How do we define cash on the sidelines? Global M2 minus M1 Money Supply ($ Millions) US Money Supply European Money Supply Chinese Money Supply

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1 How do we define cash on the sidelines? Global M2 minus M1 Money Supply ($ Millions) US Money Supply European Money Supply Chinese Money Supply Source: Bloomberg, Credit Suisse M2-M1 basically equates to savings accounts, money market accounts, retail money market mutual funds, and COD s

2 U.S. corporate cash has risen Percent of current assets Percent 45 Q4 2012: 42% Q2 2008: 32% Source: Bloomberg, Milken Institute

3 Too many depositors, not enough lenders U.S. Commercial Bank Deposits and Loans ($ in Trillions) $10 $9 $8 $7 Deposits Loans $6 $5 $4 $3 Source: Federal Reserve

4 Monetary policy has driven real interest rates below 0% Global real interest rate (%) Note: 3-month interest rates; China, Canada, France, Germany, Italy, Japan, United Kingdom, United States; Weighted by 2012 GDP. Source: DataStream, International Monetary Fund, Milken Institute.

5 Is there evidence that the Great Rotation has begun? Source: ICI, Credit Suisse

6 Personal savings rates back to pre-crisis levels Personal Savings Rate Percent (%) Source: Bloomberg, Credit Suisse

7 Panel Goals 1 Define and quantify the amount of Cash that is truly on the sidelines 2 Understand the pressures to invest (or not to) and the implications of both 3 Consider ways to spur re-investment (eg products, policy, and/or strategy)

8 Mustafa Sagun slides

9 Unleashing Cash On The Sidelines Equities will likely provide the highest absolute returns, but will be volatile Effective volatility management will be key Source: Ned Davis Research.

10 Win By Not Losing Lower volatility, quality growth delivers more reliable cumulative returns Source: Principal Global Investors.

11 Fundamental Nature of Volatility Volatility is Related to Changing Growth Expectations Recent success fuels investor enthusiasm Extrapolation leads to excessive optimism for most 25.0% Trailing 3 year Sales Growth Trailing 3yr EPS Growth vs Forward 1yr EPS Growth 20.0% 30.0% 25.0% 15.0% 20.0% 10.0% 5.0% 15.0% 10.0% 5.0% Trailing Forward 0.0% 5th 25th Median 75th 95th 0.0% 5th 25th Median 75th 95th Low Volatility High Low Volatility High Valuations bid up based on high expectations Resulting in low and volatile outcomes for most As of December 31, 2012 Source: Principal Global Equities 5 = lowest volatility stocks, 100 highest volatility stocks Universe is MSCI AC World Index Data represents Jan 1990 Dec % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 5th Forward Earnings/ Price 25th Median 75th 95th Low Volatility High Low Volatility High 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 5th Realized ROE & ROE Variability 25th Median 75th 95th ROE STD

12 Active Volatility Management is Key Price of volatility changes over time, impacting returns

13 Reference Slides

14 Expansion of balance sheets of major central banks Central bank total assets (% of GDP) BoJ ECB BoE Fed Q Q Q Q Q Q Q Source: Bloomberg.

15 Public sector significantly out-borrowing the private sector Total Private and Public Borrowing, $bn 6000 Private Sector 5000 Public Sector 4000 Total '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Sources: Federal Reserve, Credit Suisse

16 Challenges facing banks under Basel III Recalibrating to Basel III Current Shortfalls* Under B3 16% 14% 12% 10% 8% 6% 4% 2% 0% 8% Tier 2 4.0% Hybrid T1 2.0% CET 1 2.0% Basel I & II 15.5% CET 1 2.5% CET 1 2.5% CET 1 2.5% Tier 2 2.0% HT1 1.5% CET 1 4.5% Basel III Surcharge for Global SiFI Countercyclical Buffer Capital Conserv. Buffer B3 Minimum CET1 $225bn Balance Sheet (RWA) Funding ( NSFR ) $2.4tn Source: The Quantitative Impact Study Group of the Basel Committee on Banking Supervision, June 2012; Credit Suisse * As calculated by the Basel Committee for the ~200 banks included in their study. CS estimates that this study accounts for 40-60% of global banking system

17 What is safe? Gold JPY-USD (Inverse Convention) AAPL Source: Bloomberg, Credit Suisse

18 What are the implications of shifting demographics? Source: Credit Suisse Economic Research

19 Increase in corporate cash balances Selected major countries Cash and near cash items, percent of GDP Q1 2013* Source: Bloomberg Note: * 2012 GDP data used

20 Increase in cash balances among the top U.S. corporations US$ billions +133B B +47B +43B +29B +29B +7B +19B +13B +8B 0 Source: Bloomberg Note: * Q data. ** 2004 data for Google, as it did not IPO until then

21 Financial sponsors still have cash on the sidelines but less than at the peak of the crisis Private Equity Dry Powder, $ billions $600 $500 $ $ $ $100 $ Source: Prequin

22 Primary dealer holdings of short-term securities have declined Primary dealer positions of coupon treasuries, 3 years or less, US$ billions Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Source: Bloomberg, Milken Institute, March 2013

23 The effects of Quantitative Easing or flight to safety? Decline in the government bond yields in major advanced countries 10-year government bond yield (%) 6 5 Germany UK US Japan Source: Bloomberg.

24 Yields and Spreads for High Yield and Investment Grade Corporates at or near all-time lows High Yield & Investment Grade Yields High Yield vs Investment Grade Spreads 25.00% 2000 bp 1800 bp 20.00% 1600 bp 1400 bp 15.00% 1200 bp 1000 bp 10.00% 800 bp 600 bp 5.00% 400 bp 200 bp 0.00% 1/6/2000 1/6/2003 1/6/2006 1/6/2009 1/6/ bp 1/6/2000 1/6/2003 1/6/2006 1/6/2009 1/6/2012 HY IG HY IG Source: Credit Suisse High Yield and LUCI Indices

25 The growth of alternative strategies when cash is not an option U.S. public pension funds U.S. corporate pension funds 100% 90% 4.9% 5.9% 9.6% 7.3% 19.4% 100% 90% 8.3% 7.2% 10.4% 6.9% 17.3% 80% 70% 60% 49.8% 34.2% 28.7% 26.7% 80% 70% 60% 33.3% 27.2% 28.0% 37.1% 50% 50% 40% 40% 30% 20% 38.0% 57.5% 60.1% 52.2% 30% 20% 51.5% 63.5% 59.9% 43.6% 10% 10% 0% % Equity Fixed income Cash Alternatives Equity Fixed income Cash Alternatives Source: Credit Suisse

26 Monthly share buybacks since 2009 S&P 500 ($ bln) Source: Bloomberg, Milken Institute, March 2013.

27 U.S. corporate bond issuance US$ trillions High yield Investment grade Source: SIFMA.

28 Leverage has fallen (S&P 500 Companies) Net debt-to-ebitda Source: Bloomberg, January 2013.

29 S&P 500 volatility at pre-crisis levels Chicago Board Options SPX Exchange Volatiilty Index (VIX) Pre-crisis average, 2004 to June 2007: Source: Bloomberg

30 US Liquid Assets