the Eurozone valuations and real interest rate conditional

• EM Europe caught in the weakening cycle and the geopolitical blockade Russia/Turkey

• Commodity prices correction and the scarce monetary room to maneuver had a stake in Latam

• Very scarce discrimination (Thailand and India) possible in Asia, caught in the weakening cycle despite of the non commodity exporting condition

Flows 4Q15 vs. 3Q15 (% quarterly change in flows,

shades are previous values)

-6.0 -1.0 4.0

USACanada

SweedenDenmarkGermany

NetherlandsBelgium

SpainPortugal

PolandHungary

RussiaBrazil

ColombiaArgentina

IndiaThailand

PhilippinesSingapore



Relentless flight to quality and persistent and broad based volatility across risk assets May anticipate this turning into an EM crisis episode with global reach

BBVA Research Safe Haven Indicator (Median Safe Haven Factor from flows and asset prices data using the BBVA DFM/FAVAR Model)

BBVA Safe Haven Indicator Represents the median of the selected Safe Haven

Components in Portfolio Flows, Risk Premia and FX data

-2

-1

0

1

2

3

4

5

6

7

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Le

hm

So

v. F

in. C

risis

UE

Ta

pe

ring

EM

Cris

is W

oe

s:

fina

ncia

l insta

bility

(eq

uity

se

ll off &

RM

B d

eva

lua

tion

)

Performance Financial Assets (Base year 2013) EMBI: EM sovereign bond index, CEMBI: EM corporate bond index, MSCI World: world equity index, DXY index

70

90

110

130

150

170

190

210

02-J

an-1

3

02-J

ul-1

3

02-J

an

-14

02-J

ul-1

4

02-J

an

-15

02-J

ul-1

5

02-J

an

-16

EMBI G (spread) CEMBI Broad (Spread)

MSCI World DXY

Extreme High Normal Below Normal

Source: BBVA Research and Bloomberg


-5.0-2.50.02.55.0


Bonds

Equity

Net Flows Q4 2015 by Asset Class (% quarterly change in Country Flows over Total Assets. Shades are previous quarterly changes)

Net Flows Q4 2015 by Investor Type (% quarterly change Country Flows over Total Assets. Shades are previous quarterly changes)

Institutional

Retail

Increased active portfolio management (open end mutual funds*) and retail investor base warrant higher flow volatility and sensitivity to global financial conditions

Usa

Japan

Canada

UK

Sw

eeden

Norw

ay

Denm

ark

Fin

land

Germ

any

Austr

ia

Neth

erlands

Fra

nce

Belg

ium

Italy

Spain

Irela

nd

Port

ugal

Gre

ece

Pola

nd

Czech R

ep

Hungary

Turk

ey

Russia

Mexic

o

Bra

zil

Chile

Colo

mbia

Peru

Arg

entina

Chin

a

India

Kore

a

Thaila

nd

Indonesia

Phili

ppin

es

Hong K

ong

Sin

gapore

-5.0-2.50.02.55.0

-5.0-2.50.02.55.0

-5.0-2.50.02.55.0



Estimated Net Equity Flows Q4 2015 (Dark blue are Net Outflows, Light Blue are Net Inflows in Q415)

Capital flows by region: 4-week moving average (country flows as % of AUM)

Bonds

Initial rotation from Bonds (Fed lift-off) to Equity (attractive valuations) and preference for safe assets (reallocation) soon followed by simple flight to quality (January equity global sell-off and increase in gold prices)

Source: BBVA Research

US Peripheral Europe Core Europe EM

Equity

-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00

M-13 J-13 N-13 M-14 J-14 N-14 M-15 J-15 N-15

Taper tantrum

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

M-13 J-13 N-13 M-14 J-14 N-14 M-15 J-15 N-15

Ro

tati

on

Reallocation

Outflows Size Inflows Size

-7% 7%


Source: BBVA Research 11 Source: BBVA Research

-4

-2

0

2

4

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Global

Local

EM

Emerging Markets Flows (Median Emerging Market Portfolio Flow Decomposition,

monthly change in %)

30%

70%

Global factors relentlessly dominate net outflows away from EMs* yet the idiosyncratic cycle still plays a very relevant role.

BBVA Global Factor of Portfolio Flows Decomposition (First Factor from Flows using BBVA’s DFM/FAVAR Model

represents the main driver of flows)

(*) Increased redeemable funds acting at shorter horizons exacerbate the movement as

less pension and insurance long term funds give leeway to more Open End MFs and ETFs

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Activity in DMs Activity in EMs Interest rates US (10Y) Interest rates EZ (10Y) Risk in Global (VIX) Risk in EM (Embi)


12 Source: BBVA Research

BBVA Global Factor of Portfolio Flows Decomposition (First Factor from Flows using BBVA’s DFM/FAVAR Model

represents the main driver of flows)

EM risk perception loops back and forth into global risk aversion in a context of Fed’s new stance

Materializing US monetary policy shift (Dec. hike) and

undershooting expectations on ECB additional measures

Worryingly worsening of EM growth supplements tepid

recovery in DMs

Portfolio flows impaired on global risk aversion amid

Chinese uncertainty (economic cycle) and EM idiosyncratic

factors

Heightened global risk aversion bundled to monetary policy

dynamics. Global liquidity concerns in the context of

increased cost of capital (USD appreciation and expected

US rate path)

Factors in Q4 2015

Factors expected in Q1 2016

Financial Variables Quarterly assessment


Source: BBVA Research 14 Source: BBVA Research based on Bloomberg data

BBVA Research Financial Stress Index regional map Standard deviation ≈ (-1, 1)

BBVA Financial Tensions Index MAP

This indicator measures financial tensions from different

indicators across DM and EM Countries

These indicators are: sovereign risk measures, stock market

volatility, bank credit risk (CDS 5yr), corporate credit risk,

interest rate volatility, currency volatility and liquidity tensions.

EM Financial Tensions stuck at summer levels China’s contagiousness unveils EM cyclical fragility. Divergent monetary paths in DM are also a volatility source

Jan-1

6

# # # # # # # #

EMU # # # # # # # #

# # # # # # # #

Brazil # # # # # # # #

Chile # # # # # # # #

Colombia # # # # # # # #

Mexico # # # # # # # #

Peru # # # # # # # #

# # # # # # # #

Czech Republic # # # # # # # #

Hungary # # # # # # # #

Poland # # # # # # # #

Russia # # # # # # # #

Turkey # # # # # # # #

# # # # # # # #

China # # # # # # # #

India # # # # # # # #

Indonesia # # # # # # # #

Korea # # # # # # # #

Malaysia # # # # # # # #

Philippines # # # # # # # #

Taiwan # # # # # # # #

Thailand # # # # # # # #

US

Latam

EMEA

Asia

Dec-1

5

Oct-

15

Jul-15

Aug-1

5

Jun-1

5

Nov-1

5

Jan-1

5

Sep-1

5

Dec-1

4

May-1

5

Apr-

15

Mar-

15

Feb-1

5

-1.5

0.0

1.5

3.0

4.5

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Developed Emerging

BBVA Research Financial Stress Index for Developed and Emerging markets (normalized Index)

Very High Very Low


Source: BBVA Research, Haver 15

EM monetary policy trilemma remains: countercyclical role vs. inflation anchoring balance sheet stabilization

Real Interest Rates map Level up to Nov-15

>4.0 2.0-4.0 0.-2.0 -3.0-0 <-3.0



20% 80%

Risk Premium Change in Turkey and Factors

Risk Premium Change in Brazil and Factors

EM risk premia evenly affected by a mix of global and local factors Yet a vast degree of dispersion is found among EMS

52%

48%

EMs change in risk premia (Median EM 5Y CDS in bps change)

85%

15%

-20

-15

-10

-5

0

5

10

15

20

25

30


Local

Global/Regional

EM TOTAL

50% 50%

-40

-20

0

20

40

60


Local

Global/Regional

Brazil

-30

-20

-10

0

10

20

30

41275 41456 41640 41821 42005 42186 42370

Local

Global/Regional -80 bps

Graft

Probe

Fed

Wording Elections QE3 &

Draghi Tapering & Taksim



Exchange Rate: currencies best gauge the negative sentiment towards EM financial assets Sudden RMB shifts triggered strong financial volatility changes

FX 4Q15 vs 3Q2015 change in % (shades are last quarter’s cum FX change vs USD)

-35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0

Switzerland Japan

Canada UK

Sweeden Norway

Denmark EuroZone

Poland Czech Rep

Hungary Turkey Russia Mexico

Brazil Chile

Colombia Peru

Argentina China India

Korea Thailand

Indonesia Philippines Hong Kong Singapore

FX Change Decomposition in Emerging Markets * (in % MoM change, negative are depreciations vs USD)

(*) Measured as median % MoM change from the following Emerging Economies;

Turkey, Poland Czech. Rep., Hungary, Russia, South Africa, Mexico, Brazil, Chile,

Colombia, Argentina, Peru, China, Korea, Thailand, India, Indonesia, Philippines,

Hong Kong, Singapore

-8

-6

-4

-2

0

2

4


Global

Regional/Local

Emerging FX

65% 35%

(*) Argentinas case Comes after the new government decission to free the exchange rate controls.



-15

-10

-5

0

5

10


Global

Local

Brazil FX

FX Change Decomposition in Emerging Markets (in % MoM change, negative are depreciations)

Brazil (Real) Turkey (Lira)

-10

-8

-6

-4

-2

0

2

4


Local/Regional

GLOBAL

Turey

The effect of global factors is greater where funding remains coupled to bond inflows



Q4 2015 Equity price

Changes (% QoQ) (shades are last

quarters QoQ change)

### Sharp Equity Price Contraction (below -6 %)

### Strong Equity Price Contraction (between -3 % and -6 %)

### Moderate Equity Price Contraction (between 0 and -3 %)

0,50 Moderate Equity Price Expansion (between 0 and 3 %)

1,20 Strong Equity Price Expansion (between 3 % and 6 %)

3,00 Booming Equity Price Expansion (greater than 6 %)

BBVA Equity Price Map (Monthly Variation of Equity Price Indexes in %)

USA # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Japan # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Canada # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

UK # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Sweeden # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Norway # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Denmark # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Finland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Germany # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Austria # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Netherlands # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

France # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Belgium # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Italy # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Spain # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Ireland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Portugal # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Greece # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Poland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Czech Rep # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hungary # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Turkey # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Russia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Mexico # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Brazil # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Chile # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Colombia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

PeruPeru # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Argentina # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

China # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

IndiaIndia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Korea # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Thailand # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Indonesia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Philippines # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hong Kong # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

2014

G4

West

ern

Eu

rop

eEM

Eu

r

20152011 2012 2013

LA

TA

MA

sia

-40.0 -20.0 0.0 20.0

USA

Canada

Sweeden

Denmark

Germany

Netherlands

Belgium

Spain

Portugal

Poland

Hungary

Russia

Brazil

Colombia

Argentina

India

Thailand

Philippines

Singapore

Equity prices dropped across the board in a global sell off As anticipated FX risk re-pricing, higher cost of capital & faltering growth slashed earnings expectations


20

Recent sell-off improved equity markets valuations Though short stints of reversion cannot be discarded, uncertainties about the profit cycle prevent a sustainable price recovery

BBVA Assessing Equity Market Misalignment Composite Indicator (Weighted average, of PER 12months Forward, PER12months Trailing and P/B Ratios) updated Jan 20th


Country

US # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Japan # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Canada # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

UK # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Europe # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

EMU # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Denmark # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Netherlands # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Germany # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

France # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Italy # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Belgium # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Greece # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Spain # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Ireland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Portugal # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Turkey # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Poland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Czech Rep # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hungary # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Romania # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Russia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Mexico # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Brazil # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Chile # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Colombia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Argentina # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Peru # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

China # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Korea # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Thailand # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

India # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Indonesia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Malaysia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Philippines

Hong Kong # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

2016

Asi

a

2011 2012

G4

Wes

tern

Eu

rop

e

2006 2007 2008 2009 20102001 2002 2003 2004

Euro

pe

EMLA

TAM

2005 20152013 2014

Most DM returned to levels close to fair value, after equity markets

plunge early in 2016. Yet, there are some core EZ stocks that remain

overvalued

Equity valuations mixed in EM. In Latam, Chile and Colombia are

undervalued in historical terms, while Mexico moderated its

overvaluation

In EM Europe, liquid markets such as Turkey, Poland and Russia

remained undervalued, but the uncertainty about the oil prices and

idiosyncratic factors limited the gains in the short-term

In Asian markets, India and Indonesia remain overvalued, while

China is undervalued, although uncertainties about the policy

management makes difficult a sustainable recovery of prices

zscore Highly overvalued 1.5

Overvalued 1.0-1.5

Slightly overvalued 0.5-1.0 Fair Value -0.5- -0.5

Slightly undervalued -1.0--0.5

Undervalued -1.5--1.0

Highly undervalued -1.5


Source: JP Morgan, BBVA Research 21

Could financial markets be pricing a 2nd. round of tail risks on corporates, sovereign & quasi-sovereign?

EM Corporate debt index (spread bp)

0,0

200,0

400,0

600,0

800,0

1.000,0

1.200,0

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

CEMBI Mexico CEMBI Brazil CEMBI Colombia

CEMBI Chile CEMBI Peru

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

May-07 May-09 May-11 May-13 May-15

CEMBI Asia CEMBI Latam CEMBI EM Europe

EM Corporate bond index (spread bp)

Source: JP Morgan, BBVA Research


Source: JP Morgan, BBVA Research 22 Source: JP Morgan, BBVA Research

(**) Other funds: they could include loans in FX

Source: BBVA Research, BIS

Corporate Debt, structure up to Q115 (% total)

Corporate debt overhang in key EMs could exacerbate the loop between cyclical adjustment And higher financial costs bringing further FX depreciation & higher rates

EM: Corporate debt (as % of GDP)

0

20

40

60

80

100

120

140

160

180

Arg

en

tin

a

Me

xic

o

Ind

on

esia

Pe

ru

Co

lom

bia

Po

lan

d

Bra

zil

Ind

ia

Tu

rke

y

Ru

ssia

Ch

ile

Ch

ina

External Debt Domestic Capital Market Debt

Other funds (loans) Sample average

Scenarios Simulation analysis



Shocks

Vast array of shocks with global scope Some Known unknowns such as a sharp RMB depreciation or a credit crunch in big EM could amplify the impact

EM Debt Overhang

(Corporate leverage)

Economic downturn and credit

crunch in big EM: negative feedback

loop between lower corporate

profitability and financial constrains.

Higher impact on those corporates

with more exposure to indebtedness

denominated in FX

Vulnerable EM with high private

indebtedness (China, Brazil, Turkey)

Cycle of defaults in corporates with

high indebtedness. Spillovers on

banking sector (rebound of NPL) and

domestic activity

Shocks Shock definition Contagion Channels Global impact: greatest impact on…

China's shock

Financial disruption -equity bubble

burst and sharp RMB devaluation-

with significant impact on domestic

demand. Failure of economic policies

to avoid a hard landing

Spike of volatility, in particular, sharp

rebound in EM risk premia& FX

depreciations

EM commodity exporters (LatAm),

China's trade partners (other Asian

countries and USA) and EM countries

with a vulnerable external position

(Turkey, Brazil)

Intense commodity prices fall (oil

below 20$/b in 2016-17) & global

trade downturn

Commodity prices relapse (oil close to

30$/b in 2016-17) & global trade

slowdown

Geopolitics: complex

and interconnected

events

Rebound of financial tensions in

neighbors. Potential increase of oil

prices if conflict impacts on its supply

Higher risk premia (structural reforms

halt) + economic slowdown through

lower confidence & credit restrictions

Failed recovery in EMU

and Japan and/or US

cyclical relapse

Stagnation in EMU and Japan and/or

technical recession in US.

Ineffectiveness of monetary policy

(deleveraging process & capital

investment constrains)

Increase of global risk aversion

smoothed by additional QE stimulus Countries with close trade links with

EMU (EM Europe), Japan (EM Asia)

and/or US (Mexico)

Increase of global risk aversion &

funding constrains across the board.

Huge EM capital outflowsEM with a more vulnerable external

position (FX debt & current account

deficit) as, for example, Turkey and

Colombia Synchronized activity adjustment,

more intense in those sectors

dependent on debt funding

EM Europe

EMU Peripheral countries

Upsurge in geopolitical tensions in

Middle East: new wave of refugees

crisis, social unrest and spiral of

terrorist attacks

In Europe, populism gains ground

and puts at risk the political stability

Risk of Brexit (UK in/out EU)

increases

Fed tightening path

Higher/sharper than expected

interest rate hikes, not supported by

domestic demand improvement,

provokes US recession

Severity degree

Probability


Source: BBVA Research–FAVAR Model 25

Scenarios

All carry a tilt to the downside for EMs

• Global monetary policy

Long end rates anchored at

low levels. Divergences remain

after Fed lift-off

(BCE further easing vs smooth

yet steady FED hikes)

• Global growth

Gradual yet subpar global

recovery supported overly by

DMs

• Global risk aversion

Resilient at the current levels

EM high risk premia resiliently

elevated

Baseline Scenario


Reinforced easing in DM but

limited room to maneuver. EM

Policy support the cycle (and

prevent outflows) conditional on

exchange rate and policy room

• Global growth

China triggered correction of

EM growth continues, reinforced

by anemic growth in DM


Heightened risk aversion

globally (in particular in EM)

surging financial tensions

across the board

Mild Global Risk


Reinforced easing in DM and

flight to quality anchors long

rates at low levels. Tightened

funding conditions in EM

• Global growth

EM meltdown; DM stagnation


Despite policy support tries to

sooth financial volatility,

relentless surge in EM risk

premia

Heightened Global Risk on China Woes



Baseline Scenario

Selective reallocation continues from EM to DMs EM flows steadily below long term trend

Baseline Market & Macro Scenario

<-2% +2%> 0%

Outflows Inflows BBVA Research Portfolio Flows Map*

The Flows Map show the monthly evolution of net

inflows withDarker blue colors representing sharp net

outflows and lighter colors standing for net Inflows

BBVA Baseline Scenario of Portfolio Flows (% monthly change in net liabilities measured as net flows to

total assets under management)

USA # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Japan # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Canada # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

UK # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Sweeden # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Norway # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Denmark # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Finland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Germany # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Austria # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Netherlands # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

France # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Belgium # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Italy # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Spain # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Ireland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Portugal # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Greece # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Poland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Czech Rep # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hungary # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Turkey # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Russia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Mexico # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Brazil # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Chile # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Colombia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

PeruPeru # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Argentina # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

China # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

IndiaIndia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Korea # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Thailand # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Indonesia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Philippines # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hong Kong # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

EM

Eu

r

20162012 2013 2014 2015

LA

TA

MA

sia

G4

West

ern

Eu

rop

e

Global Growth (risk to the downside)

+3.6 pp in 2016-17 avg.

+2.3 pp DM

+4.8 pp EM

Global Monetary Policy

2.3 pp & 2.9 pp 10y T-note in 2016 & 2017 EoP

0.60 pp & 0.9 pp10y Bund in 2016 & 2017 EoP

Global Risk Aversion

Stable VIX relaxes back to 20 points until 2017 EoP

EMBI resiliently elevated at 4.4 pp 2017 EoP



Baseline Scenario



<-2% +2%> 0%






total assets under management) Global Growth (risk to the downside)

-1.0 pp below baseline in 2016-17 avg.

DM -1.0 pp below baseline

EM -1.5 pp below baseline


10y T-note -70 pbs below baseline on average in 2016

& 2017

Bund -60bps below baseline on average in 2016 & 2017


VIX remains at 24 points in 2016, 20 points end 2017 EoP

EMBI increases to 5.5 pp in 2017 EoP

USA # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Japan # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Canada # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

UK # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Sweeden # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Norway # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Denmark # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Finland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Germany # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Austria # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Netherlands # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

France # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Belgium # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Italy # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Spain # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Ireland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Portugal # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Greece # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Poland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Czech Rep # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hungary # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Turkey # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Russia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Mexico # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Brazil # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Chile # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Colombia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

PeruPeru # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Argentina # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

China # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

IndiaIndia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Korea # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Thailand # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Indonesia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Philippines # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hong Kong # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

LA

TA

MA

sia

G4

West

ern

Eu

rop

eEM

Eu

r

20162012 2013 2014 2015


USA # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Japan # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Canada # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

UK # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Sweeden # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Norway # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Denmark # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Finland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Germany # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Austria # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Netherlands # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

France # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Belgium # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Italy # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Spain # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Ireland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Portugal # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Greece # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Poland # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Czech Rep # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hungary # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Turkey # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Russia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Mexico # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Brazil # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Chile # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Colombia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

PeruPeru # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Argentina # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

China # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

IndiaIndia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Korea # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Thailand # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Indonesia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Philippines # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Hong Kong # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # #

LA

TA

MA

sia

G4

West

ern

Eu

rop

eEM

Eu

r

20162012 2013 2014 2015


Baseline Scenario



<-2% +2%> 0%






total assets under management) Global Growth (risk to the downside)

2.1 pp below baseline in 2016-17 avg.

DM -2.2 pp below baseline

EM -3.1 pp below baseline


10y T-note -140 pbs below baseline on average in 2016

& 2017

Bund -90 bps below baseline on average in 2016 & 2017


VIX Increases and stabilizes by 30 until 2017 & 25 in

2017 EoP

EMBI surges to 6.5 pp in 2017 EoP



Scenario Conditional Flow Paths for EMs (Cumulated Baseline and alternative scenarios. Cumulative % variation of portfolio Flows, forecast as of December 2015)

Summary of Scenarios

All carry a tilt to the downside for EMs

(**)

Basline Scenario

Negative Scenario

Heightened Risk Scenario

0

100

200

300

400

500

600

700

800

900

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(**) Original forecast intervals for the simulations made at the beginning of 2015 to compare to the current situation

Hot Topics Liquidity & Exchange Rates



Currency dynamics are deeply linked to liquidity

position of a country. A tighter situation -be that due to

less commodity revenues or due to increased financial

severance- feeds into the expectation of reserve

depletion.

Ultimately this is predicted to trigger a depreciation of

the exchange rate as stabilization mechanism. Over the

last two years increased global financial costs (Fed

normalization, risk premia etc.) and eroding export

revenues due to commodity price cuts and weaker

global demand have stressed EMs liquidity positions.

As a result, free-floating currencies (in commodity and

non commodity exporting countries) steadily

depreciated during the same period. Though the

depreciation started before the oil price slump, financial

volatility and the commodity price cycle have

exacerbated this process

Liquidity & Exchange Rates

Emerging Markets: Liquidity Position & Exchange

Rates

We asses the risk of running short of liquidity by computing the Liquidity Risk Indicator as the share of Reserves and Trade & Capital Income relative to the amount of market liabilities (ex FDI) and short-term banking debt. A Positive value implies a margin to repay the amount of outstanding short term debt by that amount, negative value imply a shortfall of funds to repay short term debt. The chart to the right displays each country's’ liquidity position (LRI) vs. the exchange rate (FX - RHA in inverse order, right hand axis). Depreciations go along tighter liquidity historically. This process started already in 2013 before commodity prices started to decline.

Start of the Oil price Slump Q3-2014 Start of the FX depreciation (Q2-2013 or before)

2.5

3

3.5

40

10

20

30

40

50

60

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Peru

LRI FX

1

2

3

4

5

6

720

30

40

50

60

Mar-

06

Dec-0

6S

ep

-07

Ju

n-0

8M

ar-

09

Dec-0

9S

ep

-10

Ju

n-1

1M

ar-

12

Dec-1

2S

ep

-13

Ju

n-1

4M

ar-

15

Chile

LRI FX

11.21.41.61.822.22.42.62.80

10

20

30

40

50

60

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Colombia

LRI FX

11.522.533.5-35

-30-25-20-15-10

-50

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Turkey

LRI FX

10

12

14

1620253035404550

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Mexico

LRI FX

1

3

5

7

9

11-400

-300

-200

-100

0

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Argentina

LRI FX

Useful Information


33

Our framework is based on the belief that there are unobservable factors or channels that act at the global (GLOBAL), regional (Developed (DM), Emerging (EM) and Safe Havens (SH) and idiosyncratic (I) transmitting from the global macro economy to flows or asset prices. The origin of these shocks can be created due to monetary policy in DMs, expected growth differentials between DMs and EMs and the differential risk aversion levels arising between the latter two.

To model the behavior between flows and asset prices and these global shocks via the described channels we use a two step approach based on a Dynamic Factor Model (DFM) and its interaction to a Factor Augmented Vector Autorregresion (FAVAR)

In the first part of the model, the “Dynamic Factor Model of Portfolio Flows and Asset Prices”, we use a version of a Dynamic Factor Model. Our set-up comprises a measurement equation block (1) and a state equation block (2). Both blocks together build the so called State Space Model. In this, the measurement equation block relates each observable portfolio flow in the (Y) matrix to several unobservable “states” or latent factors (F) with varying intensities according to the estimated parameters of each flow.

Methodology and Interpreting the Results A Dynamic Factor Model / Factor Augmented VAR to analyze and forecast flows and asset prices. Reference Paper: “Monetary Policy in the North and Portfolio Flows in the South”

In the second part of the model the “Factor Augmented VAR (FAVAR) model“ we state the relation of the extracted factors with a set of macroeconomic variables in the form of a VAR structure allowing time dynamics between the three elements of the analysis: factors, macro and flows/assets.

We have chosen a set of macro variables so that the extracted factors carry strong statistical relations to the global financial cycle represented here with the EUR and US long-term rates that proxy the term premium. Also, factors and these latter variables carry strong links to the Global Risk Aversion and the Differential Risk Aversion to Emerging Markets (here gathered with the VIX and the EMBI respectively as in Rey 2012). Lastly we have analysed the relation of these variables and variables that proxy growth and growth differentials between developed and emerging markets (here as the G7 and great -EM median GDP Q/Q growth rates).

The model is estimated by means of maximum likelihood with Bayesian techniques and a prior that leverages more in the recent past in order to gauge the recent events.

Factors are forecasted conditional to the evolution of macro economic variables following the scenarios described bellow and flows are recovered back from the forecasted factors by means of the estimated measurement equation block (1) described above.

https://www.bbvaresearch.com/en/publicaciones/monetary-policy-in-the-north-effects-in-the-south-2/


34

The BBVA_PM: a two step DFM/FAVAR model Reference Paper: “Monetary Policy in the North and Portfolio Flows in the South”

* See Doz, Giannone, Reichlin (2006), Watson, Reis (2010), Agrippino and Rey, H.

(2013) Fratzscher 2013, Rey (2012), Puy (2013) among others

(2) Factor Augmented Model (FAVAR) to combine Macroeconomic variables and factors and Variables

(1) The Dynamic Factor Model (DFM) to extract flows (and asset prices) factors

Global & Regional Macro Shocks

Transmission Channels

(Macro & Factors)

From Factors To Fin. Variables

…… Flows assumed to conceal a structure of latent factors (L) (Global, Regional and Idiosyncratic), Each factor is orthogonal and follows an AR(p) process (f(L)). PF(t)i=b1i*Global(t)+b2i*EME(t) +bi*IDIO(t)i+U(t) (emerging) PF(t)j=b1j*Global(t)+b4i*DME(t) +bi*IDIO(t)i+U(t) (developed) PF(t)j=b1j*Global(t)+ b4i*DME(t) ++b5i*SH(t) + bi*IDIO(t)i+U(t) (SH)

1 Measurement Block Relates Factors (Ft) and Flows (Xt)

2) Transition Block allows for flows (Ft) dynamics as AR

The Noise to Signal Ratio is maximized, errors are iid.

The process is estimated using a Kalman Filter

Exploiting time relations between the extracted latent factors and a set of selected global macro variables (2) and recovering flows by means of the measurement equation block in the DFM.

SHOCK • Risk Aversion ( VIX

/EMBI) • Monetary Policy (Fed,

ECB rates) • Growth differentials

TRANSMISSION • To Global the Global

factor • To Specific Markets

(DM,EM, SH)

REACTION • Retrenchment • Reallocation • Flight to

Quality • etc.

https://www.bbvaresearch.com/en/publicaciones/monetary-policy-in-the-north-effects-in-the-south-2/


35

This document, prepared by BBVA Research Department, is provided for information purposes only and expresses data, opinions or estimates pertinent on the date of issue of the report, prepared by BBVA or obtained from or based on sources we consider to be reliable, which have not been independently verified by BBVA. Therefore, BBVA offers no warranty, either express or implicit, regarding its accuracy, integrity or correctness.

Estimates this document may contain have been undertaken according to generally accepted methodologies and should be considered as forecasts or projections. Results obtained in the past, either positive or negative, are no guarantee of future performance.

This document and its contents are subject to changes without prior notice depending on variables such as the economic context or market fluctuations. BBVA is not responsible for updating these contents or for giving notice of such changes.

BBVA accepts no liability for any loss, direct or indirect, that may result from the use of this document or its contents.

Disclamer

This document and its contents do not constitute an offer, invitation or solicitation to purchase, divest or enter into any interest in financial assets or instruments. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind.

With particular regard to investment in financial assets having a relation with the economic variables this document may cover, readers should be aware that under no circumstances should they base their investment decisions on the information contained in this document. Persons or entities offering investment products to these potential investors are legally required to provide the information needed for them to take an appropriate investment decision.

The content of this document is protected by intellectual property laws. Its reproduction, transformation, distribution, public communication, making available, extraction, reuse, forwarding or use of any nature, by any means or process, are not permitted except in cases where it is legally permitted or expressly authorised by BBVA.


BBVA Research Group Chief Economist Jorge Sicilia

Cross Ciuntry Emerging Economies Cross-Country Emerging Markets Analysis

Álvaro Ortiz Vidal-Abarca [email protected]

Asia Stephen Schwartz [email protected]

Mexico Carlos Serrano

[email protected]

Latam Coordination Juan Ruiz

[email protected]

Argentina Gloria Sorensen [email protected]

Chile Jorge Selaive [email protected]

Colombia Juana Téllez [email protected]

Peru Hugo Perea [email protected]

Venezuela Oswaldo López [email protected]

Developed Economies: Rafael Doménech [email protected]

Spain Miguel Cardoso [email protected]

Europe Miguel Jiménez [email protected]

US Nathaniel Karp [email protected]

Global Areas:

Financial Scenarios Sonsoles Castillo [email protected]

Economic Scenarios Julián Cubero [email protected]

Innovation & Processes Oscar de las Peñas [email protected]

Financial Systems & Regulation: Santiago Fernández de Lis [email protected]

Financial Systems Ana Rubio [email protected]

Financial Inclusion David Tuesta [email protected]

Regulation and Public Policies María Abascal [email protected]

Recovery and Resolution Policy José Carlos Pardo [email protected]

Contact details: BBVA Research Paseo Castellana, 81 – 7th floor 28046 Madrid (Spain) Tel. + 34 91 374 60 00 and + 34 91 537 70 00 Fax. +34 91 374 30 25 [email protected] www.bbvaresearch.com

BBVA Research Asia 43/F Two International Finance Centre 8 Finance Street Central Hong Kong Tel: +852 2582 3111 E-mail: [email protected]

mailto:[email protected]

flows & assets report - bbva research€¦ · flows and assets report: q1 2016 1. key messages...

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