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1

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice.. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Copyright © 2011, Goldman Sachs. All rights reserved

The Changing Global Economy

Jim O’Neill Chairman, Goldman Sachs Asset Management

June 2012

2


Country Classification by 2011 GDP Share

Source: GSAM

N11 Bangladesh Egypt Iran Nigeria Pakistan Philippines Vietnam Mexico Korea Turkey Indonesia

World Growth Markets

Developed Markets

62%

Emerging Markets

13%

Growth Markets

25%

Indonesia 1%

Turkey 1%

Korea 2%

Mexico 2%

India 3%

Russia 3%

Brazil 4%

China 10%

3


GDP Forecasts

GSAM Consensus GSAM ConsensusUS 3.0 1.7 2.2 2.2 2.5 2.4UK 2.1 0.7 0.4 0.3 1.8 1.8Canada 3.2 2.5 2.2 2.1 2.5 2.2Euroland 1.9 1.5 -0.4 -0.4 1.0 0.6Japan 4.4 -0.7 1.9 2.5 1.3 1.3Brazil 7.5 2.7 3.6 3.0 5.0 4.3China 10.4 9.2 8.2 8.1 8.0 8.4India 10.6 6.9 7.2 6.6 8.0 7.3Russia 4.3 4.2 4.0 3.8 5.0 3.9Mexico 5.5 3.9 3.6 3.7 3.8 3.5Korea 6.3 3.6 3.4 3.0 4.8 3.8Indonesia 6.2 6.5 6.0 6.0 6.1 6.2Turkey 9.0 8.5 3.0 2.5 5.0 4.6Advanced 3.1 1.3 1.2 1.2 1.8 1.6BRICs 9.1 7.4 7.0 6.7 7.4 7.3Growth Markets 8.5 7.0 6.4 6.1 6.9 6.7World 5.3 3.8 3.5 3.4 4.1 3.9Consensus data as of June 2012.Source: GSAM and Consensus Economics

20122010 2011

2013

4


Inflation Forecasts

US 1.9 1.7 3.2 2.2 2.0UK 2.1 3.4 5.3 3.2 2.6Canada 0.8 2.2 2.9 2.1 2.0Euroland 0.9 2.2 2.6 2.3 0.6Japan -1.7 -0.4 -0.3 0.1 0.0Brazil 4.3 5.9 6.5 5.1 5.4China 0.7 4.7 5.4 3.3 3.6India 15.0 9.5 8.3 7.7 6.9Russia 8.8 8.8 6.8 6.3 6.0Mexico 3.6 4.4 3.2 3.7 3.7Korea 2.8 3.5 4.4 2.8 3.1Indonesia 2.8 7.0 5.4 4.8 5.5Turkey 6.5 6.4 6.3 9.6 6.6Advanced 1.1 1.7 2.7 2.0 1.3BRICS 5.2 6.4 6.3 4.8 4.8Growth Markets 4.9 6.1 6.0 4.8 4.7World 2.6 3.5 4.1 3.2 2.9* Consensus Economics June 2012Source: IMF and Consensus Economics

2013*2011 2012*2009 2010

5


2001 – 2010 Change in Global GDP

Source: IMF

0

2,000

4,000

6,000

8,000

10,000

12,000US$ bn

2001 - 2010 Increase in GDP

6


Change in US$ Size of GDP from 2011 to 2020

Source: GS Global ECS Research. GSAM Calculations

0

2

4

6

8

10

12

14

162010 US$ trn

2011 - 2020 GDP Increase

7


World GDP (Ave Growth)

1981-1990 1991-2000 2001-2010 2011-2020

World 3.3 3.3 3.5 4.2

United States 3.3 3.4 1.6 2.1

Euro Area 2.4 2.3 1.2 2.2

Japan 4.6 1.2 0.7 1.6

BRICs 5.3 5.5 8.1 6.6

Growth Markets 5.1 5.2 6.9 6.2N-11 4.5 4.4 4.2 5.3

Source: IMF, GS Global ECS Research

8


China vs European Periphery

2,160

1,370

7,300

2,200

1,500

300

0 2,000 4,000 6,000 8,000

Change in BRIC GDP, 2010-2011

Change in Chinese GDP, 2010-2011

Chinese GDP

Italian GDP

Spanish GDP

Greek GDP

USD, bn

Source: IMF, GSAM

9


Share of Global GDP in 2020


0

5

10

15

20

25

30

35

40

45Share, %

2020 Share of global GDP

10


Growth Market / Emerging Market Split


0

5

10

15

20

25Global GDP Share, % 2050 Share of Global GDP

Share of Global GDP Cut-off Point (1%)

Growth Markets Emerging Markets

11


BRICs & N11. 2011 Growth Environment Score (GES)

Source: GS Global ECS Research

0

1

2

3

4

5

6

7

8GES 1997-2011 GES Change

19971997 Developing Average2011 Developing Average

12


GES For Growth Markets (and US)


Korea China Brazil Mexico Russia Turkey Indonesia India United States

Headline 7.7 5.4 5.4 5.0 4.9 4.9 4.5 3.9 7.0

Rule of Law 7.0 4.3 5.0 3.9 3.4 5.2 3.7 4.9 8.2Corruption 5.8 3.8 5.1 4.3 2.9 5.0 3.5 4.0 7.5Political Stability 5.9 4.5 4.3 3.1 2.5 2.4 2.7 3.1 6.8Government Deficit 5.8 3.8 3.6 2.8 3.2 3.6 4.4 0.8 0.0Inflation 10.0 10.0 9.7 9.9 9.2 8.7 9.7 7.8 9.7External Debt .. 9.3 8.6 8.4 7.5 6.3 7.5 8.5 ..GFCF 5.7 9.1 3.7 4.0 4.4 3.7 6.4 5.9 2.9Openness 4.7 3.6 1.8 3.7 2.3 2.6 2.8 2.7 2.0Life Expectancy 9.1 7.6 7.6 8.3 6.7 7.7 6.7 6.0 8.6Schooling 9.5 6.5 8.0 6.7 7.3 7.1 6.1 4.7 8.9Mobiles 9.8 5.6 9.0 7.5 10.0 8.7 6.7 4.5 8.9Computers 10.0 0.7 2.1 1.9 1.7 0.8 0.3 0.4 10.0Internet 10.0 3.3 4.5 3.0 3.4 4.2 1.0 0.6 9.0Servers 5.1 0.0 0.2 0.1 0.1 0.4 0.0 0.0 10.0Patents 10.0 1.6 0.8 0.8 1.8 0.3 0.1 0.2 9.9R and D 8.0 3.7 2.7 0.9 2.6 2.1 0.2 2.0 7.1Cost of Business 8.5 9.6 9.3 8.8 9.7 8.3 7.9 4.4 9.9Urbanization 9.1 5.0 9.6 8.6 8.1 7.7 6.0 3.3 9.1

13


GES Aggregates

2011 2010 1997World 5.05 4.93 4.19DM 6.89 6.79 6.44EM 4.71 4.58 3.78Africa 3.77 3.64 2.80Asia 5.24 5.09 4.55CEE 5.33 5.24 4.32Developed Europe 6.81 6.72 6.25Latin America 5.16 5.06 4.24MENA 5.32 5.16 4.40North America 7.06 6.96 7.16BRICs 4.88 4.73 3.81N-11 4.73 4.65 3.60G7 6.70 6.60 6.23Broad EM 4.72 4.59 3.80

Growth Environment Score


14


Who is Fit for EMU? (Growth Markets)

Note, data are 2012 estimates Source: IMF and GS Global ECS

Cyclically adjusted budget deficit

(%GDP)

Gross General Govt. Debt (%

GDP)


India -9.1 67.6 3.9Brazil -2.7 65.1 5.4Mexico -3.2 42.9 5.0Turkey -1.8 36.0 4.9Korea 2.4 32.9 7.7Indonesia -1.6 23.2 4.5China 0.0 22.0 5.4Russia 1.6 8.4 4.9

15


Note, data are 2012 estimates. Source: IMF and Eurostat

Who is Fit for EMU? (Developed Markets)

Cyclically adjusted budget deficit (%GDP)

Gross General Govt. Debt (% GDP)


Germany -0.4 81.6 7.0France -3.3 90.7 6.5Italy -0.8 125.3 5.8Spain -4.7 78.1 6.2Netherlands -2.3 66.5 7.4Belgium -2.7 94.3 7.0Austria -3.0 73.9 6.9Greece -4.7 189.1 5.0Finland 1.2 50.3 7.2Ireland -5.5 115.4 6.1Portugal -1.3 111.8 5.7Slovakia -3.4 46.9 6.0EMU Average -2.4 90.0 6.8UK -5.1 86.6 6.8US -5.6 107.6 7.0Canada -3.2 86.7 7.1Japan -8.6 241.0 6.7Australia -1.8 23.8 7.6Sweden 1.2 32.6 7.6

16


Euro Area Competitiveness

95

105

115

125

135

145

155

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

Index, Jan '00=100

France GermanyGreece IrelandItaly PortugalSpain AustriaBelgium Finland

Unit Labour Costs

Source: Haver Analytics

17


China Lead Indicators


96979899100101102103104105106

0

2

4

6

8

10

12

14

16

18

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Index1996=100

% yoy

GSCA (lhs) CEMAC-GS Leading Indicator (rhs)

18


China FCI


103

104

105

106

107

108

109

110

111

112

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

index

China FCI

Easier Conditions

19


Retail Sales US and BRICs


-12

-8

-4

0

4

8

12

16

20

24

28

32

36

04 05 06 07 08 09 10 11 12

%yoy

USA Russia Brazil

China India* BRICs

* Private final consumption

20


Change in Real Retail Sales in Developed vs Growth Plus (Jan ‘07 to Present)

Source: National Sources, GS Global ECS Research.

-80

-60

-40

-20

0

20

40

60

80

100

120

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Bil$ Change since Jan 07

World

Advanced

Growth and Emerging Markets

21


China GDP and its Changes

2001, $bn 2011, $bn Nominal % yoy Real % yoy

GDP 1,290 7,300 15.1 10.1

Exports (net) 30 190 24.1 18.7

Investment 460 3,330 18.4 13.3

Private Consumption 600 2,510 12.2 7.4

Public Consumption 210 960 13.4 8.5

Source: IFS and GSAM calculations

22


China Retail Sales Versus IP

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

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

Ratio

Ratio of Retail Sales Growth to IP Growth

Source: Haver Analytics and GSAM calculations

23


China BBoP and Current Account Surplus

0

2

4

6

8

10

12

14

16

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

% GDP 4mmaCA BBoP

BBoP = Current Account + Net FDI + Net Portfolio Investment


24


China Export and Import Growth

-40

-20

0

20

40

60

80

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

3M MA,% yoy

Exports

Imports


25


Growth Markets Consumption

0

2

4

6

8

10

12

14

16

US Euro Area

BRICs Growth Markets

N-11 China

2010 US$trn 2011

20152020

Source: GS Global ECS Research, Haver Analytics

2010 USD trn 2011 2015 2020US 10.6 11.0 12.4Euro Area 6.6 6.8 7.5BRICs 5.4 7.8 11.0Growth Markets 7.7 10.5 14.5N-11 3.2 3.9 5.3China 2.5 3.9 5.7

26


Germany’s Exports to Asia Rising – Stabilisation Elsewhere

50

70

90

110

130

150

170

190

210

230

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

IndexJan07=100 China

India

Russia

France

Italy

Japan

US

Spain

BRIC

N-11


27


Euro Area CA vs BBoP

-5

-4

-3

-2

-1

0

1

2

3

4

5

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP 4-qtr ma Current Account

BBoP


28


US Exports to Key Destinations

Source: Haver Analytics and GSAM Calculations.

75

95

115

135

155

175

195

215

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

IndexJan07=100

World

BRIC

N-11

Canada

Mexico

China

Japan

Germany

UK

Brazil

29


US Export and Import Growth

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

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

3M MA,% yoy

Real exports

Real imports


30


UK Exports to Key Destinations

60

80

100

120

140

160

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Index Jan 07 = 100 China

Netherlands

BRICs

India

N-11

Germany

Ireland

France

U.S.

Source: Haver Analytics and GSAM Calculations.

31


UK Composite PMI

35

40

45

50

55

60

65

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

Index

UK Composite PMI

Expansion > 50


32


‘Crisis’ Indicator

-2

-1

0

1

2

3

4

5

6

90 92 94 96 98 00 02 04 06 08 10 12

Index

GS FSI (Financial Stress Index)


33


Credit Spreads


200

400

600

800

1000

1200

1400

1600

1800

0

50

100

150

200

250

300

06 07 08 09 10 11 12

bpbp

CDX IG (lhs)

CDX IH (rhs)

34


OECD Financial Conditions


98.5

99

99.5

100

100.5

101

101.5

102

102.5

103

103.5

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

Index, Jan 2000 = 100

OECD FCI

Oil Augmented FCI

35


Momentum of the GLI


-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% mom

Global Industrial Production*, 3mmaGLI Momentum

*Includes OECD countries plus BRICs,Indonesia and South Africa

36


ISM Manufacturing Index


-20

-15

-10

-5

0

5

10

15

20

25

30

35

20

25

30

35

40

45

50

55

60

65

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

IndexIndex

PMI Composite Index (50+ = Econ Expand) [lhs]New orders - Inventories Index (rhs)

37


US Weekly Job Claims


200

300

400

500

600

700

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

Claims (000s)

4-Week Moving Average

38


US House Prices vs Income

3.0

4.0

5.0

6.0

7.0

8.0

9.02.5

3.0

3.5

4.0

4.5

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

House Price/Income Ratio* (left)

Mortgage Rate (right, inverted)

Percent

* S.a. median home price divided by median family income.Source: Department of Commerce. FRB. NAR.

Ratio

39


Inflation Expectations in US


2.4

2.6

2.8

3.0

3.2

3.4

3.6

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

%yoy University of Michigan 5-10 yr Inflation Expectations

40


US BBoP vs Current Account


-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP 4-qtr ma

Current AccountBBoP

41


Five Year Forward Oil Price


0

20

40

60

80

100

120

140

160

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

$/barrel

5 Yr Forward Oil Price

Spot price

200 day ma of 5yr forward

42


Current Estimates for the Equity Risk Premium*

Source: GSAM Calculations

Real GDP

Growth

Real Earnings Growth

+ Dividend Yield =

Expected Real

Return -

Real Bond Yield

= Implied ERP

Expected Inflation

Expected Nominal Return

US 2.5 2.5 2.2 4.7 -0.6 5.4 2.0 6.7UK 2.3 2.3 3.7 5.9 -1.2 7.1 2.0 7.9Europe ex UK 2.0 2.0 4.2 6.2 0.9 5.3 2.0 8.2Japan 1.5 1.5 2.6 4.1 0.6 3.5 1.0 5.1Brazil 5.0 5.0 3.9 8.9 4.6 4.3 4.5 13.4China 8.0 8.0 4.3 12.3 0.4 11.9 3.0 15.3India 8.0 8.0 1.7 9.7 4.3 5.4 4.0 13.7Russia 5.0 5.0 4.1 9.1 2.6 6.4 6.0 15.1

GDP-weightedAdvanced 2.1 2.1 3.1 5.2 0.1 5.2 1.8 7.1BRICs 7.0 7.0 3.8 10.8 2.0 8.8 3.8 14.7World 3.5 3.5 3.3 6.8 0.6 6.2 2.4 9.2

PPP-weightedAdvanced 2.2 2.2 3.0 5.2 0.0 5.2 1.9 7.1BRICs 7.3 7.3 3.6 11.0 2.0 9.0 3.7 14.7World 4.2 4.2 3.3 7.5 0.8 6.7 2.6 10.1* As of 13 June 2012

43


ERP for Growth Market Economies

Real GDP

Growth

Real Earnings Growth

+ Dividend Yield =

Expected Real

Return -

Real Bond Yield

= Implied ERP

Expected Inflation

Expected Nominal Return

Brazil 5.0 5.0 3.9 8.9 4.6 4.3 4.5 13.4

China 8.0 8.0 4.3 12.3 0.4 11.9 3.0 15.3

India 8.0 8.0 1.7 9.7 4.3 5.4 4.0 13.7

Russia 5.0 5.0 4.1 9.1 2.6 6.4 6.0 15.1

Mexico 3.0 3.0 1.8 4.8 3.0 1.8 3.0 7.8

Korea 4.8 4.8 1.5 6.3 0.7 5.6 3.0 9.3

Indonesia 5.8 5.8 2.5 8.3 1.4 6.9 5.0 13.3

Turkey 5.0 5.0 2.5 7.5 3.6 3.9 5.5 13.0

* As of 13 June 2012

Source: GSAM Calculations

44


Trend in Forward P/Es

Source: Datastream

0

5

10

15

20

25

30

35

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

12mth forward PE US

JapanChinaIndiaEuropeRussiaBrazil

45


Cyclically Adjusted PE (CAPE) Ratios

Source: Datastream and GSAM Calculations. As of 06 June 2012

Latest CAPE Forward PE Average

CAPEDeviation from avg.

CAPE vs FY1 PE

CAPE History

USA 20.1 11.8 18.7 8% 71% 1973Indonesia 18.2 11.8 21.7 -16% 54% 2001Japan 17.4 10.8 46.6 -63% 61% 1975Mexico 17.2 15.4 19.3 -11% 12% 2001Canada 14.5 11.4 19.3 -25% 27% 1975India 14.1 12.3 22.3 -37% 15% 2001Australia 13.5 10.6 15.8 -15% 27% 1975China 12.5 8.4 17.6 -29% 50% 2001Korea 12.4 8.3 16.6 -26% 49% 2001Germany 9.7 9.0 19.0 -49% 8% 1976UK 9.5 9.2 13.8 -31% 3% 1975Brazil 9.3 8.6 15.4 -39% 8% 2001France 8.2 9.0 19.8 -59% -9% 1975Turkey 7.8 8.3 15.4 -49% -7% 2001Russia 5.8 4.3 14.3 -60% 33% 2001Italy 5.2 7.0 22.3 -77% -26% 1989Spain 4.7 7.6 18.1 -74% -38% 1985

46


GSAM Equity Benchmark Allocation in Growth Market World

Group GDP Share Market Cap

GS GIVI™ Global Growth

China 10.3% 2.6% 5.4%Brazil 3.7% 2.1% 2.5%India 2.7% 1.3% 1.7%Korea 1.8% 2.2% 2.1%Russia 2.6% 0.8% 1.9%Turkey 1.3% 0.3% 0.8%Mexico 1.8% 0.6% 1.2%

Indonesia 1.2% 0.3% 0.6%Developed Markets 70.2% 87.1% 80.4%

Growth Markets 25.3% 10.2% 16.1%Emerging Markets 4.5% 2.7% 3.5%

Source: GSAM S&P GIVI™ is a trademark of Standard & Poor's Financial Services LLC (“Standard & Poor's”) and have been licensed for use by The Goldman Sachs Group, Inc. and its affiliates. Any products associated with GIVI are not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor’s does not make any representation regarding the advisability of investing in such products.

47


GDP Index Weights vs Market Cap

-25

-20

-15

-10

-5

0

5

10

15

20

25

Growth Markets

EM Rest of DM

US Europe UK Japan

pp

Difference, GDP Weight vs Market Cap

Source: Barclays, Haver Analytics and GSAM Calculations

48


Disclaimer

Jim O’Neill is the Chairman of GSAM, which is a separate operating division and not part of Global Investment Research. The views expressed herein by Mr. O’Neill do not constitute research, investment advice or trade recommendations and may not represent the views and/or opinions of GSAM’s portfolio management teams and/or Global Investment Research. Investors are urged to consult with their financial advisors before buying or selling any securities. The views and opinions expressed herein are subject to change at any time and GSAM has no obligation to provide any updates or changes. No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. There may be conflicts of interest relating to GSAM and its service providers, including Goldman Sachs and its affiliates, who are engaged in businesses and have interests other than that of managing, distributing and otherwise providing services to GSAM. These activities and interests include potential multiple advisory, transactional and financial and other interests in securities and instruments that may be purchased or sold by GSAM , or in other investment vehicles that may purchase or sell such securities and instruments. These are considerations of which investors should be aware. Additional information relating to these conflicts is set forth in GSAM’s Conflicts of Interest Policy. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. It is not possible to invest directly in an index. S&P Indices does not sponsor, endorse, sell, or promote any S&P index-based investment product. This document does not constitute an offer of services in jurisdictions where S&P Indices or its affiliates do not have the necessary licenses. S&P Indices receives compensation in connection with licensing its indices to third parties. S&P GIVI® is a trademark of Standard & Poor's Financial Services LLC (“Standard & Poor's”) and have been licensed for use by The Goldman Sachs Group, Inc. and its affiliates. Any products associated with GIVI are not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor’s does not make any representation regarding the advisability of investing in such products. STANDARD & POOR’S, S&P, and S&P INDICES are registered trademarks of Standard & Poor’s Financial Services LLC. S&P GIVI and GIVI are trademarks of Standard & Poor’s Financial Services LLC. 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The Changing Global Economy › _legacy › blog › files › Etoncollege.pdf · 2 This information discusses general market activity, industry or sector trends, or other broad-based