PRESENTED BY

GEORGE TSETSEKOS

Dean Emeritus and Francis Professor of Finance

March 26, 2014

DREXEL UNIVERSIY

LeBow College of Business

The Global Economy and the US Markets

“Linked” Markets…Amplify Crisis

Global Crisis

EZ Sovereign Debt

Crisis

US

Subprime

Crisis

Global and U.S. GDP Growth 2000-16 Annual %

Transition: From Crisis to Stability

Policy Responses

TransitionStability

Crisis in US Global Amplification

Challenges during the transition

Normalize monetary conditionsHandle risk/volatility

Transition in USA: From Crisis to Stability

Policy Responses

Monetary Easing

TransitionStability

Crisis in US Financial Crisis Low Growth and Unemployment

Home Prices Rise, Helped by Low Inventory

Auto Sales on the Rise

Core Inflation Remains Contained

Net Worth Climbs as Debt Burden Plummets

S&P Index Performance 2013

Overall Market Performance

Unemployment is Declining

Slow Recovery in USASpending Levels still Low

Stalled Velocity of Money Supports Low Inflation Outlook

US Monetary transition and global impact

Possible Risks with the reduction of the Fed’s buying program in the near term:

Long-term rates could overshoot Sharp increases in Bond yields Volatility Higher rates may impact investment vehicles

Transition: From Crisis to Stability

Policy Responses

TransitionStability

Crisis in US Banking Crisis in EU Sovereign CrisisAusterity EU response

Common CurrencyEuroZone 17 Countries

Transitional Issues in the EZ

1. Core Countries vs. Periphery

2. Excessive Corporate Debt

3. Developing Institutions/Architecture of EU

EU: High Unemployment is problematic

Unemployment and domestic demandin the periphery

Unemployment Rate (%) Domestic Demand (volume)

Key Concerns for the Corporate Sector

• Capital flight to safer Euro-zone countries• Private capital has been replaced by public

sector flows • Liquidity in the core is not recycled in the

periphery • Funding asymmetries (corporate costs are very

high) • Current account imbalances

Flows in Euro Zone AreaCumulative from 2009Q4 in % of GDP

Challenges for the Corporate Sector in the Eurozone

• High Corporate Leverage• Credit Tightening • Revenue and profits contraction• Global Competitiveness

Corporate Debt

Debt - 2002Q1=100 Debt as % of GDP

Corporate Fundamentals

Real Long-term Ratesare still high in the EZ

» Tail risk of break-up/FRAGEMTATION appears very low » Euro zone recovery VERY SLOW in light of persistently high unemployment and

structural imbalances» Greece is moving into recovery, encouraging market optimism and foreign

investment

Real Progress in the Euro Zone?

•GREECE’S ANNUAL GDP GROWTH

28•Source: GK Research, “Ideas,” September 20, 2013 , World Bank and European Commission (Greece GDP)

CONSOLIDATED PRIVATE DEBT, % OF GDP EUROSTAT MACROECONOMICS IMBALANCE PROCEDURE SCOREBOARD

FORECAST

Euro Area

Increases in interest rates in US• Credit is hindered by financial fragmentation• Corporate debt is owned by firms with weak

debt servicing capacity; debt overhang• Banking system will experience loan losses• Need for Bank Re-Capitalization• Weak corporate and bank balance sheets• Asymmetric impact

Emerging Markets and China

Interest Rates and Capital Flows to EM

Volatility and EM Capital Flows

Low Volatility

High Volatility

EM Growth has decelerated

Growth Forecast for China Average 7% in next 5 years

China Exports Have NOT Recovered

China’s Consumption is lowerthan BRICs/EM

Leverage is Concentrated in a Few Sectors in China

Emerging Markets

Potential Risks

• Bond outflows will place at risk corporate borrowing• Financial stability concerns• Economic growth is slowing• Market liquidity is at risk

The Japanese experiment (Abenomics)

• Japan has enacted its stimulus/QE• Fiscal and structural reforms • The risk of deflation is persistent

JAPAN: Money Supply and GDP

Global Outlook: Cautiously Optimistic

US: Economic Recovery Poised to Continue at Moderate Pace» A number of important metrics beat expectations last week

• Strength in job growth, GDP, auto sales, manufacturing while unemployment fell below 7.0%

» FOMC has decided to begin tapering

» Grand rotation may have begun; money flowing out of bonds and into equities – RISK ON!

» A resilient consumer is well positioned to support recovery

Euro zone: GDP Growth Improving, More Work Ahead» Promising strides for EU, structural imbalances remain

» Valuations in Europe compelling; pointing toward economic improvement

EMs: Still a Source of Global Growth» Near-term growth has slowed, but secular stories remain intact

» Growth of EM middle class important long-term theme

Global: Dominant Theme of Synchronized Global Expansion» Global manufacturing numbers improved significantly

» Recent positive data for Eurozone, Spain, UK, Japan, Indonesia, India, Canada, Australia, Malaysia and Taiwan

» Global economic growth; good for the U.S.!

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US Equity Market Performance

Rising rates Led to Sideways Market

Sector Allocation Considerations for Rising Interest Rate Environments

•Past performance is no guarantee of future results. Source: Wells Capital “Confidence Runs Through Stock Market. Sectors shown have material differences and represent segments of the S&P 500. Daily fluctuations in specific market sectors are often more extreme than fluctuations in the overall market.

•During Periods of Rising Interest Rates… •Cyclical sectors•historically outperform defensive sectors

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Cointegrated Global Markets

GlobalDynamics

USA Eurozone

Emerging Markets

China

Abenomics

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