BRICS RequiEM16 December 2015

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Product UpdatesScenario Updates

Market Update

EM 101: BRICS + EM crushed

End of BRICS Era?

Scenario: EM Loses Footing

BRICS RequiEM

HiddenLevers

MARKET UPDATE

Market Update

sources: HiddenLevers, Bloomberg, Goldman Sachs

1

Unicorn / Unicorpse

2

3

Big Oil Cutting Dividends

High Yield Bonds Cringeworthy

Fed Rate Hike – First 25 bps rise in a Decade 4

sources: HiddenLevers, Fed, WSJ, USA Today

Fed expects 4 more hikes

in 2016

central banks

breaking ranks

BAD TIMINGEM currencies

+ high yield

GOOD TIMINGjobs +

housing

Hello Rate Hike: HiddenLevers quite useful

Research+

Model Accuracy

+Functionality

BAD

UGLY

HiddenLevers

EM 101: BRICS + EM CRUSHED

EM 101: Overview

Top 10 emerging markets according to Global Intelligence Alliance survey

BRICS = BrazilRussiaIndiaChinaSouth Africa

EM 101: Equities Markets

sources: HiddenLevers

Since 2003

Last 5 Years

EEM +234%

SPY +190%

EFA +149%

EEM -25%

SPY +78%

EFA +17%

Emerging Markets a long-term winner.

Since 2011, Emerging Markets have been stagnant.

EM 101: Correlation with Copper / USD / Rates

sources: HiddenLevers

Choppy inversion to USD

Copper tracks EM

Mixed interest rate impact

EM 101: Downside Impact on USA

source: Business Insider, HiddenLevers

Major exporters – USD rise will pinch profits

Energy + Materials Sector – Bankruptcies loom

Energy, Materials, and Tech all get over 50% of rev overseas

-86% YTD -86% YTD-80% YTD

HiddenLevers

END OF BRICS ERA?

BRICS RIP: Commodities Countries

sources: HiddenLevers

BRAZIL

RUSSIA

S.AFRICA

CEW v OILEM currency ETF

BRICS RIP: Asian Juggernauts INDIA CHINA

Buyer of Oil. Cheap prices help, not hurt.

Diversified economy + young population.

sources: HiddenLevers 1, 2

Buyer of Oil. Dumping lately. Yuan peg to USD.

Consumer economy now + artificial baby bust.

BRICS RIP: Emerging Opportunities

sources: The Economist, 1, 2

HiddenLevers

SCENARIO: EM LOSES FOOTING

Fall 2013 – Bad News BRICS

Fall 2015 – EM currencies gutted / BRICS divergence

Scenario Update

commodities rebound

US recovers alone

falling BRICS sink US

Bad News BRICS

EM Loses Footing OIL PRICES QE ENDED RATE HIKE

GOOD: Commodities Rebound

source: HiddenLevers

Unlikely due to Commodities Perfect Storm

EM rebound not that beneficial

to US

Oil still falling so no real catalyst

on horizon.

USD comes in due to rate hike

fears over

EM-commodity price link

unavoidable

BAD: USD Too StrongUSD has skyrocketed since QE ended Oct 2014

source: HiddenLevers

Rising rates don’t always

hurt EM

Priced in anticipating

rate hike

Currency risk double

whammy

US domestic sectors

unaffected

UGLY: Crippled by US Rate Hikes

Weakness could undermine

governmentssource: HiddenLevers

Monolithic EM ETFS and funds

a bad idea

Fed raising rates leads to money flowing out of EM

Bankruptcies in energy/material

sector

Global Deflation aggravates EM

slowdown

SCENARIO: EM Loses Footing

Copper

-33%S&P

-12%

Copper

-7%S&P

0%

Copper

+50%S&P

+10%

EM commodities producers are hoping for this outcome, but there’s no plausible driver for this yet. US markets might under-perform in this scenario, in a reversal of 2012-2015.

A rising dollar will keep pushing down commodities and foreign currencies, with negative impacts on US commodities producers and major multinationals.

Equity markets could face a correction if EM GDP growth slows considerably, with bankruptcies likely in the energy and materials sectors on weak pricing.

GoodCommodities

Rebound

BadUSD Too

Strong

UglyCrippled By Rate

Hikes

BRICS RequiEM – Take Aways

USD Strength + Commodities crushed Emerging Markets

Not all EM should be thrown out with commodities producers

BRICS ERA IS OVERBRICS + EM = 50% of global growth