Concepts and methods of the analysis

Money market rates
• Libor and Euribor rates with maturities ranging from overnight to up to one year
• Most important influence factor is the monetary policy of the respective central bank, which tries to steer money market rates with its key interest rates and its monetary policy operations
• Depending on the currency area, it depends on the mandate of the respective central bank which factors are especially important for money market rates.
• Common mandates include: guarantee price stability, contribution to business cycle management, exchange rate targets

The forecast of money market rates is based on the opinion of experts. In addition, statistical models of a central bank’s reaction function (modified Taylor rule) can be used.

The most important influence factors for a central bank’s monetary policy, and therefore for the development of rates on the money market, are:

• Price development, price expectations
• Money supply aggregates, loan development
• Economic momentum, economic outlook
• Long-term real economic development
• Labour market, wages
• Development of exchange rates
• Interest rates of other currency areas with close relationship
• Political influences

Market interest rates on government bonds
• Market yields (=secondary market yields, average interest) on benchmark bonds of governments; the most important maturities are: 2 years, 5 years, 10 years, 30 years
• The nominal market yield of a bond includes the following components, which can vary quite a bit: inflation compensation, real interest rate for temporary delaying consumption, (risk)premia (maturity premium, risk premia: creditworthiness, inflation surprises, liquidity premium for market and/or specific bond, exchange rate uncertainty)

The forecast of yields on government bonds is based on the opinion of experts. In addition, statistical models can be used.

The most important influence factors for the development of yields on government bonds are:
• Monetary policy
• Money market rates, expectations regarding future money market rates
• Price development, price expectations, indicators for the development of prices
• Economic momentum, economic outlook
• Long-term real economic development
• Exchange rate development, exchange rate outlook
• Government bond yields of a key currency
• General risk attitude, risk environment, financial markets volatilities, stock markets
• Political influences
• Credit worthiness assessment, rating outlook
• Development of the government budget and debt level in the respective country
• Legal framework conditions
• Demographic development, changes in savings attitude

Stock-index analysis:
In this assessment process various data (macroeconomic data, profit growth forecasts, valuation metrics, etc.) are analysed on an aggregated level and ultimately conclusions regarding the development of equity indices are made.

Classification of recommendations
The content provided on the web site is intended solely as information, and is not intended as an offer to buy or sell securities. In addition, the recommendation categories listed below mean the following depending on the given asset class:

Concepts and Methods Equities
Equities (until April 23, 2017)
Buy: anticipated performance higher than the average performance of the equities under coverage
Hold: anticipated performance roughly in line with the average performance of the equities under coverage
Sell: anticipated performance lower than the average performance of the equities under coverage

Equities (from April 24, 2017)

(a) For Austrian, Central and Eastern European as well as Russian equities:

Concepts and methods which are used in the preparation of financial analyses

Investment rating: Investment ratings are based on expected total return (price appreciation and dividend income) within a 12-month period from the date of the initial rating.

Buy:
Expected total return of at least 15% (for high volatility risk stocks)
Expected total return of at least 10% (for low and medium volatility risk stocks)

Hold:
Expected total return of up to 15% (for high volatility risk stocks)
Expected total return of up to 10% (for low and medium volatility risk stocks)

Sell:
Expected negative total return

Target prices usually refer to a twelve-month time horizon and are derived by the use of various commonly used valuation models like Discounted Cash Flow – DCF, Dividend Discount Gordon Growth – DDGG, relative valuation tools like the use of peer group multiples, the use of target multiples, sum-of-the-parts-valuation or return-based valuation models. Other fundamental factors (M&A activities - mergers of companies and the acquisition of companies or shares in a company - , capital markets transactions, share buybacks, sector sentiment etc.) are taken into account as well.

All valuation methods applied are based on an integrated planning model for every company under coverage. This model comprises a detailed forecast period of at least 3 years based on the analyst's assumptions regarding the key earnings drivers (e.g. organic sales growth, M&A activity, margin development, CAPEX plan, working capital assumptions etc.). Using a standardised modelling tool for linking Income Statement, Balance Sheet and Cash Flow assumptions as well as ratio calculation based on a database solution and carried out with Excel secures the same quality standard in terms of model functionality throughout the group. Investment recommendations will not be disclosed to the issuer prior to their publication.

Frequently used valuation methods

Discounted Cash Flow (DCF)

Discounted cash flow (DCF) valuation uses future free cash flow projections and discounts them with the appropriate cost of capital to arrive at a present value, which is used to evaluate the potential for investment. As a standard model we use a Free Cash Flow to Firm model (Free cash flow to the firm is the cash available to all investors, both equity and debt holders) where the Free Cash Flows are based on our standardised planning model (Free Cash Flow = NOPLAT + Depreciation & Amortisation - gross investment in PPE & Intangibles +/- change in Working Capital +/- change in long-term provisions). Net operating profit less adjusted taxes (NOPLAT) refers to total operating profits for a firm with adjustments made for taxes. It represents the profits generated from a company's core operations after subtracting income taxes related to core operations. As a discount factor the Weighted Average Cost of Capital (WACC) is used. To calculate WACC we multiply the cost of each capital component by its proportional weight and take the sum of the results.

To determine the cost of debt we frequently use the market rate that a company is currently paying on its long-term debt and model long-term costs of debt based on this data and our underlying yield curve assumptions.

To determine the cost of equity we apply the commonly used Capital Asset Pricing Model CAPM) and add to our long-term (10y) risk-free rate assumptions for the respective market an equity market premium multiplied by the levered company beta (beta is a measure of volatility or systematic risk). In most cases we derive the company beta by adjusting a broad-based industry beta with a company-specific adjustment factor to account for the company’s specific risk profile relative to the industry average. These adjustments are at the discretion of the individual analyst. To account for a regional profile of the company we frequently use CDS (Credit Default Swap)-adjusted risk-free rates.

On some rare occasions (e.g. more frequently in the valuation of real estate companies) the Free Cash Flow to Equity method is used (Free cash flow to Equity is the cash available to equity holders). This DCF model mandates discounting all cash flows available to equity holders (including cash flows for debt financing) at the cost of equity.

Dividend Discount Model (DDM) / Dividend Discount Gordon Growth Model

The dividend discount model is a procedure for valuing the price of a stock by using expected dividends and discounting them back to the present value by using the assumed cost of equity for the individual company. The Gordon Growth Model is frequently used in connection with the dividend discount model to derive a terminal value (the terminal value of a security is the present value at a future point in time of all future cash flows when we expect a stable growth rate forever) after our specific dividend assumptions. The following formula is frequently applied: Terminal value (TV) = Forecast Book Value * (sustainable return on equity – sustainable earnings growth)/(cost of equity – sustainable earnings growth).

Relative valuation tools

Relative valuation uses current valuation ratios of sufficiently comparable companies to derive a fair value estimate (fair value is defined as a sale price agreed to by a willing buyer and seller, assuming both parties enter the transaction freely. Many investments have a fair value determined by a market where the security is traded) of the equity value of the company under review. Usually relative valuation ratios are derived from trading multiples of peer group companies (peer group usually refers to companies that operate in the same industry sector and are of similar size). Peer group companies are listed companies which the analysts see as a sufficiently comparable proxy of the covered company. Usually companies from the same industry are seen as peers. Additional criteria commonly used are size, growth perspectives, market capitalisation, similar end-customer markets or other company specifics like, e.g., balance sheet characteristics. As peer group multiples we usually take average or median ratios or a range derived from a predefined set of specified peer group companies.

Among the relative valuation tools we mostly refer to price multiples and Enterprise Value (Enterprise value represents the entire economic value of a company) multiples.

Price multiples

The most commonly used price multiple is the price-to-earnings ratio – PER. The PER is a valuation ratio calculated by dividing the share price by the estimated earnings per share giving an indication of how much investors are willing to pay for a company’s earnings. The fair value per share is calculated by multiplying the estimated earnings per share by the peer group PER. Another price multiple is the price-to-book ratio – PBV, which is calculated by dividing the share price by the estimated book value per share. It indicates the relative premium that investors are willing to pay over the book value of the balance sheet’s shareholders’ equity of a company. The fair value per share is calculated by multiplying the estimated book value per share by the peer group PBV multiple.

Enterprise Value (EV) multiples

Enterprise Value multiples account for the impact of leverage of the company and refer to the total value of the company (debt and equity value). Most frequently we use EV/Sales, EV/EBITDA or EV/EBIT multiples. The ratios are calculated by dividing the Enterprise Value of a company by the estimated sales, EBITDA or EBIT figures. An Enterprise Value multiple indicates how many times sales, EBITDA or EBIT an acquirer is potentially willing to pay for a company. The fair value per share is calculated by multiplying the estimated Sales, EBITDA or EBIT by the respective peer group EV multiple (deducting the market value of net debt, minority interests and other adjustments) divided by the total number of shares outstanding.

Target multiples

Target valuation multiples are not derived from trading multiples of peer group companies but are taken, e.g., from the historical valuation of a company (average or median multiples over a specific time span) or simply set as an assumed fair valuation multiple by the analyst.

Sum-of-the-parts valuation

A Sum-of-the-parts valuation (SOTP) looks at a company's segments, divisions and lines of business separately in order to highlight key value drivers and/or appraise potentially diverging operations, in particular for holding companies. Each segment may be valued by a different method, and non-core assets are usually presented separately. The sum of these asset valuations denotes an Enterprise Value which may be used to derive an equity value by deducting relevant liabilities, provisions and minorities.

Return-based valuation

There is a general agreement that companies create value if their returns (Return on Invested Capital - ROIC, Return on Capital Employed - ROCE, Return on Equity – ROE, economic profit) exceed the cost of capital (COE, WACC), which may also be used for valuing a company's equity. We use appropriate rates of return or representative post-tax operating profits, relate them to capital invested and receive an Enterprise Value. The equity value is the result of deducting debt, minorities and provisions as well as other necessary liabilities.

(b) For all other equities (all countries except Austrian, Central and Eastern European as well as Russian equities)

The stock analysis carried out by Raiffeisen RESEARCH (an organisational entity of Raiffeisen Bank International AG) claims to offer a detailed presentation of a company listed on a stock exchange as well as its shares. In order to achieve this, Raiffeisen RESEARCH observes the macroeconomic environment, the industry the company belongs to and finally the company itself. When it comes to the macroeconomic environment, special emphasis is placed on the economic development, the central bank policy and trends regarding inflation, commodities and currencies of those markets where the analyzed company is active. Raiffeisen RESEARCH uses primarily its own forecasts and – where necessary – complements them with consensus estimates (a consensus estimate is the attempt to calculate a “market consensus” for economic, interest rate or company data using the various differing expectations of the capital market analysts; as a general rule, the consensus estimate is simply the arithmetic mean, that is, the mathematical average of all available analyst estimates, for instance regarding revenues and earnings, and usually the profit per share). When analyzing the industry that the company can be attributed to, the focus is on the economic framework conditions. For instance, the dependence on the economic cycle of the respective industry as well as seasonal patterns can be determined. Furthermore, factors such as the influence of commodities prices as well as regulatory and supervisory authorities are taken into account as well. Following the analysis of the industry structure, the prevailing competitive situation has to be determined. Due to the individual characteristics of each industry sector, different parameters can and must be used in the analysis in order to ascertain the long-term growth prospects.
In the direct analysis of the company itself, business data are used. These include significant key figures that can be derived mainly from the quarterly, half-year and annual reports (e.g. balance sheets, profit and loss statement, cash flow statement etc.) as well as from additional information made available by the company. This process is supported by news and data providers, with the latter procuring mainly consensus estimates. Secondly, a qualitative assessment of the company with regard to strategy, available products/services, the management or the location policy is also drawn up.
Building on the steps described above, the responsible analyst makes an assessment concerning the financial performance of the company. This means that he/she forms an opinion regarding the company's financial stability and flexibility, the profitability development and the ability to satisfy debtors and equity providers and to undertake investments. On this basis, the analyst provides a forecast as to the future development of the company.

The ultimate objective is to assess the attractiveness of the analyzed companies and their shares to the best of our knowledge and belief and thus deduce and issue a recommendation.

Unless otherwise noted, our stock recommendations always refer to the performance of the respective shares on the stock exchange chosen by Raiffeisen RESEARCH (exclusive exchange rate development). In this case, the expected exchange rate development is the subject of a separate recommendation.

Classification of recommendations by performance

Buy: expected performance > 10%
Hold: expected performance between 0% and +10%
Sell: expected performance negative

Investment horizon for the assessment of all shares: one year
Update interval: quarterly or more frequently if circumstances warrant it

Our target prices are derived using common valuation models. These include the Discounted Cash Flow Model (DCF), the Divided Discount Gordon Growth Model (DDGGM) and the relative valuation using multiples. Further fundamental factors such as mergers of companies and the acquisition of companies or shares in a company (M&A activity), capital market transactions, share repurchases and sector-specific developments are taken into consideration as well.

All valuation methods are based on an integrated planning model for every analyzed company. This model entails detailed predictions for a period of at least three years, based on consensus data and/or the analyst's assumptions regarding the underlying profit drivers. These include, for instance, organic revenue growth, M&A activity, the development of margins or capex, and assumptions regarding the development of net working capital. Using a standardised modelling tool for linking income statement, balance sheet and cash flow assumptions as well as ratio calculation and carried out with Excel secures the same quality standard in terms of model functionality. Investment recommendations will not be disclosed to the issuer prior to their publication.

Frequently used valuation methods

Discounted Cash Flow (DCF)

Discounted cash flow (DCF) valuation uses future free cash flow projections and discounts them with the appropriate cost of capital to arrive at a present value, which is used to evaluate the potential for investment. As a standard model we use a Free Cash Flow to Firm model (Free cash flow to the firm is the cash available to all investors, both equity and debt holders) where the Free Cash Flows are based on our standardized planning model (Free Cash Flow = NOPLAT + Depreciation & Amortisation - gross investment in PPE & Intangibles +/- change in Working Capital +/- change in long-term provisions). Net operating profit less adjusted taxes (NOPLAT) refers to total operating profits for a firm with adjustments made for taxes. It represents the profits generated from a company's core operations after subtracting income taxes related to core operations. As a discount factor the Weighted Average Cost of Capital (WACC) is used. To calculate WACC we multiply the cost of each capital component by its proportional weight and take the sum of the results.

To determine the cost of debt we frequently use data from data providers like Bloomberg and Thomson Reuters or the market rate that a company is currently paying on its long-term debt and model long-term costs of debt based on this data and our underlying yield curve assumptions.

To determine the cost of equity we apply input data from data providers like Bloomberg and Thomson Reuters (similar to the cost of debt) or the commonly used Capital Asset Pricing Model (CAPM) and add to our long-term (10y) risk-free rate assumptions for the respective market an equity market premium multiplied by the levered company beta (beta is a measure of volatility or systematic risk). In most cases we derive the company beta by adjusting a broad-based industry beta with a company-specific adjustment factor to account for the company’s specific risk profile relative to the industry average. These adjustments are at the discretion of the individual analyst.

On some rare occasions (e.g. more frequently in the valuation of real estate companies) the Free Cash Flow to Equity method is used (Free cash flow to Equity is the cash available to equity holders). This DCF model mandates discounting all cash flows available to equity holders (including cash flows for debt financing) at the cost of equity.

Dividend Discount Model (DDM) / Dividend Discount Gordon Growth Model

The dividend discount model is a procedure for valuing the price of a stock by using consensus estimated for future dividends and discounting them back to the present value by using the assumed cost of equity for the individual company. The Gordon Growth Model is frequently used in connection with the dividend discount model to derive a terminal value (the terminal value of a security is the present value at a future point in time of all future cash flows when we expect a stable growth rate forever) after specific market consensus dividend assumptions. The following formula is frequently applied: Terminal value (TV) = Forecast Book Value * (sustainable return on equity – sustainable earnings growth)/(cost of equity – sustainable earnings growth).

Relative valuation tools

Relative valuation uses current valuation ratios (provided by data providers) of sufficiently comparable companies to derive a fair value (fair value is defined as a sale price agreed to by a willing buyer and seller, assuming both parties enter the transaction freely. Many investments have a fair value determined by a market where the security is traded)
estimate of the equity value of the company under review. Usually relative valuation ratios are derived from trading multiples of peer group companies (peer group usually refers to companies that operate in the same industry sector and are of similar size).
Peer group companies are listed companies which the analysts see as a sufficiently comparable proxy of the covered company. Usually companies from the same industry are seen as peers. Additional criteria commonly used are size, growth perspectives, market capitalization, similar end-customer markets or other company specifics like, e.g., balance sheet characteristics. As peer group multiples we usually take average or median ratios or a range derived from a predefined set of specified peer group companies.
Among the relative valuation tools we mostly refer to price multiples and Enterprise Value (Enterprise value represents the entire economic value of a company) multiples.

Price multiples

The most commonly used price multiple is the price-to-earnings ratio – PER. The PER is a valuation ratio calculated by dividing the share price by the consensus estimate for earnings per share giving an indication of how much investors are willing to pay for a company’s earnings. The fair value per share is calculated by multiplying the estimated earnings per share by the peer group PER. Another price multiple is the price-to-book ratio – PBV, which is calculated by dividing the share price by consensus estimate for book value per share. It indicates the relative premium that investors are willing to pay over the book value of the balance sheet’s shareholders’ equity of a company. The fair value per share is calculated by multiplying the estimated book value per share by the peer group PBV multiple.

Enterprise Value (EV) multiples

Enterprise Value multiples account for the impact of leverage of the company and refer to the total value of the company (debt and equity value). Most frequently we use EV/Sales, EV/EBITDA or EV/EBIT multiples. The ratios are calculated by dividing the Enterprise Value of a company by the consensus estimates for sales, EBITDA or EBIT figures. An Enterprise Value multiple indicates how many times sales, EBITDA or EBIT an acquirer is potentially willing to pay for a company. The fair value per share is calculated by multiplying the estimated Sales, EBITDA or EBIT by the respective peer group EV multiple (deducting the market value of net debt, minority interests and other adjustments) divided by the total number of shares outstanding.

Target multiples

Target valuation multiples are not derived from trading multiples of peer group companies but are taken, e.g., from the historical valuation of a company (average or median multiples over a specific time span) or simply set as an assumed fair valuation multiple by the analyst.

Sustainability (ESG)

Another criterion that we consider within the framework of our stock analysis is the sustainability of the analyzed company. Data material from data providers such as Bloomberg and Thomson Reuters as well as sustainability reports from the companies form the basis for the sustainability analysis. The sustainability evaluation carried out by Raiffeisen RESEARCH (an organisational entity of Raiffeisen Bank International AG) is based on the “ESG factors” (= Environment, Social and Governance). Sustainability means showing particular consideration for economic, ecological and social matters in order to guarantee a well-balanced and positive development of the respective company in the long term.

Raiffeisen RESEARCH awards a “sustainability star” to certain companies analyzed within the framework of its financial analysis based on the following criteria.

The main criteria and issues in the evaluation of the sustainability factor “environment” (=Environment from the ESG factors) are:

  • environmental and waste management
  • products and services
  • ecological efficiency
  • climate change
  • natural resources
  • environmental technology opportunities

In this topic area, particular attention is paid to the careful use of natural resources and environmental protection on the part of the analyzed company.

The main criteria and issues in the evaluation of the “social” factor (=Social from the ESG factors) are:

  • staff and suppliers
  • society and product responsibility
  • product safety
  • social opportunities

When it comes to social matters, the focus is on the relationships between the employees and the responsible interaction with employees, customers and other interest groups.

The main criteria and issues in the evaluation of the “governance” factor (=Governance from the ESG factors) are:

  • corporate governance
  • business ethics

When it comes to the topic of (corporate) governance, the focus is on the legal and factual regulatory framework for the management and supervision of a company as well as the management and control of a company that acts responsibly and is geared towards an increase in value.

Awarding of the sustainability star:

The target of our sustainability analysis is to assess the companies we analyze from this angle as well. In this connection, we observe the companies by sectors. We use the classification scheme GICS (Global Industry Classification Standard) of MSCI (Morgan Stanley Capital International) which includes the eleven sectors energy, materials, consumer discretionary, consumer staples, industrials, IT, financials, real estate, health care, telecommunications and utilities. The sustainability star is awarded to companies of a certain sector that achieve the best score (approximately the top 15%) in terms of the ESG factors described above. This means that every company has the chance to achieve the sustainability star for responsible and long-term oriented conduct in each of the eleven sectors. We do not give preference to any business model. The sustainability star is awarded only if a company has implemented a bundle of exemplary measures in several areas of the ESG factors. The assessment of the companies with regard to the implementation of the ESG factors and the awarding of the sustainability star that accompanies it are based on the expertise of the respective sector analyst.

The inclusion of the sustainability of a company is only one out of many evaluation criteria taken into consideration within the framework of our comprehensive financial analysis of companies. The sustainability analysis is thus part of the overall assessment which is reflected in the recommendation for an investment decision (buy/hold/sell). This means that the sustainability topic is not the decisive factor for the recommendation. However, we consider it basically justified to include sustainability criteria in the company analysis because we believe that a responsible and long-term oriented conduct on the part of the management (especially in terms of the ESG factors) has a positive effect regarding the economic development and earnings structure of a company.

For instance, the following circumstances are taken into account in our assessment of a company's efforts to implement the ESG factors and can have a positive impact on the awarding of the sustainability star: inclusion to the Dow Jones Sustainability Index; special efforts to offer basic products at fair prices in the emerging markets; consumer safety of the distributed products as indicated by a low product recall quota; very low waste ratio; lifecycle management over the entire product lifecycle (economic and ecological requirements demand an assessment of products and processes across life phases as a central task in companies) etc.

The reasons for the awarding of a sustainability star to a company are described by the financial analyst in the text of his/her financial analysis regarding the company.
The review of the ESG factors and the new allocation of the sustainability star (where applicable) on the part of the respective sector analyst are carried out quarterly.

Equity Index Analysis Method
This is an assessment procedure in which various data (macroeconomic data, earnings growth estimates, valuation metrics, etc.) at an aggregated level are analyzed and conclusions on the future development of equity indices drawn.

Bonds in general
Unless otherwise noted, our bond recommendations always pertain to the performance of the bonds in local currency (excluding any exchange rate developments). The expected development of the exchange rate is the subject of a separate recommendation.
Recommendations made in EUR terms (the total performance in such cases consists of the bond performance in the local currency plus the anticipated exchange rate performance vis-à-vis the EUR) are always specifically designated as such.

Buy:
We recommend buying the investment instrument, as the expected total performance (change in price plus accrued interest) for the recommendation horizon exceeds the expected return on the money market (1) of the respective currency annualised by more than 100 basis points.(2)

Hold:
We expect the investment instrument to move sideways (or view the likelihood of a price increase as approximately the same as that of a price decrease). As a result, the expected performance (change in price plus accrued interest) for the recommendation horizon is broadly comparable with the alternative rate of interest on the money market1 of the respective currency (expected performance: money market rate +/- max. annualised 100 basis points). For investors who do not have the option of short selling, we recommend holding the existing position in the investment instrument (no additional purchases, but no sale of existing positions). In the case of a “Hold” recommendation, investors who are able to engage in short selling of the investment instrument should not maintain a position in the investment instruments (close existing long or short positions).

Sell:
We recommend selling the investment instruments, as the expected total performance (change in price plus accrued interest) for the recommendation horizon is annualised more than 100 basis points lower than the alternative rate of interest on the money market (1) of the respective currency.
(1) Alternative rate of interest on the money market for the corresponding currency and recommendation horizon, i.e. for a 3-month recommendation horizon on EUR bonds = 3M Euribor, 12-month recommendation = 12M Euribor.
(2)Example: the expected total performance of bond X over a 3M horizon = 2.2% (annualised), whereas the 3M Euribor yields 1.1% (annualised) over the coming 3 months; hence, the expected return of annualised 2.2% is more than 100 basis points higher than the alternative rate of interest annualised 1.1% (in this case the return on the bond is annualised 110 bp higher, or 1.1 percentage points), and we thus recommend a Buy.

Spread recommendations for government bonds

Buy:
We recommend a Buy of the first mentioned bond segment and a Sell of the second cited bond segment as we expect a reduction of the yield differential between both quoted bond segments.

Hold:
We have a neutral view (Hold) about the first mentioned bond segment compared to the second cited bond segment as we expect the yield differential between both quoted bond segments not to change substantially.

Sell:
We recommend a Sell of the first mentioned bond segment and a Buy of the second cited bond segment as we expect an increase of the yield differential between both quoted bond segments.
Recommendations for Credit Instruments (corporate bonds, bank bonds, covered bonds and other similar credit instruments) since January 1, 2014

Buy:
We expect that the total return of the instrument for the specified horizon (six months if no horizon is specified) will be higher than the relevant benchmark index.

Sell:
We expect that the total return of the instrument for the specified horizon (six months if no horizon is specified) will be lower than the relevant benchmark index.

Hold:
We expect that the total return of the instrument for the specified horizon (six months if no horizon is specified) will be equal to the relevant benchmark index.

Benchmark indices
For non-financial investment grade bonds, the relevant benchmark is the Bank of America Merrill Lynch Euro Non-Financial Index, for high yield bonds the relevant benchmark is the Bank of America Merrill Lynch Euro High Yield Constrained Excluding Subordinated Financials Index, for senior financial bonds the relevant benchmark is the Bank of America Merrill Lynch Euro Unsubordinated Financial Index, for subordinated bonds the relevant benchmark is the Bank of America Merrill Lynch Euro Subordinated Financial Index, for Eastern European bonds (with the exception of quasi-sovereign bonds) the relevant benchmark is the JPM CEMBI Broad Europe Index, for Eastern European quasi-sovereign bonds the relevant benchmark is the EMBI Global Europe Index and finally for covered bonds the relevant benchmark is the iBoxx Covered Index.

Buy:
We issue a buy recommendation for credit benchmark indices (see above for names of the credit benchmark indices) if, in our opinion, the yield difference over riskless government bonds will significantly (for bandwidth definitions see below) fall in the specified period (six months if not otherwise specified).

Hold:
We issue a hold recommendation for credit benchmark indices (see above for names of the credit benchmark indices) if, in our opinion, the yield difference over riskless government bonds will not significantly (for bandwidth definitions see below) change in the specified period (six months if not otherwise specified).

Sell:
We issue a sell recommendation for credit benchmark indices (see above for names of the credit benchmark indices) if, in our opinion, the yield difference over riskless government bonds will significantly (for bandwidth definitions see below) rise in the specified period (six months if not otherwise specified).

Bandwidth:
A significant change is observed when the fluctuation of the yield difference of the credit benchmark index over riskless government bonds is greater than half of a standard deviation.

Exchange rate recommendations (until April 30, 2014)
These recommendations are based exclusively on the expected exchange rate movements themselves, without consideration of any possible differences in interest rates.

Buy:
We expect the exchange rate to increase in numerical terms, with due regard to the financial markets’ traditional method of quoting the currency pair in question.(3)

Neutral:
We expect that the exchange rate will move sideways in the fluctuation band normal for the currency in question.

Sell:
We expect the exchange rate to decrease in numerical terms, with due regard to the financial markets’ traditional method of quoting the currency pair in question. (4)
(3) For example, EUR/JPY (sometimes also written as EURJPY) is usually quoted on the financial markets as 1 EUR = x JPY. Thus, a Buy recommendation for EUR/JPY implies that the EUR/JPY exchange rate is set to rise in numerical terms, e.g. from EUR/JPY 130 to EUR/JPY 140, i.e. in this case, the yen depreciates against the euro, as the EUR appreciates vis-à-vis the JPY.
(4) For example, EUR/CHF (sometimes also written as EURCHF) is usually quoted on the financial markets as 1 EUR = x CHF. Thus, a Sell recommendation for EUR/CHF implies that the EUR/CHF exchange rate is set to decrease in numerical terms, e.g. from EUR/CHF 1.60 to EUR/CHF 1.50, i.e. in this case, the Swiss franc appreciates against the euro, as the EUR depreciates vis-à-vis the CHF.

Exchange rate recommendations (from 1 May 2014)

Buy:
We expect the exchange rate pair to increase in numerical terms by at least 2 percent.

Neutral:
Expectation for the exchange rate pair to increase more than 0 percent, but less than the necessary for a buy recommendation.

Sell:
We expect the exchange rate pair to decrease in numerical terms, with due regard to the financial markets’ traditional method of quoting the currency pair in question.

Methodological Notes Technical Analysis:

In Technical Analysis the future course of a time series is mainly derived from its past development which does not necessarily reflect a cause-and-effect relationship and does not take into consideration aspects from fundamental analysis and may thus contravene with these.

Technical derived recommendations in this publication pertain to a horizon of 3 months.

The analysis included for each chart includes a description of the so-called “technical” situation of the time series in question. This should be taken as a purely discretionary interpretation of the analyst, which is based on publications from the professional literature on technical analysis. Accordingly, a probable scenario is postulated from the pattern of the time series analysed, using the technical indicators derived from such pattern. The outlinedscenarios are purely hypothetical and are expressed by the denotations “bullish”, “bearish” or “neutral”, whereas the first two of them hint on a likely advance or decline, while the latter means it should stay within a more or less narrow range.
The extent of the likely advances or declines of time-series has been defined by expectable minma, e.g. 10.0% for stocks, 3.0% for stock market indices, according futures-contracts and forex-markets and 1.5% for bonds. The recommendation is expressed by the buy or sell-recommendation placed within the bar left of the scenario’s description . Buy- and sell-recommendations are based on the scenarios appearingly likely and thus on a hypothetical conclusion. An alleged stop-limit indicates an alternative-scenario that come into effect once the primary scenario described as expectable has not taken place. A scenario comes into effect once the recommendation gets triggered and as a consequence instead of the term “bullish” the hypothetical position with this time-series is referred to as “long”, accordingly a “bearish” is replaced with “short”. These hypothetical positions through the stop-limit is being updated, e.g trailed, with any new issue of the publication. Once the stop-limit gets triggered the denotations changes from “long” to either “neutral” or “bearish” and accordingly from “bearish” to either “neutral” or “bullish”.

From July 3 2016 onwards, the following method for recording historic recommendations applies:

A new entry in the list of recommdatios is made in any of the following cases:
  • the first recommendation is done
  • the recommendation is changed
  • price forecast for the financial instrument is changed
  • date of validity of the recommendation is changed