EFTA01003084.pdf

From: "Pil, Anton C" To: Undisclosed recipients:; Subject: GIO Year-End Investment Road Map Date: Mon, 22 Dec 2014 16:44:39 +0000 Inline-Images: image001.png B13-0217 GIO banner for word & email.jpg Year-End Investment Road Map December 2014 Recent volatility, whether driven by the oil selloff or Fed anxiety, has created some opportunities we believe investors can take advantage of in the last few days of the year. While we did not get a removal of "considerable time" language, the Fed seems to be making attempts to phase-out the phrase and there was little in the meeting that changes our mid-2015 first hike view. Much has been made of the slightly lower median rates forecasts but we would note that 15 out of 17 members expect the Fed to raise rates by an average of 100 to 125 basis points in 2015. OPPORTUNITIES BEFORE THE END OF THE YEAR JANUARY FOCUS ITEMS Long USD Positions Whole Loans In FX, we continue to have high conviction in strong USD More than $1trillion of the $9.2 trillion U.S. residential positions particularly against Euro. In addition to the rising mortgage market are non-performing or re-performing. About deflation concerns and the growing expectation of European 60% of these loans are on bank and GSE balance sheets2 but sovereign QE, we think Russia could increasingly have spillover with recent regulatory changes and settlements, the door is effects on European economies and their banking sectors, as now opened for these entities to clear their balance sheets of 75% of Russian loans are held by European banksl . With these these loans. This creates an opportunity for private buyers to headwinds, we believe the probability of ECB action increases. buy these loans at discounts, restructure them, and ultimately sell them to yield-seeking investors. US Stocks in Natural Gas & Retail We expect crude to remain volatile in the near term and would Energy- Public & Private Opportunities prefer waiting for at least a stabilized market before making a We are actively watching the energy sector and are looking for more aggressive recommendation in oil stocks. In the opportunities to invest in oil-exposed energy companies in early meantime, our preference is to focus on natural gas-oriented 2015 once technical dynamics have stabilized. Within public producers that have strong balance sheets and on low and markets, we will be watching E&P and servicing companies with mid-end retailers. leverage to oil and with high quality balance sheets. However, the depressed valuations also creates opportunities for private Non-Energy High Yield Bonds investors looking to buy assets to restructure or going through Global high yield spreads have widened about 150 bps in the bankruptcy. last six weeks due to turmoil in the leveraged energy sector. White we are being patient on energy high yield, the selloff has Digital Divide Reload created attractive opportunities with the cash bonds of Media and telecommunications companies have stronger non-energy credits such as: underperformed recently based on weaker advertising trends • HCA Holdings (4.00% YTW) and a lack of M&A news. However, with the spectrum auction • Air Canada (6.70% YTW) ending soon, consolidation will again become a focus. We are reloading on one of our high conviction views in 2014, Digital • Amkor Technology (6.62% YTW) Divide, by adding to higher performing content companies and • Bank of America Preferreds (6.32% YTW) underperforming telecommunication and media companies. • INEOS (7.60% YTW) Year-End Tax Planning for US Clients Credit Default Protection For US clients thinking about year-end tax planning, now is a Although our base case is that the Russian Ruble crisis is good time to take tax losses, especially in the energy sector. unlikely to lead to broad contagion, it would be prudent to add protection. Specifically, European banks that have the highest exposure to Russia are likely to experience near term stress if the crisis exacerbates. EFTA01003084 610 Investments Strategy Anton Pil Jeanne Sun Peter Epstein Source: Bloomberg. As of December 19, 2014. 1 B15 consolidated statistics. Q2 2014. 2 Bank ofAmerica Merrill Lynch.. "Sccuritizcd Products Strategy". September 19, 2014. 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