What Will Happen When Fed Finally Tapers? Weekly Investment Update 19 th November 2013

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1 What Will Happen When Fed Finally Tapers? Weekly Investment Update 19 th November 2013

2 Advanced Economies Crawl Back As EM Slow Down Global Real GDP (%) PMI Aggregates 2 Source Dallas Fed, Morgan Stanley

3 DM Central Banks Continue To Supply Global Liquidity Excess Liquidity Monetary Stance Across Regions 3 Source Morgan Stanley

4 Central Bank Balance Sheet Expansion 4 Source McKinsey

5 Consumer Spending & Private Investment Driving GDP Contributions To Real GDP 5 Source Haver Analytics

6 What Matters: Home Prices, Unemployment & Rates US Home Prices US Unemployment 6 Source US Federal Housing Finance Agency, Nomura

7 Debt Is Still Very Affordable In US Mortgage Payments Household Debt Service Ratio (% Disp Income) 7 Source Quartz, Bloomberg

8 Yellen: No Equities/RE Bubble & No Taper Yet Senate Committee US Inflation Rates Below Target No set time for tapering, yet it could be costly to fail to provide accommodation to markets QE can t continue indefinitely: the longer we have it the greater the risk for financial stability Policy to remain flexible, data-dependent & with accommodative bias 8

9 What After The Fed Starts To Taper? Higher Volatility In Asset Markets Treasuries Under Stress Again Higher Cost Of Public Debt Higher Consumer Debt Service Ratios Further Outflows From EM Eurozone On a Crosswind Corporates Will Need To Boost Capital Efficiency 9

10 Tapering = Higher Volatility In Asset Markets VIX vs Monetary Policy 10 Source BNP

11 Tapering Higher Cost Of Household Debt Increase In Household Debt Payments 11 Source McKinsey

12 Tapering Further EM Outflow Pressure 12 Source McKinsey

13 The Fragile Eurozone Recovery Eurozone Real GDP Growth Current vs Average Recovery 13 Source Bloomberg, Pictet

14 Eurozone Inflation Has Been Falling Since 2011 Eurozone Inflation Annual Inflation Rate By Country 14 Source M&G, Pictet

15 Deflation Would Lift EuroZone Debt To Danger Area Eurozone Debt/GDP Ratio 15 Source Bloomberg

16 China Hints At Further Reforms As Growth Slows China GDP Growth GDP Growth & Key Reforms 16 Source Pictet

17 Income Generating Assets In An Uncertain World Our Scenario US: Soft Yet Positive Growth Euro: Recession Over, Yet Headwinds UK: Moderate Growth China: Soft Landing EM: Cyclical Slowdown Key Risks QE Unwinding & Fiscal Drag Japanification of Europe China Hard Landing Middle East Conflict POSITIVE OUTLOOK FOR INCOME GENERATING ASSETS FIXED INCOME Strong Balance Sheets & Lower Default Rates G-SIFI Financials Be Selective On High Yield & EM Gold as Long Term QE & Inflation Hedge EQUITIES Defensive Earnings & Low Leverage High, Stable & Growing Dividend US over Europe Be Selective On EM Global Macro, CTA, Liquid L/S Our Positioning Note: Unwinding zero rates likely to cause spikes in volatility

18 Summary Of Key Messages Better global growth next year, with leadership migrating from EM to DM Central Banks supportive despite better growth prospects Japanification a risk for Eurozone ECB slow to respond to deflationary threat Banking union proceeding at snail s pace Fiscal policy still too restrictive EM to slow down further as economies transition to lower gear & carry trade unwinds further 18

19 CBG Composite Asset Class Breakdown Tactical Views CBG Composite Asset Breakdown Fixed Income Alternatives Equities Cash 5% 10% 40% 45% 19

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