World Industry Outlook: Which Industries Gain and Which Lose in a Slowing Global Economy? Mark Killion, CFA Managing Director World Industry Service

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1 World Industry Outlook: Which Industries Gain and Which Lose in a Slowing Global Economy? Mark Killion, CFA Managing Director World Industry Service

2 Agenda Outlook for Industry Sales and CapEx Ranking of Industry Winners and Losers Introduction to Sector Risk Ratings Expected Migration of Sector Credit Quality Copyright 0 Global Insight, Inc.

3 CapEx is Typically More Cyclical than GDP Utilities % Mining % Sector Shares in GDP, China 0 Construction % Wholesale & Retail % Transport & Communic. % Finance & Real Estate % Business Services % Annual Growth.0%.0%.0%.0% Growth in GDP and CapEx: China Public, Defense & Recreation %.0% Manufacturing % Agriculture % 0.0% Real GDP Nominal GDP Nominal CapEx Copyright 0 Global Insight, Inc.

4 Sector Composition of Macro Economic Growth Annual Percent Growth of Real Output in China for Broad Sectors Key Growth Industries for China Annual Growth Constr. & Utilities Manuf. Services Metals, Rubber & Plastics Communications & Computers, in both Manufacturing & Services Motor Vehicles Construction & Related Materials Copyright 0 Global Insight, Inc.

5 Which Industries Will Show the Fastest Real Growth? (Industry Ranking of 0 0 Growth Rates in Inflation Adjusted Sales) Top Twelve Real Growth Performers Ranked by Growth Rate in Sales (Real) Ranking in Other Regions/Countries Ranking in China Share in GDP CAGR Growth 0-0 CAGR Growth 0-0 World U.S. W. Europe OECD Asia ASEAN India. Aluminum & Non-Fer. Metals Rubber Products & Plastics.... Fabric. Metal x Mach.& Equip Paints & Varnishes Plastic Products Computers & Office Equip..... Utilities Motor Vehicles & Parts Iron & Steel Communications.... Food & Beverages.... Electrical Appliances & Housewares Copyright 0 Global Insight, Inc.

6 Which Industries Show the Slowest Real Sales Growth? (Industry Ranking of 0 0 Growth Rates in Inflation Adjusted Sales) Most Modest Real Growth Performers Ranked by Growth Rate in Sales (Real) Ranking in Other Regions/Countries Ranking in China Share in GDP CAGR Growth 0-0 CAGR Growth 0-0 World U.S. W. Europe OECD Asia ASEAN India. Agricultural Machinery Mining of Metals & Minerals Special Industry Machinery Energy Mining Agriculture Commercial Research & Development Renting & Leasing (Machinery & Equip.) Electrical Industrial Machinery Recreational & Cultural Real Estate Scientific, Optical & Photo Eq Auto & Gas Retail Trade Copyright 0 Global Insight, Inc.

7 Which Industries Show the Fastest Nominal Sales Growth? (Industry Ranking of 0 0 Growth Rates in Nominal Yuan) Top Twelve Revenue Performers Ranked by Growth Rate in Sales (Nominal Yuan) Ranking in Other Regions/Countries Ranking in China Share in GDP CAGR Growth 0-0 CAGR Growth 0-0 World U.S. W. Europe OECD Asia ASEAN India. Aluminum & Non-Fer. Metals..0.. Paints & Varnishes Paper & Printing Utilities.... Electrical Apparatus Fabric. Metal x Mach.& Equip Rubber & Plastic Products Communications..0.. Electrical Appliances & Housewares Motor Vehicles & Parts Drugs & Medicines Food & Beverages... 0 Copyright 0 Global Insight, Inc.

8 Correlations Between Industry Rankings of Forward Sales Growth & Stock Market Investment Returns for Selected Industries Correlation Coefficient Correlation Between Rankings of WIS Forward One- Year Sales Growth & Stock Market Sector Returns US EMU Japan Malaysia Energy Consumer Staples Industrials Information Technology The -year ahead Sector Sales Growth and Sector Stock Market Investment Returns were calculated and ranked for each year from through 0 for each industry The Correlation Coefficient shows the amount of correlation between the ranking for -Year ahead Sector Sales Growth and the ranking for Stock Market Investment Return High Correlation means that the rankings for Forward Sales Growth and the ranking for Total Returns change over time in the same direction for a given industry The calculation is made using Pearson s Correlation Coefficient (URL: Source: World Industry Service; MSCI Copyright 0 Global Insight, Inc.

9 China s Merchandise Trade in 0 0 Goods Sector Net Trade, China, 0 0 Net Exports Computers & Office Equip. Textiles & Apparel Semi-Conductors & Communic. Equip. Fabric. Metal x Mach.& Equip. Electrical Apparatus Wood & Furniture Electrical Appliances & Housewares Iron & Steel Electrical Industrial Machinery Plastic Products Food & Beverages Motorcycles & Bicycles Motor Vehicles & Parts Photographic & Optical Goods Engines & Turbines Paper & Printing Petroleum Refineries Aluminum & Non-Fer. Metals Agriculture Basic Industrial Chemicals Scientific, Optical & Photo Eq. Aircraft & Aerospace Professional, Science, Measuring Special Industry Machinery Synthetic Resins Mining of Metals & Minerals Energy Mining Units: Bil. Chinese Yuan Net Imports N t I t Copyright 0 Global Insight, Inc.

10 Industries of Export Interest to China Industries Where China has net Export Surplus with Rest of the World Size of Exports by Sector, China Large Medium Small Global Consumption Growth, Real (0-'0) Fast Medium Slow Semi-Conductors & Communic. Equip. ; Computers & Office Equip.; Electrical Apparatus Textiles & Apparel; Electrical Industrial Machinery; Iron & Steel; Scientific, Optical & Photo Eq.; Electrical Appliances & Housewares Fabric. Metal x Mach.& Equip.; Wood & Furniture; Professional, Science, Measuring; Food & Beverages Basic Industrial Chemicals; Motorcycles & Bicycles; Synthetic Resins Aluminum & Non-Fer. Metals; Plastic Products; Engines & Turbines; Photographic & Optical Goods; Cement & Const. Material; Rubber Products; Shipbuilding & Repairing Agriculture; Special Industry Machinery; Paper & Printing; Petroleum Refineries Drugs & Medicines; Fertilizers & Pesticides; Paints & Varnishes; Soap & Cleaning Preparations; Machine Tools ; Aircraft & Aerospace; Railroad Equipment Pottery, China etc.; Other Transportation Equipment Energy Mining; Mining of Metals & Minerals; Watches & Clocks; Agricultural Machinery Copyright 0 Global Insight, Inc.

11 Industries of Import Interest to China Industries Where China has Net Imports from ROW Size of Imports by Sector, China Large Medium Small Sector Consumption Growth, China Real(0-'0) Fast Medium Slow Computers & Office Equip.; Textiles & Apparel; Iron & Steel; Aluminum & Non- Fer. Metals; Special Industry Machinery Electrical Industrial Machinery; Scientific, Optical & Photo Eq.; Energy Mining Semi-Conductors & Communic. Equip. ; Professional, Science, Measuring; Basic Industrial Chemicals; Synthetic Resins; Mining of Metals & Minerals Electrical Apparatus; Food & Beverages; Plastic Products; Photographic & Optical Goods; Drugs & Medicines; Aircraft & Aerospace Fabric. Metal x Mach.& Equip.; Paper & Printing; Petroleum Refineries; Paints & Varnishes Agriculture; Engines & Turbines; Machine Tools Rubber Products; Railroad Equipment Electrical Appliances & Housewares; Motorcycles & Bicycles; Cement & Const. Material; Pottery, China etc.; Fertilizers & Pesticides; Other Transportation Equipment Wood & Furniture; Shipbuilding & Repairing; Watches & Clocks; Soap & Cleaning Preparations; Agricultural Machinery Copyright 0 Global Insight, Inc.

12 Which Industries Show Fastest Growth in Capital Expenditures? (Industry Ranking of 0 0 Growth Rates in Capital Spending, in Nominal Yuan) Top Twelve Investment Performers Ranked by Growth Rate in CapEx (Nominal Yuan) Ranking in Other Regions/Countries Ranking in China Share in Total CapEx CAGR Growth 0-0 CAGR Growth 0-0 World U.S. W. Europe OECD Asia ASEAN India. Computer & Related Services Business Services Commercial Research & Development Aluminum & Non-Fer. Metals.... Plastic Products Paints & Varnishes Rubber Products Paper & Printing.... Fabric. Metal x Mach.& Equip Motor Vehicles & Parts Electrical Apparatus Drugs & Medicines.0.0. Copyright 0 Global Insight, Inc.

13 Which Industries Show the Highest Rate of return on Capital Expenditures? (Industry Ranking of 0 0 Return on Fixed Capital, Nominal) Twelve Sectors with Highest Return on Fixed Investments Ranked by ROFIC Ratio (Profits/-yr CapEx, Nominal) Ranking in Other Regions/Countries Ranking in China ROFIC Share in CapEx World U.S. W. Europe OECD Asia ASEAN India. Railroad Equipment Electrical Apparatus. 0.. Electrical Industrial Machinery. 0.. Electrical Appliances & Housewares. 0.. Energy Mining... Computers & Office Equip Construction.0.. Computer & Related Services Aluminum & Non-Fer. Metals 0... Scientific, Optical & Photo Eq Rubber Products Real Estate 0.. Limited to Sectors with at least 0.0% share in Total CapEx Copyright 0 Global Insight, Inc.

14 Introducing World Industry Service Sector Risk Ratings (SRR) Sector Risk Ratings provide globally consistent, forward-looking benchmarks of credit quality for each sector and each country Sector Risk Ratings allow you to: Quantify the Risk/Return Profile of Sector Based Portfolios Forecast Changes in the Credit Quality Profile of Industries Rank Sectors with Best and Worst Credit Profiles, Show Expected Direction of Migration in Sector Credit Quality Stress Test Portfolios with Simulation and What-if Scenarios Inform Credit Risk Analysis and Sector Rotation Strategy A composite risk rating from lowest () to highest () is created for each sector, built up from 0 separate risk factors Top-Down Sector Benchmarks to Complement Traditional Bottom-Up Analysis Copyright 0 Global Insight, Inc.

15 WIS Sector Risk Ratings are Correlated with Non-Performing Loans in Asia Pacific SRR Correlation with the Number of Bond Defaults in Asia Pacific (excludes Japan). Historical Data Forecast 0 0 Current Year and Year Ahead Correlation Coefficient between WIS Composite Non- Financial Sector Risk Ratings and Default Count in Asia Pacific excl. Japan, 0-H H0 0 0 WIS Composite Risk Rating for Corporate Non-Financial Sector - LHS The Number of Bond Defaults - RHS Current Year Year Ahead Source: World Industry Service; Moody s Corporate Finance Copyright 0 Global Insight, Inc.

16 Factors Driving Changes in Risk Ratings for China I m p or o v e W o r s e n % Change in Risk Rating % 0% 0% 0% 0% % 0% -% Growth Risk Pricing Risk Profitability Risk Supply Risk -0% '0-0 '0-0 '0-0 '0-0 '0-0 '0-0 Copyright 0 Global Insight, Inc.

17 Risk of Capacity Overhang is Rising in Select Manufacturing Sectors in China Ratings in China for the Risk Factors of Capacity Overhang (SRR Rating from Lowest () to Highest () Risk) Fabricated Metal Products Motor Vehicles Electricals,Electronics & Computers Wood Products & Furniture The Sector Risk Ratings for the Capacity Overhang risk factor are shown for select industries Capacity Overhang measures whether investment spending by industries in new capacity is in line with the demand for the industry s output The risk ratings for Capacity Overhang have been rising in recent years and look to continue rising the next few years for these industries Copyright 0 Global Insight, Inc.

18 Which Industries Have The Highest (Worse) Composite Sector Risk Ratings in China? Sectors with Highest 0 Risk Rating in China (Rank implies Worst Risk Profile; Negative Change implies Improving Risk Profile) Risk Ranking in China Change in Risk Rating 0-0 Change in Risk Rating 0-0 World Ranking in Other Regions/Countries U.S. W. Europe North Asia ASEAN Region India. Machine Tools... Auto & Gas Retail Trade Synthetic Resins.0.. Special Industry Machinery Wood & Furniture Motor Vehicles & Parts Communications Semi-Conductors & Communic. Equip Scientific, Optical & Photo Eq.... Engines & Turbines Paper & Printing..0. Agricultural Machinery -..0 Copyright 0 Global Insight, Inc.

19 Anticipated Changes in Sector Credit Profiles in China 0 0 Summary of Composite Sector Risk Ratings in China: Current Ratings Level and Anticipated Change in the Ratings Over 0 0 Sector Risk Rating Level (Down) Direction of Change in Ratings (Across) Falling Risk Static Risk Rising Risk Low Risk Health Care Svs. Electrical Industrial Machinery; Aluminum & Non-Fer. Metals; Mining Of Metals & Minerals; Educational Svs.; Recreational & Cultural Agriculture, Construction & related Materials; Energy, Finance, Transport & Trade; Chemicals, Rubber & Textiles; Electronics, computers and related services Moderate Risk Semi-Conductors & Communication Equipment Retail Trade; Insurance; Commercial Research & Development Iron & Steel; Fabric. Metal X Mach.& Equip.; Paper & Printing; Restaurants & Hotels; Scientific, Optical & Photo Eq.; Railroad Equipment; Shipbuilding & Repairing; High Risk Communications; Motor Vehicles & Parts; Wood & Furniture; Auto & Gas Retail Trade; Synthetic Resins; Special Industry Machinery; Potential Recovery Yellow Flag Red Flag Copyright 0 Global Insight, Inc.

20 Sectors with Highest (Worse) Debt Ratings in China (GICS Sectors Ranking Based on Composite Debt Risk Score in 0) Sectors with Highest (Worse) Debt Risk Rating in China Ranked by Debt Risk Rating for 0. Scale: (Lowest to Highest) Ranking in China (GICS Codes) Change 0-0 Ranking in Other Regions/Countries World U.S. W. Europe. Capital Goods () Technology Hardware(_0) Food Products (0) Machinery (0) -.. Food, Beverage & Tobacco (0) 0.00 Copyright 0 Global Insight, Inc.

21 Compare Indicators Among the Fastest Growing Sectors in China (Ranked by Real Sales Growth, Other Columns Show Ranks for Forecast Growth in Nominal Sales and CapEx, Change in Sector Risk Ratings, and Change in Historical Debt Indicators) China s Sectors with The Strongest Forecast Growth in Sales Ranking in China Based on Sales CAGR 0-0 Share in GDP Profit Margin Industry Ranking for Other Factors & Indicators (Rank is Best) Growth in Gross Profits CAGR Growth in CapEx ('0-'0) Free Cash Flow (Growth) Ratio: Capex /Sales ROFIC Δ in Composite Risk Rating. Petroleum & Tar & Coal Product 0.0. Aluminum & Other Non-Ferrous Metals. 0. Paints, Varnishes & Lacquers 0.0. Paper & Printing 0.. Construction.. Electrical Apparatus Fabricated Metal excl. Mach. & Equip..0. Plastic Products Rubber Products 0.. Electricity, Gas & Water. 0. Electrical Appliances & Housewares 0.. Communications. ROFIC = Gross Profits/ -Yr. Cumulative CapEx Copyright 0 Global Insight, Inc.

22 Thank You Mark Killion, CFA Managing Director, World Industry Service

23 Industry Consequences of a Severe Recession Scenario in the United States Mark Killion, CFA Managing Director World Industry Service

24 What If the U.S. Economy Falls into a Severe Recession? Growth Rates of the U.S. Economy Under Baseline Forecast & Alternate Scenario. Growth Rates of the World Economy Under Baseline Forecast & Alternate Scenario. Annual Growth. 0. Annual Growth US GDP Baseline US GDP Severe Recession World GDP Baseline World GDP Scenario The scenario impacts in the U.S. are driven by a collapse in private sector domestic demand The trade balance improves as slow demand cuts imports and a weak dollar boosts exports The scenario impacts on the rest of world come from slower trade and higher oil prices Commodity producing countries are hit by an erosion in their terms of trade Copyright 0 Global Insight, Inc.

25 What Is the Impact of Severe U.S. Recession on China? Growth Rates of the China Economy Under Baseline Forecast & Alternate Scenario Annual Growth China s GDP real growth is lowered by close to 0 basis points by severe U.S. recession Exports are immediately hit by slower demand from U.S. and rest of the world, in addition to weakness in the US$ currency Biggest impacts are on manufacturing, transportation Business investments begin to slow in 0 with an even greater weakness in 0 China GDP Baseline China GDP "Severe U.S. Recession" Copyright 0 Global Insight, Inc.

26 Severe U.S. Recession Scenario: China Industry Impacts Impact on Real Industry Sales in China (Compound Growth in Inflation Adjusted Sales 0-0) Agriculture Mining Manufacturing Utilities Baseline.... Scenario..0.. Difference in Growth Rate Manufacturing is worst affected by this scenario: Textiles and Apparel Toys, Sporting Goods Wood, Furniture, Paper Industrial Chemicals Plastics and Rubber Computers and Electronics Construction Metals and Glass Wholesale & Retail, Restaurants & Hotels Transport, Storage & Communication Finance, Insurance, Real Estate & Business Services Personal & Social Services Transportation and Storage also hurt by slower international trade Construction and Finance weaker due to slower business investments Retail, Personal Services, Public Sector and Administration are the least affected in this scenario Copyright 0 Global Insight, Inc.

27 Thank You Mark Killion, CFA Managing Director, World Industry Service

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