LombardOdier 2014 Outlook : a Slow and Fragile Healing Process to Safeguard

8/22/2019 LombardOdier 2014 Outlook : a Slow and Fragile Healing Process to Safeguard

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Investment Strategy Group

A slow and fragile healing process to safeguard

Samy Chaar, PhD & Stephanie de TorquatInvestment Strategy GroupNovember 2013


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Please see important information at the end of the document

Investment Strategy!October 2013!

Global leading economic indicator firmingMid year economic soft patch is abating

GLOBAL LEADING ECONOMIC INDICATOR (PROXY FOR GLOBAL GROWTH)OECD COUNTRIES PLUS 6 LARGEST NON MEMBERS, YOY%

Global economicconditions areimproving, a sign thatthe risk of globalrecession is currentlylow.

Source: Datastream, Lombard Odier calculation

Economy improving

Economy slowing


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Global manufacturing PMI improveDeveloped markets firming, emerging markets less of a drag

LEADING ECONOMIC INDICATORS - PMILEVEL (X-AXIS, CONTRACTING LINE IS 50) VS RATE OF CHANGE (Y-AXIS)

PMIs are picking upimplying little risk ofcontraction ahead,despite someregional divergences.

Contraction

Bottoming Expansion

Maturing

Note: DM in blue / GEMs in brown; Source: Bloomberg, Lombard Odier calculation


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Global growth imbalancedNew normal equilibrium still prevails

NOMINAL GROWTH CONSTITUENTS (INFLATION + REAL GDP GROWTH)IN YOY % CHANGE

Global growth stillwell below trendsuggestingeconomies to reachescape velocity ispremature.

.

Note: DM in blue / GEMs in brown; Source: Datastream, Lombard Odier calculation


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Recovery set to remain mediocre and imbalancedWith weak employment growth over the long run

US REAL GDP ANNUALIZED GROWTHOVER THE 5 YEARS FOLLOWING THE END OF RECESSIONS, IN %

An impressive set ofstimuli

- Auto Bail-Out

- Cash for Clunkers

- Homebuyer Taxcredit

- TARP

- Tax cuts

- Extendedunemploymentbenefits

- Massive Fedbalance sheetexpansion (QEs,Operation Twist)

for one of theslowest USrecoveries ever!



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Global imbalances adjusting

Deleveraging impliesa reduction in thewestern deficit, and aturn to surplus, and acorrespondingdecline in theemerging surplus asEM growth models

will evolve towardmore domesticdemand.

EMERGING VERSUS DEVELOPED ECONOMIES CURRENT ACCOUNTSUSD BN


GlobalImbalances

Globalrebalancing

Major TurningPoint in 2008


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Re-balancing global growth

The EmergingMarket GrowthMiracle is, in fact, asimple reflection ofthe willingness of theadvanced countriesto run deficits toprovide the demand

for emerging over-investment: the gapbetween advancedand emergingcountry GDP growthis easily explained bythe growth in westernprivate sectorleverage / currentaccount deficits.

EMERGING MINUS ADVANCED ECONOMIES REAL GDP GROWTH (%Y/Y) VSADVANCED ECONOMIES CURRENT ACCOUNT BALANCE (USD BN, 3Y MMA)



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Macro conclusionsA slow and gradual healing process, but not one without risks

! The global environment remains fragile. An escape route for the world economy liesahead if, and only if, a number of conditions are met:

1. Keep the cost of capital under control

Western economies are still burdened by unsustainable levels of total debts and deficits. The worldis not yet ready to support higher rates - the US housing recovery also depends on containedmortgage rates


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US Interest Rate Risk: the great divergence 1/2Long-term rates close to fair-value, short term rates widely disconnected

US YIELD CURVE MATURITIESIN %

Too rapidly rising LTyields would beunsustainable anddetrimental to theeconomic andfinancial environmentdue to excessleverage.

However, ST yields,especially whenadjusted to QE3, arenot consistent withlow but stableinflation, anddecliningunemployment.

.


No value distortion on the long-end of the yield curve.In line with sub-trend nominal growth and excessleverage.

Short-end of the yield curve is widely disconnectedto fundamentals: relatively stable inflation (no

deflation) and declining unemployment.


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US NEW HOME SALES VS MORTGAGE RATESRISING RATES TO WEIGHT ON HOUSING RECOVERY

US HOUSING STARTS VS MORTGAGE RATESRISING RATES TO WEIGHT ON HOUSING RECOVERY

US HousingRising rates starting to weigh on housing recovery


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FED FUNDS RATE VERSUS TAYLOR RULEIN %

US 10Y YIELDS VERSUS FAIR-VALUELEVEL IN % & TRAILING Z-SCORE

US Interest Rate Risk: the great divergence 2/2Long-term rates close to fair-value, short term rates widely disconnected

US 10Y close to fair-value

US Fed Funds disconnected from fundamentalsespecially when taking QE financed LSAP into

account


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Monetary involvement 101Quantitative versus qualitative/credit easing


QE1(+1400 bn)

QE2(+600 bn)

OperationTwist (400 bn)

MBS

UST and Fedagency debt

Others

Shaded area:projection of Fed

holdings

EXPANSION & DETERIORATION OF CENTRAL BANKS BALANCE SHEETSSIZE & COMPOSITION OF THE FEDS BALANCE SHEET, IN USD BN

QE3(+85 bn MBS &UST per mo)

The debt burden isstill too large to beonly tackled byconventionalmeasures such asausterity and growthpolicies.

Monetary support

remains the mainworkable tooI in theabsence of debtrestructuring andbanking sectorrecapitalizations.

However, CentralBanks also need to

be consistent withtheir mandates.

QE3 TaperingstartingJan. 2014

(-10 bn/mo)


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Divergences in monetary activity to be reversedTaper debate in the US versus low inflation in the Eurozone

EURUSD SPOT PRICE VS FED/ECB BALANCE SHEET RATIOLEVELS

The USD sufferedwhile the EURbenefited fromrelative monetarypolicies.

The gap shouldsomewhat normalize

starting early 2014 asEUR strength isundermining theEurozone'scompetitiveness andpressing downwardinflation figures.



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EUROZONE HEADLINE & CORE CONSUMERPRICE INFLATION - IN %

ECB RATE VERSUS TAYLOR RULEIN %

The ECB in a vicious cycle?Contracting balance sheet leads to stronger EUR and accelerating disinflation

EZ Inflation figures arevery low when compared to

official ECB target rate

The ECB should be forced to reverse ongoing trends thanksto conventional (rate cut) and/or unorthodox (VLTRO)

monetary policy tools


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2. Stabilisation of fiscal deficits, not too high, not too low especially in the US and Japan. Growing deficits (unrestrained addition of new debt) would

be as counterproductive as rapidly shrinking deficits (public austerity during private deleveragingprevents any economic recovery)


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US GOVERNMENT SURPLUS/DEFICITAS % GDP; 18 GOV. SHUTDOWNS SINCE 1970S

US debt ceiling and budget balanceRemarkable but worrying - politically driven - improvement on the flow side

US TOTAL PUBLIC DEBT & STATUTORY LIMITIN USD MN; 53 INCREASE SINCE 1972

Only 3 defaultsin US history (1790, 1934, 1979).

Only once because of a debt-limit crisis;the US accidentally defaulted

on a small number of bills in 1979.18 shutdowns since 1970s;Average length 6.5 days;Cost 0.1% GDP per week.

- Oct. 31: USD 6 bn in interest onTreasury securities- Nov. 15: USD 29 bn in interest on

Treasury securities


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2. Stabilisation of fiscal deficits, not too high, not too low especially in the US and Japan. Growing deficits (unrestrained addition of new debt) would

be as counterproductive as rapidly shrinking deficits (public austerity during private deleveragingprevents any economic recovery)

3. Support the global rebalancing of emerging surpluses and western deficits

Western economies are gaining internal (declining ULC) and external (FX devaluation)competitiveness pushing emerging economies to change their growth model towards moreconsumption. Productive capacity in the West responding to EM demand should allow world growthto very gradually recover


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Looking to go onshore!Fighting for a larger share of investment thanks to competitive gains


REAL EFFECTIVE EXCHANGE RATELOCAL CURRENCY, INDEXED TO Q111 = 100

TOTAL ECONOMY UNIT LABOR COSTSLOCAL CURRENCY, INDEXED TO Q208 = 100

Ger.;11%

EZ; 8%

Ireland; -11%

Spain; -6%

UK.; 16%

Port.; -3%

Japan; -7%

US.; 4%

China; 50%


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Looking to go onshore: Is the competitive story working?Fighting for a larger share of investment thanks to competitive gains


TOTAL ECONOMY UNIT LABOR COSTSLOCAL CURRENCY, INDEXED TO Q208 = 100

FOREIGN DIRECT INVESTMENT NET INFLOWSAS % GDP


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Rebalancing Industrialization between emerging & developedmarkets

TOTAL FIXED INVESTMENT SHAREAS % GDP



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The Macro ViewA slow and gradual healing process, but not one without risks

! Still a long way to normalcy for the world economy but giving the benefit of thedoubt to a long and progressive journey to recovery.

Growth: Positive but below trend (adjusting from past excesses).

Inflation: Low (little income growth, subdued aggregate demand and still ample supply).

! Following risks should be monitored to prevent a relapse:

1. Interest Rate Risk: Keep cost of capital under control (Monetary support main workable tool)2. Fiscal Risk: Further deterioration endangers solvency whilst austerity jeopardizes growth.

3. Competitive Risk: Support global rebalancing of emerging surpluses and western deficits.

! Macro Risk Barometer:

US

Eurozone

Japan

Emerging (BRICs)

Int. Rate Risk Fiscal Risk Comp. Risk


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Eurozone recovery: fragile but encouraging


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Interest rate risk: fiscal unsustainability in the peripheryInterest rates have normalized but adverse funding gap remains


10-YEAR GOVERNMENT BOND YIELDSIN %

0

2

4

6

8

10

12

14

16

18

12/07

05/08

10/08

03/09

08/09

01/10

06/10

11/10

04/11

09/11

02/12

07/12

12/12

05/13

Portugal

ItalySpainIreland

FranceGermany

PIIS real potentialoutput growth,

GDP-weighted

REAL POTENTIAL GDP GROWTH VS. REALGVT BOND YIELDS IN %

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Portugal, Italy, Ireland, Spainreal long-term interest rates,GDP-weighted


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Fiscal risk: too much austerity detrimental to the recoveryThe pace of fiscal adjustments should be controlled

Even after the effortsof the last few years,many governmentsstill need substantialfiscal swings

However, ashouseholds aredeleveraging, they

cannot offset sharpcuts in governmentspending, creatingpotentially a negativeimpact on growth

2012 and 2013 showless fiscal pressure inthe EZ than in the US


CHANGES IN GOVERNMENT BUDGET BALANCE% GDP, ANNUAL DATA

-3.0

-2.0

-1.0

0.0

1.0

2.03.0

4.0

5.0

6.0

7.0

Ireland

US

Spain

Fra

nce

UK

Italy

Germ

any

Ja

pan

Portugal

2012

2013

2012 & 2013

-13.3 to-7.5

-9.4 to-6.9

-5.3 to-4.0

-7.9 to-7.1 -0.8 to

-0.2-4.4 to-6.4

-13.3 to-7.5

-8.9 to-10.3

-10.2 to-5.4

From Dec.2011

to Dec. 2013:


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Competitiveness risk: looking to go onshore !Fighting for a larger share of investment thanks to competitive gains


REAL EFFECTIVE EXCHANGE RATELOCAL CURRENCY, INDEXED TO DEC 09= 100

75

80

85

90

95

100

105

110

115

120

125

12/09

03/10

06/10

09/10

12/10

03/11

06/11

09/11

12/11

03/12

06/12

09/12

12/12

03/13

06/13

09/13

China

SwitzerlandUK

USPortugalSpainItalyFranceGermanyIreland

Japan

RELATIVE UNIT LABOR COSTSLOCAL CURRENCY, INDEXED TO Q409 = 100

75

85

95

105

115

125

135

Q42009

Q12010

Q22010

Q32010

Q42010

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

China

UKFrance

Germany

PortugalItaly

USIreland

SpainJapan


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Fiscal risks in Spain & Italy: stock issues, flowimprovements


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Spanish private debt is still far too largePrivate deleveraging is not over

Private sector debt isslightly down (NOTbanks!), but the paceof deleveraging ismuted, and debtremains too high.This will keepconsumption "andgrowth "subpar

The government hasmore than offsetprivate deleveraging.Total debt has keptincreasing as a result

DEBT BROKEN DOWN BY ECONOMIC AGENTS% OF GDP

66

10993

197

101117

86

176

0

50

100

150

200

250

Gross governmentliabilities

Financialcorporations debt

Household sectorliabilities

Non-financialcorporations

liabilities

Q2 2010 (HH peak) Q4 2013 (projections)

Source: Oxford Economics (Q4 2013 projections), DataStream, Lombard Odier calculations


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Fiscal dilemmaDeficit improving, but keeping this tightening pace would kill the recovery

Fiscalrisk remainssignificant in Spain:the primary budgetdeficit is large at-4.0%, but if thegovernment tightenstoo much, that couldhinder the nascentrecovery

The good news isthat lots of it iscyclical. On acyclically adjustedbasis, thegovernment runs aprimary surplus

*The government primary balance is the government net borrowing or net lending excluding interest payments on government liabilities.

Source: OECD, DataStream, Lombard Odier calculations

GOVERNMENT BUDGET DEFICIT AND PRIMARY BALANCE*% OF GDP

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Primary balance

Budget deficit

-11.2 -10.6

-6.9

-4.0

Primary balance,

cyclically adjusted

Budget deficit,cyclically adjusted-2.4

+0.2


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Italys debt: a public issue

Italys private debt issmaller than that ofSpain

The issue in Italy ison the public side:with government debttopping 130% of

GDP, the country isvulnerable to any risein rates and the costof servicing the debtis significant

DEBT BROKEN DOWN BY ECONOMIC AGENTS% OF GDP, Q4 2013 (PROJECTIONS)

Source: Oxford Economics (Q4 2013 projections), DataStream, Lombard Odier calculations

200

101 117

86

176

130

107

57

116

0

20

40

60

80

100

120

140

160

180

Gross governmentliabilities

Financialcorporations debt

Household sectorliabilities

Non-financialcorporations

liabilities

Spain Italy


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But the primary balance is in surplus

Contrarily to Spain,Italy runs a primarysurplus, which helpslimiting the growth inpublic debt

But debt servicingalone adds -5.3% tothe deficit !

*The government primary balance is the government net borrowing or net lending excluding interest payments on government liabilities.

Source: OECD, DataStream, Lombard Odier calculations

Primary balance,

cyclically adjusted

GOVERNMENT BUDGET DEFICIT AND PRIMARY BALANCE*% OF GDP, DASHED LINES ARE OECD PROJECTIONS

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Primary balance

Budget deficit,

cyclically adjusted

Budget deficit

2.9

-2.3


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Household saving rate has collapsedThe margin of safety for the consumer is at historical lows

With incomes down,high unemployment,and balance sheets inneed of repair,households have beenusing their savings tokeep up consumption"but there is nocushion left

The fact thatconsumptionexpenditures havestarted to decline in Q12012 is for the momentobsucred by recentgovernment spending

Source: DG ECFIN AMECO, DataStream, Lombard Odier calculations.

HOUSEHOLD SECTOR NET SAVING RATE% OF NET DISPOSABLE INCOME

0

2

4

6

8

10

12

14

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

France

Germany

Italy

Spain


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Competitiveness risks in Spain & Italy: divergingtrends


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Remarkable improvements in Spain, Italy deterioratesSpains export market share is growing

Source: OECD Economic Outlook, Eurostat, DataStream, Lombard Odier calculations

UNIT LABOR COSTS

2005 = 100

95

100

105

110

115

120

125

2005

2006

2007

2008

2009

2010

2011

2012

2013

Italy

France

Germany

Spain

EXPORTS AS A % OF GDPCHANGE SINCE 2009, IN %

14.3

11.7

8.4

6.9

3.9 3.4

0

2

4

6

8

1012

14

16

Portugal Spain Germany Italy France UK


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Better competitiveness helps spanish foreign direct investmentWhilst Italy does not attract foreign inflows

Competitivenessimprovement in Spain,resp. deterioration inItaly, has led to higherspanish FDI, resp.lower italian FDI

Maintaining/growing

the ability to attractforeign investment,and gain exportsmarket share is crucialto the recovery, andshould be closelymonitored

Source: World Bank, DataStream, Lombard Odier calculations

FOREIGN DIRECT INVESTMENTNET INFLOWS, % OF GDP

-2

-1

0

1

2

3

4

5

6

7

Portugal Spain France UK Germany Italy

Q2 2012

Change since 2009


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70

75

80

85

90

95100

105

110

115

120

Q4199

9

Q4200

1

Q4200

3

Q4200

5

Q4200

7

Q4200

9

Q4201

1

Q4201

3

Italy - ULC

Germany - ULC

ULC VS. CPI-BASED COMPETITIVENESSOECD COMPETITIVENESS INDICATORS

Italys low competitiveness is the countrys achilles heelBut exports hold up for now

Source: DataStream, Lombard Odier calculations, OECD

Italy - CPI

Germany - CPI

EXPORTS VS IMPORTS OF GOOD & SERVICES% OF GDP

22

23

24

25

2627

28

29

30

31

32

Q4200

0

Q3200

1

Q2200

2

Q1200

3

Q4200

3

Q3200

4

Q2200

5

Q1200

6

Q4200

6

Q3200

7

Q2200

8

Q1200

9

Q4200

9

Q3201

0

Q2201

1

Q1201

2

Q4201

2

Exports

Imports


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The French conundrum: fiscal and interest raterisks are contained but fundamentals are poor andworsenin


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BUDGET DEFICIT AND CURRENT ACCOUNT%OF GDP, FRANCE

-10

-8

-6

-4

-2

0

2

4

1978

1982

1986

1990

1994

1998

2002

2006

2010

Primary balance

Budget deficit

Debt stabilizing (at high levels)But current account still deteriorating

Source: Datastream, Lombard Odier calculation, Oxford economics, OECD (2013 projections)

Current account

TOTAL ECONOMY DEBT% OF GDP, BREAKDOWN BY SECTOR, FRANCE

0

100

200

300

400

500

600

Q41995

Q41997

Q41999

Q42001

Q42003

Q42005

Q42007

Q42009

Q42011

Financial

corporations

Households

Non-financial

corporations

Government


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Investment Strategy!October 2013!Source: Datastream, Lombard Odier calculation, OECD

CURRENT ACCOUNT VERSUS BOND YIELDSFRANCE, ITALY & SPAIN DIFFERENTIAL WITH GERMANY

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Q12002

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

German MINUS Frenchcurrent account; Q3 2013 = 8.9%

French vs.German 10-yearyield spread; Q3 2013 = 0.6%

German MINUS Spain & Italycurrent account; Q3 2013 = 5.0%

Spain & Italy vs. German 10-yearyield spread; Q3 2013 = 2.6%

14%

French yields spread with Germany at odd with current accountUnfair but sustained mispricing


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French competitiveness risks prevail


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UNIT LABOUR COSTS IN TOTAL ECONOMYRECENT EVOLUTION

95

100

105

110

115

120

125

Q22005

Q22006

Q22007

Q22008

Q22009

Q22010

Q22011

Q22012

Q22013

Italy

OECD total

Germany

Spain

Ireland

Greece

UNIT LABOUR COSTS AND PRODUCTIVITYFRANCE & GERMANY, INDICES

100

105

110

115

120

125

130

135

140

145

150

1991

1994

1997

2000

2003

2006

2009

2012

France ULC

GermanyULC

Competitiveness eroded in absolute AND versus peers

Germanyproductivity

France productivity

Source: INSEE, OECD

France


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De-industrialization AND low industrialization

Source: INSEE, Eurostat (May 2013)

FRANCE VALUE-ADDED BY SECTOR% OF TOTAL

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

100%

Q11980

Q11982

Q11984

Q11986

Q11988

Q11990

Q11992

Q11994

Q11996

Q11998

Q12000

Q12002

Q12004

Q12006

Q12008

Q12010

Q12012

Services

IndustryAgriculture

12.8

France

INDUSTRY SECTOR SHAREIN TOTAL DOMESTIC ECONOMY VALUE ADDED, %

Eurozon

e17

25.8

21.919.619.318.618.518.317.8

16.8

16.216.1

0

5

10

15

20

25

30

Germ

any

Au

stria

Netherlands

Fin

land

Portugal

Italy

Sweden

S

pain

Belgium

Denmark


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France is one of the lowest industrialized countries in the world!

FR

A

EA1

7

OECD

0

5

10

15

20

25

30

35

40

45

LU

X

GRC

ES

P

GBR

US

A

ISRBE

L

PR

T

DN

K

NLD

NZ

L

ITA

AU

S

JPNIS

L

CH

E

SW

E

TUR

AU

T

FIN

ES

T

DEU

SVN

CAN

PO

L

SV

K

IR

L

ME

X

HUN

ZA

F

RU

S

CZ

E

KOR

CH

L

NORIDN

CHN

2010 or latest available year 2000

VALUE ADDED IN INDUSTRY, INCLUDING ENERGYAS A PERCENTAGE OF TOTAL VALUE ADDED, OECD

Source: OECD


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Eurozone

Spain

Italy

France

Int. Rate Risk Fiscal Risk Comp. Risk

ConclusionEurozone recovery fragile but encouraging

! Following risks should be monitored to prevent a relapse:

1. Interest Rate Risk: Keep the cost of capital under control

2. Fiscal Risk: A subtle fine-tuning in the pace of deficits reduction

3. Competitive Risk: To support reindustrialization, exports and foreign direct investments

!Macro Risk Barometer:


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Impact on asset classes


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Pushed further along the return curveCorporate risk (credit & equities) offers relative appeal

The early stages ofQE were verysuccessful inboosting credit &equity markets,owing to the wideimplied real returndifferential betweenequities, credit,

government bonds(TIPS) and cash.

Within Equitiesfavour Europe andEM over the US

Within Bonds,

favour the US andEM$ over EU debt

REAL IMPLIED RETURNS FOR CASH VS BONDS, CREDIT & EQUITIESIN %

Source: DataStream, Lombard Odier calculations. See list of underlying indices by region in following slides of thedocument.


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Asset Classes Preferences


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Market drivers: Multiple expansion


MSCI WORLD : PRICE, EPS & PE RATIOLEVELS


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Europe versus the US

MSCI EMU YOY REPORTED EPS GROWTH VERSUS EMU PMI%YOY 12M LAG & LEVEL

Current levels ofPMIs are alreadysupportive of positiveEPS growth.Earnings revisionswill start to be reallypositive when PMIsreach 55 (EMU 51.1in Sept., UK 56.7).

The forward lookingPMI components(new orders) lookencouraging.



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CurrenciesStrategically favour fundamentally strong FX (NOK, SEK, CHF);Some EM FX will benefit from the global rebalancing (MYR, CNY, KRW)

PROXY FOR FX QUALITY-ADJUSTED YIELDS*CURRENT ACCOUNT DEFICIT (AS % GDP) & 12M REAL DEPOSIT RATES (IN %)

Strategically favour

the fundamentally

strong currencies

(low debt levels,

current account &

public balance

surpluses), such as

the NOK, the SEK

and the CHF.

Some EM FX will

benefit from the

global rebalancing

(i.e. the debasement

of western currencies

for competitive

purposes); focus on

quality (fiscally soundEM FX).

* Current account balance as a proxy for external assets / liabilities, Real rates as a proxy for the average return oncapital. Source: DataStream, Lombard Odier calculations.


50/52



Gold has a strong

correlation with CDS

spreads on European

peripherals.

The narrowing in

PIIS (ex-Greece)

CDS spreads a

sign of lowersystemic risk

successfully

contained by central

banks has been

followed by much

lower gold prices and

reducing investment

demand for hedging

purposes 0

50

100

150

200

250

300

350

400

450

500

700

900

1100

1300

1500

1700

1900

2100

01.0

8

03.0

8

06.0

8

09.0

8

12.0

8

03.0

9

06.0

9

09.0

9

12.0

9

03.1

0

06.1

0

09.1

0

12.1

0

03.1

1

06.1

1

09.1

1

12.1

1

03.1

2

05.1

2

08.1

2

11.1

2

02.1

3

05.1

3

08.1

3

11.1

3

02.1

4

05.1

4

08.1

4

11.1

4

GOLD PRICES VERSUS GDP WEIGHTED AVERAGE OF 5 YEAR CDS SPREADSFOR PORTUGAL, SPAIN, IRELAND AND ITALY

July 26, 2012 Draghispeech believe me, it

will be enough

GoldGold is a hedge against systemic risk; but systemic risk is abating



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Cross Asset ReviewA balanced risk exposure with strong regional preferences

! Balanced positioning in terms of risk exposure with a medium term preference for equityrisk over interest rate risk.

Looking to benefit from the important long term implied real return differential between equities,government bonds and cash.

! Within Equities favour Europe over the US, while Emerging markets are stabilising:

European markets could outperform thanks to a pick up in earnings growth followingEurozones exit from recession, especially against US equities which remain expensive andwhere equity investor sentiment is stretched.

Emerging markets could benefit from a valuation discount as world growth is recovering.

! Within Bonds favor US and Emerging debt over core Europe (Germany):

US yields are now relatively attractive compared to its European pears.

EM debt cheapest versus High Yield since 2005; price dynamics and flows have stabilised.


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Documents

LombardOdier 2014 Outlook : a Slow and Fragile Healing Process to Safeguard