MARKET. April Economy. Geopolitical overshadowed. the want a partition. winter appears. developments.

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For professional investors Asset Allocation Monthly

weather Eurozone economy improves Asset allocation: over

Esta ate Fixed Income/ duration* Glo obal Convertib ble

com +31 20 527 5126 Mar-14 Apr- -14 MARKET REVIEW

Crimea, overshadowed economic data in March.

been recognised by the international community or by the

peninsula into the Federation of Russia.

rather modest, and Vladimir Putin has stated that he

Even so, the situation has not yet stabilised.

economy was temporarily disrupted by the cold wave this

indicators reflecting a rebound in manufacturing

from continuing to taper its asset purchases and to

5% unemployment rate benchmark from its forward guidance.

1 For professional investors Asset Allocation Monthly April 2014 US data disappoint due to severe winter weather Eurozone economy improves Asset allocation: over emerging USD debt closed Multi-asse et Equities Real Esta ate Fixed Income/ duration* Glo obal Convertib ble Bonds Commoditi ies Joost van Leenders, CFA Chief Economist, Multi Asset Solutions Mar-14 Apr- -14 MARKET REVIEW Economy Geopolitical issues, including the events in Crimea, overshadowed economic data in March. The results of the 16 March referendum, which have not been recognised by the international community or by the Kiev authorities, were cited by Moscow in annexing the peninsula into the Federation of Russia. Sanctions imposed thus far by the US and Europe look rather modest, and Vladimir Putin has stated that he does not want a partition of Ukraine. Even so, the situation has not yet stabilised. On the economic front, the assumption that the US economy was temporarily disrupted by the cold wave this winter appears to have been confirmed by the release of indicators reflecting a rebound in manufacturing activity, which is also due to the normalisation of inventories. These developments did not keep the Federal Reservee from continuing to taper its asset purchases and to withdraw the 6. 5% unemployment rate benchmark from its forward guidance. In the euro zone, the recovery remains tentative as the year begins but is still on track. Purchasing manager (PMI) surveys point to an expansion in activity in the first quarter and, after two down years, employment stabilised in late Inflation slowed again, to 0.5% year-on-year in March, based on Eurostat s preliminary estimate, but the ECB doesn t look inclined to take radical measures any time soon, while

2 Asset Allocation Monthly April continuing to maintain some ambiguity on this subject. 1 After 0.2% growth in Japanese GDP in the fourth quarter, activity sped up, driven by increased consumer spending in the run-up to the VAT rate hike scheduled to take effect at the start of April. This hike is undermining consumer confidence, but the increase in output to meet demand is supporting business survey figures. In emerging economies, the slowdown in China has been a concern in recent weeks, although everything will probably be done to keep GDP growth from moving too far from the 7.5% target (after averaging 7.7% in 2013). Equity markets The first trading session in March featured a steep drop in equities, driven by the events in Crimea. This drop was retraced the very next day and since then risk appetite has tracked geopolitical trends, concerns over the Chinese economy and indications on Fed monetary policy. Volatility has peaked several times, in particular for European equities, which would appear to be more exposed to developments en Ukraine. The MSCI AC World index (in dollars) gained 0.2% on the month, as the late-month period was marked by a stronger performance by equities. The MSCI Emerging index (in dollars) rose by 2.9% vs. end- February, driven by a rally on Latin American markets, which more than offset the difficulties of European markets (in particular the Russian index during the first half of the month). The lack of visibility on most issues is giving investors pause and causing shares to perform erratically. While the result of the Crimean referendum was not very surprising, the positions of Russia and the western countries are not yet set in stone and it is hard to imagine the ultimate consequences of the MSCI World (ex EM) & MSCI EM 1100 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 MSCI World (lhs) MSCI EM (rhs) Source: Datastream, BNPP IP All data are from Bloomberg, Datastream or Factset, unless otherwise specified. sanctions announced thus far and the potential Russian backlash. The dip in industrial output and Chinese activity surveys had an impact. Some Fed talk deemed a little less accommodating on its monetary policy also caused some concern. And ECB officials continued to blow hot and cold regarding additional measures to ease monetary policy, while inflation remains very low in the euro zone. In the US, the S&P 500 and Dow Jones 30 ended up 0.7% and 0.8%, respectively. Euro zone markets ended just barely up (+0.4% in the case of the Eurostoxx 50) with wide geographical disparities: the DAX (-1.4%) was driven down by events in Eastern Europe; the CAC 40 was down only slightly (-0.4%); and Milan outperformed by far (+6.1%). In Tokyo, the broader Topix index fell by 0.7% against a backdrop of relative yen stability and doubts on future growth after the VAT rate hike that will kick in on 1 April. The Nikkei 225 index stabilised in March but fell by 9% in three months. Unless otherwise mentioned, all indices are in local currencies. Bond markets US government bonds went through a rather uneven ride, ending with a 7bp increase in the 10-year T-Note yield compared to the end of February, at 2.72%. In early March more solid than expected economic data (ISM manufacturing index and the jobs report) sent the yield up to 2.80%. It pulled back and then rose again on the Fed comments that were deemed somewhat muddled. At the FOMC meeting of 18 and 19 March, Janet Yellen stuck to a cautious diagnosis on the state of the job market but, at the same time, various factors are pointing to a first rate hike a little earlier than expected Ten-year government bond yield 0 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 US Germany Japan Source: Datastream, BNPP IP The 2-year yield thus moved back up to its high since September, at 0.45%. The end of the month was marked by a new pullback in long yields against a backdrop of mixed economic data (durable goods and the real-estate market) and

3 Asset Allocation Monthly April nuanced comments by several FOMC members. The yield on the 10-year German Bund traded in a tight range (1.55%- 1.65%), ending the month at 1.57%, vs. 1.62% at the end of February. In recent weeks it has tracked US yields. Meanwhile, the events in Ukraine have exacerbated the retreat into safe havens, thus sending the 10-year German yield to a low since July 2013 on several occasions during the month. And the Bundesbank President stated that the possibility of ECB assets purchases could not be ruled out, which had the effect of reinforcing expectations of a firm gesture, whereas comments after the 6 March Council of Governors meeting had fallen short of expectations. Peripheral bonds continued to outperform, albeit lesser so than in January and February. Regarding 10-year yields, Italian paper ended the month at 3.29% (-19bp) and Spanish yields at 3.23% (-28bp). There was no noteworthy change in the credit market compared to end-february, with a very slight narrowing in yield spreads between the US and Europe in both investment grade and high yield. INVESTMENT CLIMATE Equities struggled to find direction in March. Improving economic conditions in the US and the eurozone supported investor sentiment, but rising geopolitical tensions and a more hawkish Fed acted as drags. US bond yields rose, but low inflation held yields down in the eurozone. We are positively exposed to market risk, although we closed our over in European equities and our short euro position. We rotated our over in US real estate into European real estate. Crisis over Ukraine not resolved When this situation arose, we developed scenarios, ranging from a benign outcome even without sanctions to military conflict, and looked at which of our positions were most vulnerable. We concluded these were our over European versus US equities and our short duration in German Bunds. (We had already closed our over in emerging market debt.) When the crisis in Ukraine developed beyond our most benign outcome, we decided to close our over in European equities versus developed equities. We still believe there are fundamentally positive factors supporting this trade such as an improving economic outlook in the eurozone, favourable monetary policy, attractive valuations and the prospect of strong company earnings growth. US Federal Reserve and ECB surprise The Fed s FOMC policy meeting in March was the first led by Janet Yellen and produced an unsurprising media statement. The Fed continued tapering its asset purchases by USD 10 billion per policy meeting since it felt the recent economic slowdown had been due mainly to adverse weather. At this pace, the Fed will have wound down quantitative easing by October or December. It ditched its 6.5% threshold for the unemployment rate in favour of a broad range of indicators to judge the right stance of monetary policy. In this regard, it s back to normal for the Fed. But at the news conference, Yellen said the time between the end of quantitative easing and the start of rate hikes could be as short as six months. She stressed the labour market was weak, but improving. FOMC members expected rate hikes to come sooner and faster than previously thought. This drove up bond yields, but we think it is too soon to see monetary policy as a headwind for equities. In a speech at the end of March Yellen sounded more dovish. Eurozone economic sentiment (GDP-ed index, january 2000 =100) Core (GE, FR, NL, BG) Periphery (IT, SP, PT, GR) Source: Datastream, BNPP IP After the early March policy meeting, it seemed the ECB was done with easing. Several indicators pointed to improving growth. For example, the Economic Sentiment Index rose in March to its highest since Portugal, Italy and Spain are leading in terms of annual improvements. In the fourth quarter of last year, employment rose for the second straight quarter. This was the first back-to-back improvement since But overall, the gains are still marginal, inflation is very low and the euro was on its way to 1.40 USD. So when Bundesbank president Weidmann and the head of the Finnish central bank Liikanen talked about additional monetary easing, such as a negative rate for banks depositing excess reserves at the ECB

4 Asset Allocation Monthly April and even quantitative easing, their prime goal appeared to have been to talk down the euro. It worked: the euro depreciated. The ECB has opened the door to more policy action, although we don t think it will go as far as quantitative easing. Nevertheless, we see monetary policy overall as still positive for global equities. Recent changes in our asset allocation In our asset allocation, we remain positively exposed to risk. We are over global equities, European high yield and European real estate and short duration in German Bunds. In broad terms, economic conditions are improving in the US and Europe, inflation is low and monetary policy extremely stimulative. Valuations are stretched in cases such as US equities or European corporate bonds, but we don t expect this to drive the markets in the short term. We de-risked our model portfolio by closing our over in emerging market debt in February and in European equities in March. We have now closed our short euro position since this was moving against us. After US real estate did well, we rotated our over in US real estate into European real estate where we expect fundamentals to start improving.

5 Asset Allocation Monthly April Asset allocation 2 Multi-asset Equities Real Estate Fixed Income/ duration* Global Convertible Bonds Commodities Equities European large caps European small caps US large caps US small caps Japan Emerging markets Real estate European Real Estate US Real Estate Asian Real Estate Fixed income Euro Govies Euro Govies AAA Euro Short Dated Corporate bonds (EUR) Euro Inflation Linked High Yield (EUR) High Yield (USD) Emerging Bonds USD Emerging Bonds Local Ccy Foreign exchange AUD CAD CHF DKK EUR GBP HKD JPY NOK NZD SEK SGD USD EM FX Over: Neutral: Under: Increase: No change: Decrease: Summary outlook KEY Cautious Fed tapering and an improving outlook reduce the risk from the normalization of monetary policy in the US In particular, increases in short-term interest rates remain years away and the Fed is keen to prevent sudden increases in longer-term yields. This is not 1994 all over again. Europe remains vulnerable amid high debt and a lack of growth, despite the improvement in European economic data lately. Monetary policy can provide an anesthetic for markets, but the lack of growth is steadily undermining political consensus and democratic legitimacy. The EU crisis has gone from an acute to a chronic problem. With the ECB in the background systemic risk seems contained, but the intrinsic problem of unsustainable debt burdens has not been resolved and will repeatedly flare up again. There will be steady downward pressure on wages and prices until unemployment subsides. A clear consensus is building that 2014 will be a good year for global growth, especially in the developed world. However, the economic cycle is definitely not strong, as US fiscal authorities repeatedly create confusion and undermine confidence, while the lingering effect of higher private sector debt in China will not disappear quickly. 2 The tables reflect net positions versus the benchmark within the MAS strategy model portfolio. Views on a particular asset class should not be seen in isolation but in the context of the overall portfolio. * Duration risk is managed independently of the underlying fixed income allocation using government bond futures.

6 Asset Allocation Monthly April Equities Over Changed. We closed our over European equities versus US equities. This was our one position most vulnerable to geopolitical tensions between Ukraine and Russia and with these tensions increasing and the trade not performing as we had hoped, we unwound it. We remain positive on global equities and thus over since we see improving growth in the US and the eurozone, low inflation and stimulative monetary policy. Valuations look stretched in the US, but not so in Europe and emerging markets. But we do not expect valuations to drive equities from a tactical perspective for now. Small-cap equities: Over Unchanged. We are over US small caps versus large caps and neutral on European small caps. Valuations in US small caps may look stretched, but strength in consumer confidence and leading economic indicators and less fiscal drag point to an improving earnings outlook, in our view. Most importantly, we see a pick-up in mergers and acquisitions supporting US small caps in the coming months. Government bonds: Short duration Unchanged. A somewhat more hawkish Fed caused an uptick in US yields, but low inflation and dovish comments from ECB officials kept German yields low. Peripheral eurozone spreads have tightened further. Our short duration position in German Bunds is at risk from more stimulative measures by the ECB and safe haven flows due to developments in Ukraine, but we think yields are too low for an improving economy. Investment-grade corporate bonds: Neutral Unchanged. We think these bonds are expensive even though the economic outlook and credit conditions are neutral and there are fewer downgrades of investment-grade credit. So we prefer other fixed-income categories. High yield bonds Over Unchanged. We expect defaults in the European high-yield segment to remain generally low. Bonds could benefit from further ECB policy easing. We also like the coupon yield. The US Federal Reserve tapering its asset purchases may cause yields to rise, but since we implemented our over versus government bonds, which usually have a much longer duration, we believe a yield increase is hedged. Emerging market bonds Neutral Unchanged. Spreads on US dollar-denominated bonds continued to narrow after investor concerns about the outlook for emerging market assets due to the Fed s tapering faded. But we think these bonds could suffer from turmoil in Ukraine and renewed investor caution as well as emerging economies and currency reserves growing more slowly. Convertible bonds: Neutral Unchanged. A limited exposure is warranted to gain diversification benefits, but we currently do not see any opportunities justifying an over or under. Due to limited liquidity, we prefer active positions in corporate bonds or equities.

7 Asset Allocation Monthly April Real estate securities: Over Changed. US real estate did well pricing in improving fundamentals such as falling vacancy rates. But we don t see valuation as positive. We also think US real estate is vulnerable to higher bond yields. We are now over Europe where the fundamentals are about to start improving. Commodities Neutral Unchanged. Oil prices did not rise despite higher geopolitical tensions. The prime beneficiary has been gold. Base metals fell, with a particularly large drop in copper. Fundamentally, we think the outlook is mixed: improving economic growth in the US and Europe could boost demand, although slower growth in China is negative. But stronger demand may not suffice to absorb rising supply. The cost of holding this asset class in a low-yield environment is negative, in our view.

8 Asset Allocation Monthly April Disclaimer This material is issued and has been prepared by BNP Paribas Asset Management S.A.S. ( BNPP AM )* a member of BNP Paribas Investment Partners (BNPP IP) **. This material is produced for information purposes only and does not constitute: 1. An offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. Any investment advice. Opinions included in this material constitute the judgment of BNPP AM at the time specified and may be subject to change without notice. BNPP AM is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective client s investment portfolio. Given the economic and market risks, there can be no assurance that any investment strategy or strategies mentioned herein will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the Financial Instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the Financial Instruments may have a significant effect on the results portrayed in this material. The value of an investment account may decline as well as rise. Investors may not get back the amount they originally invested. The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes. * BNPP AM is an investment manager registered with the Autorité des marchés financiers in France under number 96-02, a simplified joint stock company with a capital of 64,931,168 euros with its registered office at 1, boulevard Haussmann Paris, France, RCS Paris ** BNP Paribas Investment Partners is the global brand name of the BNP Paribas group s asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your locally licensed Investment Partner.

Asset Allocation Monthly

For professional investors Asset Allocation Monthly October 2015 Joost van Leenders, CFA Chief Economist, Multi Asset Solutions joost.vanleenders@bnpparibas.com +31 20 527 5126 Uncertainty about US monetary