LATIN AMERICA MARKET REVIEW

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1 LATN AMERCA MARKET REVEW MAY EQUTES Emerging Market equities retreated in as a combination of factors including downward revisions to economic growth and normalizations of US Fed borrowing rates weighed on investor sentiment. EM underperformed down 4.2%, compared to developed markets as measured by MSC World which rose marginally by 0.1%. Latin America lost ground in the month falling by 7.3%. n this environment growth companies outperformed value stocks, whilst smaller capitalized companies also fared better than their larger counterparts. Within the Latam context, we saw a reversal of fortune for Brazil, which after rising strongly in April, fell by 11.9%. The weakness was attributed to currency woes for the Real which depreciated by 5.2% versus the US dollar and due to a tax hike for Brazilian banks. Hawkish tones from the Central Bank also set the scene for incremental rate hikes before the end of the year. The Andean markets also suffered in, with Colombia declining the most as a result of a poorer economic growth outlook and profit taking in stocks across the board. Mexico was the stand alone gainer during the month, benefitting from improved economic data, higher retail sales numbers and inflation under control. BONDS was the month when a couple of black swans showed up in the clear water of negative rate markets. German bunds which were supposed to be an only-buyers market led the movement up, doubling the yield level to 0.72% in just two weeks. US Rates also inched higher with a steepening bias. New issues continue at a much lower pace than in Taking into account that capex plans are sharply down, banks are cautions on loan growth and most of the refinancing has already been done, the pipeline is growing on pure liability management transactions. Brazil Foods tendered its 2020s and 2023s, financed by a EUR 2025 bond. n we also saw Mexican tequila producer Jose Cuervo issue a 2025 bond. Jose Cuervo has a strong brand in the USA and was priced tightly on yield, more aligned to US nvestment Grade than its Latam peers. Currencies suffered in, led by the COP which fell by 5.91% and the BRL down 5.17%. Further delays announced on the public offering of the state s stake in SAGEN hit the Colombian currency, as the flow of foreign buyers of the currency will have to wait to participate. Current account numbers are not helping either. The Mexican peso was the only one to appreciate in value against the US dollar, while the Chilean Peso and the Peruvian Sol lost close to 1% each. EQUTY Level BOND/CURRENCY Level MSC World % 4.1% EMB Global % 3.3% MSC EM ndex % 5.0% EMB Lat Am % 3.1% MSC Latin America % -8.5% CEMB Global % 5.2% MSC Asia ex Japan % 8.9% CEMB Lat Am % 4.6% MSC Eastern Europe % 19.5% Brazilian Real % -16.4% MSC Argentina % 12.3% Chilean Peso % -1.9% MSC Brazil % -13.5% Colombian Peso % -6.2% MSC Chile % 2.1% Mexican Peso % -4.1% MSC Colombia % -18.3% Peruvian Sol % -5.6% MSC Mexico % -1.4% Gold spot % 0.5% MSC Peru % -3.9% Oil (Brent) % 7.1% Source: Santander Asset Management & Bloomberg as at 29 1

2 LATN AMERCA ECONOMC REVEW BRAZL Despite the recent meltdown on confidence indicators, Brazilian GDP posted only a moderate decline of 0.2%qoq in the 1Q15. However, the most recent economic activity data and news is pointing to further deterioration in production, employment and sales. As a consequence it seems the slowdown in the 2Q15 will be much stronger. Taking this into account our outlook for the year has not changed. We continue to forecast a 1.5% GDP contraction in, driven by a notable downturn on fixed investments and household consumption. Regarding inflation, we have not seen enough relief on consumer prices this year. Even though the latest CP monthly readings were milder, and in line with the seasonal pattern, the diffusion index is still at its historical highs, revealing widespread pressures on consumer prices. We believe these developments will continue for a few more months, so we are expecting an increase of 8.6% for CP this year, above the target ceiling. As a result the Brazilian Central Bank is being forced to extend the hiking cycle on interest rates. However, we believe it is close to its end, due to the weakening of economic activity and the labor market. Hence, we were expecting a 50 bps hike at the June meeting as was announced and a final 25 bps rate hike in July, with the Selic rate finishing at 14.0%. COLOMBA The performance of the Colombian economy could start to show a somewhat less complex scenario as it seems oil prices have found some supporting ground, and a slight rebound occurred during the month. We maintain our central scenario of GDP expanding 3.2% in, with a marginal downward bias. PERU The Peruvian economy expanded by a meager 1.7% in the first quarter of. Private consumption remained weak and investment deepened its contraction to 7.1%, led by public investment. But public spending is expected to recover in the second half of the year supporting the performance of the economy, which would grow around 3.5% in. Still, it is remarkable that the latest consumer confidence reading showed its lowest level in nearly two years. nflation in, probably influenced by the depreciation of the currency, surprised to the upside, with a monthly record of 0.56% and of 3.37% in 12 months. We believe the relative weakness of domestic demand will exert downward pressure, leading inflation to 2.5%yoy by the end of. MEXCO GDP growth in 1Q reached 2.5%yoy, below our expected 2.8%, but in line with market consensus and above the average growth. Looking ahead, latest results on trade balance and consumer confidence suggest Q2 will bring modest growth. Accordingly our revised GDP figure is 2.8%, with the expectation that the US economy will rebound, a moderation in internal consumption and negative contribution from the oil and gas sector. The greatest risk continues to be a potential pass through from MXN depreciation, something that we have not seen yet. But we believe Banxico s ammunition of FX reserves is more than enough. n addition, FD inflows are poised to increase from the current US$20bn to US$30bn annualised. n July, the government will award the first contracts to private oil companies. We expect a US$16bn investment in this first announcement, to flow in the coming 4-5 years. That, together with the signal of more FX intervention if necessary, will be good news for MXN. However, the promissory capex pipeline will be challenged by higher rates in US and consequent outflows. CHLE The Chilean economy expanded 2.4% in the first quarter. Public consumption grew 5.6%, while private consumption only 1.6%. Meanwhile, investment has returned to contracting ground (after 0.5% in 4Q14), registering a fall of 1.7%. On politics, the turbulent environment led to several changes in the cabinet, including the exit of the Finance Minister, which could eventually reflect positively in business expectations in the short term. nflation remains high despite weak domestic demand. April inflation closed at 4.2%yoy, while the underlying measure was 4.6%. The effect of higher exchange rate is still pushing inflation of tradable goods. We estimate that inflation will enter the tolerance range of the Central Bank (from 2.0 to 4.0%) and will close the year at 3.6%. n spite of the weak economic activity, inflation above the tolerance range will prevent the central bank from changing the benchmark rate, which we forecast will remain at 3.0% throughout the year. Source: Santander & Bloomberg all data to 29 2

3 FUND POSTONNG AND PERFORMANCE COMMENT José Cuervo* GLOBAL HEAD OF LATAM EQUTES SANTANDER AM LATN AMERCAN EQUTY OPPORTUNTY FUND The fund outperformed its benchmark index during the month. A combination of good country allocation and security selection contributed to relative returns. At a country level, an underweight exposure to the underperforming Brazilian market was one of the largest contributors to performance. The Brazilian market lost ground as a potential change in Banking tax and a weaker currency weighed on investor sentiment and affected a number of stocks. This was partially negated by the fund s investments in Mexico where the overweight holding s failed to keep up with the rest of the Mexican equity market. A number of the fund s underweight holdings lifted relative performance. n particular, Petrobras, the Brazilian energy company proved to be positive as investors took profits leading to a fall in its share price. Petrobras s equity had been rising sharply since the announcement of its results, and its valuation was deemed to be high, also investors are still waiting for the company to reveal its investment plans. We continue keep an underweight position in the company. An underweight position in Banco Do Brasil was also beneficial amid the government announcing a potential tax change and elimination of the OC tax treatment, which would incur a further headwind on the public bank s business. The fund s investment in Suzano the Brazilian paper and pulp firm contributed to performance, as it gained from favorable FX movements of the US dollar to the Brazilian Real, especially as it has a sizeable US business. The company is also seeing a fall in its operating costs, which should help to boost margins. Not owning Cielo, the Brazilian credit and debit card payments operator was positive. An imminent change in regulation regarding the treatment of interest on capital and its consequence of a rise in the company s effective tax rate was viewed by market participants as being negative. Shares in Corpbanca the Chilean bank outperformed in. The bank is in talks to merge its business with Brazil s tau. However, talks stalled between the two parties in light of Corpbanca releasing earnings data which could value its business at a higher multiple. n contrast, the fund s position in tau suffered due to the potential change in the Brazilian tax treatment. Nevertheless, we continue to be optimistic on the company s future prospects. Chilean salmon producer, Multifoods another overweight holing in the portfolio, was a detractor to relative returns as the long awaited increase in salmon prices failed to materialize. Multifoods has been a strong performer for the fund, and the manager reduced the overweight investment during the month. Not owning Televisa, the Mexican media giant was negative for performance. The company is well managed, with good cash flow. However, investors are valuing the media company on similar multiples to its US counterparts, with a P/E of 33x for, which we believe to be very expensive. Another company to be hurt by the Brazilian tax issue was the insurer BB Seguridade. Despite announcing good results the malaises surrounding companies affected by the potential fiscal change was to great and negated any positive investor mood. We remain optimistic on the long-term prospects for the Latin American equity asset class. n the short-term there are a number of headwinds, with valuations in general not being cheap, Latam trades on a P/E of 16.3x for compared to EM at 13.0x. Also lower commodity prices would be a headwind for the resource rich exporting region. nvestor flows have been lacklustre but could pick up if we see sustainable recovery in the region and if sentiment towards EM improves. Fund -6.9% -9.7% -9.4% -14.6% +34.1% -27.1% ndex -7.1% -7.3% -12.3% -25.2% +30.3% -29.3% % nvested 98.2% Number of positions 45 LU Management Fee 0.70% TER 1.23% *José joined Santander AM mid Fund inception date 31 July 2008, class shares. Performance is net of fees, in USD, Benchmark to end December 2013 was MSC Latam Small Cap ndex, 1 January 2014 changed to MSC Latin America 10/40 ndex. All data to 29. 3

4 Alfredo Mordezki Zynty* GLOBAL HEAD OF LATAM FXED NCOME Tiago Ventura Rego* PORTFOLO MANAGER LATAM FXED NCOME SANTANDER LATN AMERCAN CORPORATE BOND FUND s performance was good in both relative and absolute terms with the fund benefitting from its overweight position in names involved in M&A and capital market activity that appealed to bond holders. n the risk on environment, high yield issues performed stronger than investment grade names. Venezuela suffered as investor concerns remained over its economy. n contrast the portfolio s investments in Colombia and Mexico both proved to be fruitful as fund positioning both underweight and overweight boosted relative returns. Alfa s proposed takeover of Pacific Rubiales saw the latter s bonds rally and provide the best performance in the month while both Mexico s Unifin and Elementia profited from the announcement of their impending POs. The fund s overweight investment in Brazilian, meat producer Marfrig also proved fruitful following China s removal of an embargo on Brazilian beef. As at the end of the month, the portfolio had an overweight exposure to the Mexican and Brazilian markets, where the fund manager continues to find attractive investment opportunities. The fund had an average yield to maturity of 5.8% higher then the index level of 5.4% and was underweight duration at 4.5years. The cash level stood at 4.8%. SANTANDER AM LATN AMERCAN FXED NCOME FUND The fund had a negative performance in the month with currency depreciation being the main driver. Nevertheless, the performance was ahead of the benchmark index return. The worst performers were the Colombian Peso which suffered as a result of pressure from the low oil price. The Brazilian Real also weakened due to the impact of a smaller level of intervention from the Brazilian Central Bank in supporting its currency. The Mexican Peso, the Chilean Peso and the Peruvian Sol had smaller depreciations at under 1% against the American dollar. Within the bonds portion of the portfolio, the Brazilian investments had a strong performance, especially given the investor expectations that the end of the hiking cycle could be close. The long end of the curve appreciated by around 3% to 4%. An underweight holding in the Colombian Peso and an overweight in Brazil duration also contributed to returns. With regards to portfolio positioning, the fund was overweight Brazil duration and also the Mexican Peso. During the month the manager increased duration in Brazil. Fund +1.0% +3.6% +6.3% -2.5% +14.2% +3.4% Fund -2.5% -6.4% -5.2% -13.1% +15.4% -0.1% ndex +0.7% +4.5% +5.9% -2.7% +14.1% +4.9% ndex -3.2% -6.3% -4.2% -7.9% +16.7% +6.0% % nvested 95.2% Number of positions 87 % nvested 94.1% Number of positions 45 LU LU Management Fee 0.60% TER 0.99% Management Fee 0.60% TER 0.95% *Alfredo joined Santander AM mid 2010 and Tiago took over the fund starting Dec Santander Latin American Corporate Bond Fund inception date 25 July Santander AM Latin American Fixed ncome Fund inception date 24 July 2008, class shares; Performance is net of fees, in USD. All data to 29. 4

5 THS MATERAL S ONLY FOR PROFESSONAL CLENTS AND SHOULD NOT BE RELED UPON BY ANY OTHER PERSONS. This report has been prepared by Santander Asset Management SA SGC. The information contained herein has been compiled from sources believed to be reliable, but while all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgement as at the date of this report and are subject to change. Santander Asset Management may change the recommendation it has on a stock at any given time. From time to time, Santander Asset Management and/or any of its officers or directors may have a position, or otherwise be interested in, transactions in securities which are directly or indirectly the subject of this report. Santander Asset Management has internal rules of conduct that contain, among other things, procedures to prevent conflicts of interest with respect to recommendations, including, Chinese Walls, and the possibility of establishing specific restrictions on research activity where appropriate. Santander Asset Management may from time to time perform services for or solicit business from any company mentioned in this report. Santander Asset Management does not accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose. Santander Asset Management is under the supervision of the CNMV. Santander Asset Management advises that this presentation may contain representations regarding forecasts and estimates. Said forecasts and estimates may include, among others, remarks on the development of future business and future returns. Although these forecasts and estimates represent our opinions regarding future business expectations, perhaps certain risks, uncertainties and other relevant factors may lead the earnings to be materially different from what is expected. ncluded among these factors are (1) the situation of the market, macroeconomic factors, regulatory and government guidelines, (2) variations in domestic and international stock exchanges, exchange rates and interest rates, (3) competitive pressure, (4) technology developments, (5) changes in the financial position and credit standing of our customers, debtors or counterparts. The risk factors and other fundamental factors that we have stated could have an adverse effect on our business and on the performance and earnings described and contained in our past reports, or in those that we shall present in the future, including those filed with regulatory and supervisory entities. Santander Asset Management, S.A., SGC. All Rights Reserved. 5