The NewsLine. Economic and financial market outlook December 19, 2012 ECONOMIC RESEARCH & CORPORATE DEVELOPMENT FINANCIAL MARKETS

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1 } M ACROECONOMICS FINANCIAL MARKETS ECONOMIC POLICY SECTORS FINANCIAL MARKETS Econoic and financial aret outloo 2013 Dr. Michael Heise Phone ichael.heise@allianz.co Dr. Rolf Schneider Phone rolf.schneider@allianz.co Allianz SE On the econoic front, 2012 was a turbulent year. In id-year the eurozone was starin a systeic crisis in the face. econoy slipped into recession and the lobal econoy also sputtered. With rowth of 2.3%, the world econoy recorded the third lowest rowth rate of the past ten years. Tain stoc of the financial arets at the end of this year, the picture is far ore encourain than in the real econoy. Practically all asset classes with the exception of cash notched up sinificantly positive returns. Up aon the leaders were Geran equities; in the year to date the DAX recorded an increase of alost 30%. But a portfolio with European or US equities also raed in ore than 10%. Eerin aret stoc indices also saw double-diit increases. Exceptional returns were were also seen on loner-ter corporate bonds. For ediu-rade bonds (BBB, 7-10 years) European indices in soe cases notched up ains of ore than 20%, for loner-ter top-rade corporate bonds (AAA, 7-10 years) ains were around 10%. Even the loner-ter overnent bonds of the safe havens Gerany and USA enerated a return of 7% and 5% respectively, thans to a further decline in the yield level. With a broad portfolio of loner-ter EMU overnent bonds, includin a sizeable chun of Italian and Spanish bonds, actually anaed to enerate a return of well over 10%. Such a uniforly positive correlation of investent returns across various asset classes as this year is seldo. As a result, we thin that a siilarly unifor annual perforance in 2013 is hardly to be expected, even if as we dee liely a oderate, larely inflation-free lobal econoic recovery sets in. Next year the world econoy is liely to row by 2.7% after 2.3% this year. For the USA we are pencilin in a GDP increase of around 2%. In ost eerin arets such as, for instance, China and Brazil, the econoy will reain oentu. eurozone will probably radually crawl its way out of recession. But averae rowth in 2013 will be only arinal.

2 pae 2 of 5 Growth rates in ain econoic reions GDP, real % chane over previous year ) ) Industrialized countries European Union Euro area USA Japan Eerin arets Asia Latin Aerica Central and Eastern Europe World ) estiate; 2) forecast. Political riss still liner not least the policy approach in countries with upcoin elections. This could trier fluctuations on the financial arets, however we thin it liely that the European debt crisis will no loner eep the arets on tenterhoos on the scale it has to date. With the debt crisis radually recedin, fliht into the safe havens of Geran and US overnent bonds is liely to ease, tendin to push up yields in these arets. However, both the Fed and the ECB can be expected to stic with their ultra-loose policy stance, above all leavin ey rates unchaned. With shortter rates close to zero, there is little roo for a rise in yields on loner-ter bonds. We expect yields on 10yr Geran and US overnent bonds to clib erely into a rane of 2-2½%. Such an increase in yields would result in a slihtly neative investent return. Financial aret forecasts 3-onth oney aret rate 12/18/2012 id-2013 end-2013 EMU USA year ov.bond yield EMU USA Exchane rate USD/EUR Stoc aret index DAX Euro Stoxx Dow Jones S&P

3 pae 3 of 5 With the expected econoic picup, equities reain attractive. In addition, as a result of the investent pliht, i.e. the shortae of low-ris investents with a decent return, risier assets such as equities alost inevitably ove ore into focus if one wants to enerate a sustained return above the rate of inflation. However, looin at the stoc aret outloo for 2013, it should be borne in ind that ost stoc arets rose stronly at the end of 2012 and experience shows that the trend in shares is not a one-way street upwards. All in all, we expect to see oderate increases of 5 to 10% in ost stoc indices in the course of On stoc arets in the eerin arets, where perforance in recent years has been subdued when easured aainst the buoyant econoic rowth, we see a potential return of ore than 10%. Stoc arets are, however, particularly susceptible to shocs. Individual riss are not predictable. In particular, an eye should be ept on: - Fiscal cliff in the USA - Geopolitical tensions in the Near and Middle East as well as between Japan and China. Trends on other arets Eerin aret equities Ris preius on eerin aret bonds (relative to US Treasuries) Ris preius on top-rade corporate bonds (relative to overnent bonds) Ris preius on corporate bonds (relative to overnent bonds) Coodities, enery Coodities, non-enery : risin trend, : unchaned, : fallin trend. 6 onths 12 onths ris preius on European corporate bonds, and particularly on ediu and low-rade paper, have fallen sharply in the course of In the USA they fell slihtly. Aainst this bacdrop, the potential for further declines is liely to be liited. Given the sliht increase we are pencilin in for Geran and US overnent bonds, corporate bond yields can be expected to drift sideways. return on corporate bonds would be ore or less in line with the coupon. outloo for eerin aret overnent bonds is siilar. Ris preius fell sharply in the course of 2012, curbin the prospects of further declines.

4 pae 4 of 5 However, we do not expect to see a broad rise in the yield level here either, but rather with a sideways oveent. At the end of 2012 broad-based coodity price indices such as the CRB Index are ore or less at the sae level as at the start of the year. sae oes for crude oil prices. In the course of 2013 the econoic picup we expect to see could trier risin coodity prices. hih liquidity in the financial sector, spawned by expansionary onetary policy, would also suest this. On the other hand, coodity aret price levels are fairly hih when one considers the current econoic situation. We therefore expect only a oderate upward trend in coodity prices in In eneral, iven the turoil of recent years and unstable and shiftin interactions between the arets, the uncertainties attached to the financial aret outloo are considerable. Our oderately optiistic outloo has both upside and downside riss. Blac swans can blow thins off course at any tie.

5 pae 5 of 5 se assessents are, as always, subject to the disclaier provided below. ABOUT ALLIANZ Toether with its custoers and sales partners, Allianz is one of the stronest financial counities. Around 78 illion private and corporate custoers rely on Allianz's nowlede, lobal reach, capital strenth and solidity to help the ae the ost of financial opportunities and to avoid and safeuard theselves aainst riss. In 2011, around 142,000 eployees in soe 70 countries achieved total revenue of billion euros and an operatin profit of 7.9 billion euros. Benefits for our custoers reached 86.5 billion euros. This business success with insurance, asset anaeent and assistance services is based increasinly on custoer deand for crisis-proof financial solutions for an aein society and the challenes of cliate chane. Transparency and interity are ey coponents of sustainable corporate overnance at Allianz SE. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS stateents contained herein ay include stateents of future expectations and other forward-looin stateents that are based on anaeent s current views and assuptions and involve nown and unnown riss and uncertainties that could cause actual results, perforance or events to differ aterially fro those expressed or iplied in such stateents. In addition to stateents which are forward-looin by reason of context, the words "ay", "will", "should", "expects", "plans", "intends", "anticipates", "believes", "estiates", "predicts", "potential", or "continue" and siilar expressions identify forward-looin stateents. Actual results, perforance or events ay differ aterially fro those in such stateents due to, without liitation, (i) eneral econoic conditions, includin in particular econoic conditions in the Allianz Group s core business and core arets, (ii) perforance of financial arets, includin eerin arets, and includin aret volatility, liquidity and credit events (iii) the frequency and severity of insured loss events, includin fro natural catastrophes and includin the developent of loss expenses, (iv) ortality and orbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency exchane rates includin the Euro/U.S. Dollar exchane rate, (ix) chanin levels of copetition, (x) chanes in laws and reulations, includin onetary converence and the European Monetary Union, (xi) chanes in the policies of central bans and/or forein overnents, (xii) the ipact of acquisitions, includin related interation issues, (xiii) reoranization easures, and (xiv) eneral copetitive factors, in each case on a local, reional, national and/or lobal basis. Many of these factors ay be ore liely to occur, or ore pronounced, as a result of terrorist activities and their consequences. copany assues no obliation to update any forward-looin stateent. NO DUTY TO UPDATE copany assues no obliation to update any inforation contained herein.