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IS JAPAN ‘BACK’? Japan Society of Northern California/Federal Reserve Bank of San Francisco, May 9 th 2013 5/8/2013 2 SOME PRELMINARY OBSERVATIONS “It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind.” Keynes, speaking of Investment, 1937 SUMMARY o Causes of Japan’s “Lost Decades” o o o o o o o o o o o First – Strategic irrelevance post-1989 Second – early ‘90s headwinds strong in proportion to the size of the bubble Third - 1997-2012- persistent macro-economic policy mistakes. No insuperable “structural problems Last headwinds dropped to nothing in 2009 Senkaku spat marks Japan’s recovery of a strategic role “Abe-nomics” represents reversal of the mistakes of 1997-2012 Anyway, monetary policy has actually been loose since 3/11 Deflation may already be over PM Abe may just be “in the right place at the right time” Both the initial, long period of error and its reversal echo the ‘30s. 5/8/2013 3 WHAT ACTUALLY HAPPENED? Is Real Life lived in Real or Nominal Numbers? Year 1995 2000 2005 2010 2011 Nominal GDP (Y mil) 501,707 509,860 503,903 482,384 470,623 Population (Thou) 125,570 126,926 127,768 128,057 127,799 Period Change 1995-2011 2000-2011 Nominal GDP/head (Y mil) 4.00 4.02 3.94 3.77 3.68 Nominal GDP per Capita -7.8% -8.3% Note: GDP for Fiscal Years, Seasonally Adjusted; Population estimates as of October 1st Source: Econostats, Statistics Bureau, Milestone Asset Management 5/8/2013 4 Real GDP (Y mil) 455,460 474,847 503,921 512,364 509,450 Real GDP/head (Y mil) 3.63 3.74 3.94 4.00 3.99 Real GDP per Capita 9.9% 6.6% WHAT ACTUALLY HAPPENED? Policy the Key to the Story of the Bubble Topix 3,500 1989: BoJ hikes 3 times in one year Bubble bursts (12/31/89) 3,000 BoJ's 3rd rate hike (12/25/89) 1990: BoJ hikes twice more 2,500 "Black Monday" Consumption tax increase from April '97 decided 2,000 1,500 BoJ cuts BoJ at last starts to cut Pre"Bubble" export-driven bull market begins 1,000 1991: BoJ cuts 3 times 1993: BoJ cuts twice Fiscal/Monetary policy easing in response to Asian Financial Crisiss 1995: BoJ cuts twice Q1CY86 The"Bubble" begins 500 Yen/US$ goes to 88; International agreement to weaken it 1992: BoJ cuts twice 1986: BoJ cuts 4 times in one year 23/9/85 Plaza Agreement - Japan accepts massive revaluation of Y/US$ rate in order to correct Japan's "excessive" bilateral trade surplus with the US 0 79 80 81 82 83 84 85 86 87 88 89 90 Source: Bloomberg. Milestone Asset Management 5/8/2013 5 91 92 93 94 95 96 97 98 99 WHAT ACTUALLY HAPPENED? Policy Error the Key to the Story after the Bubble Topix 2,000 Feb 2000: US credit spreads start to widen; Internet bubble bursts 1,800 BoJ begins to drain "excess" reserves FX Intervention Ended; genuine easing stops The Earthquake/Tsunami forces genuine easing on the BoJ BoJ ends ZIRP 1,600 New Financial Minister Takenaka ventilates possibility of total loss for bank shareholders in context of bank resolutions. Market tanks. 1,400 BoJ tightens 1,200 1,000 Partial Nationalisation of Resona proves not to involve total loss for shareholders. Market rallies "QE" instituted 800 QE+FX intervention = genuine easing 600 Gov Kuroda pledges unlimited easing BoJ eases; Fiscal policy loosens 400 26/9/2006: PM Koizumi leaves office. Topix 1610 200 26/4/2001: Koizumi becomes PM. 14/4/2003: Topix 1366 Topix 770 0 00 01 02 03 04 05 06 07 Source: Bloomberg. Milestone Asset Management 5/8/2013 6 08 09 10 11 12 13 WHAT ACTUALLY HAPPENED? Another, very different, Narrative – All about Strategic Position Topix 3,500 9th November 1989 - Berlin Wall opened. Market peaks 8 weeks later 3,000 2,500 2,000 1,500 1,000 11th September 2012 China makes a fuss about the Senkaku Islands. Market breaks out in November 500 0 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 Source: Bloomberg. Milestone Asset Management 5/8/2013 7 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 5/8/2013 8 MONETARY AND FISCAL POLICY “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” Keynes, The General Theory of Employment, Interest and Money, 1936 WHAT IS “ABE-NOMICS” o o o o o Do we know what it is? o Not really, but the fact that it is seen as a “-nomics” is an unconscious admission that it is relevant to the economy o Contrast with Koizumi – who was of no relevance Could it be an “cover band, reprising the LDP’s greatest hits”? o No. Something new, but echoes of the past are strong Is it any more than a currency policy? o Yes, but not much more Isn’t that enough? o Yes it is, so let’s forget irrelevant chit-chat about “reform” But isn’t it also little more than a case of “political luck” o Largely, but not entirely so. 5/8/2013 9 BANK RESERVES HEADING FOR DOUBLE THEIR 2007 PEAK Easing has its Roots in Tragedy - the Tohoku Tsunami. Just as in 2003-7 real effects lagged… Y bn 70,000 60,000 50,000 40,000 30,000 20,000 Current Account Balances 10,000 Excess Reserves 0 Jan-09 Nov-09 Sep-10 Jul-11 Source: BoJ, Bloomberg, Milestone Asset Management 5/8/2013 10 May-12 Feb-13 “TRIED AND FAILED” – AUSTERITY FAILED, NOT SPENDING Proactive Fiscal Policy used only Twice – and it “worked” when tried 13% 12% 11% 10% 9% 8% 7% Estimate of 'Managed' Expenditure as % of Nominal GDP 6% 1985 1987 1989 1991 1993 1995 1997 1999 Source: MoF, HM Treasury, Milestone Asset Management 5/8/2013 11 2001 2003 2005 2007 2009 2011 4% OF GDP ‘MONEY PRINTING’ GAVE US THE ’05 RECOVERY Monetary policy works with long and variable lags Y tril 60 50 40 30 20 10 0 01 02 03 04 05 06 07 Source: BoJ, Bloomberg, Milestone Asset Management 5/8/2013 12 08 09 10 11 12 THE YEN IS KEY Yen over/under-valuation vs OECD Purchasing Power Parity Estimate 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% -20.0% -30.0% Source: OECD, Bloomberg, Milestone Asset Management 5/8/2013 13 Jan-12 Jan-08 Jan-04 Jan-00 Jan-96 Jan-92 Jan-88 Jan-84 -10.0% Jan-80 0.0% INFLATION COULD BE EASY TO PRODUCE Labour costs competitive: US and Japan now the cheap, developed, places to produce Minimum Wages (per hour) In USD Shanghai 2.28 HK 3.87 US 9.00 UK 9.50 France 12.35 Japan ¥744 US$7.67 Source: National labour data, OECD, Bloomberg, Milestone Asset Management 5/8/2013 14 (actual) (actual) (proposed) (actual) (actual) (nationwide average) (at current FX) OLD INFRASTRUCTURE = MORE SPENDING = HIGHER WAGES One third of construction workers now over 55 Source: Ministry of Land , Infrastructure and Transport 5/8/2013 15 INFLATION-ADJUSTED JGBS THINK DEFLATION IS OVER Implied break-even inflation rate (5-year) on Inflation-adjusted JGBs 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50 Jun-09 Jun-10 Jun-11 Source: Bloomberg, Milestone Asset Management 5/8/2013 16 Jun-12 HOW MUST STIMULATION WORK? KALECKI SHOWS US HOW Kalecki’s Profit Equation: Total profits = the sum of the consumption of capitalists & net investment & the public deficit & the net external surplus minus the savings of workers 35 30 Household Savings (-) External Surplus Government Savings (-) Net investment (+) Dividends (+) Profits 25 Percent of GDP % 20 15 10 5 0 -5 -10 Source: BoJ, MoF, Morgan Stanley, Milestone Asset Management 5/8/2013 17 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 -15 HOW MUST STIMULATION WORK? KALECKI SHOWS US HOW Kalecki’s Profit Equation: Total profits = the sum of the consumption of capitalists & net investment & the public deficit & the net external surplus minus the savings of workers If it isn’t the interest rate alone that equilibrates savings and investment there is a function for other factors This opens up a role for, for instance, Tobin’s ‘Q’ arbitrage and for “animal spirits” In Japan’s case, net investment (investment less capital consumption (economic depreciation)) has fallen consistently since the onset of deflation and is now negative A rise in investment is actually a ‘good thing’ when your starting point is capital consumption (let’s glide over the data quality complications…) Raising dividends would also be a ‘good thing’ for profits because it would increase the income of capitalists Implication is that ‘Abe-nomics’ will really work by stimulating the non-salariman portion of the country – it is inherently redistributionist. The issue is how long the essentially non-capitalist salariman will consent to give up the gains he has made in relative terms over the past 16 years. 5/8/2013 18 5/8/2013 19 IMAGINARY “STRUCTURAL PROBLEMS” “It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics.” Keynes, The General Theory of Employment, Interest and Money DO RATINGS AGENCIES HAVE ANYTHING TO SAY? Or Are They Inadvertently Admitting that Deflation, Not Spending, is the Issue? 1.5 JGB yield; % Credit rating 1.9 2.0 1.7 2.5 1.5 1.3 3.0 1.1 3.5 0.9 4.0 0.7 Average credit rating 10yr bond yield (RHS) Source: CLSA , Milestone Asset Management 5/8/2013 20 Dec '12 Dec '11 Dec '10 Dec '09 Dec '08 Dec '07 Dec '06 Dec '05 Dec '04 Dec '03 Dec '02 Dec '01 Dec '00 0.5 Dec '99 4.5 JAPANESE ARE NOW `POOR` A “Salariman’s” “Pocket Money” has halved in 20 years (JPY/month) 80,000 73,858 70,000 66,633 66,527 60,861 60,000 60,603 58,593 53,582 54,706 52,579 53,000 49,657 50,000 56,837 53,532 55,455 54,691 48,703 49,609 46,394 45,445 46,116 45,104 42,958 40,000 37,786 41,302 40,641 37,546 39,603 38,377 36,647 32,885 30,000 29,480 20,000 79 81 83 85 87 89 92 96 Source: Shinsei Bank , Milestone Asset Management 5/8/2013 21 98 00 02 04 06 08 10 05 WHAT MIGHT HAVE BEEN…… 110 Trillion Yen of GDP Gone Missing = Depressed Tax Collections 650 Assume 1% nominal growth since 1997 600 550 500 450 Actual GDP in Nominal Terms 400 350 300 250 200 1980 1985 1990 1995 2000 Source: Morgan Stanley, Milestone Asset Management 5/8/2013 22 2005 2010 2015 DID JAPANESE SUDDENLY BECOME “TAX CHEATS” IN ‘96? What changed was Deflation, not “Tax Evasion” % of Corporate Sector's Sales represented by Loss-making Companies 50 45 40 35 30 25 20 15 Onset of Deflation 10 5 0 1951 1956 1961 1966 1971 1976 1981 Source: NTA, Morgan Stanley, Milestone Asset Management 5/8/2013 23 1986 1991 1996 2001 2006 LOSSES OF LOSS-MAKING COMPANIES 4% OF GDP Profits of Profitable Companies Essentially Unchanged post-1996 70 (Y Tril) 60 50 40 30 20 10 0 -10 -20 -30 -40 1963 1968 1973 1978 1983 1988 Source: NTA, Morgan Stanley, Milestone Asset Management 5/8/2013 24 1993 1998 2003 2008 12% DECLINE IN WAGES LEADS TO 40% DROP IN TAX Income Tax Withheld at Source on Regular Wages 14 250 (Y Tril) 12 200 10 150 8 6 100 4 50 Income Tax Withheld(LHS) 2 Total Wages(RHS) 0 0 72 77 82 87 92 Source: NTA, Morgan Stanley, Milestone Asset Management 5/8/2013 25 97 02 07 CRUMMY ECONOMY = SPENDING UP & TAXES CRUSHED FY 2011– Spending at deflationary period highs, revenues at secular lows % of Nom in a l GDP, Fisca l Yea r s T ot a l Ex pen dit u r e (A s decla r ed) of w h ich : In t er est Pa y m en t Socia l w elfa r e Loca l Gov . T a x Gr a n t s, Specia l Gr a n t s a n d ot h er s A ll Ot h er Ex pen dit u r es A ct u a l T ot a l Expen dit u r e l ess In t er est Cost s A v er a ge 1 7 .6 0 % 1997-2011 High 2 1 .3 0 % Low 1 5 .3 0 % La st y ea r A ct u a l 2 1 .3 0 % 1 .7 0 % 4 .3 0 % 3 .3 0 % 8 .3 0 % 15.90% 2 .1 0 % 6 .3 0 % 4 .1 0 % 1 0 .1 0 % 19.70% 1 .4 0 % 3 .0 0 % 2 .6 0 % 7 .2 0 % 13.20% 1 .7 0 % 6 .3 0 % 4 .1 0 % 9 .2 0 % 19.60% 9 .4 0 % 1 0 .5 0 % 8 .2 0 % 9 .1 0 % 3 .1 0 % 2 .2 0 % 2 .0 0 % 2 .0 0 % 3 .7 0 % 2 .9 0 % 2 .2 0 % 2 .3 0 % 2 .7 0 % 1 .3 0 % 1 .8 0 % 1 .9 0 % 2 .8 0 % 2 .0 0 % 2 .2 0 % 2 .1 0 % T a x a n d Ot h er Rev en u e in T ot a l of w h ich : In com e T a x Cor por a t e T a x Con su m pt ion T a x Ot h er r ev en u es Re-St a t ed Cen t r a l Gov er n m en t Su r plu s/Deficit -1 0 .5 0 % Source: MoF, Milestone Asset Management 5/8/2013 26 BETTER ECONOMY = SPENDING DOWN & TAXES UP Let’s remember that just as inflation is a “tax increase” so deflation is a “tax cut” Hy pot h et ica l Ca se T ot a l Ex pen dit u r e (A s decla r ed) of w h ich : In t er est Pa y m en t Socia l w elfa r e Loca l Gov . T a x Gr a n t s, Specia l Gr a n t s a n d ot h er s A ll Ot h er Ex pen dit u r es A ct u a l T ot a l Expen dit u r e l ess In t er est Cost s T a x a n d Ot h er Rev en u e in T ot a l of w h ich : In com e T a x Cor por a t e T a x Con su m pt ion T a x Ot h er r ev en u es Re-St a t ed Cen t r a l Gov er n m en t Su r plu s/Deficit A ssu m pt ion 3 .4 0 % 4 .5 0 % 3 .5 0 % 8 .7 5 % 20.15% Dou ble Ret u r n Ret u r n Ret u r n A ssu m pt ion FY 2 0 1 1 t o Mea n t o Mea n t o Mea n 1 3 .0 0 % 4 .6 0 % 3 .5 0 % 2 .0 0 % 2 .9 0 % -7 .1 5 % Source: MoF, Milestone Asset Management 5/8/2013 "Refl a t ion Wor ks" 27 4 .0 0 % 3 .0 0 % 2 .6 0 % 7 .2 0 % 16.80% 2 .3 5 x FY 2 0 1 1 Fa ll t o low s Fa ll t o low s Fa ll t o low s 1 6 .5 0 % Pr e-defla t ion A v er a g e Pr e-defla t ion A v er a g e A v er a g e post -1 9 9 7 Pr e-defla t ion A v er a g e 5 .8 0 % 4 .8 0 % 2 .2 0 % 3 .7 0 % -0 .3 0 % Rise Rise Rise Rise t o pr e-defla t ion t o pr e-defla t ion t o pr e-defla t ion t o pr e-defla t ion h ig h s h ig h s h ig h s h ig h s SOCIAL SPENDING: NO LINK WITH “DEMOGRAPHICS” Year-on-year (FY) Change in Central Government “Social Welfare Expenditure” 50% 40% 30% 20% 10% 0% -10% 67 70 73 76 79 82 85 88 91 Source: MoF, Milestone Asset Management 5/8/2013 28 94 97 00 03 06 09 12 THE GROWTH PROBLEM IS NOT “DEMOGRAPHICS” Growth and Population Change in 147 countries over the last 30 years - No Relationship 8% r2 = 4% 7% 6% 19 417 Population growth 5% 4% 3% 2% 1% 0% -10% -5% 0% 5% 10% 15% -1% 20 2 -2% Source: IMF, CLSA , Milestone Asset Management 5/8/2013 GDP CAGR 29 20% RELAXING OR LAID OFF? BECOMING A “NORMAL” COUNTRY Japanese Working Hours – Steep post-Bubble Decline; Now at OECD Average 2,300 Hours per year 2,200 2,100 2,000 1,900 1,800 1,700 1970 1975 1980 1985 1990 Source: OECD, JP Morgan , Milestone Asset Management 5/8/2013 30 1995 2000 2005 2010 NUCLEAR POWER – SCARE STORIES TO BE IGNORED Conventional sources of generation more or less cover Japanese power needs Output (mn kWh) Total Peak Nuclear Therm al Hy dro Purchase non-nuclear pre-quake 77,431 25,967 52,7 98 7 ,837 1 6,7 97 post-quake 90,344 17,083 64,445 7 ,239 1 8,660 Assumptions : Output roughly = demand < supply capacity peak dem and 96,173 Aug-07 Pre-quake nuclear peak 25,967 Peak dem and less non-nuclear supply 5,829 Probable need for nuclear/nuclear capacity 22% (= peak dem and m inus post-quake non-nuclear supply as a % of pre-quake nuclear output) Source: METI, BAML, Milestone Asset Management 5/8/2013 31 LIMITATIONS OF BIG-COMPANY MANAGEMENT 32 5/8/2013 HAS THE EARNINGS UP-SHIFT ALREADY OCCURRED? Trailing 10-year Average Real EPS since 1980 Source: Morgan Stanley, Milestone Asset Management 5/8/2013 33 20 YEAR DELEVERAGING REDUCES ROE Deflation = Deleveraging 8 (x) Total Assets/Net Assets 7 6 5 4 3 2 1 1963Q3 1975Q3 1987Q3 1999Q3 Source: Ministry of Finance, Morgan Stanley, Milestone Asset Management 5/8/2013 34 2011Q3 20 YEAR DELEVERAGING REDUCES CAPITAL EFFICIENCY Renewed Rise in Leverage & Asset Turnover Requires the End of Deflation 1960s A v era ge ROE (%) 1970s A v era ge 2010s A v era ge 8 .4 0 4 .9 8 6 .01 4 .8 8 1 .7 111 4 .2 1 .2 120 5 .1 1 .4 129 4 .7 1 .4 97 3 .6 2 .5 89 2 .7 3 .3 78 2 .4 A ssu m e Net Ma r gin 3.30% Nor m ROE 90% 95% 100% 105% 110% 115% 120% 8 .1 7 % 8 .9 1 % 9 .6 5 % 1 0 .4 0 % 1 1 .1 4 % 1 1 .8 8 % 1 2 .6 2 % 8 .6 2 % 9 .4 1 % 1 0 .1 9 % 1 0 .9 7 % 1 1 .7 6 % 1 2 .5 4 % 1 3 .3 2 % 9 .0 8 % 9 .9 0 % 1 0 .7 3 % 1 1 .5 5 % 1 2 .3 8 % 1 3 .2 0 % 1 4 .0 3 % 9 .5 3 % 1 0 .4 0 % 1 1 .2 6 % 1 2 .1 3 % 1 2 .9 9 % 1 3 .8 6 % 1 4 .7 3 % 9 .9 8 % 1 0 .8 9 % 1 1 .8 0 % 1 2 .7 1 % 1 3 .6 1 % 1 4 .5 2 % 1 5 .4 3 % 1 0 .4 4 % 1 1 .3 9 % 1 2 .3 3 % 1 3 .2 8 % 1 4 .2 3 % 1 5 .1 8 % 1 6 .1 3 % 1 0 .8 9 % 1 1 .8 8 % 1 2 .8 7 % 1 3 .8 6 % 1 4 .8 5 % 1 5 .8 4 % 1 6 .8 3 % Source: Morgan Stanley, Milestone Asset Management 5/8/2013 2000s A v era ge 8 .7 9 Scen a r io A n a l y sis 2 .7 5 3 .0 0 3 .2 5 3 .5 0 3 .7 5 4 .0 0 4 .2 5 1990s A v era ge 7 .8 5 Net Ma rgin (%) A sset T u rn ov er Lev era ge Ra t io A sset T u r n ov er Lev er a ge (x) 1980s A v era ge 35 BIG COMPANIES DO NOT USUALLY EARN A RETURN The “Good News” is that Returns should go back towards the 2006/7 level; the “Bad News” is that that will still only equal the Cost of Capital Source: Bloomberg, Morgan Stanley , Milestone Asset Management 5/8/2013 36 PRODUCTIVITY REMAINS A MACRO PROBLEM… Relative Labour Productivity and the Stock Market 300 1.20 1.15 250 1.10 1.05 200 1.00 150 0.95 0.90 100 0.85 0.80 50 Nikkei in US$ 0.75 Relative Labour Productivity Source: Bloomberg, Mitsubishi UFJ Morgan Stanley , Milestone Asset Management 5/8/2013 37 Mar-12 Mar-10 Mar-08 Mar-06 Mar-04 Mar-02 Mar-00 Mar-98 Mar-96 Mar-94 Mar-92 Mar-90 Mar-88 Mar-86 Mar-84 Mar-82 Mar-80 Mar-78 Mar-76 Mar-74 Mar-72 0.70 Mar-70 0 …WITH MICRO ROOTS - BLOATED WORKFORCES Workers (no.) FY 2011 Sales/Worker (Ymn) Hitachi Toshiba Mitsubishi Electric 350,000 203,000 114,000 25.75 31.58 31.85 323,000 191,000 117,000 24.71 30.12 32.37 Panasonic Sony Sharp TDK 348,000 168,000 56,000 88,000 22.22 42.69 54.37 9.97 290,000 190,000 50,000 34,000 25.13 35.25 37.28 19.65 Canon Ricoh 198,000 109,000 17.94 17.81 87,000 67,000 32.09 21.49 Nissan Toyota Honda 159,000 318,000 179,000 55.03 59.78 49.91 136,000 211,000 112,000 43.84 61.12 54.26 NTT 219,000 46.98 224,000 46.53 Kajima 15,000 87.89 19,000 92.23 Fast Retailing 33,323 24.62 1,853 185.74 Shiseido Fuji Photo Shinetsu Chemical 32,595 81,691 16,167 20.94 26.88 64.81 24,495 37,151 18,754 24.36 37.73 36.20 Fanuc SMC 5,198 15,384 103.60 22.22 3,707 9,891 56.39 19.64 Komatsu HCM 44,206 21814 44.83 37.46 28,522 9,503 37.01 33.85 Source: Bloomberg, Milestone Asset Management 5/8/2013 FY 2000 Workers Sales/Worker (no.) (Ymn) 38 ...AND SPECIFICALLY WHITE -COLLAR OVEREMPLOYMENT How Gross Cashflow has been Used by Selected Major Consumer Electronics Companies (Averages) Averaging Period Panasonic Sharp Sony Philips Siemens Samsung Apple Hon Hai 10 years 3 years 10 years 3 years 10 years 3 years 10 years 3 years 10 years 3 years 10 years 3 years 10 years 3 years 10 years 3 years Depreciation SG&A R&D Interest Other nonOp costs Tax Dividend Retained Earnings Gross Cash Flow 11% 11% 33% 39% 16% 16% 9% 7% 10% 8% 19% 19% 3% 3% 13% 14% 58% 60% 28% 29% 50% 52% 62% 68% 53% 46% 40% 42% 25% 19% 38% 42% 21% 21% 25% 26% 27% 26% 20% 17% 18% 17% 15% 15% 8% 6% 11% 3% 1% 1% 1% 1% 1% 1% 3% 3% 4% 1% 1% 1% 0% 0% 2% 1% 7% 16% 8% 14% -4% 1% -7% -2% -3% -2% -3% -4% -2% -1% -5% -5% 4% 4% 5% 8% 7% 15% 3% 3% 5% 8% 5% 5% 18% 19% 7% 6% 2% 1% 3% 3% 1% 2% 6% 7% 6% 9% 2% 2% 0% 0% 7% 5% -3% -14% -3% -21% 0% -14% 4% -3% 8% 10% 20% 21% 48% 54% 27% 23% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: Citi Investment Research, Milestone Asset Management 5/8/2013 39 IMPORTANT DISCLOSURES Milestone Asset Management Co. Ltd (the “Manager”) is the Investment Manager of the Ichirizuka Fund and the Investment Advisor to the Simplex Milestone Small-cap Value Fund (together, the “Fund(s)”). This information is for illustration and discussion purposes only and is not intended to be, nor should it be construed or used as, investment, tax, ERISA, or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, any securities, units or interests in any fund, including an unit or interest in any private investment fund managed or advised by Manager, including the Fund(s). Any offer or solicitation of an investment in the Fund(s) may only be made only upon delivery of the offering and subscription documents (the “Fund Documents”) to qualified investors. Prospective investors should rely solely upon such Fund Documents in making any investment decision. An investment in the Fund(s) is not suitable for all investors. This presentation has not been prepared for any particular investor or client or necessarily for any particular type of investor or client. Neither the Manager nor any of its affiliates, employees, agents or representatives are authorized to make (or, through information contained herein, are making) any representations or warranties inconsistent with or in addition to those contained in the Fund`s(s`) Documents. Investments in the Fund(s) will be selected by, and will vary at the sole discretion of, the Manager and are subject to availability and market conditions, amongst other factors. No representation is made that the Manager`s or the Fund`s risk management, investment process or investment objectives will be or are likely to be achieved or successful, or that the Fund or any of its investments will make any profit or will not sustain losses. Past performance is not indicative of future results. Return targets or objectives and volatility targets, if any, are used for measurement or comparison purposes and only as a guideline for prospective investors to evaluate particular investment opportunities and accompanying information. Targeted returns reflect subjective determinations by the Manager based on a variety of factors, including, amongst others, prior performance of similar investments (if any), volatility measures, risk tolerance and market conditions. Performance may fluctuate, especially over short periods. Targeted returns should be evaluated over the time period indicated and not over shorter periods. Targeted returns are not intended to be actual performance and should not be relied upon as an indication of actual or future performance. Any assumptions, assessments, intended targets, statements or the like (collectively, “Statements”) regarding future events, future market conditions or expectations, investment opportunities, market conditions or commentary or which are forward-looking constitute only subjective views, outlooks, estimations or intentions, are based on the Manager`s expectations, beliefs or intentions, should not be relied upon, are subject to change without prior notice due to a variety of factors, including fluctuating market conditions and economic factors, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond the Manager`s or the Funds` control. Future evidence and actual results (including actual composition and investment characteristics of future Fund portfolio investments) could differ materially from those set forth in. contemplated by, or underlying these Statements. In light of these risks and uncertainties, there can be no assurance and no representation is given that these Statements are now or will prove to be accurate or complete in any way. The Manager undertakes no responsibility or obligation to revise or update such Statements. (Continued overleaf) 5/8/2013 40 IMPORTANT DISCLOSURES (Continued…) Any descriptions or information involving investment objectives or criteria, investment process, or investment strategies are provided for illustration purposes only, may not be fully indicative of any present or future investments, may be changed at the discretion of the Manager and are not intended to reflect actual performance or to project performance. Any information concerning past performance of any fund is presented for illustrative purposes only. There can be no assurance that the investment returns of the Fund (s) will repeat or resemble the patterns of the past. Past performance is not an indication of future performance. This information is as of the date(s) indicated, is not complete, is subject to change, and does not contain material information regarding the Fund, including specific information relating to an investment in the Fund(s) and related important risk disclosures. Before making any investment, investors should thoroughly review the Fund (s) Documents with their professional advisor(s) to determine whether an investment is suitable for them. The Fund(s) are unregistered private investment funds that may invest and trade in many different markets, strategies and instruments, including securities, non-securities and derivative) and are NOT subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors. An investment in the Fund(s) may involve a high degree of risk and volatility and could be highly illiquid. Certain information contained herein has been provided by and/or is based on third party sources, and although believed to be reliable has not been independently verified and its accuracy, timeliness or completeness cannot be guaranteed. This information is confidential, is the property of the Manager, is intended only for the intended recipients and their authorized agents or representatives, and may not be distributed to any other person without our prior written consent. 5/8/2013 41 MILESTONE ASSET MANAGEMENT Enquiries: Alexander Kinmont Tel: 03-5413-4196 Fax: 03-5413-4192 E-mail: [email protected] www.mamj.com 4F Keyakizaka Terrace Roppongi 6-15-1 Minato-ku Tokyo 5/8/2013 Discretionary asset management company for qualified investors registered with the FSA (Registration No. : Kanto Financial Bureau 1064) Member of Japan Investment Advisers Association (Membership No.: 012-02093) 42