Global Funds Outlook Troubled waters

BBVA Research - Global Funds Outlook 4Q18 / 1 Global Funds Outlook Troubled waters November 2018

BBVA Research - Global Funds Outlook 4Q18 / 2 Main Takeaways In 3Q18 global investment funds (GIFs) registered net outflows for a second quarter in a row. As expected, EM funds continued to register withdrawals amidst an increasingly challenging global economic outlook. However the accompanying outflows also registered in DM funds were an unwelcomed surprise. Investors conduct towards EM remains measured. They have cautiously discriminated across EM economies restraining from panic yet acting harder on economies with higher external financing needs. All in all, accumulated outflows in 2018 represent 15% of the total inflows registered in 2017. Investment flows are an increasingly distressing issue for Europe. Italy s renewed fiscal-led financial turbulence and Brexit ongoing negotiations are taking their toll. Portfolio outflows from Europe have accelerated to a pace not seen since the European debt crisis. A generalized risk-off mood persists among global investors. More worrying, it is growing in scope: hurting now US assets and starting to impact money market funds. Looking forward, and accompanying the expected economic cyclical downturn, the ongoing monetary policy normalization and the return of some volatility, portfolio outflows from EM will likely intensify in the coming quarters.

BBVA Research - Global Funds Outlook 4Q18 / 3 Global Investment Funds (GIF) We analyse EPFR data on global fund flow over the quarter to track asset volumes to describe net reallocations across regions and asset types to identify common factors underlying those dynamics

Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 BBVA Research - Global Funds Outlook 4Q18 / 4 What happened to GIF in 3Q18? Global investment funds showed outflows for a second quarter in a row. Differentiation between EM and DM is fading Investors continued to withdraw capital from global funds amidst an increasingly challenging outlook: protectionism threats have escalated, the Fed is proceeding with monetary policy normalization and political risks re-emerged in Europe. EM confronted another round of financial turbulence but a sudden stop has been avoided so far (thanks to the response of most vulnerable countries) GIF flows and their composition (quarterly average, all countries, % AUM) GIF flows to EM and DM (weekly flows, 4w moving average, % AUM) 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 0.75 0.50 0.25 0.00-0.25-0.50-0.75 0.5 0.4 0.3 0.2 0.1 0.0-0.1-0.2-0.3-0.4-0.5 Common Idiosyncratic Total EM DM (rhs) Source: BBVA Research, EPFR

BBVA Research - Global Funds Outlook 4Q18 / 5 What happened to GIF in 3Q18? Investors are increasingly worried about Europe while anxiety on EM seems to subside and US fund are still attracting fresh flows GIF flows across regions in 2Q18: common vs idiosyncratic factors (monthly average,%, AUM) EM DM US Japan EZ core EZ peripherall Europe EM LatAm Asia EM -2.5-2 -1.5-1 -0.5 0 0.5 1 1.5 The pace of portfolio outflows from EM has moderated despite steady tightening of global funding conditions. Most vulnerable EM countries (Turkey, Argentina) are taking economic (fiscal and monetary) actions to curb renewed financial tensions. Meanwhile China is trying to offset the negative impact of US tariff measures through easing measures Outflows from the Eurozone increased sharply on the back of fiscal concerns in Italy and Brexit negotiations with some differentiation between core and peripheral countries US funds have consolidated as the preferred destination of flows during 2018. However, recent volatility spike and equity correction, are starting to dampen investors appetite Common Idiosyncratic Total *All comparative inferences across countries are based on inflows relative to each country s total assets under management (AUM). They are NOT based on actual USD flows, which tend to be significantly larger for the US than for any other economy Source: BBVA Research, EPFR

Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 BBVA Research - Global Funds Outlook 4Q18 / 6 What happened to GIF in 3Q18? Outflows from EM, a bit of comfort: GIF have evolved broadly in line with our expectations and far from a sudden stop While EM have been witnessing persistent portfolio outflows since May2018, we can not talk about an episode of capital flight. The dynamic and size of outflows have been orderly and manageable, pointing out that investors could still be reassessing their exposure to EM Outflows from EM in different episodes (cumulated flows in different episodes, % AUM) Monthly GIF flows to EM (3M moving average, monthly flows, % AUM) 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728 weeks Taper Tantrum (May 2013) China's concerns (Aug 2015) Current episode (May 2018) 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Source: BBVA Research, Bloomberg

Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 BBVA Research - Global Funds Outlook 4Q18 / 7 What happened to GIF in 3Q18? Outflows from EM, a bit of risk: cumulated outflows from EM are a very small portion of the bulk of inflows during 2017, more to come? The bulk of inflows to EM during 2017 increases the chances of persistent outflows even in 2019. During the recent risk events, EM registered outflows for 12 months in a row Portfolio flows to EM (% of AUM, monthly data) Buffer of portfolio flows built since early 2017 (% of Jan-17 AUM) 3% Tapper tantrum 2% taper tantrum China US election Current episode 1% From January 17 to March 18 16.7% 0% -1% From April to October 18-2.2% -2% -3% Net since January 17 14.5% Source: BBVA Research, Bloomberg, EPFR

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Oct-18 BBVA Research - Global Funds Outlook 4Q18 / 8 What happened to GIF in 3Q18? Renewed turbulences in Italy and Brexit is taking its toll: outflows from Europe have accelerated showing a worrying dynamic While US funds have continued to attract a sizable amount of portfolio flows, investors have continued to reshape portfolio allocation against Europe. Outflows from European funds have surpassed the Brexit episode and the path is akin to the Eurocrisis (2011) Accumulated flows to DM (% of AUM from January 2018) GIF flows to Eurozone funds (cumulated flows since 2018 % AUM) 3% Coalition of Government in Italy Concerns on 2019 budget in Italy 0.0% -0.5% 2% -1.0% 1% -1.5% 0% -2.0% -1% -2.5% -2% -3.0% -3% -3.5% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 US Bonds US Equity EZ Bonds EZ Equity Source: BBVA Research, EPFR Political concerns in Europe (Italy and Brexit) (May-18) Brexit vote (June-16) Euro Crisis (Nov-11)

BBVA Research - Global Funds Outlook 4Q18 / 9 Major macro determinants of GIF flows We identify the global and idiosyncratic macro-drivers of net GIF inflows to both EM and DM

Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 BBVA Research - Global Funds Outlook 4Q18 / 10 Major macro determinants of GIF flows Among global factors, global growth has remained solid chiefly driven by the US, allowing the Fed to proceed with normalization Economic conditions in the US remain consistent with high growth in 2018 and 2019, unemployment rate near 50 year low, and the Fed is poised to further raise rates (in December, following the September hike). Market expectations on the Fed have corrected to the upside US: Confidence indicator and unemployment rate (ISM, level, and Unemployment rate,%:mm 3 months) 65 3.5 US: Implicit rates in Fed Funds futures (%) 3.5 60 55 50 45 40 35 4.5 5.5 6.5 7.5 8.5 9.5 10.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 ISM (manufacturing and non manufacturing) Unemployment rate (rhs) Current July-2018 Fed Funds Source: BBVA Research, Bloomberg

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 BBVA Research - Global Funds Outlook 4Q18 / 11 Major macro determinants of GIF flows In fact, global financial conditions have further tightened on the back of higher 10-year US Treasury yields and strong US dollar As markets incorporate a more hawkish outlook for the Fed, the 10-yr Treasury trended upwards (reaching a seven year high, 3.20%). Unlike in the rate increase showed early in the year, bond yields have been mainly driven by real rates (while inflation expectations have remained well-anchored) Global Financial conditions: US Dollar and US bond yields (DXY index: US Dollar vs major developed currencies, %) 10Y UST descomposition (%) 3.5 110 1.5 2.8 3.0 2.5 105 100 95 1.0 0.5 2.6 2.4 2.2 2.0 1.5 90 85 80 0.0-0.5-1.0 2.0 1.8 1.6 1.4 1.0 75-1.5 1.2 US10Y USD (DXY,rhs) real yield (lhs) breakeven Source: BBVA Research, Bloomberg

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 BBVA Research - Global Funds Outlook 4Q18 / 12 Major macro determinants of GIF flows With investors focused on solid growth and ignoring global risks, volatility remained subdued and equity indices kept on growing However, risk perception has abruptly changed. Equity markets have finally adjusted to rising yields as the Fed continues with its tightening cycle, and volatility has reemerged. Going forward, investors should navigate in a more challenging environment Main developed equity indices and volatility (VIX) (Equity indices Jan15=100; Volatility, %) Brent prices (USD) 150 45 90 140 130 40 35 30 80 70 21% 120 110 25 20 60 100 90 15 10 5 50 40 Asymmetric impact among EM 80 0 30 20 VIX (rhs) S&P500 Eurostoxx Source: BBVA Research, Bloomberg

Asia Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Eastern Europe LatAm BBVA Research - Global Funds Outlook 4Q18 / 13 Major macro determinants of GIF flows On idiosyncratic factors in EM, macro-financial vulnerabilities are playing a major role Emerging Markets: Macro-financial vulnerabilities monitor Current account balance (% GDP, Q118) External sector External debt (% GDP, Q118) External Reserves / short term external debt (%) Public sector Public debt (% GDP, Q417) Private sector Non financial debt (% GDP, Q417) Argentina -5.2 40 1.0 55 21 Brazil -0.5 33 4.0 83 69 Chile -1.0 66 1.6 25 139 Colombia -3.1 40 2.8 49 65 Mexico -1.3 39 3.4 36 43 Peru -1.3 32 6.3 25 41 Hungary 3.2 112 1.1 81 101 Ukraine -2.1 104 1.0 76 40 Poland 0.0 75 1.6 51 81 Russia 2.7 33 4.9 16 66 Turkey -6.3 55 0.7 28 85 China 0.9 15 3.8 47 209 India -1.9 21 4.0 69 56 Indonesia -2.0 35 2.3 29 39 Malaysia 3.7 73 1.3 51 134 Thailand 10.6 33 3.4 33 116 BBVA Financial Tension Index: Emerging markets 6 5 4 3 2 1 0-1 -2 Argentina Turkey Brazil

May-18 Jun-18 Jul-18 Aug-18 Oct-18 Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08 Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 Jun-15 Jan-16 Aug-16 Mar-17 Oct-17 May-18 May-18 Jun-18 Jul-18 Aug-18 Oct-18 BBVA Research - Global Funds Outlook 4Q18 / 14 Major macro determinants of GIF flows Most vulnerable EMs have taken some steps (monetary and fiscal measures) to regain market confidence The adoption of monetary and fiscal measures in most vulnerable EM countries has allowed for some stabilisation. In Mexico, the trade deal with the US and Canada (USMCA) has been a supportive factor. In Brazil, short-term uncertainty on presidential elections has faded. While China is already implementing fiscal and monetary measures to offset the negative impact of trade tariffs on growth EM monetary policy indicator (Number of rate hikes minus number of rate cuts by 23 central banks 6 months moving average) 10 5 More tightening than easing ARS/USD 21 26 31 36 41 46 Argentina Very restrictive monetary policy: rate hikes (+1500 bps) and no monetary growth Strong fiscal consolidation IMF programme 0-5 -10 TRY/USD Turkey -15-20 More easing than tightening 4 5 6 7 Rate hikes: +650 bps Moderate Fiscal plan Easing geopolitical tensions 8 Index (6M, moving average) Source: BBVA Research, Bloomberg

Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Oct-18 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Oct-18 BBVA Research - Global Funds Outlook 4Q18 / 15 Major macro determinants of GIF flows Tough times for European assets amidst Brexit negotiations and Italian fiscal concerns Italy risk premium has consolidated levels around 300bp, after the new government fiscal plan, with limited contagion to other peripheral countries The increasing uncertainty is dragging down the EUR (to its lowest since early 2017) and German Bund yields Peripheral risk premium (10Y yield spread against Germany, bps) 450 Germany 10Y sovereign yields and Euro (% and level against the USD) 0.8 400 350 300 250 200 150 100 50 0 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1.25 1.20 1.15 1.10 1.05 Spain Italy Portugal 10Y Germany EUR/USD (rhs) Source: BBVA Research, Bloomberg

Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 BBVA Research - Global Funds Outlook 4Q18 / 16 Major macro determinants of GIF flows Italian challenging environment: political turmoil, the end of the ECB QE and increasing cost of funding Under the Italian draft budget 2019, public debt remains sustainable but more vulnerable and less room of maneuver if fiscal adjustment postponed. Italy: Public Debt (% of GDP) 140 130 120 110 100 90 12month change in Government debt by investor (EUR, bn) 250 200 150 100 50 0-50 -100 80 2018 2020 2022 2024 2026 2028 2030-150 Stability program May 2018 Draft budget 2019 Stimulus fails, temporary spread 425bp and fiscal adjustmente in 2023 Stimulus fails, no fiscal adjustment and permanent spread 425bp Bancad Italia Domestic Banks Dom. Fin. Inst Other residents Non-residents Total Source: BBVA Research, Bloomberg

BBVA Research - Global Funds Outlook 4Q18 / 17 Investor sentiment We have developed a set of indicators, which combine asset prices and GIF flow data from EPFR, to identify episodes of risk-on mood and episodes of risk-off mood, of which there are three types - pure risk aversion, redemption and safe-haven flight Furthermore, we assess investor appetite for funds in emerging markets vs. developed markets or equity vs. bonds

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Nov-18 BBVA Research - Global Funds Outlook 4Q18 / 18 Investor sentiment Investors sentiment remains in risk- off territory. Moreover, latest data pointed for further deterioration The deterioration of market sentiment seems to halt during the Summer, but anxiety has returned to financial markets led by the correction of US equity According to our probit model, during last Summer the probability of markets entering into safe-haven was high but it moderated as the quarter went by. Investment mood index* (above (below) zero = risk-on (risk-off) mood Trump Commodities Probability of safe-haven flight based only on portfolio flow data China I China II EMs risks & trade fears 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 "Risk-on mood" "Risk-off mood" 1.0 0.9 0.8 0.7 0.6 0.5 Brexit 0.4 0.3 Trump 0.2 0.1 0.0 Confidence interval of regime probability Safe-haven regime probability (*) see annex for more details Source: BBVA Research, EPFR

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 BBVA Research - Global Funds Outlook 4Q18 / 19 Investor sentiment Preference for Developed vs Emerging markets is fading as investors sentiment towards Europe deteriorates The sharp outflows from the EZ along with decreasing inflows to US curbed the preference for DM Rotation from equity towards bond funds continued in EM while in DM the outflows from bond funds outpaced those from equity funds Investor appetite for DM vs EM (indicator expressed as standard deviation from historical mean) Investor appetite for bonds vs equity (indicator expressed as standard deviation from historical mean) 1.5 1.3 1.0 0.8 0.5 Taper tantrum China Trump Preference for EM 2.0 1.5 1.0 0.5 Preference for Equities 0.3 0.0 0.0-0.5-0.3-0.5-0.8-1.0-1.3 Preference for DM -1.0-1.5-2.0 Preference for Bonds -1.5 Emerging markets Developed markets Source: BBVA Research, EPFR

What s next? BBVA Research - Global Funds Outlook 4Q18 / 20

BBVA Research - Global Funds Outlook 4Q18 / 21 Our baseline macroeconomic outlook Global economic outlook Global growth still solid, but moderating and less synchronized. The peak is behind us Strong performance in the US contrast with stabilization in the Eurozone and China US-China trade escalates. Still limited impact but ready for more action, while US tensions with other countries have eased Biased to the downwards. Global risks intensify Protectionism (US-China trade escalates) and Fed s exit, with EM sell-off acting as potential amplifier and greater uncertainty in Europe. Major central banks monetary policy Ongoing monetary policy normalization: Central banks balance sheet to further shrink: -450 bn USD in 2019 Fed and ECB at very different stages: Fed at the end of the tightening cycle and ECB to start only in 2019 The Fed is expected to further raise rates 25 bps in December and by 75 bps in 2019 The ECB to end QE by the end of 2018 (reinvestment to be maintained) and start hiking interest rates in Sep2019 Global financial conditions Financial volatility has returned given the lingering concerns on the global outlook and diminishing global liquidity. Long-term interest rates in the US and EZ are expected to increase gradually, with some downward pressure to German rates due to safe-haven flows. US Dollar is expected to weaken vs EUR, assuming that political risks in Europe recede Oil prices will remain high in the short term (led by supply factors such as US sanctions on Iran). Gradual convergence to estimated long-term equilibrium (60USD/b)

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Dec-18 Mar-19 BBVA Research - Global Funds Outlook 4Q18 / 22 What s next? Portfolio outflows from EMs have been persistent but not sudden stop EMs funds registered outflows amounted to 1% of AUM in the 3Q18, broadly in line with our projections led by the ongoing withdrawal of global liquidity According to our estimations, outflows from EM fund could intensify as global conditions could worsen. In particular, financial volatility is on the rise, and there is a growing evidence that the peak on the global cycle is behind us. In particular, the rebound of financial tensions is expected to have an impact on EM growth Global Investment Funds flows to EM (% of AUM, QoQ) 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Common Idiosyncratic Forecast Real Source: BBVA Research, EPFR

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 BBVA Research - Global Funds Outlook 4Q18 / 23 What to watch? The effect of higher and persistent financial stress on GDP growth could be sizeable, especially in EMs EM Financial Tension Index simulation: tensions back to 2016 level or reverting 2017 complacency (normalized index) 1.5 1.0 0.5 0.0 Effect of higher financial stress on EM GDP growth (cumulated effect over the next 4 quarters, pp) -0.7% -0.5-1.0-1.5 Current Financial tensions remain close to 2017 average Financial tensions return to 2015-16 average Source: BBVA Research

BBVA Research - Global Funds Outlook 4Q18 / 24 What to watch? Trade war (US-China) could threat global economic outlook. Mild impact, so far US and China have raised tariffs. The trade channel effect on GDP growth of approved measures for now could be limited, but indirect effects through confidence and financial could be sizeable, especially for China and emerging economies US import tariffs applied vs. announced (volume under threat of new tariffs, $bn) Approved so far $250bn (10%-25%) Under discussion $505bn (10%-25%) $255bn (10%) 800 700 600 500 400 Effect of approved US tariff increases and retaliation on GDP growth. September 2018 (2018-20, pp) 0.0-0.2-0.4-0.6-0.8-1.0 $50bn (25%) $200bn (10%) $200bn (25%) 300 200-1.2 World China US Europe Approved, confidence/financial channel Steel & Aluminum: $0.7bn (25%) $16bn (25%) $34bn (25%) Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2018 2019 100 0 Approved, trade channel Tariffs 25% All Chinese imports Simulation: 25% tariff increase on steel, 10% on aluminum, 25% on Chinese $50bn imports and 10% on $200bn. China s retaliation: 25% on $50bn and 10% on $60bn Source: BBVA Research and National Sources

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 BBVA Research - Global Funds Outlook 4Q18 / 25 What to watch? How will China react to the US? Managing a RMB depreciation poses a material potential threat to financial stability China: Renminbi and Equity Psychological level 7.0 6.9 6.8 6.7 6.6 6.5 6.4 6.3 6.2 6.1 6.0 5500 5000 4500 4000 3500 3000 2500 2000 The trade war is one reflection of a broad, long-term geopolitical conflict between the US and China The dilemma for China on the trade conflict: how to mitigate the impact of tariffs without risking financial stability Policy options to counter US tariffs are limited A sharp currency depreciation could lead to large-scale capital outflows and an escalation of the conflict with the US USDCNY Shanghai Equity (rhs)

Annex BBVA Research - Global Funds Outlook 4Q18 / 26

BBVA Research - Global Funds Outlook 4Q18 / 27 Glossary GIF: Global Investors Funds: these are the funds covered by the EPFR database in the Country flows allocation, with amounts shown in millions of US Dollars. This database includes the flows in country-denominated funds and the proportional amounts in global or supranational labelled funds AUM: Assets under management in the EPFR database DM: Developed markets included in our sample are Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the US EM: Emerging markets included in our sample are Argentina, Brazil, Chile, China, Colombia, Czech Republic, Hungary, India, Indonesia, Korea, Mexico, Peru, Philippines, Poland, Russia, Slovenia, South Africa, Thailand, Turkey and Venezuela

BBVA Research - Global Funds Outlook 4Q18 / 28 Methodological annex November 2018

BBVA Research - Global Funds Outlook 4Q18 / 29 Factor analysis of EPFR flows, decomposition of global and idiosyncratic factors % of 42 EQ flows explained % of 42 BN flows explained Implicity, % of 42 Total flows explained GIF flows could be explained by 3 identified factors and idiosyncratic differences F1 31% F1 41% F1 48% 1 Global: Captures common movements across all countries (same direction), i.e. due to changes in market risk appetite F2 19% F2 10% F2 9% 2 Asset reallocation (bonds and equities) Variation explained by the reallocation between assets within a geographical region. The effect on each country will vary according to the composition of its stock between equities and bonds. Positive factor for preference for Equities over Bonds. F3 11% F3 6% F3 11% 3 Regional reallocation (EM vs, DM) Explains the variation caused by the appetite for one area as against the other. Inverse effect between DM and EM

BBVA Research - Global Funds Outlook 4Q18 / 30 Macro-Financial Determinants of EPFR Flows 01 02 03 04 Methodology: GLS panel data Sample: 42 countries, quarterly data from October 2005 to June 2017 Dependent Variables: Equities (EQ), Bonds (BN) and Total flows to each country. We have allowed each explanatory variable to have a different effect on Developed vs. Emerging Markets 05 Explanatory variables (first differences) VIX USA 10Y-2Y Curve GDP Growth (EM, DM, Idios.) Inflation (EM, DM, Idios.) Short-term interest rate (EM, DM, Idios.) West Texas Intermediate (WTI) FED, ECB & BoJ Balance Sheet Expectation of changes in FED, ECB & BoJ Balance Sheet Public Debt-to-GDP Credit-to-GDP gap* Investment-to-GDP Savings-to-GDP Reserves-to-Imports

BBVA Research - Global Funds Outlook 4Q18 / 31 Macro-Financial Determinants of EPFR Flows. Panel Regression Results (Coefficients) Global variables are by far the most important determinants of total, equity & bond flows. Idiosyncratic variables play a limited role Markets seem to differentiate sharply between Emerging and Developed countries, but differentiation between countries seems quite limited R 2 = 0.54 (*) Coefficients of standardised variables.

FED BS FED BS Exp. Oil price BoJ BS EM GDP DM GDP BoJ BS Exp. DM Short IR DM CPI ECB BS ECB BS Exp. EM CPI EM Short IR US 10/2 slope VIX DM GDP DM Short IR FED BS FED BS Exp. BoJ BS BoJ BS Exp. US 10/2 slope ECB BS ECB BS Exp. EM CPI EM Short IR DM CPI EM GDP Oil price VIX BBVA Research - Global Funds Outlook 4Q18 / 32 Global macro drivers Sensitivity of EM GIF flows (Coefficient of standardised variables in a panel regression) Sensitivity of DM GIF flows (Coefficient of standardised variables in a panel regression) 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 Source: BBVA Research, EPFR

BBVA Research - Global Funds Outlook 4Q18 / 33 Safe-haven indicator The starting point for developing the indicator is to identify periods of risk aversion in financial markets. We determine these periods based on significant movements in selected financial variables. That is, we define a period t of risk aversion as follows: t is a risk aversion period ( T10 < 0 or GER10 < 0 & VIX > 0 & EquityEM < 0) Where: T10 refers to the weekly change of the 10Y Treasury YTM GER10 refers to the weekly change of the 10Y German government bond YTM VIX refers to the weekly change of the VIX index EquityEM refers to the weekly change of the MSCI Emerging Markets Index In short, a risk aversion period is such that we witness lower long-term rates in developed market s government bonds, higher volatility in developed markets equity and losses in emerging markets (EM) equity. Once we have defined the set of risk aversion episodes, we categorize Safe Haven periods as a subset. To do so we follow two steps: First, we use the EPFR data to determine the conditional distribution of bond flows from institutional investors to Safe Haven countries (USA, Germany and Japan) and the conditional distribution of equity flows to Emerging Market countries (EM) from retail investors, both based on the four-week moving average change of assets under management (AUM). We are interested in the distributions in periods of risk aversion given their different behavior in comparison when considering the whole sample. In addition, we separate the distributions by type of investor given that we found a significant difference in their behavior under conditions of uncertainty (see figures 1, 2 and 3,4). That is, we found that institutional investors tend to fly to government bonds, while retail investors tend to reduce significantly their exposure to EM equity. These patterns could be associated with the different investment objectives and investment horizons of these types of investors Second, based on the analysis of the distributions by type of investor in risk aversion episodes we define the safe haven episodes as those periods t such that t is a safe haven period (Bond flows to haven countries from Institutional Investors > p50) & (Equity flows to EM from Retail Investors < p50) t ɛ risk aversion episode) That is, given that we are in a risk aversion episode, this can be considered in the subset of Safe Haven episodes if and only if the flows from Institutional Investors to safe haven bonds during the period increases in more than the median of the distribution; and if bonds from retail investors to emerging market equity decrease during the period in more than the median of the distribution. All measured by the four-week moving average change of assets under management A second subset of risk aversion episodes is given by the redemption category. This tries to capture all risk aversion episodes in which investors sell most financial assets looking not just for save haven but for liquidity. In short, we define redemption episodes as follows: t is a redemption Bond flows < 0 & Equity flows < 0 & Money market flows > 0 t ɛ risk aversion episode That is, given that we are in a risk aversion episode, this can be considered in the subset of redemption episodes if and only if two conditions hold: 1) The flows to bonds and equity during the period decrease; 2) The flows to money markets increase; All measured by the monthly average of assets under management

BBVA Research - Global Funds Outlook 4Q18 / 34 Regional re-allocation This exercise pursues a simple indicator to measure the investor s preference for a certain region over time. It is based on EPFR data* The indicator has been built with the EPFR data (since 2005) in USD but the portfolio flows have been relativized by assets under management (of each period) to make their comparable. The indicator allows us to capture the short term dynamics and to quantify and compare the effects in portfolio flows of the realization of some risk events in a very simple way. It lets us identify easily the regions that suffered the most and to measure the relative impact. This is a relative indicator as it compares the flows to different regions to create relative measure. The previous step is to create an indicator for EM and to DM. Those indices are obtained by smoothing (moving average 3M) the normalized flows to each region (weighted by asset under management of each country or area) in order to create a more stable indicator for each region given we aim to capture the trend more than the weekly spikes. As the flows have been standardized, those indices should be understood as standard deviation from their historical mean (since 2005). These partial indicators allow us to breakdown areas or countries contribution to the indicator. The difference between developed markets and emerging market indices shows the relative appetite of each region, and a deviation of 0.5 from the mean means a marked preference for one region over the other. Weekly change in total portfolio flows by Country (% of assets under management) x i = Weekly total flows (USD) Total assets under management (USD) Standardization Z i = x i x σ Moving average of 3 months 1 n n Z i i=0 n: 12 weeks The moving average weighted by its relative weight in EPFR database x DM = n i=1 x DMi w DMi n i=1 w DMi x EM = n i=1 x EMi w EMi n i=1 w EMi W: is the weight of each country or area in the assets under management in each area (DM or EM ) X: is the 3-month moving average of the standardized flow to a country or region i: is the countries or area in the regional (DM or EM) index Relative preference: Y = x EM x DM Weight of each country in the region

BBVA Research - Global Funds Outlook 4Q18 / 35 Type of asset re-allocation This exercise pursues a simple indicator to measure the investor s preference for a certain type of assets (equity or bonds) over time. It is based on EPFR data* The indicator has been built with the EPFR data (since 2005) in USD but the portfolio flows have been relativized by assets under management (of each period) to make their comparable. The indicator allows us to capture the short term dynamics and to quantify and compare the effects on portfolio flows of the realization of some risk events in a very simple way. It allows us to easily identify the type of assets that suffered the most and allows us to measure the relative impact. This is a relative indicator as it compares the flows to different type of assets to create relative measure. The previous step is to create an indicator for Bonds or Equity. Those indices are obtained by smoothing (moving average 3M) the normalized flows to each type of asset (weighted per asset under management of each country or area) in order to create a more stable indicator for each region given we aim to capture the trend more than the weekly spikes. As the flows have been standardized, those indices should be understood as standard deviation from their historical mean (since 2005). The difference between bonds and equity shows the relative appetite of each type of asset, and a deviation of 0.5 from the mean means a marked preference for one type of assets over the other. Weekly change in Bonds and Equity portfolio flows by Country (% of assets under management) x i = Weekly total flows (USD) Total assets under management (USD) Standardization Z i = x i x σ Moving average of 3 months 1 n Z n i i=0 n: 12 weeks The moving average weighted by its relative weight in EPFR database (example for DM) x DM bond = n i=1 x DMi w DMi n i=1 w DMi x DM equity = n i=1 x EMi w EMi n i=1 w EMi W: is the weight of each country or area in the assets under management in each area (DM or EM ) X: is the 3-month moving average of the standardized flow to a country or region i: is the countries or area in the regional (DM or EM) index Relative preference: Y(DM) = x DMequity x DM bond Weight of each country in the region

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