Global Markets & Investor Flows Risks and Opportunities

Information Security Identification: Confidential

Global Markets & Investor FlowsRisks and Opportunities

May 2012Global Markets

Samarjit Shankar

Managing Director

BNY Mellon

[email protected] BNY Mellon iFlowsm Research

Information Security Identification: Confidential2

Global economy remains delicately balanced

Economic recovery has been multi-speed and uneven

Subdued global growth estimates by IMF and World Bank

Advanced economies facing short-term pain amid fiscal consolidation, financial sector repair, subdued growth and still high unemployment

Extraordinary stimulus, both monetary and fiscal, likely to linger

Central banks remain in cautious mode, maintaining unconventional stimulus measures (more QE?)

Emerging economies, the key locomotives of growth, feeling the pain now

Emerging market central banks volte-face – once grappling with inflation & capital inflows, saw capital outflows toward end-2011, fresh buying in 2012

Global imbalances: re-balancing acts required; Investor bi-polaritiesCore Inflation

Real GDP Growth

Investor Bi-Polarities

Risk appetiteRisk aversion

DeflationInflation

Glass half-fullGlass half-empty

Developed MarketsEmerging markets Growth

RecessionBonds

Equities

QE 3QE exit

DovesHawks

Relapse v. rɪˈlæps;n. rɪˈlæps, ri læps

–verb (used without object) -> to fall back into illness after convalescence or apparent recovery. –noun -> a return of a disease or illness after partial recovery from it.

Eu ro Zone

Un i ted Kingdom

J apan

Un i ted Sta tes

Swi tz e rland

Canada

Ch ina , To ta l , g rowth ra te , Chg Y/Y

Ind ia , Ov e ra l l , To ta l a t fac to r c os t, INR, 2004 -2005 p ric es

Sourc e : Reu te rs Ec oWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

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Uni ted States c ons umer pric es , al l i tems les s food and energy

Canada c ons umer pric es , al l i tems ex c luding food and energy

Switz erland c ons umer pric es , Core inflation

Euro Zone c ons umer pric es , ex c luding energy, food, alc ohol and tobac c o

J apan c ons umer Pric es , ex c luding fres h food

Uni ted Kingdom c ons umer pric es , ex c luding energy, food, alc ohol and tobac c o

Sourc e: Reuters Ec oWin

Apr J un Aug Oc t Dec Feb Apr J un Aug Oc t Dec Feb Apr J un Aug Oc t Dec Feb

09 10 11 12

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ent

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-1

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Bond Markets: fiscal stimuli, QE, but sovereign debt concerns abound Credit markets have stabilized but not fluid yet; Bank lending remains relatively tight; Eurozone liquidity issues

Fiscal policies weigh stimulus vs austerity needs amid persistent concerns about sovereign debt sustainability

Developed equity markets have been recovering gradually, but recent setbacks amid growth concerns

Emerging equity markets have bounced stronger, but relapse has led to investors becoming very selective

Equity Markets: wealth destruction, recovery, but been susceptible again

% move since 1 July 2008: DAX, SPX, NKY % MSCI move since 1 July 2008: LatAm, Asia, E.Europe

Bond 2yr-10yr yield spreadsTED spread: 3m LIBOR less 3m T-Bill yields 5yr CDS sovereign spreads

Un i te d Ki n g d o m, GBP Eu ro Zo n e , EUR Un i te d Sta te s , USD Ca n a d a , CAD J a p a n , J PY

So u rc e : Re u te rs Ec o W i n

J a n

0 7

Ap r J u l Oc t J a n

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0 9


1 0


11


1 2

Ap r

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2 Y

r. Y

ield

in

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-0 .5

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3 .5


About BNY Mellon’s iFlow – total assets monitored worth ~ $33 trillion

Global Custody: largest in the world at $25.8 trillion drawn from heritage Mellon & BNY Platforms

Market Penetration: Flows represent about 15-27% of tradable securities in most markets worldwide

Objective - based on tangible and concrete data, not surveys

Timely - investor flows: on a trade-date basis, updated daily;

- investor positions: timely updates of monthly shifts (equity, bond and currency portfolios)

Level of Detail - adds invaluable insight into market activity with unparalleled granularity

Comprehensive and Relevant Multi-Asset Perspective - encompassing Equity, Fixed Income & FX markets activity globally

History – Flows data extend back to 15-21 years’ history (Equities/Bonds to 1996, FX to 1990)

Performance & Risk Analytics – Mellon Analytical Solutions (formerly Russell/Mellon) & BNY Global Risk Services

• Client relationships represent $8.9 trillion in assets under measurement

• Investor positions vs benchmark (e.g. MSCI EAFE, BarCap Global Agg etc); What are my competitors/peers doing? IMF GFSR: Correlation between BNY Mellon iFlow and BoP Flows

BNY MELLON Equity Flows vs Japan MOF Flowsindexed data, settlement basis for MOF data

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(LHS)

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MOF DATA


iFlow: where is the money going? iFlow featured in the International Monetary Fund’s Global Financial Stability Report, Oct 2010

For example, net equity flows to Brazil reported by BNY Mellon represent about 10 percent of those recorded in the balance of payments, with a correlation coefficient of 84%. Similarly, net bond flows to Korea represent about 5 percent of those recorded in the balance of payments, with a correlation coefficient of 61%.


Debt inflows were particularly strong, with economies that offered higher levels of risk-adjusted local government bond yields (prior to the surge in capital flows) attracting greater foreign inflows (Figure 1.33).

iFlow: strong bond & equity inflows in emerging markets iFlow featured in the International Monetary Fund’s Global Financial Stability Report, Apr 2011

The response of emerging market firms to equity and debt inflows has been strong. Equity issuance rose to the highest levels ever in Brazil and China, and although in India and Korea such issuance remained below pre-global crisis highs, it surpassed pre-Asian crisis levels.33,34 Similarly, the supply of emerging market external corporate bonds in 2010 surpassed historical records in aggregate, led by Latin American corporate bonds.35 Figure 1.36 shows that large equity issuance appears in some cases to have mitigated equity appreciation stemming from strong foreign portfolio inflows. Brazilian firms issued actively through IPOs, absorbing large inflows without stretching valuations. Some Asian corporate markets have displayed a combination of price & supply responses.


iFlow: peripheral Eurozone debt firmly out of favoriFlow featured in the International Monetary Fund’s Global Financial Stability Report, Apr 2012


iFlow: What are our investor flow data telling us? • Bond yields have diverged within the Eurozone – relative weakness in the periphery has led to a renewed spike in yields

• Yield differentials between Germany and especially Greece, Italy, Portugal, Spain and Ireland have widened again

• Lack of a coherent solution, policy discord, severe austerity – Spain: investor focus now; Greece: re-escalation of crisis; Italy: contagion worries; Portugal: persistent funding concerns

• German bunds in favor as investors seek relative safety and liquidity, but safe-haven status starting to wane?


US Trade-Weighted Major Currency Index

ISM Mfg & Non-Mfg; Consumer Confidence

Home Sales: Existing and New

Non-farm payrolls & Unemployment Rate

10-year US TIPS-nominal Spread

USD total speculative positions (CFTC data) and DXY

Fed Chairman Ben Bernanke stays the course on accommodative stance - “I think it’s a little premature to declare victory”

Challenging mix of a frustrating recovery and inflation – will price pressures prove transitory?

After a secular USD downtrend, a strong dollar trend emerged since in 2008H2, faded in 2009, re-emerged in 2010; USD down and up in 2011

Recent data on manufacturing, employment, consumer confidence – monetary accommodation to continue => but risk-off bouts buoy USD

FOMC to keep rates low; Operation Twist; Will QE3 entail more monetary easing?

Currency Markets: US Dollar at a crossroads

Consumer Surveys, Conference Board, Consumer confidence, 35-54, 1985=100

Business Surveys, ISM Manufacturing, PMI total

Business Surveys, ISM Non-manufacturing, Business activity

Source: Reuters EcoWin

May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb

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US ex is ting home s a les (lhs ) US new home s a les (rhs )

Sourc e : Reu te rs Ec oWin

Apr J u l Oc t J an Apr J u l Oc t J an Apr J u l Oc t J an Apr J u l Oc t J an Apr J u l Oc t J an

07 08 09 10 11 12

Perc

ent

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10

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Perc

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U.S. unemploy ment rate (rhs ) U.S. non-farm pay ro l l 3-mth mov ing av erage of m/m c hange (lhs )

Sourc e: Reuters Ec oWin

00 01 02 03 04 05 06 07 08 09 10 11 12

Perc

ent

3.5

4.0

4.5

5.0

5.5

6.0

6.5

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9.5

10.0

10.5

thou

sand

s

-800

-700

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Un i te d Sta te s T ra d e W e i g h te d Ex c h a n g e In d e x Ma j o r Cu rre n c i e s

Source: Reut ers EcoWin

0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 11 1 2

Index

6 5

7 0

7 5

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8 5

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9 5

1 0 0

1 0 5


iFlow Insights: Global Capital Flows and Investor Activity• US Treasuries still sought; Cross-border investors prefer relative safety and liquidity • US equities have been favored especially by cross-border investors, supporting benchmark indices• USD buoyed by risk aversion, though Fed’s continuing monetary accommodation remains a weight

VIX (CBOE) Vol Index = pay for insurance against equity losses

2011-12: VIX peaked at 29.40 just after Japan’s quake/ tsunami in Q1, fell below the 20.35 average over two-decade history, spiked and fallen

US Company Guidance vs. Earnings Estimates

0

1000

2000

3000

4000

5000

6000

7000

00Q

100

Q2

00Q

300

Q4

01Q

101

Q2

01Q

402

Q1

02Q

202

Q3

02Q

403

Q1

03Q

203

Q3

03Q

404

Q1

04Q

204

Q3

04Q

405

Q1

05Q

205

Q3

05Q

406

Q1

06Q

206

Q3

06Q

407

Q1

07Q

207

Q3

07Q

408

Q1

08Q

208

Q3

08Q

409

Q1

09Q

209

Q3

09Q

410

Q1

10Q

210

Q3

10Q

411

Q1

11Q

211

Q3

11Q

412

Q1

Source: Bloomberg

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idan

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# announcements % Up % Down % Neutral


EUR: renewed pessimism … what is that light at the end of the tunnel?

• EUR had provided only credible alternative (sovereign debt markets that were deep enough) to USD for reserve managers looking for an alternative home for their fresh funds.

EUR was being seen as “new DEM”? However, Greek crisis was a sharp reminder that it’s the component of all its parts (e.g., its also the “new GRD”, the “new ITL”, the “new PTE”).

• 2010: considerable anguish vis-à-vis sovereign debt crisis

• 2011: contagion fears erupt

Ongoing policy discord about effective crisis prevention mechanisms such as the EFSF

Germany and France stock markets shed -30% in 2011Q3

Austerity may further choke growth amid economic headwinds

Eurozone banking sector vulnerable – tight liquidity and weaker credit creation further limits growth potential

• Greece is the word

Deficit reduction disappointment

2012-14 financing gap is large; cannot access markets near-term

Recession may be deeper and longer; painful adjustment

• Germany’s hard stance; France differs; ECB adamant about no restructuring or credit event

• Support for peripheral debt shown by China & other Asian nations

• 2012: Greek denouement – tragedy or the great escape?

Private bondholders negotiate; IMF reiterates caution

Spain: in focus now

• Contagion fears as crisis spreads to ‘core’ from ‘periphery’; Policy discord a key concern• Since mid-2010, the EUR benefited from oversold/undervalued asset markets; 2011 rekindled doubts• ECB hawkishness also proved supportive for the Euro in 2010; likely to fade in 2012• Eurozone’s two-speed economy may become one-speed as growth stalls; potential fallout from default?


Parallelism/Contagion: Other Sovereign Debt Concerns?

Since 10/1/2010: CDS (5 yr) percentage changes

Steady outflows from Spain and Italy in recent months; Greece and Portugal out of favor

Concerns about Dubai and Greece have been paramount in recent years. Lingering risks in other countries – contagion?

Fiscal accounts in focus; US/EU downgrades – Meaningful alternatives to holding sovereign debt as public debt burdens grow?


Central banks’ balancing acts in 2011-12; Currency tensions?• Central banks in advanced economies dealing with growth moderation, rising

inflation

• Policy rates had converged at historic lows; some central banks started the process of normalization but stopped short in their tracks; others continue

• Keeping options open for now: Monetary accommodation in place, keeping interest rates low

• US: May yet consider QE3 if core inflation remains low & labor market worsens

• UK: BoE may consider another QE despite up-tick in inflation; spending cuts

• Japan: Battling deflationary forces, lowered rates & raised asset purchases

• Switzerland: Mindful of deflationary pressures, CHF strength a major concern

• Currency weakness either a consequence of monetary policy choices (such as QE) or a deliberate policy in and of itself … currency as a policy weapon

• Investors’ erosion of faith in currencies as “stores of value”

• General discontent about competitive currency “devaluations”?

• Mar 2011: show of solidarity by G-7 – coordinated JPY intervention amid crisis

• Now, inflationary pressures a concern even as recovery threatens to stall

• Emerging markets central banks had been pro-active in tightening as growth was relatively more robust; now rate hikes on hold as growth falters

G-10 Policy Benchmark Rates

•US: Treasury Secretary Geithner: "We are concerned, as are many of China's trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited.”•Japan: Finance Minister Noda : “There is something unnatural about the fact that China can buy Japanese government bonds while Japan cannot (purchase Chinese bonds). ….I do not know what their true objectives are, but we would like to clarify their objectives.” •China: Yao Jian, Commerce Ministry spokesman: it’s unreasonable for the US to level criticism at China's exchange rate policy simply because of its trade surplus, and points to China’s trade deficits with Japan & Australia as evidence that the CNY was not the root cause of the US imbalance

Select Emerging Markets Currencies: Policy Rates

US Growth and Inflation Trends

Un i te d Kin g d o m

Un i te d Sta te s

Ne w Ze a la n d

Au s tra l i a

Eu ro Zo n e

Ca n a d a , Po l i c y Ra te s , Ov e rn ig h t Ta rg e t Ra te , CAD

So u rc e : Re u te rs Ec o Win

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U nited S ta te s , S A

A ll urba n co nsum e rs , U .S . c i ty a ve ra g e , C o nsum e r P rice s , A ll i te m s le ss fo o d a nd ene rgy, Ind e x, 19 8 2 -19 8 4 =1 0 0 [c.o .p 12 m o nths ] Na tio na l Inco m e A cco unt, N a tio na l P ro d uc t A cco unt, G ro ss D o m e s tic P ro duc t, O ve ra ll, To ta l, C o ns ta nt P rice s , A R , US D , 2 0 0 5 p rice s [c .o .p 1 2 m o nths ]

S o u rce : R e u te rs E coW in

70 7 2 7 4 7 6 7 8 8 0 8 2 8 4 86 8 8 9 0 92 9 4 9 6 9 8 0 0 0 2 0 4 0 6 08 1 0 1 2

Pe

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nt

-7 .5

-5 .0

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Stagflation


Gold as a safe haven and “store of value”

Since 1/1/08:Gold Price and US Dollar Index (inverted)

US

D w

eak

er

• Gold prices have not just benefited due to US dollar weakness. Gold prices have gained during periods of both US dollar weakness and US dollar strength in recent years.

• If almost all the major nations would like to benefit from more competitively priced currencies then what can investors still buy as a “store of value”? No surprises.

• Will disinflationary trends curtail gold price upside?

PHYSICAL DEMAND FOR GOLD IN CHINA AND INDIADuring 2011Q1, gold consumption in China totaled 233.8 tons up from 158.9 tons a year earlier – World Gold Council. Growth was more than triple the average 14% annual pace since the nation’s market for the precious metal was deregulated in 2001.

As of end-May 2011, Industrial and Commercial Bank of China (ICBC – world’s biggest lender by market value) set up 1.4 mln gold-linked accounts since their introduction in Dec 2010

China has overtaken India to become the world’s largest physical investment market, -- demand for gold jewelry increased 21 % to a record 142.9 metric tons and with purchases more than doubling to 90.9 tons.

• Concerns about inflation• Risk aversion – Eurozone (sovereign debt crisis); Middle East (political upheaval); Japan (natural disasters)• Broader lack of confidence as growth moderates and fiscal problems persist; US credit rating downgrade• Lasting store of value; an instrument to protect purchasing power of savings• Central banks turning to gold both as an investment and as a means of diversification

- As of March 2011, held 27,219.8 metric tons (11.3% of total reserve holdings)- Feb-Mar 2011: Mexico, Russia and Thailand added gold worth about $6 bln to their reserves

. Mexico bought 93.3mt, raising holdings from about 6.9mt

. Feb-Mar 2011: Russia bought 18.8mt to raise holdings to 811.1mt

. Thailand bought 9.3mt to 108.9mt


Multi-speed recoveries & policy divergence; commodity-cycle a key factor • Emerging markets: most had enjoyed strong recoveries – led to a

structural increase in commodity demand, while supply responses had been slow

• Weak USD has also kept commodity/energy prices buoyant

• Renewed investor buying in commodity-linked markets led to a buildup of inflationary pressures

• Stalling global growth has removed a major price support; copper and crude oil fell -17% in 2011Q3, worst quarter since 2008Q4

• Growth prospects and resilience in emerging markets a key focus

• Significant capital on sidelines may be deployed selectively

Commodity Index Comparisons

G-10 FX Returns 9Mar2009 – 01May2012

JOCIMETL (Journal of Commerce): Steel, Copper, Aluminum, Zinc, Lead, Tin, NickelSPGSCI & CRY: Grains, Soft Commodities, Livestock, Energy, PreciousMetals, Industrials

as of Dec 2009

S&P GSCI Agriculture, Industrial & Precious Metals sub-indices

Source: Bloomberg

April 2012 Jan 2012

Advanced Economies 1.4 2.0

US 2.1 2.4Euro Area -0.3 0.9Japan 2.0 1.7

Developing Economies 5.7 6.0

China 8.2 8.8India 6.9 7.3ASEAN-5 5.4 6.2Brazil 3.0 4.1

IMF: WORLD OUTPUT 2012 2013

OECD Countries 1.3 1.9

US 2.2 2.4Euro Area -0.3 1.1Japan 1.9 1.6

Developing Economies 5.4 6.0

China 8.4 8.3India 6.5 7.7East Asia and Pacific 7.8 7.8Brazil 3.4 4.4

WORLD BANK 2012 2013


China – poised for growth; but is slowing to a more sustainable pace• China is a key locomotive of global growth

Full-year 2011 GDP grew 9.2%, down from 10.3% in 2010 Trade surplus in 2011 fell to $155.14 billion from $181.51 billion in

2010, the smallest in six years Foreign reserves fell to $3.18 trillion in 2011Q4 from $3.2 trillion in

2011Q3, the first quarterly decline since the 1998 Asian crisis.

• Currency flexibility since 19 June 2010 has encouraged investors who have been monitoring policy maker efforts to rein in overheating pressures such as in bank loans, property

• Since Jan 2011, PBOC has raised benchmark rate 3 times and boosted lenders’ reserve requirement ratios 6 times

• The Shanghai Composite Index fell about 30% during Apr-Dec 2011 on concerns about inflationary pressures and higher borrowing costs hurting corporate earnings, but steady net inflows in place have seen the index gain +11% Jan-Apr 2012

• China’s changing growth model Premier Wen says the main cause of the US trade deficit is not the

exchange rate of the Chinese currency, but the structure of investment and savings

Premier Wen says China has made increasing consumption a long-term strategy

PBOC governor Zhou Xiaochuan said on April 16, 2011 at Boao Forum 2011 annual meeting that the exchange rate tool has been used to fight inflation when he was interviewed by the media. He said, “The exchange rate is actually already in use, the yuan has appreciated, and how to measure its effectiveness in fighting inflation, usually is difficult. "

INTERNATIONALIZATION OF THE RENMINBIRegulatory change: RMB settlement in Hong Kong September 27, 2010 onward – deluge of issuance as institutions tap the RMB market

Gradual liberalization of China’s capital account could see the CNY emerge as a viable longer term alternative in currency portfolios

PBOC Governor Zhou Xiaochuan - "When there is a certain amount of cross-border use of the CNY, there will be a natural demand that the CNY will move towards full convertibility in a gradual and orderly manner."

HKMA Chief Executive Norman ChanHong Kong Yuan Deposits at a record USD 89 bln as of end-July amid companies’ demand for Chinese currency (up 82% YTD as of July)

USD/CNY and Yuan NDFs for 1m and 1y


iFlow Insights: Commodity-linked markets slowly regaining lost allure• Strong buying of ZAR, BRL & RUB as commodity prices rose from March ’09 lows; some profit-taking and selling, inflows again; higher oil prices boosted especially the RUB, recent oil price decline hurt but renewed buying of late

• AUD, NZD had been in favor as G-10 ‘commodity-linked currencies’ but have lost ground in recent months as growth outlook sours; recent Kiwi downgrade; CAD weighed by energy price moderation and risk aversion, but recovering now


High Yielding Emerging Markets Currencies vs USD

The thirst for yield: currency markets weighed by asset-markets’ sell-off• Low rates in mature markets had boosted emerging markets capital inflows, investors pulled back, now slowly getting back

in


The thirst for yield: Asia has been well-placed, but no longer remains insulated

Asia FX Reserves: strong growth; stop and re-start

Asia Currencies vs USD

Asia: price pressures

• Domestic demand and regional trade key drivers

• Favorable growth prospects led to strong equity inflows since March 2009

• Growth moderation concerns have afflicted the region

• Asia still relatively well-placed

Taiwan Thailand China India S outh K orea

S ource: Reuters E coW in

Nov

05 06

Mar Jul Nov

07

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08

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09

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10

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11

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12

Mar

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/Y C

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China (rhs)

India (lhs)

Thailand (lhs)

South Korea (lhs)

Taiwan (lhs)

Malaysia (lhs)

Hong Kong, Reserves, Foreign currency reserves, total, USD

Source: Reuters EcoWin

02 03 04 05 06 07 08 09 10 11 12

US

D (t

rillio

ns)

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Asia & other emerging local bonds: sentiment has soured a bit• Emerging East Asia local

currency bond market grew 13.6% in 2010 to $5.2 trillion

• Local-currency denominated debt instruments

• Large and liquid asset class

• Relatively high yields

• Central banks did not raise rates aggressively in 2011

• Currency appreciation potential

• Improved credit worthiness

• Favorable growth differentials

• Recent inflation pressures have damped investor enthusiasm

• Risk aversion has led to some outflows, but inflows resuming

ADB Report • Growth in the region has been marked by improving maturity profiles for many individual corporate and government bond markets. This reflects improving structural fundamentals as lengthened duration will attract a greater diversity of investors.

• Foreign participation in the region's local bond markets continued to expand as investors hunted for yield and anticipated gains from appreciation of the underlying currencies. For example, foreigners held 30.5% of Indonesian government debt at the end of 2010.


Asian and other EM central banks: FX Interventions volte-face• Significant amount of portfolio capital inflows

• China becoming more interested in neighbors’ asset markets

More buying of Japanese government bonds

Stepping up purchases of South Korean debt

Added MYR to small group of currencies allowed to be traded directly vs CNY

• Variety of measures to deter flood of inflows?

South Korea: Audit of lenders handling foreign currency derivatives

Brazil: tripled tax to 6% on foreigners investing in debt securities

• FX interventions to smooth local currency appreciation; but abrupt turn-around as EM central banks look to limit currency downside

iFlow: Cumulative Equity Flows in Japan & South Korea

1 Mar ’09 – 30 Apr ‘101 Jul ’08 – 28 Feb ‘09

iFlow featured in IMF GFSR Report Oct 2010: In response to increased foreign inflows, policymakers in a number of countries have introduced a variety of measures. For instance, authorities in Brazil, Indonesia, and Korea introduced measures to mitigate the impact of strong capital flows on domestic macroeconomic and financial stability – precisely in countries where the BNY Mellon iFlowsm data found foreign equity inflows had become especially persistent. The measures in these countries might have changed the overall composition of capital inflows, but they have not as yet significantly reduced the persistence of equity inflows.

1 May ’10 to date


iFlow Insights: Bond Allocations by Currency 2007-12• JPY-denomination shot up in Jul 2007, stayed at elevated levels, spiked in Jan 2008, and again Sep 2008 onward

• Periods of risk aversion: Higher Allocation to USD-denominated bonds as riskier positions were liquidated during equity market sell-offs in Aug ’07, Nov ’07, Jan ’08 and Sep ’08 onward

• Investors favored the shorter end of the curve amid search for safety and liquidity

• Up-tick in EUR-denominated holdings in Jan/Feb ’08 => EUR/USD broke above 1.50 and 1.55

• Spike in EUR/USD in Dec ’08/Jan ’09 (1.25 to 1.45); JPY began losing its safe-haven allure during 2009Q1

• Reverse direction for EUR/USD in Aug ’07; also in Aug ’08 (1.56 to 1.46) and Oct ’08 (1.40 to 1.27)

• UK gilt buying outpaced CAD bonds during 2010H1, profit-taking on Gilts during 2010H2

• Canadian bonds have been out of favor lately, but slowly recovering

• USD-denominated bonds: steady appetite in recent months amid risk aversion, consistent with decline in yields

Cumulative Monthly iFlow: Developed Bonds as of 01May2012

Bond Allocation by Currency in US Global Fixed Income Portfolios (Jan 07=100)

65.00

75.00

85.00

95.00

105.00

115.00

125.00

135.00

145.00

155.00

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

Source: BNY Mellon iFlow

CAD EUR GBP JPY USD


Interesting Juncture for Asset Allocations• Relative valuations: bonds in vogue again; equities have had a good run

• Strange co-existence of risk aversion and risk appetite, former re-asserting itself

• Continued low rates & additional QE prospects had fueled global liquidity

• Positive for asset markets as QE-related currency debasement fears arose

• G-24 emerging markets saw currency appreciation amid strong capital inflows

• Risks: debt crisis contagion; growth setbacks; buoyant price pressures

• Risk aversion and asset markets’ sell-off offers very attractive strategic plays

• Equity upside as excess capital deployed; evidence of buying in select markets

• Emerging markets as an asset class attractive – both equities and bonds

iFlow Daily E-Mail as of 25Jan2011


Equity/BondPositions

Strategic & Tactical

Allocations/Trading Ideas

Quant

Analysis

Fundamentals

Portfolio Flows

Deviationsfrom Benchmark

Strategic

Tactical

Strategic

Tactical

Key 2012H2 focus on whether investors1. raise or reduce risky exposure2. adjust asset allocations 3. become more selective

P&RA (formerly MAS/Russell Mellon)• ASSET MIX• COUNTRY & SECTOR ALLOCATIONS

iFlow:


2011 GLOBAL FINANCE MAGAZINE

2011 GLOBAL INVESTOR/isf MAGAZINE FX SURVEY

“ . . . a force to be reckoned with . . .”- Global Investor/isf Magazine

February 2011

2011 PROFIT & LOSS MAGAZINE

#1 Asset Owner Respondents#1 Hedge Fund Respondents #1 Credit Quality

Best FX Research

Best Forecasts

Best Technical Analysis

Best FX Provider – Honorable Mention in the U.S.

Best Real Money Platform

Top Comments from 2011 Survey Respondents

“Sales coverage is superb”

“BNY Mellon has been our most trusted FX counterparty”

“An honest provider who understands my business”

“I can trust them to always protect my interest”

“Excellent service in front and back office”

“Always have traders available to answer any questions, concerns that may arise”

Recent Awards2010, 2009 and 2008 GLOBAL INVESTOR : Best Capital Flow Research


Documents

Global Markets & Investor Flows Risks and Opportunities