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Annual Forecasting 2013 Wednesday 16th January 2013 MODERATOR: James Mackintosh, Investment Editor, Financial Times SPEAKERS: Michael Saunders, Head of West European economic research, Citigroup Kevin Gardner, Managing Director and Head of investment strategy EMEA, Barclays Wealth & Investment Management Thanos Papasavvas, Head of Investec Asset Management’s Currency Management team Event sponsored by: Will Goodhart CEO CFA Society of the UK Event sponsored by: FTSE 100 CBOE VIX US 10y Treasuries UK 10y Gilts USD/EUR ICE Brent Crude London Spot Gold Average Forecast as per Annual CFA UK survey As at 15/01/2013 6093 6117.31 17.53 13.55 1.92 1.81 2.07 1.99 0.79 0.763 110.41 110.3 1744.99 1680.5 What will the FTSE 100 Index be at the close on 31st Dec 2013? 7866 high What will the CBOE VIX Index be at the close on 31st Dec 2013? 80 high What will the US 10 year treasury yield be at the close on 31st Dec 2013? 4 high What will the UK 10 year Gilt yield be at close on 31st Dec 2013? 6 high What will the US Dollar/Euro exchange rate be on 31st Dec 2013? 1.09 high What will the ICE Brent Crude $ be at close of 31st Dec 2013? 400 high What will the London Gold Spot Price (US$ per troy ounce) be at close on 31st Dec 2013? 2687 high 0.79 average and median 6105 median 6093 average 17.53 average 16.5 median 4400 low 10 low 1.92 average 1.90 median 1750 median 1744.99 average 2.07 average 2 median 111 median 110.41 average 0.95 low 1.1 low 0.54 low 65 low 500 low Michael Saunders, Head of West European Economic Research, Citigroup Event sponsored by: Global and European Economic Outlook European Economics Michael Saunders Managing Director [email protected] +44 (0)20 7986 32299 Global Economic Forecasts Overview 2012-14F GDP Growth (%) 7 CPI Inflation (%) 2012 2013 2014 2012 2013 2014 Global 2.5 2.6 3.1 2.9 2.8 3. 0 US 2.2 1.6 3.0 1.8 1.9 2.0 Japan 1.6 0.7 0.7 0.0 -0.3 1.6 Euro Area -0.4 -0.7 -0.4 2.6 2.0 1.5 Germany 0.9 0.5 0.3 2.0 1.9 2.5 France 0.1 -0.2 0.2 2.3 1.5 1.8 Italy -2.1 -1.2 -1.5 3.3 1.8 1.2 Spain -1.5 -2.4 -1.9 2.4 1.9 0.4 Greece -7.2 -7.4 -11.8 1.0 0.3 16.7 Ireland 0.5 0.7 1.0 1.7 1.2 1.4 Portugal -3.3 -4.6 -2.4 2.8 1.7 0.9 Netherlands -1.1 -0.9 0.2 2.6 2.8 1.7 UK 0.1 0.4 0.7 2.8 2.6 2.2 Switzerland 1.1 0.9 0.6 -0.7 -1.4 -0.9 Sweden 1.0 1.6 2.3 0.9 0.6 1.7 Emerging Markets 4.7 5.3 5.5 4.4 4.6 4.7 China 7.7 7.8 7.3 2.7 2.8 3.6 India 5.4 6.2 6.9 7.5 7.0 6.0 Source: Citi Research Global Market Forecasts Current Mid-13 End-13 Avge 2014 US Fed Funds 0.25 0.25 0.25 0.25 1.10 2.10 ECB Refi Rate 0.75 0.25 0.25 0.25 0.25 0.31 Japan Call Money 0.10 0.10 0.10 0.10 0.10 0.27 UK Base Rate 0.50 0.50 0.50 0.50 0.50 0.50 UK QE Target 375 400 450 450 450 450 10 Yr US Treasury 1.82 1.95 2.50 2.80 3.25 3.50 10 Yr Euro (Bund) 1.53 1.75 1.50 1.44 1.50 2.00 10 Yr BTP-Bund (bp) 275 350 400 350 400 300 10 Yr OAT-Bund (bp) 62 90 120 120 150 80 10 Yr JGB 0.83 1.00 1.10 1.13 1.50 1.75 10 Yr Gilt 2.05 1.95 1.80 1.75 1.75 2.50 USD/EUR 1.33 1.22 1.20 1.20 1.24 1.31 YEN/USD 88 86 84 83 82 82 EUR/GBP 0.83 0.79 0.79 0.79 0.79 0.79 USD/GBP 1.61 1.54 1.52 1.51 1.57 1.66 8 Source: Citi Research Avge 2015 Avge 2016 US, Euro Area, Japan, UK Private Sector Debt/GDP Ratios 240 % 220 200 180 160 140 120 100 80 60 1980 1985 Euro Area 9 Source: Citi Research 1990 UK 1995 2000 US 2005 Japan 2010 Spain Change in Private Debt/GDP Ratios In This Crisis Compared to Historical Experience US, Euro Area, UK Sources: BIS, Datastream and Citi Research 100 % US 80 60 40 EMU UK Average +/- one standard deviation We date start of current crisis for EMU, US, UK as Q408 20 0 Average in 12 Countries With Systemic Banking Crisis (Chile 1981, Finland 1991, Indonesia 1997, Japan 1997, Malaysia 1997, Mexico 1994, Nicaragua 2000, Norway 1991, Philippines 1997, Sweden 1991, Thailand 1997, Uruguay 2002) -20 -9 10 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 Distance in Years from First Year of Crisis 4 5 6 7 8 UK Structural Fiscal Deficit as Pct of GDP 10 % 9 US 8 UK 7 IMF Estimate EMU 6 5 4 3 2 US has been far more Keynesian than Europe 1 0 2006 11 2007 Sources: IMF and Citi Research 2008 2009 2010 2011 2012 2013 2014 2015 US and Europe Deleveraging By Default Total Banking Sector Margins and Loan-Loss Provisions (Pct of Assets) 4500 4000 3000 Sources: CIRA, BIS, ECB US UK Germany Austria Average Insolvency Rate in 2009-11: Ireland 6, Spain 21 (per million people) France US Austria 0 Spain 0.0 Italy 500 Australia 0.5 Canada 1000 UK 1.0 France 1500 Sweden 1.5 Neths 2000 Japan 2.0 Germany 2500 Swiss 2.5 12 Annual Average for 2009-11 Neths 3.0 3500 Sweden Loan-Loss Provisions (Sum for 2008-11) 3.5 2006 Swiss 4.0 Net Interest Margin (Average 2008-11) Finland 4.5 5000 Spain % Ireland 5.0 Personal Insolvency Rate (Insolvencies Per Million People) US, Euro Area, UK Change in Real GDP Per Head After Banking Crises 10 8 % EMU (2007+) 6 US (2007+) 4 UK (2007+) 2 Japan (1997-2007) 0 -2 -4 -6 -8 13 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: MF and Citi Research Housing Recovery Now Underway US US 90 20 80 16 70 % % 12 8 60 4 50 0 40 -4 30 -8 20 -12 10 -16 0 -20 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Michigan Survey -- Net Balance of Consumers Believing Buying Conditions for Houses are Good/Bad (left) NAHB Index of Number of Prospective Home Buyers (left) 14 House Prices YoY, Median Single Family (right) 180 160 140 120 100 80 60 40 20 0 -20 -40 -60 -80 UKRAINE ROMANIA PARAGUAY BULGARIA MACEDONIA (FYR) MOLDOVA GUATEMALA GUATEMALA PERU DOMINICAN REP GUATEMALA GABON BOSNIA AND HERZ. DOMINICAN REP IRAQ PARAGUAY HONDURAS ECUADOR GEORGIA MACEDONIA (FYR) DOMINICAN REP PERU COLOMBIA HONDURAS ETHIOPIA ROMANIA COSTA RICA CROATIA UKRAINE GEORGIA ROMANIA CROATIA UKRAINE COLOMBIA BELARUS ARMENIA LATVIA TURKEY MALAWI GABON BOSNIA AND HERZ EL SALVADOR EL SALVADOR SERBIA KYRGYZ REPUBLIC SERBIA BOLIVIA SERBIA AND MONT. MOROCCO PAKISTAN URUGUAY BRAZIL ARGENTINA URUGUAY SEYCHELLES MALDIVES HUNGARY DOMINICA SEYCHELLES JORDAN ICELAND IRAQ IRELAND (to 2013) IRAQ PORTUGAL (to 2014) ST. KITTS AND GREECE (to 2016) Global Govt Debt/GDP Ratio for Countries in Last Year of IMF GRA Programmes Since 2002 Greece on new Troika plan to 2016 % Level At End of IMF Programme 15 Sources: IMF and Citi Research Portugal in 2014 on IMF forecast Ireland in 2013 on IMF Forecast Change from Year Germany Austria Slovenia Belgium Korea EMU Finland Italy France Slovakia Romania Czech Bulgaria US Poland Sweden Latvia Norway Portugal Lithuani Canada NZ Hungary UK Australia Spain Neths Denmark Greece Estonia Cyprus Ireland Global Household Debt/GDP Ratio 80 70 60 50 40 % Change Since 2006-10 Peak Change From 2001 To 2006-10 Peak Total Change Since 2001 30 20 10 0 -10 -20 16 Sources: Eurostat and Citi Research Euro Area Change in Real GDP Per Head Since 2007 5 0 % -5 -10 -15 -20 -25 -30 -35 Iceland Ireland Italy Greece Spain Portugal Cyprus -40 17 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: MF and Citi Research Ireland Ireland Population YoY 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10 % Q2-2000 to Q2-04 Q2-2004 to Q2-08 Q2-2008 to Q2-12 15 to 20 to 25 to 30 to 35 to 40 to 45 to 50 to 50 to 60 to 65 to 65+ 19 24 29 34 39 44 49 54 59 64 69 Age in Years 18 Source: Eurostat Euro Area General Govt Debt/GDP Ratios 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 % 1995 19 1997 Spain Italy Portugal Ireland 1999 2001 Sources: Eurostat and Citi Research 2003 Greece 2005 2007 2009 2011 2013 2015 2017 What Will the New Europe Look Like? EMU Mark 1: EMU Mark 2: Minimalist euro area institutional structure Bigger euro area structure, erosion of power at national governments – and perhaps also at EU-27 level? between reasonably well-developed structures at national government and EU-27 level. EU27: Single Market and “four freedoms”; limited role in common foreign policy and justice; limited fiscal transfer (EU Budget only approx 1% of EU GDP); EU Parliament, limited role in fiscal supervision Euro Area: fixed exchange rates, single ECB policy rate, limited role in fiscal supervision National Govts: fiscal policy, supply side framework, bank regulation, foreign policy, justice etc. Same for EMU and non-EMU countries. This structure for the euro area failed 20 to achieve stability and prosperity EU27: Probably as in EMU Mk 1. Over time, role in foreign policy and justice likely to grow. But, will the single market stay intact for countries outside more closely integrated core? Euro Area (and “pre-ins”): as in EMU Mk 1 + bank regulation + close fiscal supervision +supply side framework + ESM rescue body for strained sovereigns + limited EMU fiscal transfer budget (perhaps 1% of EMU GDP) + joint bank recap budget National Govts: reduced powers among EMU members US, Euro Area, Japan, UK GDP Per Head as Pct of US Level 120 110 % 100 90 80 70 60 50 40 30 20 10 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Japan Korea Singapore Taiwan Ireland India China Avge of Germany, Fr, It, Sp 21 Source: US Conference Board Global Sustained Medium-Term EM Demand Outperformance Nominal Consumer Spending By Region (USD in 000bn) 18 16 10 Nominal Investment Spending By Region (USD in 000bn) 2012 2012 8 14 2015F 2015F 12 2020F 10 6 2020F 8 4 6 4 2 2 0 0 US 22 Europe Other AEs Sources: IMF, Citi Research China Other EM EM EM Asia CEEMEA LATAM US Europe Other AEs China Other EM EM EM Asia CEEMEA LATAM Selected Countries Exports of Goods to Emerging Markets as Pct of GDP % 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 2000 2006 2012 12 11 10 9 8 7 6 5 4 3 2 1 0 UK US Ireland Spain France Greece Portugal Japan Sweden Exports to Asia Exports to Mid East Exports to Lat Am 23 Sources: IMF and Citi Research Italy Swiss Germany Exports to Africa Exports to Emerging Europe MPC Forecasts for Level of Real GDP (Indexed to Q1-2005 = 100) UK 118 Nov 08 IR 116 Nov 09 IR Nov 10 IR 11 Nov IR 114 112 Nov 12 IR 110 108 106 104 Actual and Citi Forecast 102 100 2005 2006 24 Source: Citi Research 2007 2008 2009 2010 2011 2012 2013 2014 2015 US and EU Total Growth in Export Volumes From Q1-07 to Q3-12 25 Source: Citi Research Iceland US Germany Spain Neths Portugal EMU Ireland Swiss Sweden Belgium France UK Austria Denmark Italy % Finland 40 35 30 25 20 15 10 5 0 -5 -10 UK Weaknesses in High-Tech and Medium-High Tech Manufacturing Exports of High-Tech and MediumHigh Tech Goods as Pct GDP 18 % EU15 Average 16 UK 14 12 10 Change in Manufacturing Output 2005-12 20 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 % UK EU15 Average High Tech 8 1990 1993 1996 1999 2002 2005 2008 2011 Medium- MediumHigh Low Tech Tech 26 Sources: ONS and Citi Research Low Tech UK Structural Weaknesses in Exports and Manufacturing 100 Split of Imports of Manufactured Goods % Gross Rate of Return on Capital 24 Services-Manufacturing Gap 22 90 80 70 60 50 40 Low Tech 20 Rate of Return in Manufacturing Sector 18 Rate of Return In Service Sector MediumLow Tech 16 MediumHigh Tech 12 High Tech 30 % 14 10 8 6 20 4 10 2 0 World AEs All EMs China 0 1988 27 Sources: ONS and Citi Research 1992 1996 2000 2004 2008 2012 UK General Government Debt/GDP Ratio UK 110 % 100 90 80 70 June 2010 Budget Forecast Nov 2010 Autumn Statement Forecast 60 Mar 2011 Budget Forecast Nov 2011 Autumn Statement Forecast 50 Mar 2012 Budget Forecast Dec 2012 Autumn Statement Forecast 40 Actual and Citi Forecast 30 2006 28 2007 2008 Sources: OBR and Citi Research 2009 2010 2011 2012 2013 2014 2015 2016 2017 UK Bank Lending (FLS Definition) To Households and Businesses 22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 FLS Begins Mom (£bn) YoY (Pct) 2004 29 Sources: BoE and Citi Research 2006 2008 2010 2012 UK How Might Rate Guidance Work? Advantage: helps anchor rate expectations, lower forward rate path. King (2007) rejected rate guidance: said it would confuse people, MPC might not agree on it, and might be wrongly interpreted as a promise. Many inflation targeting central banks do give rate guidance. Option 1. Permanent rate guidance: central bank publishes its own interest rate forecast as part of economic forecast. Among 26 inflation targeting central banks, 5 publish forecasts using constant rates, 4 use market rates (including UK), 13 use central bank’s own judgement for appropriate rate path and 4 use a policy rule to generate the rate path. Probably requires the central bank rather than MPC to generate forecast. Option 2. Occasional rate guidance: can use previous Fed- (and BoC) style guidance: eg “with this outlook, the median view among MPC members currently is that rates will be stable for the next two years or so”. Can be done if economic forecast is still owned and produced by the MPC. Can be linked to forecasts for key variables (inflation, unemployment). 30 UK What Type of Inflation Target Do Countries Have? 18 16 14 12 10 8 6 4 2 Hungary Iceland Norway Sweden UK 0 Point Target (eg 2%) 31 Sources: BoE and Citi Research Australia Colombia Israel NZ S Africa Range Target (eg 1-3%) Armenia Brazil Canada Chile Czech Rep Ghana Guatemala Indonesia Mexico Peru Philippines Poland Romania Serbia S Korea Thailand Turkey Point+Range Target (eg target is 1-3% band and aim for centre) UK Targets for CPI Level of Nominal GDP Level Unlikely Nominal GDP Level Target 475 CPI Index Level Target 130 £bn 450 425 Target for Nominal GDP Level With 5% YoY Growth 125 Target for CPI Level With 2% YoY Growth Actual Nominal GDP 120 Actual CPI 400 115 375 110 350 12% undershoot 325 105 7% overshoot 100 300 275 2004 32 2006 2008 Sources: Citi Research, IMF 2010 2012 95 2004 2006 2008 2010 2012 Citi Research is available via email Citi Economic Research is Available via Email, Websites and Bloomberg If you would like to receive any of the research listed below, please contact Jan Maguire ([email protected]) Daily Publications Weekly Publications and Data Notes Monthly Publications Europe Europe Global Economic Outlook and Strategy US US Chief Economist Willem Buiter Special Pieces Japan Japan Emerging Markets Macro and Strategy Outlook UK Canada Australia and New Zealand Emerging Markets 33 Appendix A-1 Analyst Certification The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analyst's name appears in bold alongside content which is attributable to that analyst. 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This report is distributed in Singapore by Citibank Singapore Ltd ("CSL") to selected Citigold/Citigold Private Clients. CSL provides no independent 36 Kevin Gardiner, Managing Director and Head of investment strategy EMEA, Barclays Wealth & Investment Management Event sponsored by: Capital markets in 2013 Kevin Gardiner Head of Investment Strategy EMEA, Barclays Wealth & Investment Management CFA UK annual forecasting event, 16th January 2013 The views expressed here are the personal views of the author Q: Who’s got the toughest job? The Fed Chairman or the ECB President? Bernanke: - Humphrey-Hawkins Act: two targets – inflation, employment - One conventional tool: interest rates - Two targets + one tool = an impossible ‘assignment’ Draghi: - One target: price stability - One conventional tool: interest rates - Complication: euro area politics A: It’s a no-brainer Draghi has the most difficult job. Bernanke just has to do the impossible… … but Draghi has to cope with European politicians. The good news: he’s managing 2013 capital markets outlook Source: Google Images, Barclays 41 “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain “We don’t make anything in the West” “Services don’t add value” “We can’t pay for our pensions” “We live in dangerous times” … “The euro can’t survive” “There’s too much debt” “Things haven’t been this bad since the 1930s” Spain, the ECB and OMT… Will Spain ask for a bail-out? If the ECB’s promise is credible, it may not matter A formal request determines who, not what After Greece’s default, why not Spain? Budget and debt arithmetic is better Economy is different & reforms more credible The troika would try harder… “One must imagine Sisyphus happy” – Camus 44 ECB safety net at work (%) 2.0 (%) 7 6 1.5 5 4 1.0 3 2 0.5 1 0.0 2007 2008 Euro interbank - OIS spread (lhs) Source: Bloomberg, Barclays 45 2009 2010 2011 Germany-Spain 10 year bond spread (rhs) 2012 0 2013 The US: life after debt (I) US consumer spending and unemployment Dec 2005=100 000s per week 125 650 120 550 115 450 110 350 105 100 15/12/2005 250 15/12/2007 15/12/2009 15/12/2011 US household spending (nominal, index) Unemployment claims (000, RHS) Source: Datastream, Barclays The US: life after debt (II) Selected US assets and liabilities, $trillion Government borrowing overseas Total government debt Consumer debt Memo: GDP (annual flow) All US international assets All US international liabilities Consumer financial assets Consumer net worth Consumer total assets 0 Source: Datastream, Federal Reserve, Barclays 10 20 30 40 50 60 70 80 The US: life after debt (III) 150 140 130 120 110 100 90 Q1 2003 Q1 2005 Q1 2007 Bank loans/nominal GDP Source: Datastream, Barclays Q1 2009 Nominal GDP Q1 2011 Real GDP Govt. borrowing (rolling 12 mths, % GDP) 12 10 8 6 4 2 0 -2 -4 -6 Q1 1994 Q1 1999 Q1 2004 US Source: Datastream, Barclays Research 49 UK Q1 2009 US growth: the ‘new normal’ is getting old 5.0 % per annum 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Q11960 Q11970 Q11980 Q11990 US quarterly GDP growth, annualised, 10yr moving average Source: Datastream, Barclays Research 50 Q12000 Q12010 Why global investors look to Asia Asia’s weight in the world, % 60 50 40 30 20 10 0 Stocks now Source: US Bureau of Census, MSCI, Barclays 51 Bonds now Real GDP now Population in 2041 GDP growth is not always enough… Indices logged, Mar 1993 = 100 2.6 (logged) 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 China/US Real GDP Source: Datastream, Barclays Research 52 China/US stock prices Relative wages: China/US, 2002 = 100 450 + 17% pa 400 350 300 + 14% pa 250 200 150 100 50 2002 2003 2004 2005 2006 Local currencies Source: Datastream, Barclays Research 53 2007 2008 2009 Common currency 2010 2011 S&P real earnings: balance sheets did the damage 135 Real, "As Reported" Earnings 125 115 105 95 85 75 '50 '55 '60 '65 Real S&P profits (logged, index) Source: Datastream, S&P, Barclays '70 '75 Fitted trend '80 '85 '90 '95 '00 '05 '10 S&P nominal EPS – do analysts’ forecasts matter? S&P 500 EPS $ 1987 155 1988 1989 1990 1991 1992 135 2014 2010 1994 2013 1995 1996 2009 115 2012 1997 1998 1999 2008 95 2007 2011 2006 2001 2003 2004 2005 2005 2000 1992 35 15 2006 1999 55 2002 1994 1993 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Datastream, Barclays 55 2007 2008 2009 2010 1995 1990 1988 1989 1987 1991 2003 1998 1997 1996 2000 2001 2002 2004 75 1993 2011 2012 2013 2014 TMF EPS Trend Developed world profitability (real terms, %) 16 14 12 10 8 6 4 2 0 -2 Dec-74 Dec-79 Dec-84 Dec-89 Dec-94 inflation adjusted RoE 10 year moving average Source: MSCI, Datastream, FactSet, Barclays Dec-99 Dec-04 Dec-09 Global stock market valuations: price/book value PB(x) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 World USA +/ - one standard deviation Current Source: FactSet, Barclays 57 UK Eu x UK 10 year average Japan Pac x JP EM Dislocated valuations: a message to CFOs Yield (%) 8 7 6 5 4 3 2 1 0 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Developed Markets Equity Dividend Yield Global Investment Grade Corporates Yield Source: Factset, Barclays 58 Jan-11 Stock valuations: the CAPE debate P/ E(x) 50 45 40 35 30 25 20 15 10 5 0 1881 1891 1901 Graham & Dodd PE Source: Robert Shiller data, Barclays 59 1911 1921 1931 forecast with no earnings growth 1941 1951 1961 25 year moving average 1971 1981 1991 50 year moving average 2001 2011 100 year moving average Stock valuations: PE / value-added? Trailing PE / Corporate value-added 35 30 25 20 15 10 5 0 Dec-74 MSCI USA Dec-84 10-year moving average Source: MSCI, FactSet, Barclays 60 Dec-94 ± one standard deviation Dec-04 A subtle shift: New Fed guidance on rates 12 10 8 6 4 2 0 -2 -4 Dec-05 Dec-06 Dec-07 Unemployment rate (%) Source: Bloomberg, Barclays 61 Dec-08 Dec-09 Threshold Dec-10 Inflation (%) Dec-11 Dec-12 Threshold What a difference a year makes… US rates, spot & forward 4 3.5 3 2.5 2 1.5 1 0.5 Swap curve Source: Bloomberg, Barclays 62 3-mths forwards Swap Jan '12 ye ar s 10 ye ar s 9 ye ar s 8 ye ar s 7 ye ar s 6 ye ar s 5 ye ar s 4 ye ar s 3 ye ar s 2 ye ar 1 3 m on th s 0 Fwd Jan '12 VIX and US money market mutual funds 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 US Money Market Mutual Funds (as %of S&P market cap) Implied S&P volatility (VIX, %) Source: Datastream, Barclays Research 63 0 Jan-13 Precious metals losing their shine? Index (15/12/1977=100) 800 700 600 500 400 300 200 100 0 '77 '80 '83 Silver/ US CPI Source: Datastream, Barclays Research 64 '86 '89 '92 '95 Gold/US CPI '98 '01 '04 '07 '10 Conclusion: risk assets preferred in 2013 1. Barclays' SAA: asset class performance (%) Corporate securities preferred to government 2. - Business cycle & risk appetite matter more than QE Cash & ST bonds - Spreads flattered by GB yields: High Yield preferred Developed govt bonds Stocks preferred to bonds - Valuations still favourable, despite rally IG credit HY credit & EM bonds - US and EUX; neutral EM (Asia preferred) - Within EUX: core and periphery - Rotation: ‘Income’ & ‘Recovery’ into ‘Growth’… 3. F/X: USD may become pro-cyclical… - Conviction low: USD most favoured, JPY & CHF least - Longer-term: Asian currencies strongly favoured 65 2012 2011 Developed stocks Emerging stocks Commodities Real estate (est.) ATS (est.) -20 -10 0 10 20 Disclaimer This document has been issued and approved by Barclays Bank PLC. 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Thanos Papassavas, Head of Investec Asset Management’s Currency Management team Event sponsored by: Fixed Income and Currencies 2013 Thanos Papasavvas – Strategist January 2013 Leading indicators point to pick up in G7 GDP in 2013 G7 Longer Leading Indicator ● Outlook for the G7 has remained for a modest improvement over the next four quarters ● Chinese stabilisation continues Source: Investec Asset Management Page 69 | CONFIDENTIAL 10302 Markets had front-run modest uptick in data ● Markets continue to imply an uplift in macro data in the first part of 2013 – but not as enthusiastically as before ● Data surprises in Developed Markets are rolling over, led by the US and Europe Source: Investec Asset Management Page 70 | CONFIDENTIAL 10302 Core government bond yields remain supressed G2 Real Yield vs. Fair Value Source: Investec Asset Management ● ● ● ● Source: Merrill Lynch Central bank manipulation continues to hold down yields Some scope to normalise next year if global growth accelerates Near-term growth risks suggest caution Implied option volatility depressed making insurance cheap Page 71 | CONFIDENTIAL 10302 Implied Treasury Market Volatility Emerging Markets The strategic case and ways to invest The attractions of emerging markets debt ● Strong emerging market fundamentals – better placed than many developed markets ● Significant and growing part of global economy, with plenty of room for productivity gains ● Growth accentuated by four accelerator themes − Favourable demographics − Commodity richness Emerging markets as percentage of world Contribution to world GDP 36% Contribution of emerging markets to aggregate growth over the 3 year period Jun 2008 to Jun 2011 92% Contribution to global trade 37% Government bonds outstanding (includes both domestic and international) 14% Population 84% Total land surface area 74% Known oil reserves 86% − History of fiscal and monetary reforms − Better fiscal situation Convergence to developed markets will lead to outperformance of EM assets Source: IMF World Economic Outlook Database, June 2011; BIS (Bank for International Settlements), June 2011, CIA World Fact book and EIA (US Energy Information Administration). Page 73 | CONFIDENTIAL 10302 EM accelerator theme 1 Favourable demographics Population growth Working age % of population Dependency ratios are improving in emerging markets Source: UNStats, World Bank, IAM calculations Page 74 | CONFIDENTIAL 10302 EM accelerator theme 2 Commodity riches Percentage share of global commodity production 100% Developed Emerging 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Coal Iron Ore Gold Oil Copper Rice Wheat Global natural resources are predominantly found in EM Source: UN Stats, IAM calculations, December 2011 Page 75 | CONFIDENTIAL 10302 EM accelerator theme 3 Strong historic reforms Adoption of fiscal rules in EM Adoption of inflation targeting in EM Much of EM applying global best practices in managing macroeconomic stability Source: IMF, Centre for Economic Policy Research Page 76 | CONFIDENTIAL 10302 EM accelerator theme 4 Much better fiscal situation ● Emerging markets do not face the challenges that the developed world is facing ● Rising public debt in industrial countries poses fiscal challenges Gross debt % of GDP % of GDP Overall balance Fiscal situation much stronger compared with developed markets Source: IMF, June 2011 Page 77 | CONFIDENTIAL 10302 Accessing the emerging markets themes Key drivers and relationships Page 78 | CONFIDENTIAL 10302 Emerging debt markets compare very favourably with other asset classes December 2002 to June 2012 (USD) (Return/correlation data since the start of JP Morgan GBI-EM Global Diversified index, our preferred local currency comparative index) Ann Return Standard deviation Sharpe ratio Correlation with Local EM debt EM equities 16.2% 24.7% 0.66 0.80 Local EMD 11.9% 12.2% 0.98 1.00 Blended EMD 11.3% 10.0% 1.13 0.96 Developed property 10.9% 22.6% 0.48 0.71 Dollar EMD 10.5% 9.0% 1.16 0.78 Global high yield 10.2% 11.6% 0.87 0.71 Corporate EMD 8.2% 8.9% 0.92 0.71 Global equities 7.5% 16.6% 0.45 0.77 EM Currencies 7.5% 8.2% 0.91 0.94 Hedge funds 6.9% 6.0% 1.14 0.66 S&P500 6.8% 15.1% 0.45 0.69 Global bonds 6.2% 7.3% 0.85 0.55 Global credit 6.0% 6.2% 0.96 0.64 US bonds 4.9% 4.8% 1.02 0.08 Data from 31 December 2002 – 30 June 2012, standard deviation and correlation of monthly returns in USD, Local EMD = JP Morgan GBI EM Global Diversified. Blended EMD=50% JP Morgan GBI-EM GD+50% JP Morgan EMBI GD; Dollar EMD=JPMorgan Emerging Markets bonds Index EMBI GD; Developed Property = S&P/Citi Developed REIT Index TR; Hedge funds = CS/Tremont Hedge Fund Index; EM currencies =JPMorgan Emerging Local Markets ELMI Plus Composite; Global high yield = Merrill Lynch Global High Yield Index (100% hedged to $); EM equities =MSCI Daily Gross Returns USD EM; Global equities = MSCI Daily Gross TR USD World Indx; Global credit = Citigroup World Broad Investment-Grade Index; Global bonds = Citigroup WGBI All Maturities USD; US bonds = Citigroup US GBI All Maturities USD; Commodities = S&P GSCI Total Return Page 79 | CONFIDENTIAL 10302 Latest Dynamic portfolio – active positions Active duration positions Active currency positions Total: -0.38 Total: 5.32% MYR Russia 0.21 Malaysia 0.20 Czech 0.10 Hungary 0.09 4.87% INR 4.03% TRY 3.96% IDR 3.85% RUB 2.51% Nigeria 0.05 MXN 1.76% Brazil 0.05 BRL 1.56% Romania 0.01 NGN Philippines 0.00 KRW 0.03% THB 0.02% South Africa 0.00 Peru 0.00 Chile 0.00 Poland -0.02 Indonesia -0.16 Thailand -0.20 Mexico South Korea -0.50 -0.22 -0.08% HUF -0.16% PLN -0.23% -2.02% PEN -2.37% CZK -2.38% CLP -2.44% PHP -0.36 -4.00% SGD -0.30 -0.10 0.10 Source: Investec Asset Management, 30 November 2012 Page 80 | CONFIDENTIAL 10302 ZAR COP -0.13 Colombia 1.25% 0.30 -4.84% -10.00% -5.00% Off-composite index positions 0.00% 5.00% 10.00% Unconstrained Fixed Income - Bond benchmarks do not reflect how the world has changed Country weights in the WGBI A benchmark unconstrained approach makes increasing sense Source: Citigroup World Government Bond Index Page 82 | CONFIDENTIAL 10302 Fixed income opportunities can broadly be characterised as either defensive or pro-risk Time weighted correlation to broad market risk Pro-risk Defensiv e A diversified portfolio will have the best of both Source: Investec Asset Management Page 83 | CONFIDENTIAL 10302 Thank you www.investecassetmanagement.com Important information This document is not for general public distribution. If you are a private investor and receive it as part of a general circulation, please contact us. The information discusses general market activity or industry trends and should not be construed as investment advice. The economic and market forecasts presented herein reflect our judgment as at the date shown and are subject to change without notice. These forecasts will be affected by changes in interest rates, general market conditions and other political, social and economic developments. There can be no assurance that these forecasts will be achieved. Investors are not certain to make profits; losses may be made. The information contained in this document is provided in good faith and has been obtained from sources believed to be reliable. No warranty is provided as to its accuracy or completeness. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute an offer for sale and is not a buy, sell or hold recommendation for any particular investment. In the U.S., this communication should only be read by institutional investors, professional financial advisers and, at their exclusive discretion, their eligible clients, but must not be distributed to U.S. persons. In Australia, this document is provided for general information only to wholesale clients (as defined in the Corporations Act 2001). Outside the U.S., telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset Management Limited, August 2011. Investec Asset Management Limited is authorised and regulated by the Financial Services Authority. Page 85 | CONFIDENTIAL 10302 Panel Questions Event sponsored by: