RISE OF BRIC POST-2008

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5 RISE OF BRIC POST-2008 Internet and fall of Berlin Wall accelerated globalization trend. Multinational firms have little national loyalty loyalty, divergence between U U.S. S economy and corporate earnings. IIn October O t b 2003, 2003 Dominic D i i Wil Wilson and d Roopa R P Purushothaman h th off Goldman G ld Sachs wrote a paper that shook international finance circles titled: Dreaming With BRICs: The Path to BRIC- an acronym for Brazil, Russia, India and China- are the four largest emerging market nations in the world. According to the paper, BRIC economies will overtake G6 countries and challenge the U.S. as the largest economic power in the world. But only China has recovered from the Global Financial Crisis.

6 BRIC REPORT FORECAST 2005 VS US 25% Brazil 2% US 44% China 33% China India Russia 7% 2% 2%France 6% Germany 8% Italy 5% UK 7% Brazil 4% Japan 17% UK 3% Japan 5% Italy Germany 1% France 3% Russia 2% 4% India 20%

7 2012 BRIC GDP Growth China 7-8% India 5-6% Russia 3% Brazil 2-3% Inflation rate is over 5% in BRIC nations

8 China ss Post 2008 Growth China Reflate asset values via money creation creation, $600 Billion stimulus spending grew to $2 Trillion Chi money supply China s l grew 3 titimes as ffastt the th U.S. US purchasing gp power in 5 yyears, yyet Yuan lost 60% p currency rose 10% vs. the dollar, overvalued Real estate estate, investment grade wine wine, tea and jade all up huge: 150% to 1000% in past 5 years Chi has China h more millionaires illi i th than th the U U.S. S

9 C G = HIGHER G C S CHINA BUYING PRICES Prices 2/08 Today Change Beijing Condo Gold Oil LA House $1M $920 $90 $1M $2.5M $1,650 $88 $0.85M +150% +75% -2% -15% Phoenix houses and apartments? Property Wars style. Buy what China buys

10 Aging Population in Developed Economies Population in developed countries is aging: The percentage of people over 60 years-old is increasing rapidly in Europe, Japan and the U.S. Currently there are about 5 workers for every retiree in the U S system U.S. system. As baby boomers retire retire, by , the ratio will drop to 3 workers supporting every retiree - not a recipe for economic growth or bullish stock market. Number of Americans 65 & older increasing rapidly This happened in Japan between 1990 and The Japanese stock market was down 75% during this time.

11 China Demographic Profile: 850 million people under 45 (65%of total)

12 Record low interest rates and rising taxes force retirees to invest for higher cash returns 70 million baby boomers entering retirement age between 2012 and 2029 Wealthiest demographic group in world history But with rising inflation, low interest rates, and rising healthcare cost, retirement investing becomes more challenging than ever. Retirement Wave

13 U.S. QE 3&4: Fed buys $40 billion of agency (government-guaranteed) mortgage securities plus $45 billion of Treasuries per month = Targeting real estate Japan: Deflation to inflation target 2%, unlimited government asset p g purchases. Yen down, Nikkei up p 10% Europe: ECB buying Spanish and Italian sovereign bonds directly. directly Global Reflation

14 Inflation risk increases, investors need to invest and beat inflation. Prices of financial assets and real estate will rise more than th price i off consumer goods d b because mostt $ is concentrated in the top 5% - people who tend invest more $ than theyy spend. p Yet tightening lending standard and aging demographics prevent new real estate bubble from forming. forming Reflation and Inflation

15 Near zero interest rate forces retirees to invest in Near-zero high dividend yielding instruments. Record fund flow into high yielding MLPs and mortgage REITs in 2011 and 2012 But high dividend payout is unsustainable in the long run unless the underlying fundamentals sales,earnings, profit margins - are strong High income is the new growth

16 Although they pay high dividend yields of 8% or higher, not all mortgage REITs and MLPs are investable. investable Avoid mortgage REITs that invest in agency debt, ie Annaly, y Hatteras, because Fed buying y g via QE3 is driving down agency debt yields. Avoid MLPs based on energy. Avoid dividend traps

17 er makes non agenc and Real estate market reco recovery non-agency hybrid mortgage REITs more desirable Two Harbors Investment ((TWO)) invests in nonagency debt, agency debt and residential units. Recently spun off residential properties business to Silver Bay Realty (SBY), (SBY) 17% annualized dividend yield, 11% after spin-off Changyou (CYOU) is a leading online gaming company in China, cheap valuation PE <6, paid $3.80 cash dividend (18%) in 2012, more this year Invest in high yielding stocks with China and/or reflation exposure

18 Investors need a combination of growth, g, inflation hedge and income in a balanced portfolio ARCA Global Income Program invests in high income generating stocks and bonds with ith capital it l growth th potential t ti l 15% average annual return in past 4 years, 15% = 8% dividend + 7% appreciation Our 15% Solution

19 Please fill out the card and return to me Gong Shi Fat Tsai! Thank You