Athena Wealth Management

January 2015

Investment Research Report

For Professional Use Only

1

MSCI World Index

(1/2012 ~ 1/2015)

MSCI EM Index

(1/2009 ~ 1/2015)

Summary

Global Equity markets remain volatile in Jan.

MSCI World Index dropped 1.88% by the

end of the month. Meanwhile, EM markets

had outperformed their developed peers.

The MSCI Emerging Market Index

increased by 0.55% during the month.

Russia was the best performer, gaining

17.98%. In contrast, the Brazilian market

slid 6.20%.

Fixed income market performed mixed in

Jan. The US Treasury bond yields continue

to drop while high yield bond prices may

have reached the bottom and started to

stabilize. Gold price rebounded and crude

oil price maintained its weak sentiment.

The MSCI World Index reached the

resistance level after the strong rally in

recent few years. It is still yet to confirm

whether the current market correction is

just a consolidation for the next rally or

already an end to the bull-run. Emerging

market, on the other hand, may have

reached the supportive level and may

attract hot money to flow back into this

area. There is the chance that emerging

market may outperform the developed

market in the short run under the current

relax liquidity environment.

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(Fig. 1) Deposits In Currencies

(Fig. 2) GDP Growth

Swiss franc has always been an ideal safe haven

to avoid risk. However, its high creditability has

also turned into a problem. After 2008, more

money has been trying to get into Switzerland

than getting out, especially for people who want

to shield themselves from the risks in the euro

area (Fig.1). With the prospect of QE from the

ECB, the SNB felt their peg was no longer tenable

and as a result, it abandoned its currency ceiling

of 1.2 Swiss francs per euro.

This Month’s Hot Topic

In January, Europe market has no doubt become

the "Eye of the Storm" of the global financial

market. The Swiss National Bank (SNB) has

suddenly abandoned its currency ceiling of 1.2

Swiss francs per euro. The ECB launched a trillion

Euro asset purchase plan, while Greece’s

radical-left anti-euro party, Syriza, won the

parliamentary election. All these issues have

significantly pushed down the euro exchange rate

back to its level in 2003.

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(Fig. 3) European unemployment rates

(Fig. 4) European unemployment rates

(Fig. 5) Greece Election Share of Votes Result

Source: Wall street Journal

The easing program by the ECB was clearly

aimed at stimulating the European economy

and avoiding the economy from going into

deflation. Currently, the European economy is

indeed recovering (Fig.2) but the employment

situation is still very unsatisfactory (Fig.3),

with only the unemployment rate in Germany

able to drop clearly.

However, if we pay close attention to some of

the European countries, some of the

economies can be said is plummeting,

particularly for Greece and Spain. Greece's

unemployment is reported at 26% of the labor

force (Fig.4) and youth unemployment at over

50%. GDP is also 26% below its pre-crisis

peak. Thus, there is no surprise for the victory

of Greece’s leftwing anti-austerity Syriza party

(Fig.5, 6). Greece's 10-year bonds in early

before has already been surging (Fig.7) in

response for this party to rule Greece.

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4

(Fig. 6) Seats in new parliament compared to

prior parliament

(Fig. 7) 10-year Bond Yields

(Fig. 8) Spanish Political Party Polling

The success of Syriza inspires Spain’s own

new radical leftist party, Podemos. Just

one year so far, Podemos has become the

second largest party (Fig.8) shown in

recent polls. One can image it will

virtually initiate most of European

countries to develop growing movements

to oppose the European Union and its

policies. This will be the biggest dilemma

of the Eurozone in foreseeing future, or

will result in divergences in European

Union policy.

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5

Switzerland 4 year Government Bond Yields

(2/2013 ~ 1/2015)

Germany 6 year Government Bond Yields

(2/2013 ~ 1/2015)

EURO STOXX 50® Volatility index

(2/2013 ~ 1/2015)

Eurozone Market

The Eurozone CPI fell 0.6% in January on the

previous year, the biggest drop since the depths

of recession in 2009. Although the ECB unveils

€1.1trillion QE plan, it is hard to predict the

effectiveness to the deflation risks at this

moment. However, the OECD's latest leading

indicator publication said economic growth

prospects had improved in key areas of the

Eurozone. Versus 100-day moving average, the

aggregate Eurozone reading in the latest

monthly survey remained at 100.6.

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6

MSCI Europe Large Cap (Red) and MSCI Europe Small Cap (Blue)

(1/2014~ 1/2015)

Many investors did think the excess liquidity will favor to the investment markets in

the short run. But the uncertainties on the economic prospect and Greece’s

negotiation boost the market volatility. The markets are keen on seeking for the high

quality bond investments. In some extreme cases, the yields had dropped to negative

as the bond duration was around 4-7years. It means that some investors consider the

deflation risk more than the return. Moreover, we hold neutral to positive view on the

Eurozone equity because of relaxing liquidity. We prefer the large cap equity more

than small cap.

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7

US Market

Excluding food and energy, prices unchanged

for a second straight month. The core PCE price

index increased 1.3 % in the 12 months

through December. While the Fed has

repeatedly said it viewed the oil-driven decline

in inflation as transitory and expected inflation

to move back to its target. The fed also signaled

it would keep short-term interest rates near

zero at least until mid-year and set the stage for

tough debates in the months ahead about

whether to wait even longer. The US dollar

keeps strong while depresses the commodity

prices. We expect the US equity market will

stay strong as the better economic prospects,

but it would become more volatile because of

the concern on the rate hike.

S&P 500 index and Dow Jones Industrial Index

(1/2014 ~ 1/2015)

VIX index

(1/2014 ~ 1/2015)

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8

US 10 year Treasury Bond Yields

(1/2014 ~ 1/2015)

US High Yield Bond ETF

(1/2014 ~ 1/2015)

Meanwhile, the US Treasury bond yields

will stay between 2% and 2.5% due to

many uncertainties likes China’s

slowdown, European debt crisis and the

deflation risks. The high-yield bond may

rebound after the significant drawback

due to profit taking in short period.

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9

China Market

China now is facing the economic slowdown. Its

GDP growth rate of 7.4 % last year was the

slowest pace since 1990. The IMF also predicted

China will grow slower than India next year for

the first time in decades (Fig. 1). This month, the

PBC cut the reserve requirement ratio (Fig. 2) to

release market liquidity and support the

economy. However, it also can be viewed as a

signal that the China's economy will continue to

worsen. For instance, both January exports and

imports figures were far from the market

expectations, especially the import figure,

implying weak domestic demand. With the

economic slowdown, we expect copper will

further decrease because the demand is shrinking

(Fig. 3).

(Fig. 1) China Relaxed Money

(Fig. 2) GDP, annual rate of change in %

(Fig 3)

LME COPPER 3m

(1/2014~ 1/2015)

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(Fig 4) Publicly Announced Fundraising By

China’s LGFVs*

(Fig 5) Total Debt By Sector, as % of GDP

Meanwhile, we believe the state government

may boost the infrastructure investment for

supporting the growth rate, which worsen the

debt problems. Some statistics on the local

government fund raising showed that they sold

Rmb1.66tn worth of bonds in 2014, compared

with Rmb900bn in each of the two previous

years (Fig. 4,5). The China’s credit will be the

ongoing concern issue.

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11

The crisis was precipitated by the plummeting

price of oil, on which the commodity-dependent

Russian economy depends. The ruble has lost

more than half its value against the dollar over the

past year.

But currently, the central bank has cut the policy

interest rate to 15% from 17%, claiming that

recent inflation will relieve temporary and the

financial markets have now stabilized.

(Fig. 1)

Russian Trading System Cash Index

(1/2014~ 1/2015)

(Fig. 2)

Cruel Oil Commodity Price

(1/2014~ 1/2015)

From the technical perspective, Russian Trading

System Cash Index just passed 50-day moving

average which means it is more likely to

rebound (Fig. 1), especially when the oil price's

downside momentum had reached the bottom

and also rebounded. (Fig. 2)

Will the collapse continue?

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(Fig. 3)

Price change of Commodities

(1/2014~ 1/2015)

As oil has disproportionately sold off relative to base metals in recent months, base metals are now

relatively overvalued versus oil compared to the historical averages (Fig. 3). We can see there is high

correlation between oil and copper (Fig. 4). The massive divergence (Fig. 3) will push copper price

down under the environment global economic slowdown.

(Fig. 4)

Correlation between copper and oil price

(1/2014~ 1/2015)

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reliable but no guarantee is given as to their accuracy or completeness. Neither Athena Best Financial Group, nor its subsidiaries, nor its related companies, nor any of

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