SEPTIEMBRE / OCTUBRE 2016Empresa de asesoramiento financiero (EAFI) inscrita con el número 191 en el Registro de la CNMV

Paseo de la Castellana 13, 2º izda. Madrid

www.lebris.es

SHALUQA 2016

2

1. GLOBAL OUTLOOK

2. NOTES ABOUT SPANISH ECONOMY

3. LCP SECTORS: SENSE & SENSIBILITY

3

GLOBAL OUTLOOK

4

WHERE WE ARE…

-6

-4

-2

0

2

4

6

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Global Economic Growth

Upswing

Downswing

5

…AND WHERE WE ARE GOING

#1. LEVEL

#2. TREND

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THE BACKBONE OF GLOBAL ECONOMIC ACTIVITY

LeBris Business Cycle Clock

EXPANSION

DOWNSWING

UPSWING

CONTRACTION

EMERGING

USA

EMU

Brazil

China

Russia

UK

France

Italy

Spain

Germany

7

PUT NUMBERS, PLEASE

-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%

2001 2003 2005 2007 2009 2011 2013 2015 2017

GDP USA (annual growth)

Real LeBris Model

-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%

2001 2003 2005 2007 2009 2011 2013 2015 2017

GDP EUROZONE (annual growth)

Real LeBris Model

8

9

ANEMIC GROWTH… BUT… AND ALL THIS STIMULUS?

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MONETARY POLICY: PRICE & QUANTITY OF MONEY

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DO YOU KNOW THE “BALANCE SHEET RECESSION”?

ASSETS LIABILITIES

CAPITAL

DEBTREAL ESTATE

12

BEFORE & AFTER A BALANCE SHEET RECESSION

INTEREST RATE

GDP GROWTH

INFLATION

Before Balance Sheet Recession: range +2% +4%

After Balance Sheet Recession: range -1% +2%

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ECONOMIC CYCLE ANALYSIS IN USA

Number MEAN MAX MIN MEAN MAX MINEXPANSION 11 21 39 4 24,4% 53,7% 4,4%RECESSION 11 3,5 6 2 -2,1% -4,2% -0,1%

Duration (number of quarters) Amplitude (the percent change in real GDP)

0

5

10

15

20

25

30

35

40

45

MAX. CURRENT MEAN

DURATION OF ECONOMIC EXPANSIONS (number of quarters)

0%

10%

20%

30%

40%

50%

60%

MAX. CURRENT MEAN

AMPLITUDE OF ECONOMIC EXPANSIONS (% change in real gdp)

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ECONOMIC CYCLE ANALYSIS IN USA

-2%

0%

2%

4%

6%

8%

10%

GDP PRIVATECONSUMPTION

PUBLICCONSUMPTION

ANDINVESTMENT

PRIVATEINVESTMENT

EXPORTS IMPORTS

REAL GDP AND COMPONENTS (annual growth)

Expansions Current cycle

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NOTES ABOUT SPANISH ECONOMY

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The recovery strengthened in 2015 and 2016, with growth above the euro area average

Private consumption:1. Steadily improving labour market conditions.2. The increase in gross disposable income.3. Favourable credit conditions.4. Low inflation.5. High consumer confidence.

Investment:1. Positive internal and external demand prospects.2. Improvements in the situation of balances. 3. Favourable credit conditions.

External demand:1. Good competitiveness. 2. Strength of the export market in the euro zone.3. Imports suported by domestic demand.

Public Sector: 1. Strong Bruselas pressure. 2. Difficulties at regional level3. Political uncertainty

2015 2016 2017

GDP 3,2% 2,8% 2,3%Private consumption 3,1% 3,1% 2,1%Public Consumption 2,7% 1,5% 1,2%Investment 6,4% 4,6% 3,8%Domestic demand (*) 3,8 3 2,3Exports 5,4% 4,8% 5,0%Imports 7,5% 5,5% 5,2%External demand (*) -0,6 -0,2 0Inflation -0,6 -0,5 1Employment (annual growth) 3 2,5 2Unemployment rate (% labour force) 22,1 19,8 18,4General government balance (% GDP) -5,1 -3,7 -2,7General government gross debt (% GDP) 99,2 100,3 100,1Current account (% GDP) 1,4 1,1 0,9* Contribution to GDP growthSource: OECD (june 2016)

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Private sector debt continues to decline but remains high, making the country vulnerable to shocks…

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

Household debt (% gross disposable income)

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

Non financial corporations debt (% GDP)

Breakdown of debt in Spain by sector

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… low potential growth amplifies the risks related to macroeconomic imbalances.

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

1983-1990 1991-2000 2001-2007 2008-2014 2015-2020

The contribution of labour, capital, and TFP to potential growth

Labour Capital TPF

Potential GDP growth Output gap

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LCP SECTORS: SENSE & SENSIBILITY

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THE CRONOLOGY OF THE ECONOMIC CYCLE

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FORECASTING FOR YOUR OWN INDUSTRYIS FORECASTING AT THE MICRO LEVEL A REALISTIC PROSPECT?

Some industries are far more subject to unpredictable domestic and international political events than to cyclical economic inputs (i.e. Defense and Energy sectors).

Some of the largest industries serving consumers´nondiscretionary social needs (healtt care, pharma, education) are inherently noncyclical. They are driven more by demographic, consumer needs.

Other industries, including several in the consumer spending category, are subject to some extent to economic variables but are driven to a much greater extent by new fashions or hits (athletic foot wear, women´s appareal, entertainment companies).

Still other industries are on such rapid growth curves that, during their highest-growth phases, the effect of economic cycle is not visible on their operating results (technology).

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FORECASTING FOR YOUR OWN INDUSTRYSTART WITH DEDUCTIVE REASONING, FINISH WITH A CHART

Simple deductive reasoning goes a long way in giving us a starting point for developing a charted historical cause-and-effect relationship.

If the relationship can be shown visually to exist, it may prove rewarding in predicting the business demand cycles for a specific industry or even the sales of an individual company

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INDUSTRY (EUROZONE): KEY INDICATORS

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YEAR 1 YEAR 2 YEAR 3 YEAR 4

+2

+4

+6

+8

+10

+12

-2

-4

-6

-8

Industrial Production

Real Capital Spending

Typical Cycle: Capital spending rises or falls 2 to 4 quarters after industrial production

Following strong uptrends in industrial production (solid line) and demands for services, manufacturers and service providers embark on periods of capital spending (dotted line) to build the equipment, factories, and offices that produce these goods and services.

This usually entails a lag of 2 to 4 quarters, making capital spending always a lagging indicator in the economy. Therefore, it sholud not be used for forecasting general economic activity.

% change vs prior year

25

YEAR 1 YEAR 2 YEAR 3 YEAR 4

+2

+4

+6

+8

+10

+12

-2

-4

-6

-8

Real Consumer Spending

Real Capital Spending

Typical Cycle: Major swings in capital spending lag moderate changes in consumer spending by 2 to 4 quarters

Moderate changes in consumer spending drive volatile swings in industrial production, and the volatile capital spending cycle lags these swings by 2 to 4 quarters.

Consequently, moderate changes in real consumer spending (solid line) also lead more volatile swings in real capital spending (dotted line) by 2 to 4 quarters

% change vs prior year

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INDUSTRY (EUROZONE): KEY INDICATORS

Industrial production: equipment goods index

Capital goods imports

Industrial production trend

Key Indicators Industry

New Orders / Inventories

Employment expectations industry sector

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INDUSTRY (EUROZONE): KEY INDICATORS

-25

-20

-15

-10

-5

0

5

10

Leading indicator industry sector - Level

-20

-15

-10

-5

0

5

10

15

Leading indicator industry sector - Trend

Mean

Upswing

Downswing

Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Equipment goods PI. 2 1 1 -1 0 -1 2 -3 0 0 -2 0 0 1 1 1 2 2 1 3 1 3 1 0 3 0 -1 1 -1 0 -2

Capital goods Imp. -4 -3 -2 -2 -1 0 1 0 1 1 1 1 2 2 2 2 2 2 1 1 1 1 1 1 1 0 -1 -1 -2 -2

Production trend 2 3 4 2 3 2 1 2 0 0 1 0 1 0 1 2 1 0 3 1 1 3 2 2 2 0 0 0 2 0 2 -1

New orders / Inventories 1 2 1 2 2 1 1 1 1 1 2 1 1 1 2 2 2 2 2 2 2 2 2 3 2 1 1 2 2 2 3 1

Employment Exp. 2 2 2 2 2 2 2 2 2 1 1 2 3 3 3 3 4 4 3 3 4 3 4 4 2 2 2 3 3 4 4 4

2014 2015 2016

00

28

INDUSTRY (EUROZONE): KEY INDICATORS

-15%

-10%

-5%

0%

5%

10%

-25

-20

-15

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010 2012 2014 2016

Leading Indicator vs GVA industry (ex const.)

Leading Indicator Industry (left) GVA Industry (YoY, right)

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30

31

CONSUMER GOODS / RETAIL (SPAIN): KEY INDICATORS

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A SIMPLE FORMULA FOR CONSUMER SPENDINGWage growth, and not employment, is a leading indicator of consumer spending

WAGES PER

WORKER

NUMBER OF

WORKERS

TOTAL WAGES

AND SALARIES

REAL CONSUMER SPENDING

LEADING INDICATOR

LAGGING INDICATOR

X

equals

Which drives

33

YEAR 1 YEAR 2 YEAR 3 YEAR 4

+2

+4

-2

Real personal consumption expenditures

Real average hourly earnings

Typical Cycle: How real average hourly earnings lead real consumer spending

Changes in individuals´year over year real average hourly earnings (dotted line) –usually ranging form -2% to +3% - have typically been a reliable indicator of broader swings in real consumer spending (solid line). And because stock market declines have often correlated with the early stages of consumer-spending slowdowns, real hourly earnings have also been a useful leading indicator of stock market direction, particulary before bear markets.

% change vs prior year+6 BEAR MARKET BEAR MARKET

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35

CONSUMER GOODS / RETAIL (SPAIN): KEY INDICATORS

Key IndicatorsConsumer

Goods / Retail

Retail sales

Industrial production: consumer goods index

Consumer goods imports

Consumer confidence

Business retail sector confidence

Employment expectations retail sector

36

-25

-20

-15

-10

-5

0

5

10

Leading indicador retail sector - Level

-10-8-6-4-202468

10

Leading indicator retail sector - Trend

Mean

Upswing

Downswing

Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Retail Sales 1 0 0 1 1 1 0 1 1 2 3 7 5 4 4 4 4 3 4 4 6 7 5 3 4 5 5 5 4 6 6

Consumer goods PI. 5 4 1 4 4 2 3 0 2 3 -1 1 -4 -1 4 0 1 1 3 3 3 5 5 3 7 5 0 3 2 5 2

Consumer goods Imp. -4 -3 -1 0 1 1 2 3 2 3 2 1 1 1 1 1 0 0 -1 -1 -1 -1 -1 0 -1 0 0 0 0 0

Consumer Confidence 1 0 3 3 4 5 3 4 2 2 1 4 6 6 8 9 8 7 7 6 6 7 7 10 7 6 4 5 5 6 4 4

Retal Confidence 8 6 9 9 9 8 8 10 9 8 9 10 10 10 10 10 10 9 9 9 8 10 10 10 10 9 8 7 8 7 9 7

Employment Exp. -3 -3 2 3 5 -2 1 5 1 6 6 8 5 3 9 4 7 7 5 3 7 6 10 8 8 8 7 4 5 6 6 4

2014 2015 2016

CONSUMER GOODS / RETAIL (SPAIN): KEY INDICATORS

37

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

-25

-20

-15

-10

-5

0

5

10

2000 2002 2004 2006 2008 2010 2012 2014 2016

Leading Indicator vs GVA retail sector

Leading Indicator Retail Sector (left) GVA Trade, Transport and Accommodation (right)

CONSUMER GOODS / RETAIL (SPAIN): KEY INDICATORS

YoY

38

CONSTRUCTION / REAL ESTATE: KEY INDICATORS

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CONSTRUCTION / REAL ESTATE (SPAIN): KEY INDICATORS

Industrial production: construction index

Cement consumption

Building permits

New construction orders

Employment expectations construction sector

Home sales

Home prices

Consumer expectations

Wages

CONSTRUCTION REAL ESTATE

40

-25

-20

-15

-10

-5

0

5

Leading construction / real estate - Level

Construction

Housing-14

-12

-10

-8

-6

-4

-2

0

2

4

6Leading construction / real estate - Trend

Construction

Housing

Upswing

Downswing

Mean

Construction Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Construcction PI. 7 10 10 10 7 4 4 4 3 3 4 3 2 0 -1 0 0 1 0 0 1 1 0 2 3 3 2 0 1 2 3

Cement consumption -8 -8 -6 -5 -4 -3 -2 -1 0 1 1 2 3 3 3 4 5 5 4 4 4 4 4 4 4 4 3 2 2

Building permits -4 -5 -3 -2 -1 -1 0 0 1 2 2 1 2 5 4 5 5 6 5 6 6 6 8 10 10 10 10 9

New construction orders -10 -8 -9 -9 -8 -10 -7 -7 -5 -3 -5 -5 -4 -3 -5 -6 -4 -4 -5 -4 -5 -4 -3 -4 -5 -3 -6 -7 -5 -6 -6 -7

Employment Exp. -4 -5 -4 -5 -4 -7 -2 -1 -1 0 1 0 -1 0 1 0 0 -2 -1 0 -2 0 0 1 -1 0 -3 -1 -3 -4 -3 -3

Housing Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. Aug.

Home sales 10 10 10 4 4 4 4 4 4 5 5 5 2 2 2 4 4 4 4 4 4 1 1 1 5 5 5

Home prices -12 -12 -11 -10 -10 -10 -11 -11 -11 -9 -9 -9 -11 -11 -11 -8 -8 -8 -8 -7 -7 -7 -7 -7 -7 -7 -7

Consumer expectations -8 -8 -8 -8 -8 -8 -8 -8 -8 -9 -9 -9 -8 -8 -8 -7 -7 -7 -7 -7 -7 -7 -7 -7 -6 -6 -6 -7 -7 -7 -5 -5

Wages -11 -11 -11 -8 -8 -8 -6 -6 -6 -6 -6 -5 -3 -3 -3 -2 -2 -2 -1 -1 -1 0 0 0 0 0 0

2014 2015 2016

CONSTRUCTION / REAL ESTATE (SPAIN): KEY INDICATORS

41

-20%

-15%

-10%

-5%

0%

5%

10%

-20

-15

-10

-5

0

5

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Leading Indicator vs GVA construction

Leading Indicator Construction (left) GVA Construction (YoY, right)

CONSTRUCTION / REAL ESTATE (SPAIN): KEY INDICATORS