Estrategia de Inversión 2015

PLEASE SEE IMPORTANT DISCLOSURES ON THE LAST THREE PAGES OF THIS REPORT.

Anti-deflationary measures leave room for positive surprises in Europe

Equity Strategy - November 2014

Beatriz Tejero European Equity Strategist | [email protected] I +34 91 374 46 61

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Anti-deflationary measures leave room for

positive surprises in Europe / November 2014


• Our call for 2014 was to go long on equities, with developed markets outperforming the emerging ones and a relative

outperformance of Europe vs. the US. Despite the lower growth momentum in emerging markets and Europe, our fundamental

position has not changed and we do expect further equity market gains in 2015

• Our constructive outlook in equities is supported by:

1. An improving global growth, although at a slow pace: We expect better growth conditions for the countries which depend

more on local demand, since the concentration of the global supply chains in China will cause global trade to slow further. In that

sense, among emerging markets we prefer Asia over LatAm. Inside LatAm, we still prefer countries that have introduced structural

reforms, and consequently our favourite is Mexico

• In the developed areas, the US is still the bright spot. Productivity levels are supported by contained ULCs and the positive

impact of lower energy costs. This, together with growing private demand based on the wealth effect that underpins the

personal consumption and on the “reindustrialisation”, will help to boost investment

• In Europe, the expansionary policy mix (monetary policy, fiscal policy and structural reforms) avoids a deflationary framework.

We think that there is room for positive surprises driven by less restrictive fiscal policies, aggressive QE and the euro’s

depreciation

• In Spain, credit growth is still weak but the expansionary monetary policy, together with the NPL’s having reached their peak

and the foreseeable cycle improvement, will help the growth in credit volumes accelerate

2. Corporate use of cash: Equities will be underpinned by the positive cycle in the US, and in general by the attractive cash flow

generation, that will support corporate M&A activity, leading to RoE improvement. Shareholder remuneration is a positive.

Considering the low rates environment, relative valuations remain attractive (EY of the S&P 500 at 6.3% vs. 10Y Treasury at

2.3%, EY of the Stoxx600 at 8.0% vs. 10Y Bund at 1.0%)

Executive Summary

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3. Policy mix and structural reforms will continue to reduce the equity risk premium: liquidity will be high and interest

rates will remain low and this will make investors look for yield. The policy actions, the infrastructure development plans

and the weaker euro leave a lot of room for positive surprises for the European cycle and EPS revisions, which are still near all

time lows (-45% vs. 2010 peak and -60% vs. 2007 peak). Margins will be well supported by the operating leverage (European

margins 4% below US ones), and M&A activity (+60% YoY in Europe and +56% YoY globally) will help reach higher RoEs.

Valuations are appealing in both absolute (P/E15 11.5x BBVAe for the Eurostoxx50 vs. 15x of the S&P500) and relative terms

(EY15 Eurostoxx50 at 8.7% vs. BBB European corporate bonds at 1.8%), especially considering the low interest rates

framework. Following our Gordon valuation model, our target for the S&P 500 for 2015 is 2,175, for the Eurostoxx50 3,900

and for the Ibex-35 12,000. Note that Europe has the greatest potential, but entails the highest risks too, since valuations

depend on the policy mix. Our valuation contemplates a QE that includes sovereign bonds. In the US indices, future returns

might moderate if the Fed starts raising rates any time in 2015

4. Earnings can recover even in a low inflation scenario: technological innovation, reindustrialisation and productivity gains on

low ULC and energy costs can compensate for the impact of low CPI. In fact we expect a +9% YoY EPS growth for the S&P500

in 2015, +16% YoY for the Euro Stoxx 50 and +20.5% YoY for the Ibex-35

Executive Summary

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5. Sector recommendations: In the US, we look for growth sectors (IT and Healthcare) and look to play the positive surprises in

consumption through Consumer Cyclicals. We also want to be exposed to the floor in oil prices (Oil & Gas sector). Since the

Fed is expected to raise rates in 2H15, we will avoid sectors sensitive to interest rate hikes (Telecommunications and Utilities)

• In Europe, we want to play the RoE recovery though Financials and Cyclicals and the investment repositioning with IT and

Semiconductors. We will profit from the global rise in infrastructure investment by buying the Construction and Building

Materials sector. We want to be exposed to the recent stabilisation of raw material prices, and especially oil, through the

Materials and Oil & Gas sectors

• In Iberia, we want to profit from the ECB’s expansionary policy and the return to higher RoEs by being exposed to the Banking

sector (Santander, Liberbank). We will play the global cyclical recovery by investing in Materials (Acerinox, Arcelor Mittal) and

aim to gain from the floor reached in oil prices through the Oil & Gas sector (Repsol and GALP are our top picks). We want to

be exposed to the Spanish recovery through the Media sector (Mediaset, Atresmedia). We would also like to follow Iberian

Small Caps: Portucel, Técnicas Reunidas, CTT, CAF, CIE Automotive, Deoleo, Logista and Zeltia

Executive Summary

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Section 0

A look at what has happened in 2014

Section 1

On the right track for global growth in 2015 1.1. A modest global acceleration of growth: innovation and trade are key

1.2.The US is still the bright spot

1.3.No deflation in Europe. Room for positive surprises

1.4.Spain. Internal demand and housing sector improving

1.5.Emerging economies: back to growth but at different rates. Transition to a model less dependent on exports and investment

1.6.Key issues for our financial models

Structural low-neutral interest rates in developed markets A stronger USD is here to stay Raw materials will bottom out on the recovery of the cycle

Index

Section 2

Asset allocation

Section 3

Equity strategy in developed markets 3.1 US equities: still positive but lower returns lie ahead

3.2 Why would we invest in European and Iberian equities?

3.3 Investment ideas in the US

3.4 Investment ideas in Europe

3.5 Investment ideas in Iberia

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Section 0


Our call for 2014 was to go long on equities with developed markets outperforming. Relative outperformance of Europe vs. the US and

with Emerging markets lagging behind

The reality check: US equities rallying with European markets remaining flat. Good performance of the traditional safe heavens, such as sovereign bonds

The reason: fears of deflation in Europe and concerns about global growth

25.1 22.6

14.710.0

8.3 7.2 7.2 7.1 5.1 4.6 3.30.8

-3.9 -6.6-10.8

-15.2

-24.4-28.1

CorpUS(TR)

MSCIPERU

S&P 500 IBEX 35 MX IPC MSCIWorld

Govt 10aUS (TR)

STOXXEurope

600

E 50 MSCI EMAsia

MSCI MX HangSeng

Gold MSCI EMLatAm

MSCI BR GSCI TR MSCIPortugal

Oil-Brent

Performance of world indexes (YoY % change until closing of 24/11/2014) Source: DataStream

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Index

Section 0

A look at what has happened in 2014 Section 1

On the right track for global growth in 2015

1.1. A modest global acceleration of growth: innovation and trade are key






Structural low-neutral interest rates in developed markets

A stronger USD is here to stay

Raw materials will bottom out on the recovery of the cycle

Section 2

Asset allocation

Section 3

Equity strategy in developed markets 3.1. US equities: still positive but lower returns lie ahead

3.2. Why would we invest in European and Iberian equities?

3.3. Investment ideas in the US

3.4. Investment ideas in Europe

3.5. Investment ideas in Iberia

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Global macroeconomic forecasts *Data updated in September 2014 Source: BBVA based on OECD, EC and IMF

1.1. A modest acceleration of growth: global growth to rise in 2015 to 3.7%-3.8% YoY (vs. 3.2% in 2014e)

Section 1


2014e 2015e 2014e 2015e 2014e 2015e 2014e 2015e 2014e 2015e 2014e 2015e

World 3.2 3.0 3.2 3.7 3.3 3.8 3.3 3.8 4.2 3.8 4.2 4.4

US 2.8 1.9 2.0 2.5 2.2 3.1 2.2 3.1 2.1 1.5 1.9 2.2 1.8 2.0 2.0 2.1

UK 0.3 1.7 3.1 2.7 3.1 2.7 3.2 2.7 2.8 2.6 1.5 1.6 1.5 1.6 1.6 1.8

Eurozone -0.6 -0.4 0.8 1.3 0.8 1.1 0.8 1.3 2.5 1.4 0.5 1.0 0.5 0.8 0.5 0.9

Germany 0.9 0.5 1.3 1.4 1.3 1.1 1.4 1.5 2.1 1.6 0.9 1.5 0.9 1.2 0.9 1.2

France 0.4 0.4 0.4 1.1 0.3 0.7 0.4 1.0 2.2 1.0 0.7 0.9 0.6 0.7 0.7 0.9

Italy -2.4 -1.8 -0.3 0.8 -0.4 0.6 -0.2 0.8 3.3 1.3 0.3 0.7 0.2 0.5 0.1 0.5

Spain -1.6 -1.2 1.3 2.0 1.2 1.7 1.3 1.7 2.4 1.4 0.0 1.0 -0.1 0.5 0.0 0.6

Portugal -3.3 -1.4 0.9 1.5 0.9 1.3 1.0 1.5 2.8 0.4 0.0 0.7 0.0 0.6 0.0 1.1

LatAm 2.6 2.4 0.9 1.8 1.4 2.4 7.6 8.9 13.1 14.2

Asia 5.2 5.2 5.0 5.2 6.1 6.3 5.5 5.6 3.4 3.5 3.4 3.6 3.7 3.7

Inflation (% YoY, average)GDP (% YoY)

BBVA (Nov-14) EC (Nov-14) IMF (Oct-14) BBVA (Nov-14) EC (Nov-14) IMF (Oct-14)

2012 2013 2012 2013

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The expansionary policy mix should lead to positive feed-back loops, especially in Europe, Japan and the emerging markets. In the US much of the effect on growth is already known

Increasing return on capital

Wealth effect

Extremely lax monetary policy

Fiscal policy

(towards a looser stance beyond 2015)

Lower cost of capital

+

Business cycle

1.1. A modest global acceleration of growth

Structural reforms

Efficiency, productivity and lower ULCs

Section 1


+

+

Innovation, digital revolution and

reindustrialisation

+

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Global trade

Global trade to grow at a slower than expected pace. This slowdown might be structural. In fact world trade development has, to a large extent, relied on the globalisation of supply chains, and in the last 2-3 years China has concentrated a growing share of these supply chains. Consequently: i) countries with the right policy mix and/or have implemented structural reforms are more attractive and ii) exchange rates are key for the competitive advantage

World export volumes (% var. 3M) Source: Datastream, BBVA GMR

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Mar-

10

May-

10

Jul-10

Sep-1

0

Nov-

10

Jan-1

1

Mar-

11

May-

11

Jul-11

Sep-1

1

Nov-

11

Jan-1

2

Mar-

12

May-

12

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar-

13

May-

13

Jul-13

Sep-1

3

Nov-

13

Jan-1

4

Mar-

14

May-

14

Jul-14

World exports EMs Developed

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

BRL JPY CNY EUR USD MXN

Since 2008 Since 2004

Global exchange rates Source: BEA, BBVA GM Research

1.1. A modest global acceleration of growth

Section 1


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Industrial Production: US vs. Eurozone Source Federal Reserve, Eurostat, BBVA GMR

Investment supports the new industrial boom

Investment is the main growth driver in this cyclical recovery. Historically growth cycles driven by investment and industrial production have been longer and more resilient

US new capital goods orders (ex-defence and ex-aircraft) (USD bn) Source BEA, BBVA GMR

80

85

90

95

100

105

110

Dec-

98

Jul-99

Feb

-00

Sep-0

0

Apr-

01

Nov-

01

Jun-0

2

Jan-0

3

Aug-0

3

Mar-

04

Oct-04

May-

05

Dec-

05

Jul-06

Feb

-07

Sep-0

7

Apr-

08

Nov-

08

Jun-0

9

Jan-1

0

Aug-1

0

Mar-

11

Oct-11

May-

12

Dec-

12

Jul-13

Feb

-14

Sep-1

4

US Euro

40000

45000

50000

55000

60000

65000

70000

75000

Jan-9

5

Oct-95

Jul-96

Apr-

97

Jan-9

8

Oct-98

Jul-99

Apr-

00

Jan-0

1

Oct-01

Jul-02

Apr-

03

Jan-0

4

Oct-04

Jul-05

Apr-

06

Jan-0

7

Oct-07

Jul-08

Apr-

09

Jan-1

0

Oct-10

Jul-11

Apr-

12

Jan-1

3

Oct-13

Jul-14

1.2. The US is still the bright spot

Section 1


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Mortgage rates in the US have remained subdued: The recovery in the real estate market continues to support the wealth effect and this, together

with the stock market recovery, has supported the personal consumption expenditure and has offset the impact of the tax increases put in place last

year. The wealth indicator anticipates a PCE stability in the coming quarters. In fact the model of the US economy used by the Federal Reserve

suggests that an additional dollar of household wealth leads to a permanent rise in household consumption of about three to five cents

Impact of the real estate recovery on personal consumption expenditures Source: NAHB, BEA, BBVA GMR

The wealth indicator anticipates a further recovery in personal consumption expenditures Wealth indicator:1/3 (1/mortgage rates YoY) +2/3 SP500 YoY Source: Bloomberg, BBVA GMR

Real estate continues to perform better than expected with a knock-on effect on wealth

-2

-1

0

1

2

3

4

5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

Oct-

99

Oct-

00

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

Oct-

11

Oct-

12

Oct-

13

Oct-

14

Wealth indicator (-4 months) PCE YoY (%) (rhs)

-2

-1

0

1

2

3

4

5

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Ja

n-0

0

Ja

n-0

1

Ja

n-0

2

Ja

n-0

3

Ja

n-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Ja

n-1

3

Ja

n-1

4

Ja

n-1

5

Median House Sales Prices YoY (%) PCE YoY (%) (rhs)

1.2. The US is still the bright spot

Section 1


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It is important, however, for Europe to follow the path marked out by the United States if it wishes to mitigate the impact of secular stagnation, while also ensuring that the virtuous circle, now underway, does not distort or sag

Transfer of credit

Limited growth despite economic

upturn

Sharp injection

of liquidity via TLTRO

Carry trade

penalty

+

Driving the ABS/securitisation

market

Fostering business in

private equity/private placement

Sharp drop in

borrowing costs < RoE

Incentivising family wealth

by increasing financial assets

Weakening the euro Exports

Consumption

Encouraging private investment in

production

Reactivation

of SME borrowing/capital

Effect

six months

QE

Sovereign bonds

+

Fiscal slack

+

Low rates

Means of offsetting

Dis

inte

rme

dia

tio

n

Low Euro growth outlook

Bank deleveraging

The risk of deflation is very limited in Europe: the market is underestimating the interaction between real and financial variables

Section 1


1.3. No deflation in Europe. Room for positive surprises

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Note that among the central banks of the developed areas, only the Fed is expected to stop increasing the size of its balance sheet and it is going to be the first one to hike rates, although not in the near future. This should foster non-USD exports and help the European recovery

-4

-3

-2

-1

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014

ECB Fed BoE BoJ

%

0%

10%

20%

30%

40%

50%

60%

70%

Oct-07

Apr-

08

Oct-08

Apr-

09

Oct-09

Apr-

10

Oct-10

Apr-

11

Oct-11

Apr-

12

Oct-12

Apr-

13

Oct-13

Apr-

14

Oct-14

BoE ECB Fed BoJ

Central bank balance sheet (% of GDP) Source: DataStream

Real policy rates Source: DataStream

Catalysts of a positive virtuous cycle in Europe: 1) An expansionary policy mix

Section 1



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Impact of a fall in the price of oil (pp) Source: BBVA Research

-0.3

-0.2

-0.1

0.0

0.1

0.2

Inflation GDP

2015 2016

Impact of a decline in EURUSD (pp) Source: BBVA Research

0.0

0.1

0.2

0.3

Inflation GDP

According to the ECB a fall in oil prices of -6.5% in two years has an impact on CPI of -0.1pp in the first year and -0.2pp in the second year and for every 1% yearly depreciation of the EUR vs. the USD, the impact on CPI is of 0.07pp and of +0.05pp YoY on the GDP growth rate. We believe that Brent should reach USD95/bbl (vs. the current USD77.02/bbl). This could add +0.18pp and +0.36pp to CPI in 2015 and 2016 respectively and could impede -0.18pp of growth in both 2015 and 2016. We also think that the USD will trade at EURUSD1.20 by the end of 2016 vs. current level of EURUSD1.25 (-4.2%). This would imply a 0.3pp increase in CPI and +0.2pp in GDP YoY growth in 2015 and 2016 respectively. Leading to no impact on growth and limiting the risks of deflation

Catalysts of a positive virtuous cycle in Europe: 3) The positive impact of currency and oil

Section 1



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Volumes of new credit Source ECB, BBVA GMR

The effects of the expansionary policy mix if the cycle recovers: credit improvement

Credit has been improving, especially in the European peripherals. Credit normalisation is essential for a sustainable recovery in Europe and Spain.

This will depend on how fast the fragmentation in European financial markets and the high levels of bank intermediation in Europe are reduced

-6%

-4%

-2%

0%

2%

4%

6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Credit to Eurozone residents ex-government YoY (%) EMU GDP YoY (%) (rhs) (-2qtrs)

Credit vs. growth in the Eurozone Source: Bloomberg, BBVA GMR

Section 1



-10

-5

0

5

10

15

20

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

Loans to non financial corp (YoY %) Loans to households (YOY%)

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Spain: house transactions (000s per quarter, sa)

and housing prices (2007=100) Source: BBVA based on Ministry of Public Works

Spain: GDP growth breakdown *contribution to GDP growth

Source: BBVA based on INE

Since the beginning of 2014, the Spanish recovery has been based on exports. Since then, domestic demand has started to contribute positively to

growth on the better evolution of the labour market and the increase in credit for household consumption

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jun

-12

Se

p-1

2

Dec-1

2

Ma

r-13

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-14

Jun

-14

Se

p-1

4

Domestic demand* External demand* GDP growth (% QoQ)

60

70

80

90

100

110

25

50

75

100

125

150

175

200

225

250

275

Jun

-04

Dec-0

4

Jun

-05

Dec-0

5

Jun

-06

Dec-0

6

Jun

-07

Dec-0

7

Jun

-08

Dec-0

8

Jun

-09

Dec-0

9

Jun

-10

Dec-1

0

Jun

-11

Dec-1

1

Jun

-12

Dec-1

2

Jun

-13

Dec-1

3

Jun

-14

House transactions (lhs) Nominal house price index (rhs)

Section 1


1.4. Spain will still be the best performer in Europe. Internal demand and the housing sector are improving

1.4.1. Expansionary financial conditions are rebalancing the Spanish growth structure

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In China, the economic reforms rely more on the domestic demand and less on exports, which makes China more attractive in the current global environment, as well as a “more efficient and productive use” of China’s finite supply of human resources and capital (TFP) and this should help support growth on a long-term basis. GFCF and labour market stabilisation are essential

China: job vacancies vs. job seekers Source: DataStream

0.8

0.9

1.0

1.1

1.2

04 05 06 07 08 09 10 11 12 13 14

Tighter labour market

Slacker labour market

China: loans vs. urban fixed investment (YoY) Source: DataStream

Section 1


1.5. Emerging economies: back to growth but at different rates. Transition to a model less dependent on exports and investment A managed soft landing in China towards a new normalised growth of around 6-7%, supported by a favourable policy mix

10%

15%

20%

25%

30%

35%

40%

5%

10%

15%

20%

25%

30%

35%

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

Urb

an fix

ed in

vestm

ent (Y

oY

)

Fin

ancia

l in

stit

utio

ns lo

ans (Y

oY

)

China financial institutions (loans) Urban fixed investment

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A stronger USD is here to stay. We forecast a relatively bullish multi-year USD trend

Section 1


1.6. Financial implications of the current growth model

DXY Source: Bloomberg, BBVA GMR

50

70

90

110

130

150

170

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

'85 Plaza Accord:

concerted effort by

central banks to

weaken the USD after

'79 (until '87 Louvre

Accord), SPX +12%

year on year

Strong recovery in

EM/raw materials

(Equities in BRICS

+400% vs. US +90%)

Unprecedented growth

in central bank

reserves and

diversification out of

the USD

'95-'00 cycle of

productivity

and equities in

US: SPX +20%

year on year

Consolidated USD

negatively affected

by QEs and

benefited by its

status as a safe-

haven currency

Credit spreads, changes

in CB balance sheets,

limits in the flow to EUR

and JPY/GPIF strategy

vs. positions high in

USD and productivity

limits ("permanent

stagnation" on both

sides?)

Risks: surprise

downticks in US,

rallies in Europe?

US:CPI vs Libor 3m Source: Datastream

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-1

0

Oct-10

Jul-11

Apr-

12

Jan-1

3

Oct-13

Jul-14

Yie

ld (%

)

US

CPI

(YoY

%)

US CPI Libor 3m

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Raw materials will bottom out on the recovery of the cycle. Oil prices might have reached a floor. We expect Brent to return to 95USD/bbl as balanced level

Section 1


1.6. Financial implications of the current growth model

• In the long term (2019), we believe that demand growth will outpace supply by over 2mbpd, which should keep oil prices close to the marginal

costs of production (USD90-100/bbl, according to our estimates), thus balancing supply and demand

• If current prices remain unchanged, we think that many high-cost projects (gas to liquids, oil sands, unconventional oil, ultra deep water drilling,

Arctic drilling, etc.) will be abandoned, while the pressure placed on the budgets of oil-producing countries (Saudi Arabia, Venezuela, Russia) will

be unsustainable, which should push prices up

• We choose USD95/bbl for Brent, based on marginal costs and balanced supply/demand

Lower OPEC weighting in production (values in mbpd) Source: EIA

Production cost curve (USD/bbl) Source: BBVA GMR

0

20

40

60

80

100

120

140

Sa

udi A

rabia

Iran/Ira

q

Ku

wait

Nort

h A

fric

a

UA

E

Bra

zil

CIS

Ea

gle

Fo

rd

Ve

nezuela

Rest of E

uro

pe

LatA

m

Rest of A

fric

a

An

gola

/ N

igeria

Ba

kken

Me

xic

o

Chin

a

Nort

h S

ea

Oth

er

Sh

ale

s U

SA

Russia

Con

ve

ntio

na

l U

SA

Bitum

en C

ana

da

Bitum

en s

ands

Gas to liq

uid

s

35%

40%

45%

50%

55%

60%

0

20

40

60

80

100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

mb

/d

Middle East

Former Soviet Union

Non-OECD Europe

China

Asia

Non-OECD Americas

Africa

OECD Asia, Oceania

OECD Europe

OECD Americas

OECD share

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Section 0


Section 1








Index

Section 2

Asset allocation

Section 3






Annex

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Asset allocation: Equities Source: BBVA GMR

Section 2

Asset allocation

0

5

10

15

20

25

30

0

2

4

6

8

10

12

Jan-0

7

May-

07

Sep-0

7

Jan-0

8

May-

08

Sep-0

8

Jan-0

9

May-

09

Sep-0

9

Jan-1

0

May-

10

Sep-1

0

Jan-1

1

May-

11

Sep-1

1

Jan-1

2

May-

12

Sep-1

2

Jan-1

3

May-

13

Sep-1

3

Jan-1

4

May-

14

Sep-1

4

Premium (rhs) Synthetic EY (lhs) 10Y synthetic (lhs)

%%

Valuation global equity / bonds* *Composite EEUU, Euro, Spain, Mexico and Brazil Source: BBVA GMR

We prefer equities because: i) expansionary policy mix will be supportive of lower growth in developed markets in 2015, ii) QE increases the relative value of equities vs. fixed income, iii) emerging markets are on a long-term growth path but depend on infrastructure spending, low rates, stable raw materials and weaker currencies (preference for countries with domestic market potential), iv) leverage and M&A cycle to support margins and RoEs (depend on capacity reduction), and v) high cash flow and dividend generators are preferred.

2.1. Equities remain our favourite asset, especially in Europe and Asia

- 0 +

Global Equities

EuroStoxx50

S&P500

Peripheral Equities

Asian Equities

LatAm Equities

Brazil

Colombia

Mexico

- 0 +

Global Corporates

Peripheral Europe

Corporates LatAm

Sovereign Bonds

Peripheral Europe

Core Europe

USA

LatAm

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Section 0


Section 1








Index

Section 2

Asset allocation Section 3






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Section 3

Equity strategy in developed markets

3.1. US equities: still positive but lower returns lie ahead

3.1.1. Growth momentum and re-industrialisation

3.1.2. Cash flow and shareholder remuneration are attractive, especially against a backdrop of lower financial leverage

3.1.3. Adjusted by our low-neutral rates, long-term valuations remain appealing

3.1.4. Relative valuations vs. corporates and fixed income remain attractive in spite of above average P/E ratios

3.1.5. However, future returns in the US might start to moderate, especially if the Fed begins raising rates in 2015

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US equity cycles: current vs. 2002-07 Source: Bloomberg, Datastream, BBVA GMR

64.6

4.3

12.9

2.9

12.9

21.2

84.6

5.7

11.5

2.3

10.5

21.4

110.8

1.7

15.0

2.7

10.9

19.3

EPS

Corp. rates

RoE

P/B

PCF

EBITDA /Sales

Average 02-07 2008 03-Sep-14

Growth momentum is supportive for EPS and profitability. The slow but steady US expansion provides a stable outlook for corporate revenues.

Profit margins remain near historical highs and show little sign of pressure, supported by ULC contention and low energy prices. Against this

backdrop, single-digit corporate profit growth appears achievable.

10%

12%

14%

16%

18%

20%

22%

-6

-4

-2

0

2

4

6

Dec-

99

Jul-00

Feb

-01

Sep-0

1

Apr-

02

Nov-

02

Jun-0

3

Jan-0

4

Aug-0

4

Mar-

05

Oct-05

May-

06

Dec-

06

Jul-07

Feb

-08

Sep-0

8

Apr-

09

Nov-

09

Jun-1

0

Jan-1

1

Aug-1

1

Mar-

12

Oct-12

May-

13

Dec-

13

Jul-14

CPI - PPI EBITDA/Sales

Margin indicator (CPI –PPI) vs. margin Source: Datastream and BBVA GMR

Section 3


3.1.1. Growth momentum and reindustrialisation


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S&P 500: buy-backs (USD bn) Source: Datastream and BBVA GMR

0

20

40

60

80

100

120

140

160

180

Dec-07 Jun-09 Dec-10 Jun-12 Dec-13

US: non-financial leverage (*) (*) Non-farm, Non-fin. corp. bus: US credit market debt / US market value of corp. equities – Non-farm, Non fin. Corp. bus Source: Datastream (Flow of Funds)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

Section 3


3.1.2. Cash flow and shareholder remuneration are attractive, especially against a backdrop of lower financial leverage


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In historical terms, a proper multiple on the S&P 500 is 20 minus the 10-year Treasury yield. With the 10-year Treasury yield sitting at 2.5% and real

rates close to zero, and the S&P 500 trading at 16x earnings, that puts the fair value for stock market valuations at about 17x earnings. So there is

a little bit of room to run. The key is where the real neutral rate is.

US: P/E (Schiller) vs. 10Y real rates Source: Bloomberg and BBVA GMR

US: P/E vs. 10Y real rates Source: Bloomberg and BBVA GMR

0

5

10

15

20

25

30

35

40

-4 -2 0 2 4 6 8 10

Real interest rates (%)

Schiller

P/E

(x)

0

5

10

15

20

25

30

35

40

-2 0 2 4 6 8 10

Real interest rates %

S&

P 5

00 P/E

(x

)

Section 3


3.1.3. Adjusted by our low-neutral rates, long term valuations remain appealing


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US: earnings yield vs. corporate BAA vs. 10Y Govt Source: Datastream, BBVA GMR

S&P 500: P/E +12M Source: Datastream and BBVA GMR

Section 3


3.1.4. Relative valuations vs. corporates and fixed income remain attractive in spite of above average P/E


8

10

12

14

16

18

20

22

24

26

Nov-84 Nov-89 Nov-94 Nov-99 Nov-04 Nov-09 Nov-14

Average

Current

1

3

5

7

9

11

13

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Earnings yield Baa US 10Y Govt

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S&P 500: EPS (USD) Source: Datastream and BBVA GMR

S&P 500: P/E (x) Source: Datastream and BBVA GMR

S&P 500: EPS and fair value estimates Source: Datastream and BBVA GMR

Target 2014

2,045

Target 2015

2,175

S&P 500 2013 2014 2015 14/13 15/14

Consensus 109 117 131 8.0% 12.0%

BBVAe 109 119 130 9.9% 8.9%

EPSApr-13 Nov-13 May-14 Jul-14 Sep-14

Interest rates 3.7% 3.7% 3.5% 3.5% 3.0%

Risk Premium 4.8% 4.0% 4.0% 4.0% 4.0%

G 1.0% 1.0% 1.0% 1.0% 1.0%

Section 3


3.1.5. However, future returns in the US might start to moderate, especially if the Fed begins raising rates in 2015


5

10

15

20

25

30

35

97 99 00 01 02 03 04 05 06 07 08 09 10 12 13 14 15

0

20

40

60

80

100

120

140

160

97 99 00 01 02 03 04 05 06 07 08 09 10 12 13 14 15

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Section 3



3.2.1. Earnings are still depressed, so there is room for positive surprises following policy actions, and a weak euro

3.2.2. Operating leverage in Europe leaves a lot of room for margins. Valuations are appealing

3.2.3. The QE to be implemented by the ECB will lead to an improvement of the financial conditions and put a floor under the market. Relative valuations vs. fixed income are at historical lows

3.2.4. Attractive valuations on a medium-term perspective. M&A is key for reducing capacity and allowing RoEs to improve

3.2.5. Yields and cash flow are crucial

3.2.6. Our Gordon valuation model

3.2.7. Potential is higher in Europe than in other developed areas but the risk is greater, and depends on the policy mix. Our valuation contemplates a QE that includes sovereign bonds

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If the Financial Stress Index (FSI) rises back to its historical level, the European ERP would still have room to fall by an additional 100bp. In fact, we

expect the FSI to remain subdued in the next two to three years, on the back of expansionary monetary policy. The FSI summarises credit,

financing and monetary market conditions and has a negative correlation with EPS, so a low FSI should help upwards EPS revisions

BBVA EMU FSI vs. ERP Eurostoxx50 Source: BBVA GMR

BBVA EMU FSI vs. EPS Euro Stoxx 50 Source: BBVA GMR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

FTI Europe Avg. FTI Europe EYG Europe (rhs)

y = -0.0152x - 0.0029 R² = 0.0127

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

-1 -0.5 0 0.5 1 1.5 2

FTI Europe (4 week change)

Eu

ros

tox

x50 E

PS

FY

2e 4

week %

ch

an

ge

Section 3



3.2.1. Earnings are still depressed, so there is room for positive surprises following policy actions and a weak euro

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Euro depreciation should have a positive impact on margins. A 10% increase in the real effective exchange rate decrease margins by 1-3%. This export resistance suggests that part of the impact of a stronger euro is absorbed though margins.

S&P 500 vs. Stoxx 600: Profit margin Source: Datastream

-9%

-8%

-8%

-7%

-7%

-6%

-6%

-5%

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Stoxx600 Capex/Sales S&P500 Capex/Sales

S&P 500 vs. Stoxx 600: Capex/sales Source: Datastream

Section 3



3.2.2. Operating leverage in Europe leaves a lot of room for margins. Valuations are appealing

There is room for further margin improvement

6

7

8

9

10

11

12

13

14

15

Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14

S&P 500 Stoxx 600

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Low rates and low inflation make investors look for high yielding assets. The 10-year equity return forecast shows that in the long run the Stoxx600

gives on average a 7% YoY return. In fact, we decompose the expected return into: i) EPS growth, ii) repricing, and 3) dividends. EPS growth can

be split into inflation and “real” earnings growth (around 3% YoY). For the repricing we assume that the market’s P/E ratio tends to move towards

the long-term average (this adds about 1% to the long-run return) . And we apply a dividend yield of 3% for Europe (historical average)

Stoxx 600: 10Y expected returns Source: Datastream & BBVA GMR

0%

1%

2%

3%

4%

5%

6%

7%

8%

Breakeven Real EPSGrowth

EPS meanreversion

Earnings PE meanreversion

DividendYield

Total

Section 3



3.2.3. The QE to be implemented by the ECB will lead to an improvement of the financial conditions and put a floor under

the market. Relative valuations vs. fixed income are at historical lows

EYG Stoxx 600 vs. 10Y Bund vs. IBOXX Corporate Europe BBB Source: DataStream and BBVA GMR

0

2

4

6

8

10

12

Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14

EYG 10Y Govt Corporate BBB

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0

5

10

15

20

25

Feb

-05

Feb

-06

Feb

-07

Feb

-08

Feb

-09

Feb

-10

Feb

-11

Feb

-12

Feb

-13

Feb

-14

Feb

-15

Feb

-16

S&P 500 E50

RoE: S&P 500 and Euro Stoxx 50 Source: Datastream and BBVA GMR

In the medium term, European indexes have the greatest potential for re-rating, because of the ample room for RoE normalisation, particularly in banks. The Schiller P/E (cyclically-adjusted P/E ratio) remains attractive even if current valuations are distorted by global growth divergences

2014e 2015e RoE 2004 Dif RoE 2004-14e % Potential

S&P 500 16.50% 18.30% 15.10% -1.40% -9.80%

E50 10.10% 11.30% 12.40% 2.30% 16.10%

Cyclically adjusted P/E Source: Datastream and BBVA GMR

0

5

10

15

20

25

30

35

40

45

50

Feb-83 Feb-86 Feb-89 Feb-92 Feb-95 Feb-98 Feb-01 Feb-04 Feb-07 Feb-10 Feb-13

USA Euro Spain


3.2.4. Attractive valuations on a medium-term perspective. M&A is key for reducing capacity and allowing RoEs to improve

Section 3


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Global equity valuation Source: Datastream and BBVA GMR

MSCI indices: DY (%) Source: Datastream and BBVA GMR

PE +12M P/B P/CF DY PE +12M P/B P/CF DY

Msci World 13.47 1.96 8.99 2.50% 13.01 2.11 8.74 2.41%

France 12.54 1.38 8.30 3.53% 11.41 1.55 6.35 3.29%

UK 12.56 1.81 7.36 3.79% 11.48 1.95 8.14 3.62%

Australia 13.61 1.81 10.76 4.82% 13.30 2.37 13.03 4.25%

Germany 11.49 1.58 7.42 2.99% 11.47 1.54 7.88 2.93%

Japan 12.83 1.24 7.47 1.94% 15.66 1.43 8.21 1.56%

Canada 13.35 1.89 9.91 2.83% 13.62 2.21 10.22 2.29%

Sw itzerland 15.06 2.55 14.83 3.13% 13.42 2.48 -11.39 2.57%

United States 14.72 2.62 10.10 1.90% 13.95 2.46 9.83 2.00%

Current 10Y avg

0%

1%

2%

3%

4%

5%

6%

Spain

Aust

ralia UK

Fra

nce

Sw

itzela

nd

Italy

Germ

any

Canada

World

Japan

US

Dividend flow is going to remain one of the appealing investment issues in the coming years in Europe, since we expect a low interest rates policy

for an extended period of time

Section 3



3.2.5. And attractive valuation vs. the developed markets: yields and cash flow are required

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Target 2015

3,900

Objetivo 2015

12.000

E50 2013 2014 2015 2016

Consensus 211,81 228,40 267,20 298,71 7,8% 17,0%

BBVAe 211,81 228,97 265,60 302,79 8,1% 16,0%

EPS

14/13 15/14

abr-13 nov-13 may-14 jul-14 sep-14 nov-14

Interest rates 3,7% 3,7% 3,5% 3,5% 3,0% 3,0%

Risk Premium 4,8% 4,0% 4,0% 4,0% 4,0% 3,8%

G 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%

IBEX 2013 2014 2015 2016

Consensus 549.41 587.26 723.43 845.25 6.9% 23.2%

BBVAe 549.41 616.67 742.82 895.10 12.2% 20.5%

EPS

14/13 15/14

abr-13 nov-13 may-14 jul-14 sep-14 nov-14

Interest rates 4,3% 3,7% 3,7% 3,7% 3,5% 3,5%

Risk Premium 4,8% 4,0% 4,0% 4,0% 4,0% 4,0%

G 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%

We have lowered our ERP estimates to 4.00% for the Ibex-35 (vs. 4.25% previously) to 3.75% for the Euro Stoxx 50 (vs. 4.00% previously) and to 3.75% for the S&P 500 (vs. 4.30% previously) since we expect an extremely expansive monetary policy by the ECB during the coming two years. In that sense, our central scenario is that the ECB will carry out a QE programme from December onwards that will lead to an increase in the bank’s balance sheet of EUR1trn, mainly to buy covered bonds and ABS, although additional measures are not ruled out if needed. The resulting target prices offer more potential for the Euro Stoxx 50 and the Ibex-35 (20.3% and 11.1% respectively) than for the S&P 500 (5.1%)

EPS estimates and fair value Source: BBVA GMR estimates

Valuation model

( ) ( ) 2-t 1

15e 1

14e

e e K

Tv EPS K

EPS FV

+

+ + +

= t

Section 3



3.2.6. Our Gordon valuation model: TP Ibex-35: 12.000; Euro Stoxx 50: 3.900

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• We look for growth (IT and HealthCare)

• Play the positive surprises in consumption in the US through Consumer Cyclicals

• Play the floor in oil prices

• Avoid sectors sensitive to interest rate hikes

Section 3



What sectors do we recommend in the US?

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Sectors with an Overweight recommendation. Sanford Bernstein’s Top Picks and least preferred stocks Source: Bernstein Research and BBVA GMR

Section 3


Overweight Main Takeaways Preferred Stocks Least Preferred

Oil & Gas Despite the expected additional RoE deterioration, w e see upside potential from better

than expected oil pricing. Relative valuations are attractive

Cobalt International Energy, Talisman

Energy, Apache Corp

Noble Energy, Devon Energy

Technology Scepticism appears excessive, source of attractively valued earnings pow er.

Reindustrialisation in the US comes from IT

Adobe, Oracle CRM, CA

Defence Current valuations leave little room for further expansion, but w e see them as source of

above average earnings pow er

Boeing, Lockheed Martin General Dynamics

Consumer cyclicals Room for positive revisions from better than expected disposable income grow th. Room

for positive surprises in consumption in the US linked to employment and housing.

Capital discipline remains a positive

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Section 3


Neutral Main Takeaways Preferred Stocks Least Preferred

Healthcare Services Neutral due to potential impact from uncertain regulatory environment Baxter Int, Boston Scientif ic Abbott Laboratories,

Johnson & Johnson

Financials Some optimism on continued RoE recovery priced in, positive revisions could help

sustain current valuations, although regulatory concerns could w eight on the sector

Citigroup, JPMorgan Chase Bank of America, American

Express

Transport Source of above average earnings pow er provided capital discipline and pricing pow er

are sustained

UPS, JBHT FedEx, Norfolk

Autos/Housing Consensus seems achievable, but valuations are not attractive anymore

Sectors with a Neutral recommendation. Sanford Bernstein’s Top Picks and least preferred stocks Source: Bernstein Research and BBVA GMR

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Section 3


Underweight Main Takeaways Preferred Stocks Least Preferred

Telecommunications Dow nside risk from negative beta to rate rises Ubiquiti Netw orks, Juniper Netw orks Aruba Netw orks, Ruckus

Wireless

Utilities Dow nside risk from rising rates PCG, Edison International Dominion Resources,

Nextera Energy

Capital

equipment

Valuations appear elevated in the context of RoEs that are likely to remain depressed

barring a signif icant upside surprise in capital spending

Honeyw ell Int, Eaton Corp 3M, Emerson

Consumer

Staples

RoE erosion not fully reflected in valuations; See dow nside risk from rising rates for

high-yielding stocks

Estee Lauder, Procter & Gamble,

Mondelez

Dr Pepper, Campbell, General

Mills

Commodities Risk of dow nw ard revisions and further de-rating from current valuations Freeport-McMoRan, Teck Resources United States Steel, Nucor

Healthcare

Products

Relative RoE recovery embedded in consensus seems achievable but does not seem

fully reflected in valuations. Avoid SMID Biotech as they see further dow nside risk

Actavis, Momenta Hospira, Theravance

Sectors with an Underweight recommendation. Sanford Bernstein’s Top Picks and least preferred stocks Source: Bernstein Research and BBVA GMR

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• Play the RoE recovery though Financials and Cyclicals

• Get exposure to pent-up demand and investment repositioning with IT and Semiconductors

• Buy cash flow and dividends through Utilities

• Play the recent stabilisation of raw material prices with exposure to the oil sector

3.4. Investment ideas in Europe What sectors do we recommend in Europe?

Section 3


Consensus estimates for EPS FY2 YoY for the sectors of the Stoxx600 Source: Bloomberg, BBVA GMR

MSCI Europe Banks: revisions of the relative EPS vs. P/E Source: Bloomberg, BBVA GMR

0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1.0

1.1

1.1

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14

Rela

tive P

/E (B

anks

/Tota

l)

Banks

earn

ings revis

ions (M

A12M

)

Banks earnings revisions (MA12M) Relative P/E (Banks/Total)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Dec-

07

Jun-0

8

Dec-

08

Jun-0

9

Dec-

09

Jun-1

0

Dec-

10

Jun-1

1

Dec-

11

Jun-1

2

Dec-

12

Jun-1

3

Dec-

13

Jun-1

4

EPS YoY Growth (%) Cyclicals vs non Cyclicals Cyclicals Non Cyclicals

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Section 3


Sectors with an Overweight recommendation (1). Sanford Bernstein’s Top Picks and least preferred stocks Source: Bernstein Research and BBVA GMR


Banking RoEs should return to low -mid teens numbers (normalised RoE e: 9% - 14%)

Potential low ering of CoE due to improved bank safety

Four key drivers w ill support recovery in RoEs: 1) Normalisation of credit cost, 2) Presence in fast

grow ing markets, 3) Potential for further operating leverage and 4) Adapted CIB divisions

Best Value/Grow th combination in our GARP Model (see Annex)

INTESA, BNP, BCP

Oil&Gas Solid upstream pipelines focus on more profitable projects; Shift to long life assets w ill drive grow th for

both production and free cash flow ; Improving capital discipline; Refinery closures

Attractive valuation in GARP, and very attractive valuation in our score (see Annex)

BG, GALP, SHELL

Metals&Mining Q4 should see a recovery in the iron ore price; Real demand grow th has not come to an end in China;

Improving Capital discipline from the majors

Among the best Value/Grow th combinations in our GARP Model (see Annex)

Cheap in our Score valuation (see Annex)

RIO TINTO, ANGLO AMERICAN BHP BILLITON

Building

Materials&Construction

Momentum has reached rock bottom; Expected grow th in underlying earnings; Recovery in construction

markets (US and UK), emerging markets

HEIDELBERG, SAINT GOBAIN HOLCIM, LAFARGE

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Section 3


Sectors with an Overweight recommendation (2). Sanford Bernstein’s Top Picks and least preferred stocks Source: Bernstein Research and BBVA GMR


Technology Strong scale advantage in Wireless, revenue expectations

In the extremely attractive area in terms of our GARP Model (see Annex)

ERICSSON, ALCATEL NOKIA

Beverages Western Europe is on track to deliver another strong surples (bigger than last year). Global grain prices

having fallen back sharply. W European forw ard prices imply a small fall in malting barley prices after a

fall in 2013. Aluminium spot prices imply modest pressure on 2015 costs. Transactional FX pressures in

emerging markets have reached up again in recent w eeks.

Among the best combinations Value/Grow th in our GARP Model

CARLSBERG, PERNOD RICARD REMY COINTREAU

Semiconductors Sounder operating margins, stock undervalued ASML, INFINEON STM, ARM

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Sectors with a Neutral recommendation. Sanford Bernstein’s Top Picks and least preferred stocks Source: Bernstein Research and BBVA GMR

Section 3



Utilities The key factors that underpinned the sector's disappointing performance have now become substantially

w eaker or have disappeared and four key areas of development have emerged (Emerging Markets, global

Renew ables, global LNG (and gas)and regulated business) and w ill be the engines of grow th in coming

years (expected 4-6% CAGR EM pow er demand) and continue throughout the decade.

How ever in some European countries there is some regulatory risk still pending and in a framew ork of

cyclical recovery, the sector might underperform the market.

ENEL, RWE EDP

Food Prefer Food over HPC. The European Food Group is w ell-positiones for the long-term grow th, and they

expect accelerating grow th in 2014

Among the best combinations of Value/Grow th in our GARP Model (see Annex)

In the "expensive part" according to our score valuation (see Annex)

UNILEVER, NESTLE ABF, DANONE

Luxury Goods Macro-economic indicators, maintain our LT positive stance on the Luxury sector. Slow dow n in Sw iss

w atch exports appears to be bottoming out, w ith reversals of decline particularly noticeable in China.

Retail sales trends in Europe have show n signs of recovery. Global tourism has show n some signs of

instability. FX remains a key theme and expect tailw inds to gather as w e move into 4Q14 and 2015.

Unattractive in terms of Value and offers limited grow th according to our GARP model (see Annex)

Expensive according to our score valuation (see Annex)

LVMH, RICHEMONT HERMES,BURBERRY

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Sectors with an Underweight recommendation. Sanford Bernstein’s Top Picks and least preferred stocks Source: Bernstein Research and BBVA GMR

Section 3



Oil services

& Equipment

Continue to forecast the low est level of new offshore activity since 1999

Still see margin compression of up to 30%.

2015 earnings for the offshore players w ill be even w orse than w e expected.

PETROFAC, VALLOUREC, TECHNIP SAIPEM, SBM OFFSHORE, SUBSEA 7

Pharma The drug sector has become slightly constructive.

Sales trends: grow th has been slow ing dow n.

FX: negative impact of the USD vs. GBP and vs. CHF in 3Q14 vs. 3Q13. Neutral vs. the EUR.

The most unattractive sector in terms of value, according to our GARP

Expensive according to our score valuation

Still probabilities of M&A activity in the sector according to our estimates.

NOVARTIS, ROCHE, SANOFI ASTRAZENECA, GLAXO SMITHKLINE

Food Retail We prefer companies w ith distinct retail models, high quality earnings grow th and those w ho

are w ell positioned to compete in "space races" in international markets.

AHOLD, SAINSBURY, CASINO MORRISONS

Insurance Negative impact of a low rates environment, that could erode the sectors results. RSA, MAPFRE GENERALI, MUNICH RE, AVIVA,

SWISS RE

Autos Poor prospects for earnings grow th, valuation remains modest PEUGEOT FIAT CHRYSLER, DAIMLER

HPC Well-positioned for long-term grow th betw een 5-6% (given good categories, markets,

dominance etc.) along w ith some margin grow th and good cash generation, but w e expect

some slow dow n in 2014 and 2015 driven by w eak markets and strong competitive and

promotional pressures.

After very strong FX headw inds in 2013/2014, expect tailw inds for most companies in 2015.

HENKEL, RECKITT L'OREAL, BEIERSDORF

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• Play the RoE recovery and ECB action though Financials

• We want benefit from the stabilisation of raw material prices, getting exposure to the oil sector

• Gain exposure to the global recovery through Materials

• Profit from the bottoming out in activity in Iberia through Small & Mid Caps exposed to the Iberian economy

• Get exposure to pent-up demand and investment repositioning with IT and Semiconductors

• Buy cash flows and dividends through Utilities


What sectors do we recommend in Iberia?

Section 3


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Sectors with an Overweight recommendation Source: BBVA GMR

Section 3



Banks The main takeaw ays to recommend the Iberian banking sector are 1) ROEs normalisation to low -mid

teens (normalised RoE e: 9-14%) on the sector's adjusted capacity, 2) NPL's peaking, w hich w ill affect

positively the sector's net profit, 3) Low er f inancing costs on the expansionary policy of the ECB w ill

low er the f inancing costs and 4) Expected cycle recovery that w ill help increase credit volumes.

Sabadell, Santander,

Liberbank, Popular

Bankinter, Bankia, BPI

Oil & Gas We expect a re-rating of the sector, since w e think that oil has reached a bottom and should recover in

the coming months on higher activity levels and supply reduction. We also expect better CF in the sector

on CAPEX discipline.

Repsol, Galp

Materials The steel industry w ill be supported by 1) the European sector consolidation, 2) Supportive framew ork,

including anti-dumping measures and 3) the global cyclical recovery.

Acerinox, Arcelor Mittal Tubos Reunidos

Media In Media, the recovery of the advertising sector is a fact and this together w ith contained OPEX and a

strong operating leverage, supports a strong recovery of the sector. Moreover the companies are

strong cash generators and this makes them very attractive

Mediaset, Atresmedia

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Sectors with a Neutral recommendation Source: BBVA GMR

Section 3




Telecommunications We believe that the transformation process of the sector continues through the consolidation, that should lead to better

margins. Another positive factor is that prices are stabilising. How ever, the companies have a level of debt that can be

excesive, especially taking into account that the consolidation process leads to high CAPEX requirements.

Telefónica, NOS

Utilities The sector offers an attractive cash generation (DY at least at 4%) and cyclical recovery should support higher

electricity prices and consumption. How ever, concerns about regulatory risk could arise again in 2015 on the Spanish

Gerneral Elections. Moreover valuations are adjusted to a large extent and this w ill limit the performace of the sector.

Iberdrola, Endesa,

EDPR

Gamesa

Construction &

Building materials

Weak contruction margins and w eak w orking capital in general and higher risk profile in international construction (very

large contracts are failing to generate cash). How ever the improvement of the Spanish cycle, together w ith the increase

infrastructure plans on a global scale could benefit the companies.

Ferrovial FCC, ACS, OHL

Food Retail Valuations of the sector are attractive. In fact the fragile Iberian momentum is priced- in and valuations price in a fall in

Iberian sales in perpetuity. How ever the environment of low prices in the sector makes us be cautious and therefore w e

have a neutral recommendation on the sector.

DIA Jeronimo Martins

Pharma After f ive health reforms in 2010-12, the market has plummeted 29% from its peak and pharma spending remains at

2004’s levels. Although w e do not expect a volume recovery until 2016e, w e do not foresee any new large measures

affecting drug spending (current spending is below 1% of GDP that is the EU recommendation). The pharma business

implies high volatility and regulatory risk regarding drug approvals and therefore a healthy balance sheet position is

required. This w ill help maintain the M&A activity seen during 2014, in the coming years. How ever valuations are

adjusted and limits the appeal of the sector.

Grifols, Almirall, Zeltia FAES, Rovi

Consumption Prospects for the domestic consumer sector are solid, driven by the improvement in private consumption in 2014e

(+2.1% BBVAe) and the continuation of the international expansion. Moreover the companies of the sector are usually

high cash generators due to negative WK (retailers) or productive investments that require low capex

(Food&Beverages).

Logista, DIA, Inditex Natra, Codere

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Sectors with an Underweight recommendation Source: BBVA GMR

Section 3


Other Small & Mid Caps Source: BBVA GMR


Preferred Stocks Least Preferred Stocks

Other Small & Mid CapsPortucel, Técnicas Reunidas, CTT, CAF, CIE Automotive, Deoleo,

Logista, Zeltia

eDreams, Prosegur, Viscofán, Barón de ley, ESS, Indra, REN, Ence,

Codere, Natra, Viscofán


Insurance The low rates environment makes the sector less appealing than the rest. In the non-life insurance sector w e w ill

probably see premiums improving and margins deteriorating (especially in the Motor sector).

Mapfre Grupo Catalana

Occidente

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Section 0


Section 1


Section 2

Asset allocation

Section 3


Section 4

Equity strategy: Europe and Iberia

Annex

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The financial markets have encountered a number of external shocks in 2014. These shocks have not been systemic but market perception towards emerging markets has deteriorated after the summer

S&P 500: external shocks and volatility in 2014 Source: Bloomberg, BBVA GMR

Section 0


DMs vs. EMs: Financial tension index Source: BBVA Research

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

-0.7

-0.4

-0.1

0.2

0.5

0.8

1.1

1.4

1.7

Dec-

11

Mar-

12

Jun-1

2

Sep-1

2

Dec-

12

Mar-

13

Jun-1

3

Sep-1

3

Dec-

13

Mar-

14

Jun-1

4

Sep-1

4

Developed Emerging (rhs)

10

12

14

16

18

20

22

24

26

28

30

1400

1500

1600

1700

1800

1900

2000

2100

2200

Jan-1

3

Feb

-13

Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

Dec-

13

Jan-1

4

Feb

-14

Mar-

14

Apr-

14

May-

14

Jun-1

4

Jul-14

Aug-1

4

Sep-1

4

Oct-14

Ukranie crisis starts

Portugal banking sector (BES)

EU cycle losing Momentum

Iraq

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Section 1


Global

acceleration of growth

Policy mix:

• Monetary

• Fiscal Policies

• Structural reforms

Relative

competitiveness is key Global trade

Domestic demand,

consumption, investment

Asset

repricing wealth effect

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GFCF (base 100 1Q99) US vs. EMU vs. JP Source: DataStream

60

70

80

90

100

110

120

130

140

Feb

-99

Feb

-00

Feb

-01

Feb

-02

Feb

-03

Feb

-04

Feb

-05

Feb

-06

Feb

-07

Feb

-08

Feb

-09

Feb

-10

Feb

-11

Feb

-12

Feb

-13

Feb

-14

US EMU JP

60

160

260

360

460

560

660

760

860

960

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

CH MX BR

GFCF (base 100 1Q99) China vs. Mexico vs. Brazil Source: DataStream

Investment is one of the drivers of innovation and has been especially active in the US since the beginning of the crisis. In fact GFCF has remained sluggish in Europe, Mexico and Japan, where there is now room for positive surprises

Section 1


Domestic demand: investment

A modest global acceleration of growth

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The global recovery continues to be driven by the typical cyclical factors, while policy actions and structural issues continue to be just tailwinds. Personal consumption in durable goods has made the difference in the pace of the recovery between the US and the rest

Car registrations (base 100 Q1 2000 accum. 1Y) Source: DataStream

MSCI US vs. EM vs. JP: HH and durable goods (August 1999: base 100) Source: DataStream

40

50

60

70

80

90

100

110

120

130

140

1Q

00

3Q

00

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

UK US JP EM ES

0

50

100

150

200

250

Jan-9

9

Aug-9

9

Mar-

00

Oct-00

May-

01

Dec-

01

Jul-02

Feb

-03

Sep-0

3

Apr-

04

Nov-

04

Jun-0

5

Jan-0

6

Aug-0

6

Mar-

07

Oct-07

May-

08

Dec-

08

Jul-09

Feb

-10

Sep-1

0

Apr-

11

Nov-

11

Jun-1

2

Jan-1

3

Aug-1

3

Mar-

14

Oct-14

EM JP US

Section 1


Domestic demand: consumption

A modest global acceleration of growth

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ULC contention helps boost exports and consequently growth. This is supporting the turnaround of the cycle in Europe

Real wealth indicator Brazil vs. China (GNI at PPP) 2005: base 100 Source: World Bank, BBVA GM Research

100

150

200

250

300

350

400

450

2005 2006 2007 2008 2009 2010 2011 2012 2013

Brazil China

100

105

110

115

120

125

130

135

140

145

2005 2006 2007 2008 2009 2010 2011 2012 2013

Germany Mexico Spain United States

Real wealth indicator by country (GNI at PPP) 2005: base 100 Source: World Bank, BBVA GM Research

Section 1


A modest global acceleration of growth Global trade

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EMU BBVA FTI vs. M2 YoY (%) Source ECB, BBVA GMR

EMU BBVA FTI vs. Economic Confidence Source: Bloomberg, BBVA GMR

0

2

4

6

8

10

12

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Oct-

05

Ap

r-06

Oct-

06

Ap

r-07

Oct-

07

Ap

r-08

Oct-

08

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Ap

r-14

Oct-

14

FTI EMU M2 EMU YoY (rhs)

The expansionary monetary policy of the ECB has helped to ease the financing conditions in Europe and this is having a very positive effect on economic sentiment, which should translate into higher activity rates

Historically M2 and the Financial Tensions Index (FTI) have acted as leading indicators for the economic cycle

60

70

80

90

100

110

120-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Oct-

05

Ma

r-06

Au

g-0

6

Jan

-07

Jun

-07

Nov-0

7

Ap

r-08

Se

p-0

8

Fe

b-0

9

Jul-0

9

Dec-0

9

Ma

y-1

0

Oct-

10

Ma

r-11

Au

g-1

1

Jan

-12

Jun

-12

Nov-1

2

Ap

r-13

Se

p-1

3

Fe

b-1

4

Jul-1

4

FTI EMU (inv. Rhs) EC Euro Economic Confidence

Catalysts of a positive virtuous cycle in Europe : 1) An expansionary policy mix

Section 1


No deflation in Europe. Room for positive surprises

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3.4

14.4

5.9

4.7

3.5 3.5 3.3 2.9

0.7

-1

1.5 1.5 1.9

0.31.2

-0.1

-2

0

2

4

6

8

10

12

14

16

Eurozone Greece Portugal UK Spain Italy France Germany

2010-13 2013-16

Government fiscal drag (% of potential GDP reduction in structural deficits from one period to the next) Source: Eurostat, BBVA GMR

Catalysts of a positive virtuous cycle in Europe: 2) Less negative fiscal policy

Section 1



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Structural reforms help to contain ULCs in the long term. This has led to an increase in exports that is backing the turnaround of the European

cycle, limiting the likelihood of generating deflation in the foreseeable future

Labour productivity in Europe Source: BBVA Research estimates based on the Smets-Wouters model

EMU exports vs. unit labour costs Source: Eurostat, BBVA GM Research

-20

-15

-10

-5

0

5

10

15

20

25

Mar-

96

Mar-

97

Mar-

98

Mar-

99

Mar-

00

Mar-

01

Mar-

02

Mar-

03

Mar-

04

Mar-

05

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

-2

-1

0

1

2

3

4

5

6

7

Exports YoY (%) ULC YoY (%) (-2 qtrs) (inv rhs)

Catalysts of a positive virtuous cycle in Europe: 4) Europe’s competiveness has already improved, but there is still a lot of room for additional reforms

Section 1



-20

-15

-10

-5

0

5

10

15

Gre

ece

Irel

and

Spain

Port

uga

l

EA

17

Denm

ark

Germ

any

Italy

Fra

nce

Neth

erla

nds

Unite

d K

ingdom

Aust

ria

Fin

land

Belg

ium

Labour productivity (inverted) Wages Unit labour cost

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Spain: merchandise exports by geography (% of total) Source: BBVA based on Ministry of Economy and Competitiveness

Spain: share and growth

of merchandise exports by sector (in nominal terms) Source: BBVA based on Ministry of Economy and Competitiveness

Euro depreciation since May 2014 (-11% vs. USD) has led to a surge in exports and a diversification by type of product and by geographical area. Note that the contribution of the foreign trade within the Eurozone with the Eurozone has diminished in favour of exports to Asia and Africa, that are faster growing economic areas

-5-3-113579111315

0

5

10

15

20

25

Eq

uip

ment

and

ma

chin

ery

Fo

od a

nd

bevera

ge

Au

tom

otive

industr

y

Chem

ical

pro

du

cts

Non-c

hem

ical

pro

du

cts

Ma

nufa

ctu

red

con

s.g

oods

En

erg

y

Raw

ma

teria

ls

Dura

ble

goods

Export share (%, Jan-Sep 2014, lhs) % YoY growth (%, Jan-Sep 2014, rhs)

% YoY growth (%, 2013, rhs)

0

5

10

15

20

25

30

35

40

45

50

55

60

EMU Rest of Europe Africa Asia North America Latam

Share Jan-Sep 2014 Share 2008

Section 1


Spain will still be the best performer in Europe. Internal demand and the housing sector are improving

Euro depreciation uncovers new growth opportunities

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New loans to the non-financial

private sector (%YoY quarterly cumulative data) Source: BBVA based on Bank of Spain

Spain: Loan-to-deposit

and non-performing loan ratios Source: BBVA based on Bank of Spain

NPLs have stabilised during 2014 and this together with the current low rates have led to an increase in the volume of new loans to households and SME’s and has given support to the recovery. However total credit growth rates are still in negative territory and this leaves room for domestic demand to grow further

115%

125%

135%

145%

155%

165%

175%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14

NPL ratio (lhs) Loan-to-deposit ratio (rhs)

-100

-50

0

50

100

Jun

-04

Dec-0

4

Jun

-05

Dec-0

5

Jun

-06

Dec-0

6

Jun

-07

Dec-0

7

Jun

-08

Dec-0

8

Jun

-09

Dec-0

9

Jun

-10

Dec-1

0

Jun

-11

Dec-1

1

Jun

-12

Dec-1

2

Jun

-13

Dec-1

3

Households: consumptionHouseholds: house purchaseNon-financial corporations: loans up to EUR1mnNon-financial corporations: loans over EUR1mn

Section 1


Spain will still be the best performer in Europe. Internal demand and the housing sector are improving

Credit growth is still meagre, but is on the right track

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• In our opinion, there are three main forces that drive

global demand:

1. the resilience to the slowdown in Chinese growth,

2. solid U.S. growth momentum; and

3. the contribution of productivity to growth

• We rate these factors from 1 to 10 for a selection of

emerging countries and obtain a total score

• This total score shows that, except for Mexico and

Colombia, Asian countries have a greater resilience

to the cycle than LatAm countries

Section 1


Emerging economies: back to growth but at different rates. Transition to a model less dependent on exports and investment

3 U.S. 8 10 9.3 4.5 7.95

2 Mexico 7.7 10 9.8 1.5 7.25

4 Colombia 8.1 7.1 8.9 1.5 6.4

6 Japan 6.1 2.8 9.7 3 5.4

8 India 6.8 2 9.2 3 5.25

12 Brazil 6.6 1.4 9 1.5 4.625

19 Greece 8.5 0.3 6.2 1.7 4.175

20 Peru 2.4 3.4 8.6 1.5 3.975

17 China 0 3.7 8.9 3 3.9

29 Russia 6.9 0.7 5.5 1.7 3.7

21 Italy 6.8 1.1 4.8 1.7 3.6

18 UK 7.4 1.7 3.4 1.7 3.55

27 Chile 1.3 2.3 8.7 1.5 3.45

24 France 7.4 1.1 3.5 1.7 3.425

35 Spain 7.9 0.5 2.4 1.7 3.125

30 Germany 5.1 1.5 4 1.7 3.075

32 Portugal 7.9 0.6 0.6 1.7 2.7

T o tal Sco reR ank

C o ntribut io n

o f T F P to

GD P gro wth

Overall R esilience to

C hina's

Investment

Slo wdo wn

T rade

Expo sure to

U.S. R eco very

R esilience to

EZ Gro wth

Slo wdo wn

Country score Source: Damodaran, BBVA GMR

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Base case macroeconomic scenario. LatAm will grow 1% in 2014 and 2% in 2015

• Downward revisions of growth forecasts across all countries, except for Colombia. Main downwards corrections in ARG, BRA, VEN, PER.

• There are very important differences across countries. The Pacific Alliance (Mexico, Colombia, Peru and Chile) to grow 2.9% and 3.9% in 2014-

15. Mercosur in recession in 2014-15.

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15

ARG BRA CHI COL PER VEN Lat5 Lat6

Oct-14 Jul-14

LatAm GDP growth forecasts Pacific Alliance: MEX, COL, PER, CHI Mercosur: BRA, ARG, VEN, PAR, URU

Source: BBVA Research

LatAm 2013-15 growth forecasts Source: BBVA Research

Section 1


Emerging economies: back to growth but at different rates. Transition to a model less dependent on exports and investment

6.1

4.1

2.6

2.4 1.0

2.0

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2010 2011 2012 2013 2014e 2015e

LatAm Mercosur Pacific Alliance

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Global and LatAm currencies. The USD will continue to dominate in 2015

Outlook: Long-term USD cycle linked to UST rates, flows and raw materials. LatAm is on its own: continued weakness in LatAm FX, and only the Fed's soft policy after the increases can create opportunities. In general, our recommendations focus on the differentiation and relative values of LatAm or the possibility of financing in other G10

Factors:

A. different central bank monetary policies and balance sheets

B. mediocre growth, LatAm stalling between the deceleration in China and the slow recovery in developed markets

C. limits to LatAm's fiscal and monetary capacity

D. falling raw material prices put pressure on the trade and fiscal balances

E. lack of competitiveness leads to adjustments in exchange rates

F. different correlations based on the market depth (fixed income, equities)

Inertia in the US and in LatAm but different, and there may be limits to the Fed's increases

Section 1


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• The ongoing negative short-term rates, with low inflation rates, will continue to anchor the long end of the euro curves

• The German Bund will limit the margin of increase of the US Treasuries

• Based on our simultaneous estimates, as long as the German Bund fluctuates below 1.5% or is close to that level, the spread with the UST will move to an average of 115bp. If the spread remains at current levels, the range for the 10Y Treasury would be 2.6-3.3%

• And vice versa: if the spread increases to a record high of 200bp, the ratio with the 10Y UST would be 3.35%

Structural low-neutral interest rates in the developed markets, driven by low inflation and global liquidity

Section 1


Financial implications of the current growth model

10Y bonds Source: Fed and BBVA GMR

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UST 10Y German bund

Developed vs. emerging markets: CPI (YoY %) Source: DataStream

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Emerging Developed

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Raw materials will bottom out on the recovery of the cycle. Oil: Rebound following the sharp correction, but fundamentals will remain weak in 2015

Section 1


• We believe that the recent price correction (-25% since June) is justified following the revised estimates pointing to lower demand (IEA:

+0.7mbpd 14e vs. +1.4mbpd in June 14) in a context of greater non-OPEC production (+1.7mbpd vs. a forecast +1.3mbpd one year previously)

and stable OPEC production (recovery in Libya and Iraq)

• The current weakness could continue during 2015 (demand 15e +1.13mbpd vs. non-OPEC supply 15e +1.26mbpd), unless OPEC takes action

to protect production by increasing idle capacity (4.0mbpd)

Oil price performance Values in USD/bbl Source: Bloomberg

Medium term market balance Annual change (mbpd) Source: EIA

Supply glut

150$

140$

120$

100$

80$

60$

40$

20$

0$

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12

13

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Operation desert storm Chinese growth�

takes off

Financial crisis

BP oil spillArab

springIran nuclear

tensions

Worlddemand slows

Peak $ 147.27

July 11, 2008

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Implied spare capacity

Effective OPEC spare capacity

World demand growth

World supply capacity growth

Financial implications of the current growth model

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• LatAm trades at a premium of 17% vs. the rest of emerging markets vs. the historical average PE 12M FWD of +13x and in line with the historical premium of +12% in terms of P/BV 12M FWD. Premiums are similar vs. Asian markets. In our opinion there is a derating risk in LatAm because of the influence of Brazil and raw materials

• We continue to prefer markets with growth potential based on reforms and internal demand, to avoid valuation traps until commodities recover.

PE MSCI: LatAm / Emerging mkts vs. LatAm / Asia Source: Bloomberg and BBVA GMR

Asia has a more appealing valuation and less sensitivity to raw materials than LatAm. In LatAm we prefer Mexico

Relative valuation criteria - LatAm Source: Bloomberg and BBVA GMR estimates

Section 2

Asset allocation

Equities remain our favourite asset, especially in Europe and Asia

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

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1.25

1.30

Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14

LatAm/Asia Latam / Emerging mkts

0

20

40

60

80

100Struct. advances. (+)

Domestic demand (+)

Trade DNA (+)Exp. to commodities (-)

Valuations (=)

Brazil Chile Colombia Mexico Peru

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0

20

40

60

80

100

Struct.advances. (+)

Domesticdemand (+)

Trade DNA (+)Exp. to

commodities (-

)

Valuations (=)

Brazil Chile Colombia Mexico Peru

• After an intense period of volatility due to the stabilisation of growth in China and the expectation regarding the election results in Brazil, the markets seem to have returned to trading based on their respective fundamentals. Therefore, we reiterate our preference for Mexico and Colombia in Latin America

• Our country selection methodology gives a relevant weighting to: i) the process of structural reforms; ii) relative strength of domestic demand; iii) stock market exposure to commodities (energy and materials); iv) the portion of value added products among exports, and v) relative valuations

Relative valuation criteria - LatAm Source: Bloomberg and BBVA GMR estimates

We continue to prefer markets with growth potential based on

reforms and internal demand to avoid valuation traps until

commodities recover

In LatAm we overweight Mexico

Section 2

Asset allocation

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Valuations * Target calculated with consensus EPS and the valuation parameters of BBVA GMR. Source: Bloomberg and BBVA GMR estimates

% chg in EPS

FV 2015e

Target

2015e Pot.

P/E @ Target (x)

2014e 2015e 2016e 2014e 2015e 2016e

Brazil Bovespa

BBVA* 113 14.8 16.5 59,659 59,700 108 14.3 125 10.7

Mexico CPI

BBVA 75 239 178 52,136 52,150 16.2 272 219 18.6

Consensus 248 92 174 52,770 23.7 21.7 18.5

Colombia Colcap

BBVA* 62 10.4 13.7 1,890 1,870 14.8 20.4 18.4 16.2

Peru IGBVL

BBVA 20 180 15.0 17,454 17,500 142 20.8 176 153

Chile IPSA

BBVA* 11 79 77 4,088 4,100 4.8 20.5 19.0 17.6

Our target prices for 2015 imply upsides of 16% and 15% for Mexico and Colombia respectively. These markets are even more attractive when adjusted for volatility

Potential vs. volatility Source: Bloomberg and BBVA GMR estimates

0.0

0.1

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Mexico Colombia Peru Brazil Chile

Pote

ntia

l/ Price v

ola

tility

Pote

ntia

l / Earn

ings v

ola

tility

Potential / Earnings volatility Potential / Price volatility

In LatAm we overweight Mexico

Section 2

Asset allocation

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Section 3


Why would we invest in European and Iberian equities?

Our Gordon valuation model: If the ECB measures are not aggressive enough, target for the Ibex-35: 10.338;

Euro Stoxx 50: 3.104; and S&P 500: 2.039

Price 5Y avg 2014 2015 5Y avg 2014 2015 Fair value

Ibex 10,148.00 12.93 17.19 13.97 1.25 1.38 1.33 10,338

Euro Stoxx 50 3,059.99 11.76 13.69 12.22 1.25 1.40 1.32 3,104

Stoxx 600 335.63 13.67 14.97 13.34 1.57 1.69 1.61

S&P 500 2,039.82 16.64 17.32 15.77 2.33 2.66 2.49 2,039

P/E P/B

P/E estimates and fair value Source: BBVA GMR estimates

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Sectors where there could be M&A activity: Energy, Health Care and Materials

AutosCapital Goods

C.Durables

Energy

Food Retailing

Food&Bev.

Health Care

HH &PP

Materials

Pharma

Retail

Semiconductors

Softw are

Telecoms

Transportation

Utilities

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-8 -6 -4 -2 0 2 4 6 8 10

Capex/s

ale

s 2

014

-2013

RoE-Wacc 2014-2013

Investment ideas in Europe

Section 3


• Note that on a dynamic basis, the sectors that have evolved towards ratios that increase the likelihood of corporate activity are the ones with:

– The highest expected increases in RoE-WACC

– The largest expected reduction in capex/sales

– The highest expected FCF generation in 2014-2013

• These are mainly: Energy, Health Care (Pharma) and Materials

European sectors: RoE-WACC, capex/sales and FCF (2014-2013) Source: Bloomberg, BBVA GMR

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GARP Source: Bloomberg, BBVA GMR

We think that global economy is bottoming out on the expansionary policy mix and therefore we recommend growth sectors. Our GARP model

points out Banks, Food, Materials and Retail & Luxury as growth sectors with attractive valuations. Utilities and Energy are appealing on a value

basis and Food Retail is the best positioned sector according to this same parameter

Sector Score valuation

Food Retail -1.02

Energy -0.56

Telecoms -0.43

Materials -0.09

Utilities -0.01

Banking 0.05

S&P Europe 350 0.15

Financials 0.20

HHPP 0.27

Autos 0.30

Pharma 0.42

Cons.Staples 0.43

Industrials 0.57

Food&Beverage 0.62

Technology 0.63

Cons.Discretionary 0.66

Retail&Luxury 0.82

Insurance 0.86

Cheap

Expensive

For each sector we calculate the current number of standard deviations above/below the

historical average of the valuation ratios

We calculate P/E 15e, P/BV 15e, EV/EBITDA 15e, P/CF 15e, RoE 15e, capex 2015e, capex/sales 15e,

EBIT 2015e (net income for Financials), operating margin 2015e (NIM 15e for Financials) and EPS 15e


Section 3


R.Est

Utilities

Autos

Transport

PharmaBanks

Materials

Media

TelecomsEnergy

Insurance

Retail

Cons. DurablesHPP Food&Bev.

Cap.GoodsTech Hard&Equip

Food Retail

Softw are

Semiconductors

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wth

Value

Grow th

Unattractive

GARP

Extremaly AttractiveAtractive

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EPS elasticity to GDP growth in the different areas, combined with the weight of each area in the revenues of the Ibex-35, result in the following

inputs for our valuation model: estimated EPS growth of 15.5% YoY in 2015 and +18.4% YoY in 2016 (vs. 22% YoY and 14.6% YoY respectively

estimated by the consensus). The new g should be increased to 2.4%, the ERP to 4.9% and the risk-free rate to 4.6%. Using these criteria, our

target of the Ibex-35 is 11,600

GDP and EPS estimates Source: Bloomberg and BBVA GMR

Considering a geographical approach the upside potential is greater for Europe: Ibex-35 target: 11,600

Section 4


Valuation inputs Source: Bloomberg and BBVA GMR

Target Ibex-35: 11,600

2014 2015 2016

Weight in

revenues

Elasticity

of EPS

World 3.6% 3.8% 3.9% 11.6% 5.7

US 2.5% 2.5% 3.0% 6.5% 1.9

Spain 1.1% 1.9% 2.0% 30.0% 8.0

Asia (ex. Japan) 5.0% 5.2% 6.0% 5.5% 6.8

LatAm 2.3% 2.5% 4.0% 24.6% 5.7

Eurozone 1.1% 1.9% 2.0% 21.8% 6.5

EPS YoY % BBVAe 12.0% 15.5% 18.4%

EPS YoY % Consensus 11.9% 22.0% 14.6%

Total World US Spain

Asia (ex.

Japan) LatAm Eurozone

Rf 4.6% 3.1% 3.0% 3.5% 4.6% 8.4% 3.0%

G 2.4% 2.1% 1.0% 1.0% 1.5% 6.0% 1.0%

ERP 4.9% 6.4% 3.7% 4.0% 6.5% 6.3% 3.7%

Weight in revenues 11.6% 6.5% 30.0% 5.5% 24.6% 21.8%

Elasticity of EPS 5.7 1.9 8.0 6.8 5.7 6.5

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Considering a geographical approach the upside potential is higher:

Euro Stoxx 50 target: 4,200

Target Euro Stoxx 50: 4,200

2014 2015

World 2.9% 3.1%

US 2.6% 3.0%

Japan 1.6% 1.3%

Asia exJapan 6.3% 6.2%

LatAm 3.2% 3.6%

Eurozone 1.4% 1.7%

EPS YoY% BBVAe 12.2% 13.5%

EPS YoY% Consensus 11.4% 11.6%

Total World US Japan Asia exJapan LatAm Eurozone

Rf 4.1% 4.4% 4.0% 1.0% 4.6% 8.6% 3.7%

G 1.7% 2.4% 1.5% 1.0% 1.5% 6.7% 1.3%

ERP 4.3% 4.8% 3.8% 3.8% 6.0% 6.3% 4.0%



Section 4


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Considering a geographical approach the upside potential is higher:

S&P 500 target: 2,400

Target S&P 500: 2,400

2014 2015

World 2.9% 3.1%

US 2.6% 3.0%

Japan 1.6% 1.3%

Asia exJapan 6.3% 6.2%

LatAm 3.2% 3.6%

Eurozone 1.4% 1.7%

EPS YoY% BBVAe 11.2% 12.5%

EPS YoY% Consensus 11.0% 10.7%

Total World US Japan

Asia

exJapan LatAm Eurozone

Rf 4.1% 4.4% 4.0% 1.0% 4.6% 8.6% 3.7%

G 1.7% 2.4% 1.5% 1.0% 1.5% 6.7% 1.3%

ERP 4.0% 4.8% 3.8% 3.8% 6.0% 6.3% 4.0%



Section 4


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MSCI Europe Banks: P/E (Trailing) Source: DataStream, BBVA GMR

MSCI Europe Banks: P/B (Trailing) Source: DataStream, BBVA GMR

1. Valuations are near pre-crisis levels in terms of P/E and dividend yield, but the P/B ratio and RoE remain near their respective lows

2. The EPS trends have stabilised

3. The AQR has helped to clean up the system and reduce systemic risk

4. Most of the capital increases have already taken place

5. The reduction in credit spreads and financing costs is essential to lower the cost of corporate financing

Reasons to buy banks

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+1STD

+1STD


Section 4


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MSCI Europe Source: DataStream, BBVA GMR

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Section 4


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MSCI Europe Banks: revised EPS (upwards-downwards)/

(upwards+downwards) + 12M moving average Source: Bloomberg, BBVA GMR

MSCI Europe Banks: revisions of the relative EPS vs. P/E Source: Bloomberg, BBVA GMR

-120%

-100%

-80%

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-40%

-20%

0%

20%

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09 10 11 12 13 14

0.6

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0.02

Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14

Rela

tive P

/E (B

anks

/Tota

l)

Banks

earn

ings revis

ions (M

A12M

)

Banks earnings revisions (MA12M) Relative P/E (Banks/Total)


Section 4


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1. Global cycle is bottoming out, although at a slow pace

2. Investment is still rising in the US and is starting to recover in Europe

3. Capital discipline favours higher margins and RoE

4. Valuations favour Cyclicals vs. Non-cyclicals

Reasons to buy Cyclicals


Consensus estimates for the P/E FY2 for the sectors of the Stoxx600 Source: Bloomberg, BBVA GMR

The cyclical sectors of the Stoxx600 offer the greatest level of relative attractiveness vs. the non-cyclical sectors since 2007. Moreover policy mix together with the Euro depreciation should support EPS growth in 2015

Consensus estimates for EPS FY2 YoY for the sectors of the Stoxx600 Source: Bloomberg, BBVA GMR

-3

-1

1

3

5

7

9

11

13

15

Mar-

06

Jul-06

Nov-

06

Mar-

07

Jul-07

Nov-

07

Mar-

08

Jul-08

Nov-

08

Mar-

09

Jul-09

Nov-

09

Mar-

10

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Nov-

10

Mar-

11

Jul-11

Nov-

11

Mar-

12

Jul-12

Nov-

12

Mar-

13

Jul-13

Nov-

13

Mar-

14

Jul-14

PE Cyclicals vs non Cyclicals Cyclicals Non Cyclicals

-50%

-30%

-10%

10%

30%

50%

Dec-

07

Jun-0

8

Dec-

08

Jun-0

9

Dec-

09

Jun-1

0

Dec-

10

Jun-1

1

Dec-

11

Jun-1

2

Dec-

12

Jun-1

3

Dec-

13

Jun-1

4

EPS YoY Growth (%) Cyclicals vs non Cyclicals Cyclicals Non Cyclicals

Section 4


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Sector valuation ratios (Closing of 24/11/2014) Source: BBVA GMR


Price P/E TR (x) P/E +12M (x) P/BV +12M (x) P/CF +12M (x) DY (%)

Auto G 177.377 9.987 8.818 1.098 4.658 6.128

Banks IG 66.52 13.198 10.653 0.896 5.402 3.128

Cap Gds 233.874 16.458 14.554 2.291 10.405 7.767

Comm Prof Svs 112.611 17.989 16.304 4.116 11.808 3.45

Cons Dur/App 268.737 18.358 16.257 2.487 12.262 6.62

Consr Svs Ind 147.956 20.88 18.792 3.911 12.888 3.749

Div Fin IG 51.741 14.641 11.76 0.891 9.785 1.811

Energy IG 152.547 10.772 10.773 1.138 4.949 8.158

Fd/Bev/Tob 289.557 20.466 18.944 3.644 14.64 8.935

Fd/Drug RtlIG 63.886 12.951 13.275 1.366 5.92 2.166

H/C Eq/Svs 310.736 23.052 20.391 3.056 12.976 5.098

H/H Pers Prd 332.87 20.919 19.519 3.335 15.415 7.793

Insurance IG 70.29 10.957 10.445 1.166 9.129 3.373

Materials IG 229.462 15.025 13.559 1.52 7.466 7.961

Media IG 100.974 18.138 16.103 3.386 10.146 3.496

Pharm/Biotec 179.529 18.199 17.139 4.069 14.557 5.556

Real EstateIG 156.516 20.728 19.505 1.009 16.494 6.618

Retailing 171.024 21.608 19.067 4.159 13.832 5.572

S/W & SVS 85.666 17.38 15.854 3.071 13.421 1.719

SemiIG 214.834 30.064 22.547 3.417 16.2 3.087

T/Cm Svs IG 79.473 17.972 18.192 1.658 5.47 3.558

Tch H/W/Eq 41.649 24.776 17.477 2.366 14.038 1.133

Transpt 140.832 15.732 13.418 1.842 7.072 4.581

Utilities IG 116.008 14.744 14.398 1.348 5.823 5.627

Section 4


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Contacts

Antonio Pulido Director Global

Markets Research [email protected]

+34 91 374 31 81

Ana Munera Director Global Equity [email protected]

+34 91 374 36 72

Equity Iberia

Telecoms and Media Chief Analyst Ivón Leal [email protected] +34 91 537 81 44 Construction / Infrastructure / Industrials / Real Estate / Hotels Chief Analyst Antonio Rodríguez [email protected] +34 91 374 66 21 Javier Pinedo [email protected] +34 91 374 99 07

Luis García, CFA [email protected] +34 91 374 59 77 Financials Chief Analyst Ignacio Ulargui, CFA [email protected] +34 91 537 50 47 Silvia Rigol [email protected] +34 91 374 32 94 María Torres [email protected] +34 91 537 77 28

Utilities Chief Analyst

Isidoro del Álamo [email protected] +34 91 374 75 07 Daniel Ortea [email protected] +34 91 537 05 50 Oil / Raw Materials Chief Analyst Luis de Toledo, CFA [email protected] +34 91 537 07 09 Consumer / Pharma / Small Caps Chief Analyst Isabel Carballo [email protected] +34 91 374 32 69 Juan Ros [email protected] +34 91 537 88 57

Equity Derivatives Chief Analyst

Juan Antonio Rodríguez, CFA [email protected] +34 91 374 30 54

Alfredo de la Figuera [email protected] +34 91 537 61 16

Mayte Frutos [email protected] +34 91 374 76 21 Strategy European Equity Strategist

Beatriz Tejero [email protected] +34 91 374 46 61

Equity Mexico

Chief Analyst

Rodrigo Ortega [email protected]

+52 55 5621 9701

Telecoms / Media / Housing

Alejandro Gallostra, CFA [email protected]

+52 55 5621 9870

Beverages / Consumption / Food

Fernando Olvera [email protected]

+52 55 5621 9804

Retail / Pharma

Miguel Ulloa [email protected]

+52 55 5621 9706

Technical Analysis

Chief Analyst

Alejandro Fuentes [email protected]

+52 55 5621 9705

Analyst

Roberto Gonzalez

[email protected]

+52 55 5621 9704

Mining / Steel

Chief Analyst

Miguel Leiva [email protected]

+511 414 2968

Agribusiness / Consumer

Goods / Energy

Odeth Salomon [email protected]

+511 414 3057

Infrastructure / Capital goods

Joswilb Vega [email protected] +511 211 2397

Construction / Fibras / Infrastructure Chief Analyst

Francisco Chávez [email protected]

+52 55 5621 9703

Construction / Housing / Fibras

Mauricio Hernandez [email protected]

+52 55 5621 9369

Mining / Industrials / Transport

Jean Baptiste Bruny

[email protected]

+52 55 5621 9849

Financials

Ernesto Gabilondo [email protected]

+52 55 5621 9702

Equity Peru

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Contacts

Javier Valderde

Sorensen Director Cash

Equities [email protected]

+34 91 374 53 50

Head of Cash Equities

Javier Godoy [email protected]

+34 91 382 62 49

Deputy Head of Cash Equities

Javier Enrile [email protected]

+34 91 537 07 65

International +34 91 374 53 60

Fernando Gugel [email protected]

Jorge Batchilleria [email protected]

Claudine Innes [email protected]

Stephane Prinet [email protected]

Peter Prischl [email protected]

Spain +34 91 374 53 50

Team Leader

Milagros Treviño

[email protected]

Juan Bueno [email protected]

Carlos Gonzalez [email protected]

José Villanueva [email protected]

Sales Trading +34 91 374 53 61

Team Leader

Daniel Ruiz [email protected]

Eric Hongisto [email protected]

Carlos Kuster [email protected]

Europe and International Mexico Director

Juan Carlos Rodriguez

[email protected]

+52 55 5621 9940

Sales Trading

Alejandro Pavon [email protected]

+52 55 5621 9377

Julio Garcia

[email protected]

+52 55 5621 9171

Equity Net

Elba Padilla [email protected]

+52 55 5621 9408

Network Sales

Jose Miguel Fonseca

[email protected]

+52 55 5621 9490

Ana Maria Rivera

[email protected]

+52 55 5621 9176

Viart Vazquez [email protected]

+52 55 5201 2000 ext 3933

Berenice Patron [email protected]

+52 55 5621 9456

Felipe Casillas [email protected]

+52 55 5621 9984

Institutional Sales

Omar Revuelta [email protected]

+52 55 5621 9322

Vivian Salomon [email protected]

+52 55 5621 9811

Marie Laure Dang [email protected]

+52 55 5621 9232

Mauricio Martinez [email protected]

+52 55 5621 9289

Aron Brener [email protected]

+52 55 5621 9524

Bogota (Colombia) Head of Equity

Felipe Duque Urrea [email protected]

Institutional Sales Trading

Maria Camila Franco Villegas [email protected]

+57 1 3139843

+57 1 3077018 ext.12943

Lady Esperanza Rivera [email protected]

+57 1 3139821

+57 1 3077018 ext 12991

Javier Camilo Sanchez [email protected]

+57 1 3139842

+57 1 3077018 ext 12942

Willy Alexander Enciso [email protected]

+57 1 3139841

+57 1 3077018 ext 12941

Lima (Peru) Head of Equity

Jorge Ramos [email protected]

+51 1 0211 2380

Head Trader - Institutional

Equity Sales

Erick Valdez [email protected]

[email protected]

+51 1 2111276

Trader Equity

Vanessa Juarez [email protected]

+51 1 2112382

Head of Equity

Mauricio Andrés Bonavia [email protected]

+56 2 2679 1474/1471

Diego Susbielles [email protected]

Antonio Palacios [email protected]

Guillermo Arias [email protected]

Santiago (Chile)

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Contacts

BBVA Equity Derivatives Distribution

Director

Emilio Sainz de Baranda +34 91 374 51 36

Spain

Madrid

+34 91 374 51 36

+34 91 374 51 14

Europe

Paris

+33 1 42 96 81 80

+33 1 42 96 81 81

Milan

+39 0 27 629 63 65

+39 0 27 629 63 85

Lisboa

+35 1 21 311 75 06

London

+44 207 397 61 12

+44 207 648 75 97

Düsseldorf

+49 211 97 55 05 14

+49 211 97 55 05 70

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Disclaimer

Important Disclosures

The BBVA Group companies that have participated in preparing or contributed information, opinions, estimates, forecasts or recommendations to this report are identified by the location(s) of the author(s) listed on the first page as follows: 1) Madrid, London or Europe = Banco Bilbao Vizcaya Argentaria, S.A., including its E.U. branches (hereinafter called ‘BBVA’); 2) Mexico City = BBVA Bancomer, S.A. Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer (hereinafter called ‘BBVA Bancomer’); 3) New York = BBVA Securities, Inc. (hereinafter called "BBVA Securities"); 4.) New York Branch = BBVA, New York branch; 5.) Lima = BBVA Continental; 6.) Bogota = BBVA Colombia S.A.; 7.) Santiago = BBVA Chile S.A.; 8.) Hong Kong = BBVA, Hong Kong branch. For recipients in the European Union, this document is distributed by BBVA, a bank supervised by the Bank of Spain and by Spain’s Stock Exchange Commission (CNMV), and registered with the Bank of Spain with number 0182. For recipients in Hong Kong, this document is distributed by BBVA, which Hong Kong branch is supervised by the Hong Kong Monetary Authority. For recipients in Mexico, this document is distributed by BBVA Bancomer, a bank supervised by the Comisión Nacional Bancaria y de Valores de México. For recipients in Peru, this document is distributed by BBVA Continental, a bank supervised by the Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones. For recipients in Singapore, this document is distributed by BBVA, which Singapore branch is supervised by the Monetary Authority of Singapore. For recipients in USA, research on products other than equity securities or swaps is being distributed by BBVA Securities, a subsidiary of BBVA registered with and supervised by the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation. U.S. persons wishing to execute any transactions should do so only by contacting a representative of BBVA Securities in the U.S. Unless local regulations provide otherwise, non-U.S. persons should contact and execute transactions through a BBVA branch or affiliate in their home jurisdiction. Research on swaps is being distributed by BBVA, a swaps dealer registered with and supervised by the Commodity Futures Trading Commission (“CFTC”). U.S. persons wishing to execute any transactions should do so only by contacting a representative of BBVA. Unless local regulations provide otherwise, non-U.S. persons should contact and execute transactions through a BBVA branch or affiliate in their home jurisdiction. Research prepared by BBVA on equity securities and equity derivatives is being distributed by BBVA to “major U.S. institutional investors” based on an exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). BBVA is not a registered broker-dealer in the United States and is not subject to U.S. rules on preparing research or independence of research analysts. BBVA and BBVA Group companies or affiliates (art. 42 of the Royal Decree of 22 August 1885 Code of Commerce), are subject to the BBVA Group Policy on Conduct for Security Market Operations which establishes common standards for activity in these entities’ markets, but also specifically for analysis and analysts. This BBVA policy is available for reference at the following web site: www.bbva.com. Analysts residing outside the U.S. who have contributed to this report are not registered with or qualified as research analysts by FINRA or the New York Stock Exchange and may not be considered “associated persons” of BBVA Securities (as such term is construed by the rules of FINRA). As such, they are not subject to NASD Rule 2711 restrictions on communications with subject companies, public appearances and trading of securities held in research analysts’ accounts. BBVA or any of its affiliates beneficially owned at least 1 % of the common equity securities of the following companies covered in this report: ACS, Bolsa, Cemex, Galp Energia, Iberdrola, Meliá Hotels Int., OHL, Ohlmex, Telefónica, Técnicas Reunidas, Tubos Reunidos. In the past twelve months, BBVA or one or more of its affiliates managed or co-managed public offerings of the following companies covered in this report: Abertis, ACS, Actinvr, Aeromex, Almirall, Acciona, Bayer AG, BBVA, BES, Cemex, Chdraui, CTT - Correios de Portugal, DIA, EDP, Enel Green Power, Enagás, ESS, Falabella, Funo, Gamesa, Gfamsa, Herdez, Kof, GRUPO LALA SAB DE CV, Liberbank, Livepol, Logista, Arcelor Mittal, OHL, Oma, Pinfra, Banco Popular, Red Eléctrica, Telefónica, Telefónica Deutschland. In the past twelve months, BBVA or one or more of its affiliates has received compensation for investment banking services from the following companies covered in this report: Alfa, Alicorp, Almirall, Alsea, Amx, Acciona, Ara, Bimbo, Bolsa, Cemex, Cementos Lima, Enel Green Power, Funo, Gas Natural, Grifols, Gruma, Ica, Mexchem, Ohlmex, Pinfra, Repsol, Telefónica, Telmex. In the next three months, BBVA or one or more of its affiliates expects to receive or intends to seek compensation for investment banking services from the companies covered in this report. BBVA or one or more of its affiliates makes a market/provides liquidity in the securities of the following companies covered in this report: Amx, Bankia, Cemex, DIA, Endesa, Falabella, Femsa, Gas Natural, Gcarso, Gmexico, Iberdrola, Meliá Hotels Int., Banco Popular, Repsol, Banco Sabadell, Telefónica, Telmex, Televisa, Walmex. BBVA is subject to a Code of Conduct for Security Market Operations, which details the standards of the above-mentioned overall policy for the EU. Among other regulations, it includes rules to prevent and avoid conflicts of interests with the ratings given, including information barriers. This Code of Conduct for Security Market Operations is available for reference in the ‘Corporate Governance’ section of the following web site: www.bbva.com. BBVA Bancomer is subject to a Code of Conduct and to Internal Standards of Conduct for Security Market Operations, which details the standards of the above-mentioned overall policy for Mexico. Among other regulations, it includes rules to prevent and avoid conflicts of interests with the ratings given, including information barriers. This Code and the Internal Standards are available for reference in the ‘Grupo BBVA Bancomer’ subsection of the ‘Conócenos’ menu of the following web site: www.bancomer.com. BBVA Continental is subject to a Code of Conduct and to a Code of Ethics and Internal Standards of Conduct for Security Market Operations, which details the standards of the above-mentioned overall policy for Peru. Among other regulations, it includes rules to prevent and avoid conflicts of interests with the ratings given, including information barriers. Both Codes are available for reference in the ‘Quiénes Somos’ subsection of the ‘Conócenos’ menu of the following web site: www.bbvacontinental.pe. BBVA Securities is subject to a Capital Markets Code of Conduct, which details the standards of the above-mentioned overall policy for USA. Among other regulations, it includes rules to prevent and avoid conflicts of interests with the ratings given, including information barriers.

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Disclaimer

Exclusively for Recipients Resident in Mexico

In the past twelve months, BBVA Bancomer has granted banking credits to the following companies covered in this report: Alfa, AXTEL SAB DE CV - CPO, Bachoco, Bimbo, Chdraui, Gas Natural, Gcarso, Geo, Gfamsa, Iberdrola, Ica, Lab, GRUPO LALA SAB DE CV, Livepol, Urbi.

In the past twelve months, BBVA Bancomer has granted Common Representative services to the following companies covered in this report: N/A.

As far as it is known, a Director, Executive Manager or Manager reporting directly to the BBVA Bancomer General Manager has the same position in the following companies that may be covered in this report: Alfa, Alsea, Amx, Asur, Bimbo, Femsa, Gap, Gcarso, Gfinbur, Gmodelo, Gruma, Kof, Livepol, Oma, Pe&oles, Telmex, Televisa, Urbi.

BBVA Bancomer acts as a market maker/specialist in: MexDer Future Contracts (US dollar [DEUA], 28-day TIIEs [TE28], TIIE Swaps, 91-day CETES [CE91]), Bonos M, Bonos M3, Bonos M10, BMV Price and Quotations Index (IPC), Options Contracts (IPC, shares in América Móvil, Cemex, CPO, Femsa UBD, Gcarso A1, Telmex L) and Udibonos.

BBVA Bancomer, and, as applicable, its affiliates within BBVA Bancomer Financial Group, may hold from time to time investments in the securities or derivative financial instruments with underlying securities covered in this report, which represent 10% or more of its securities or investment portfolio, or 10% or more of the issue or underlying of the securities covered.

Equity Derivatives - Ratings System

Recommended strategies in equity derivatives may include taking positions in an equity underlying instrument (such as stocks, stock indices, sector indices, or dividends on stocks or stock indices), volatility or correlation/dispersion instruments, and/or structured products. Strategies may be: 1.) directional, long or short positions; or 2.) relative, spread based, between products that are the subject of a report. Factors that are considered in recommending strategies may include current market prices and conditions, macroeconomic trends and outlook, fundamental analysis of underlying companies and securities, outlook for dividends, as well as expected volatility and momentum in securities prices. Recommended strategies are maintained until expired, or recommended to be closed in a report.

Recommended strategies employing equity derivatives may differ from ratings that have been made by BBVA on underlying companies and their securities. Strategies over different time horizons may also not be consistent. You should note that actual outcomes and results could materially differ from what is expressed, implied or forecasted in the recommended strategies, or price targets, as these involve risks, uncertainties and assumptions that are beyond the ability of BBVA or its affiliates to control or predict. Future actions, conditions or events (affecting both market and non-market conditions, including those of a political or macroeconomic nature) and future results of operations of subject companies may cause prices of recommended securities to differ materially from those expressed in this document.

Equities - Ratings System, Distribution and History

We have three ratings for stocks based on our current expectations of relative returns over a six to twelve month period: i.) Outperform – we expect the stock to have returns more than 5% above its benchmark; ii.) Market Perform - we expect the stock to perform in-line (+/-5%) with its benchmark; and iii.) Underperform - we expect the stock to have returns more than 5% below its benchmark. Factors which may influence our ratings include: current market prices and conditions, operating issues and financing needs, macroeconomic trends and outlook, mergers and acquisitions, and valuation. Valuation methods used by BBVA include multiples of comparable companies, discounted cash flows, sum of the parts, and other generally accepted methods that may apply to a particular case.

Price targets are provided based on the methodology explained above. You should note that actual outcomes and results could materially differ from what is expressed, implied or forecasted in these price targets, as these involve risks, uncertainties and assumptions that are beyond the ability of BBVA or its affiliates to control or predict. Future actions, conditions or events (affecting both market and non-market conditions, including those of a political or macroeconomic nature) and future results of operations of subject companies may cause stock prices to differ materially from those expressed in this document.

As of today, for the whole universe of companies which BBVA has under coverage there are 42.86%Outperform ratings, 29.76% Market Perform ratings and 22.62% Underperform ratings. BBVA or any of its affiliates has rendered Investment Banking services or participated as manager and/or co-manager in public offerings in 53.33% of the Outperform ratings, 30% of the Market Perform ratings and in 10% of the Underperform ratings.

Analyst Certification

This report has been prepared by different authors. The analysts who have prepared this report, whose names appear on the page 27 under Equity Iberia section, hereby certify that the views expressed in this research report accurately reflect their personal views about the subject company(ies) and its (their) securities. They also certify that they have not been, are not and will not be receiving direct or indirect compensation in exchange for any specific recommendation in this report.

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Disclaimer

Disclaimer

This document and the information, opinions, estimates, forecasts and recommendations expressed herein have been prepared to provide BBVA Group’s customers with general information and are current as of the date hereof and subject to changes without prior notice. Neither BBVA nor any of its affiliates is responsible for giving notice of such changes or for updating the contents hereof.

This document and its contents do not constitute an offer, invitation or solicitation to purchase or subscribe to any securities or other instruments, to undertake or divest investments, or to participate in any trading strategy. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind.

Investors who have access to this document should be aware that the securities, instruments or investments to which it refers may not be appropriate for them due to their specific investment goals, financial positions or risk profiles, as these have not been taken into account to prepare this report. Therefore, investors should make their own investment decisions considering the said circumstances and obtaining such specialized advice as may be necessary. Other than the disclosures relating to BBVA Group, the contents of this document are based upon information available to the public that has been obtained from sources considered to be reliable. However, such information has not been independently verified by BBVA or any of its affiliates and therefore no warranty, either express or implicit, is given regarding its accuracy, integrity or correctness. To the extent permitted by law, BBVA and its affiliates accept no liability of any type for any direct or indirect losses or damages arising from the use of this document or its contents. Investors should note that the past performance of securities or instruments or the historical results of investments do not guarantee future performance.

The market prices of securities or instruments or the results of investments could fluctuate against the interests of investors. Investors should be aware that they could even face a loss of their investment. Transactions in futures, derivatives, options on securities or high-yield securities can involve high risks and are not appropriate for every investor. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances, investors may be required to pay more money to support those losses. Thus, before undertaking any transaction with these instruments, investors should be aware of their operation, as well as the rights, liabilities and risks implied by the same and the underlying securities. Investors should also be aware that secondary markets for the said instruments may not exist.

BBVA or any of its affiliates’ salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to its clients that reflect opinions that are contrary to the opinions expressed herein. Furthermore, BBVA or any of its affiliates' proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. No part of this document may be (i) copied, photocopied or duplicated by any other form or means (ii) redistributed or (iii) quoted, without the prior written consent of BBVA. No part of this report may be copied, conveyed, distributed or furnished to any person or entity in any country (or persons or entities in the same) in which its distribution is prohibited by law. More specifically, this document is in no way intended for, or to be distributed or used by an entity or person resident or located in a jurisdiction in which the said distribution, publication, use of or access to the document contravenes the law which requires BBVA or any of its affiliates to obtain a licence or be registered. Failure to comply with these restrictions may breach the laws of the relevant jurisdiction.

The remuneration system concerning the analysts responsible for the preparation of this report is based on multiple criteria, including the revenues obtained by BBVA and, indirectly, the results of BBVA Group in the fiscal year, which, in turn, include the results generated by the investment banking business; nevertheless, they do not receive any remuneration based on revenues from any specific transaction in investment banking.

In the United Kingdom, this document is directed only at persons who (i) have professional experience in matters relating to investments falling within article 19(5) of the financial services and markets act 2000 (financial promotion) order 2005 (as amended, the "financial promotion order"), (ii) are persons falling within article 49(2) (a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the financial promotion order, or (iii) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) may otherwise lawfully be communicated (all such persons together being referred to as "relevant persons"). This document is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons.

BBVA Hong Kong Branch (CE number AFR194) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong this report is for distribution only to professional investors within the meaning of Schedule 1 to the Securities and Futures Ordinance (Cap 571) of Hong Kong.

This document is distributed in Singapore by BBVA’s office in this country for general information purposes and it is generally accessible. In this respect, this document does not take into account the specific investment goals, the financial situation or the need of any particular person and it is exempted from Regulation 34 of the Financial Advisors Regulation (“FAR”) (as required in Section 27 of the Financial Advisors Act (Chapter 110) of Singapore (“FAA”))

BBVA, BBVA Bancomer, BBVA Chile S.A., BBVA Colombia S.A., BBVA Continental and BBVA Securities are not authorised deposit institutions in accordance with the definition of the Australian Banking Act of 1959 nor are they regulated by the Australian Prudential Regulatory Authority (APRA).

General Disclaimer for Readers Accessing the Report through the Internet

Internet Access

In the event that this document has been accessed via the internet or via any other electronic means which allows its contents to be viewed, the following information should be read carefully:

The information contained in this document should be taken only as a general guide on matters that may be of interest. The application and impact of laws may vary substantially depending on specific circumstances. BBVA does not guarantee that this report and/or its contents published on the Internet are appropriate for use in all geographic areas, or that the financial instruments, securities, products or services referred to in it are available or appropriate for sale or use in all jurisdictions or for all investors or counterparties. Recipients of this report who access it through the Internet do so on their own initiative and are responsible for compliance with local regulations applicable to them.

Changes in regulations and the risks inherent in electronic communications may cause delays, omissions, or inaccuracy in the information contained in this site. Accordingly, the information contained in the site is supplied on the understanding that the authors and editors do not hereby intend to supply any form of consulting, legal, accounting or other advice.

All images and texts are the property of BBVA and may not be downloaded from the Internet, copied, distributed, stored, re-used, re-transmitted, modified or used in any way, except as specified in this document, without the express written consent of BBVA. BBVA reserves all intellectual property rights to the fullest extent of the law.

Estrategia de Inversión 2015

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