Carney spells out the UK s prospects and the pound falls. Commodities Forecasts for a bumper harvest hits crop prices GENERAL COMMENT

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1 Butterfield Asset Management In vestm ent Views August 2013 Equities Currency Bonds Recovery from the spring correction Carney spells out the UK s prospects and the pound falls Yields consolidate Commodities Forecasts for a bumper harvest hits crop prices CALM BEFORE THE STORM? GENERAL COMMENT As investors head off on holiday the summer is often a period of calm, a pattern that held in July. Yet fewer market participants also results in reduced liquidity, so the potential for increased short-term volatility is ever-present. Sell in May and go away is a well-known trading adage based on the historical underperformance of stocks in the May-October period based partly on this lower liquidity. So far this summer, equity markets and credit spreads have regained much of their second quarter losses. The backdrop driving the recent improvements is the U.S. economy, aided by a significant reduction of noise from Europe and very preliminary signs of the green shoots of recovery. With the equity market having performed so well and bond markets remaining volatile, investors now face a dilemma. If markets trade sideways or rise, investing funds in ultra-safe cash or T-bills with very low yields can be a significant drag on portfolios. Yet reaching for yield at a time when valuations everywhere are beginning to look stretched is also very risky. What is an investor to do? Well, recent weakness in the US government bond market has been at least partially driven by improvements in the real economy, giving risk assets a level of genuine underlying support. Equity valuations also still have some room to increase - provided the US economy continues gain momentum, Europe emerges from the doldrums and the reduction in global systemic risk continues. Over the long-term this is bound to happen, so despite gains for the rest of 2013 looking a little more muted, on a prudent 3-5 year view equities remain our asset class of choice. As alluded to, there is certainly no guarantee of smooth sailing in the remainder of this year. Clouds on the horizon include the September German elections, yet more stimulus for Greece and Portugal, the U.S debt ceiling, renewed turmoil in Egypt, and Obama s choice as to who will lead the Federal Reserve when Bernanke steps down next year. Whoever that is will face the unenviable fact that U.S. Treasury rates are rising. In the long term, as monetary policy normalizes we can look forward to the Fixed Income market resuming its natural place as a protector of wealth. Until then, equities look like the asset class of choice, at least on a relative basis. This has been supporting net inflows of late. EQUITIES Developed equity markets staged a strong recovery in July, fully retracing June s declines. In the UK, the FTSE 100 returned just under 7% following the 5% fall in June. In the US, the S&P 500 index breached all-time highs, peaking mid-month just four points shy of 1,700, before ending the month at 1,686, up 5% for the month and 20% for the year. Returns in Europe were also strong: the Spanish THE BAHAMAS BERMUDA CAYMAN ISLANDS GUERNSEY SWITZERLAND UNITED KINGDOM

2 market, buoyed by tentative signs of recovery returned 10% whilst the German DAX gained 4%. The MSCI World returned 5% bringing the total return so far this year to 15%. Emerging markets continued to lag, with the MSCI Emerging index returning just 1% over the month, still down 10% year-to-date. The Topix finished the month flat but is up 33% this year. At a sector level the price rise across developed markets was particularly broad based. No single industry group had a negative return and the range between the worst performing sector (Telecommunication Services at 3%) and best (Financials at 6%) was modest. The Cyclicals sector performed marginally better than defensives. We remain positive on the long-term outlook for equity markets. Developed economies are quietly improving, particularly in the US where unemployment continues its downward march and in the UK where second quarter GDP grew by 0.6%. Yet we are mindful that valuations have also ticked up, with the MSCI World index now on 14 times forward earnings, marginally above the 10 year average. Corporate earnings have largely been positive, with 67% of companies in the S&P 500 index so far exceeding expectations compared to the long term average of 63%, although much of this has been driven by financials. Emerging markets have suffered as hot money flows out of the region but their long-term structural drivers (rising incomes, positive demographics, industrialization) remain in tact. CURRENCIES The US dollar weakened as the Fed Chairman calmed speculation of an aggressive tightening of US monetary policy. The key focus was on the idea that a reduction of the level of quantitative easing, which consensus generally believes will begin in September, was separate from a hike in the federal funds rate and there could be considerable time between the first instances of each. However, the market continues to focus intently on statements from the Fed in order to determine the direction of the dollar. Should growth prove stronger than expected the dollar will undoubtedly strengthen. Sterling fell by 2% against the Euro during July, despite positive UK GDP figures, underlining the magnitude of the task facing newly instated Bank of England governor Mark Carney. The expectation is that the Bank of England will reaffirm its policy of low interest rates for the foreseeable future in line with its new approach of giving more explicit forward guidance. Throughout the month, the Yen traded around the Y100 level as Shinzo Abe s three-arrow approach continues. However, toward the end of the month a decline in industrial production caused the Yen to weaken on speculation that the Bank of Japan may have to introduce further expansionary measures to stimulate the economy. The Australian dollar continued its decline, retreating another 1% over the month. This was due to comments from Glenn Stevens, Governor of the Reserve Bank of Australia, that although the current strategy is working additional easing may be required via supplementary rate cuts. It has been the worst performer amongst its 16 major peers over the last 3 months, dropping by almost 13% against the US dollar. Given the rosier outlook of the US relative to Australia, this trend is likely to continue. BONDS Bond markets stabilised during the month following the sharp increase in yields seen in May and June. The speed and extent of the sell off probably surprised US central bankers, prompting the Federal Reserve s move to calm bond investors by making it clear that any slowing of QE remains dependent upon the strength of the US economy.

3 UK CPI Inflation rose from 2.7% to 2.9% in June largely driven by price increases in fuel and clothing, although the increase was slightly below market expectations. Consensus expects it to peak at around 3% before falling back to around 2% by the end of this year. Over the last few months, market implied inflation expectations have fallen and this has seen UK 10 year real yields rise to % from a low of -1.6% in April. This means that bonds offer better value than they did but with real yields still negative we do not see sufficient value to alter our short duration position. June saw the largest ever month of redemptions from bond funds in the UK, with 624m being withdrawn from funds in the IMA fixed interest sector. Given the significant flows of money into bond funds over last few years this potential reversal poses a significant risk to bond markets and further supports our defensive positioning in both duration and credit. COMMODITIES Commodity markets have enjoyed a positive start to the second half of 2013, which is evidenced by the 3.02% gain in the Thompson Reuters / Jefferies CRB Index during July. Improved risk appetite for equities in developed economies and a generally weaker US Dollar led the index to its first positive return since March. Out of the underlying constituents, precious metals showed some of the strongest returns. The energy sector also performed well with rallies in both crude oils, especially West Texas Intermediate (WTI) crude, which helped offset a third monthly drop in natural gas. The strong rally in WTI crude (8.77%) in response to a sharp reduction of US inventory levels indicates that demand has increased over the month. To support sentiment, the preliminary Purchasing Manager s Index (PMI) data from the US and Europe reflects that manufacturing is gathering momentum which should benefit crude prices. In addition, prices have been supported by concerns that protests in Egypt may result in a conflict spill over into the Middle East which could, in turn, create supply disruptions. Whilst news flow out of China has predominantly been negative during July the price of copper increased a modest 1.9% to $6,880 a metric ton. Momentum was restricted by a lower-than-expected Chinese HSBC flash PMI figure but this contrasted with a more positive official manufacturing PMI. The difference between the official survey and the flash PMI is that the former gives a much larger weight to firms in heavy industry. This may indicate that investment spending is recovering which would be supportive for copper prices. Precious metals posted a positive return during July with gold and silver rising for the first time since March and January respectively. Continued strong physical demand from China and a slowdown in the selling of exchange-traded products lent support over the month. In addition, the Fed chairman s comments also benefitted gold in the short term. Agricultural commodities fared particularly badly during July, with corn declining by more than 26% as concerns about supply shortages faded. According to the US Department of Agriculture, approximately 70% of the crop in the main US growing areas was in good or excellent condition. Optimal growing conditions across the Northern Hemisphere have raised expectations for a bumper harvest of not only corn, but other key crops such as soybeans and wheat over the coming months. As a result the price of corn has fallen to its lowest level in 33 months and currently trades almost 9% below the past five years' average.

4 POLICY SUMMARY CHART The chart set out below is a summary of our current policy stance on the various equity and bond markets which we monitor. It is not intended as anything other than a guide on where we stand and we will change the content as our views alter. Cash exposure is a residual and will tend to be high when negatives outweigh positives and vice versa. REGULATION Past performance is not indicative of future performance. This document is for information purposes only and does not constitute an offer or solicitation of products or services where prohibited by Law. The information contained herein is not intended as specific investment, financial, accounting, legal or tax advice and the Bank will accept no responsibility for any reliance on the information contained herein. More comprehensive information is available upon request. Butterfield Asset Management Limited is licensed to conduct investment business by the Bermuda Monetary Authority. Butterfield Bank (Cayman) Limited is licensed to conduct securities investment business by the Cayman Islands Monetary Authority. Butterfield Bank (Guernsey) Limited is licensed and regulated by the Guernsey Financial Services Commission under The Banking Supervision (Bailiwick of Guernsey) Law, 1994, as amended, and The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. Company registration No Butterfield Bank (UK) Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: 99 Gresham Street, London EC2V 7NG. Registered in England No Butterfield Private Bank is the name used by Butterfield Bank (UK) Limited for private banking and wealth management services. Telephone calls are recorded for security purposes.

5 MARKET PERFORMANCE All performance numbers show % changes except for bond yields which show yield changes. Now - 1 mth - 3 mth - 12 mth CURRENCIES (VS USD) GBP CHF JPY EUR BOND YIELDS (10 yr) UK US Germany Japan EQUITIES UK. FTSE 100 (GBP) 6, US. Dow Jones (USD) 15, Japan. Nikkei Dow (JPY) 13, China. Shanghai A (CNY) 2, MSCI Pac ex Jap (USD) 1, MSCI Eur ex UK (Local) MSCI Lat Am Free (USD) 3, MSCI World (USD) 1, MSCI World (GBP) COMMODITIES Oil (WTI) Gold Source: Bloomberg as at 31 st July 2013