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Wealth and Investment

Management

Important Information: Please note that the contents of this document are intended for non-US residents only.

In Focus: Markets as we see them

Siren Call

“Come this way, honoured Odysseus…over all the generous earth we know

everything that happens."

(Homer, Odyssey)

Plug your ears…

The claims made on behalf of gold by its many ardent admirers certainly resemble

Homer’s imagining of the siren song in their sheer breadth. Owning gold in

investment portfolios can apparently help protect against inflation or deflation,

political, financial or economic chaos and much more besides1. Moreover, many still

argue that the move away from the Gold Standard in 1971 represents patient zero of

the mutating financial pandemic that has regularly reared its ugly head in the

intervening decades. Crisis has followed crisis leading to the mess we find ourselves in

today, with contorted capital markets amidst a central bank race to debase their

respective currencies fastest and furthest - a final desperate rearguard action against

the inevitable global economic apocalypse – an apocalypse incidentally that we surely

deserve for de-anchoring our money from gold all those decades ago.

Some caution is obviously warranted here. Odysseus famously plugged his crew’s

ears with beeswax and had himself strapped to the mast to resist the call of the

sirens. We would simply suggest that gold should occupy no more than low single

digits in percentage terms as a proportion of your total investible assets – calls to hold

significantly more, no matter how honeyed the voices, should be strongly resisted. We

explore the reasons for this stance below in a bit more detail.

1 8 Reasons To Own Gold - Investopedia

20 May 2016

For EMEA distribution only

Inside (click to jump to sections)

Plug your ears… We would suggest

that gold should occupy no more

than low single digits in percentage

terms as a proportion of your total

investible assets – calls to hold

significantly more, no matter how

honeyed the voices, should be

strongly resisted.

Safe haven? Gold’s historical record as

a safe-haven asset over the long run is

far from perfect.

Inflation protection The long-run

correlation between gold and

unexpected inflation looks entirely

unremarkable.

Real yields and gold One area where

there is an undeniably strong

relationship is between gold and real

bond yields.

Conclusion

Market calls – summary

Macro economy summary

Asset class summary

Latest market data

Key macroeconomic projections

Markets in a nutshell…

Figure 1: Performance of gold price year-to-date Figure 2: Gold and equity market downturns

Source: MSCI, FactSet, Barclays Source: MSCI, FactSet, Barclays

1100

1300

1200

Mar Apr May

2016

Jan Feb

Gold

USD / Troy Ounce

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

1971 1981 1991 2001 2011Market downturns - annual price changes below -10% y/yMSCI World y/y %Gold ($ per troy ounce, y/y %)

In Focus 20 May 2016 2

Safe haven?

Perhaps the most alluring part of gold’s story right now seems to be its role as a safe port

in the storm. In a world seemingly beset with more than usual levels of monetary,

economic and even political uncertainty, gold, with its thousands of years of practice as a

store of value, seems to shine brightly as an investment prospect (Figure 1).

Here the question of what we look for in a safe haven is important to answer. The idea of

what constitutes a safe asset would probably differ from person to person, however most

would agree that a safe asset should have a relatively stable value during times of market

stress2. If we assume that such times tend to see equity markets fall sharply, Figure 2

illustrates that gold’s historical record over the long run is far from perfect on this count.

Even without that blemished relative track record, investors should be wary of safe

havens where the price has jumped around so dramatically – even when just viewed over

the last five years. Nonetheless, if enough investors believe gold to be a safe haven then it

may well act as one. As Warren Buffet suggested when asked to comment on gold’s

popularity – “the rising price on its own generated additional buying enthusiasm,

attracting purchasers who see the rise as validating an investment thesis. As

“bandwagon” investors join any party, they create their own truth – for a while”3. If this is

indeed the case, then there is clearly nothing magical about gold that imbues it with

defensive properties. Gold investing would simply be a momentum strategy, an illusion

forged by the masses.

2 The Golden Dilemma – Erb, Harvey, 2013 3 2011 Annual Shareholder Letter – Berkshire Hathaway

Figure 4: Gold price and unexpected inflation Figure 5: Gold price and unexpected inflation

Source: Datastream, Barclays Source: Datastream, Barclays

R² = 0.1125

-50

0

50

100

150

200

250

-6 -4 -2 0 2 4

Go

ld p

rice

y/

y

Deviation of annual inflation rate from HP trend (%)

R² = 0.2177

-50

0

50

100

150

200

250

-10 -5 0 5 10

Go

ld p

ric

e y

/y

Deviation of inflation rate from 5 yr MA of annual inflation (%)

Figure 3: Real gold price

Source: Datastream, Barclays

0

50

100

150

200

250

300

350

400

450

500

1975 1985 1995 2005 2015

Real gold price - adj. for US CPI (base year = 1975, $ per troy ounce) Long-run average

Investors should be wary

of safe havens where

the price has jumped

around so dramatically

In Focus 20 May 2016 3

Inflation protection

Gold’s role as an inflation hedge has drawn plenty of academic work. Roy Jastram (1978)

for example, famously suggested that gold has been a poor inflation hedge in the short

run, but over a century (far beyond any reasonable investor’s time horizon!), it has done a

better job. Patience is surely an important trait in investing, as we are regularly at pains to

point out, however this may be stretching it4.

For the more relevant shorter term time frame, we have to wonder if gold provided

decent inflation protection, then its inflation adjusted price would be constant over time.

Figure 3 shows that this has not been the case. If claims of a constant, mean-reverting

real gold price are true, then Figure 3 would show that gold is currently overvalued – thus

even less of a reason to hold it now. To counter this, some argue that gold is not for

protection against expected changes inflation, but the unexpected. This is more difficult

to weigh, as the tricky procedure of decomposing inflation into its expected and

unexpected components is more art than science. However, based on some (admittedly

crude) empirical work, the long-run relationship between gold and unexpected inflation

looks entirely unremarkable as Figures 4 and 5 illustrate5.

Real yields and gold

One area where there is an undeniably strong relationship is between gold and real bond

yields (Figure 6). The basic argument here is that the relative attraction of gold wanes as

the real yield available on other, more plausible, safe havens rises. Why would you buy

4 The Golden Constant – Roy Jastram, 1978 5 Hedging inflation: The role of expectations – Vanguard, 2011

Figure 8: US wage growth Figure 9: Relative contribution to OECD headline inflation

Source: Datastream, Barclays Source: Datastream, Barclays

5

10

15

20

2

3

4

5

1

1990-'99 2000-'09

NFIB small business survey:

compensation plans, pushed

forward 12 months

Average hourly wages: private nonfarm

production and nonsupervisory (rhs)

3mma

(%)

YoY, 3mma (%)

0

2

3

4

1

-1

'13'12'11'10'09 '15'08 '14'07

Headline

Food

Energy

Core

Contributions

to OECD

headline

inflation

(%)

Figure 6: Gold price and inflation-linked Treasury yields Figure 7: US revolving consumer credit growth

Source: Datastream, Barclays Source: Datastream, Barclays

800

1600

1800

1000

600

1200

1400

0

2

-2

1

-1

'13'12'11'10'09 '15'08 '14

Gold price

US 5 year TIPS yield (rhs)

USD / Troy Ounce Percent

0

4

-4

8

-8

12

16

20

2005-'09 2010-'142000-'04

US revolving consumer credit

Year on year growth (%)

If gold provided decent

inflation protection, then

its inflation adjusted

price would be constant

over time

In Focus 20 May 2016 4

gold, which throws off no cashflows or coupons, when you can lend the US government

money with a yield above inflation so to speak? As real and nominal bond yields have

plunged lower this year, gold has prospered.

So what are the chances that this will remain the case? Real and nominal yields to remain

depressed allowing gold to continue to shine in portfolios? Readers will know well that we

see inflation picking up over the course of the year, particularly in the US economy.

Revolving credit is picking up (Figure 7), wages are too (Figure 8) and just as oil prices

exerted significant downwards pressure on inflation indices over the last 2 years (Figure

9), so will they exert upward pressure as we continue to annualize those dramatic falls.

Figure 10 represents a very rough guess at the potential effects on US inflation, all else

being equal, if oil prices just stay where they are through this year.

So assuming this is right and inflation does start to pick up, does this mean that real

yields will move higher? We have suggested that even with the return of some inflation,

the bond market may not become disorderly, with levels of central bank ownership

important. Nonetheless, term premia 6have been falling alongside inflation for the last

several decades to now pretty invisible levels (Figure 11)7. We suspect that as inflation

starts to return, a less historically remarkable term premium for government bonds may

also follow, pushing real yields higher. We would hesitate to suggest how quickly such a

risk premium would return, however, this sits behind our recommendation that gold

should not occupy large parts of diversified investment portfolio. Claims on its behalf look

6 Term premium - the compensation that investors require for bearing the risk that short-term Treasury yields do not evolve as they expected 7 Treasury Term Premia – Federal Reserve Bank of New York

Figure 11: US term premia

Source: Datastream, Barclays

-1

0

1

2

3

4

5

6

1961 1971 1981 1991 2001 2011

US 1y Treasury term premium US 5y Treasury term premium US 10y Treasury term premium %

Figure 10: US headline inflation, assuming oil price maintains current price of $50/bbl

Source: Datastream, Barclays

-3

-2

-1

0

1

2

3

4

5

6

7

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

US CPI y/y % US CPI y/y % - assuming brent oil price remains constant at 50$ until March 2017

Readers will know well

that we see inflation

picking up over the

course of the year,

particularly in the US

economy

In Focus 20 May 2016 5

thin on the evidence set out above.

Conclusion

So given that the Tactical Allocation Committee has just neutralised its long held

underweight position in commodities, where would we recommend investing? There is

perhaps some irony that the recent recovery in oil prices has perhaps sown the seeds for

gold’s future underperformance. Nonetheless, our preferred route in commodities is the

diversified one. China’s ongoing property market bounce is likely to help sentiment across

the space even in the face of still unappealing inventory statistics and supply demand

balances. For those looking for a port in the storm, cash and short term bonds remain the

best option, nominal values will remain constant even if real values won’t. To protect

against the kind of inflation that we are currently envisaging, equities have historically

proved to be the most consistent bet (Figure 12 and 13)8.

William Hobbs

Head of Investment Strategy, UK and Europe

william.hobbs@barclays.com

Hao Ran Wee

Research Analyst

haoran.x.wee@barclays.com

8 In Focus 9th May 2014 – Inflation-deflation

Figure 12: Real UK equity returns by inflation regimes Figure 13: Real asset class returns by inflation regimes

Source: Barclays Equity Gilt Study Source: Datastream, Barclays

-15

-10

-5

0

5

10

15

-2 to 1 1 to 4 4 to 7 7 to 10 10 to 13

Price

Dividend

Total

Inflation year on year (%)

Real average annual UK equity return (1900-2015,%)

-10

0

10

20

30

40

50

60

<1 1 to 4 4 to 10 >10

S&P 500 TR index CRB SpotGold US TIPS

Inflation year on year (%)

Average annual real return (%)

Start point for data varies across the asset

classes from 1936 to 1998

Our preferred route in

commodities is the

diversified one

In Focus 20 May 2016 6

Investment conclusions

1. Strategically: corporate securities preferred to

government, and stocks to bonds

There remain unfulfilled economic opportunities to

exploit for the corporate sector in our view. Bonds

look expensive, with positive real returns likely hard

to achieve even if inflationary pressures remain

benign.

2. Tactically: we remain overweight developed equities

Continuing economic growth, as well as the reduced

influence of commodity earnings may see quoted

sector earnings surprise market expectations

positively this year. Valuations continue to look

unremarkable.

Market calls – summary Macro economy summary

Incoming economic data continue to help the latest capital

market’s tantrum to fade. Much of the commentary and

activity around markets suggests that tensions remain

elevated all the same.

A summer interest rate rise from the Federal Reserve is

getting a little more likely, though the market is still on

balance sceptical. For our part, we continue to argue that

inflationary prospects may still be perkier than currently

assumed by the bond market.

The next leg higher in equity markets will likely require

analyst forecasts to recover some of the recently lost

ground. The pickup in important lead indicators for the US

and global economy suggests we may not be waiting long.

More broadly, we believe the world economy will continue to

grow and see the cycle end as a relatively distant, albeit

inevitable, prospect. The benefits of lower fuel prices

continue to be underestimated by those calling for an imminent US and global recession.

Total returns across key asset classes

-1.9%

2.7%

7.9%

-1.0%

-1.1%

5.9%

4.2%

4.0%

0.1%

-3.6%

-0.8%

-24.7%

-14.9%

-0.9%

-4.3%

-0.2%

1.4%

0.1%

Alternative Trading Strategies*

Real Estate

Commodities

Emerging Markets Equities

Developed Markets Equities

High Yield and Emerging Markets Bonds

Investment Grade Bonds

Developed Government Bonds

Cash & Short-maturity Bonds

2015 2016 (through 19 May 2016)

*As of 18th May; Asset classes in USD and represented by indices as published in Compass February 2013. Source: FactSet, Barclays

Christian Theis, CFA +44 (0)20 3555 8409

christian.theis@barclays.com

In Focus 20 May 2016 7

Asset class summary We maintain a Strategic Asset Allocation for five risk profiles, based on our outlook for each

of the asset classes. Our Tactical Allocation Committee (TAC), comprised of our senior

investment strategists and portfolio managers, regularly assesses the need for tactical

adjustments to those allocations, based on our shorter-term (three to six month) outlook.

Here, we share our latest thinking on our key tactical tilts.

Developed Markets Equities: Decreased to Overweight from Strong Overweight

(18 April 2016)

Developed equity markets have rallied substantially from the lows plumbed earlier in the

year. The TAC’s decision to further increase the recommended exposure to equities at the

expense of cash on the 20th January thus paid off and the opportunity was taken to take

some profits in developed equities. We remain overweight the asset class, as we believe that

there is further upside, with excessively pessimistic earnings forecasts likely to be corrected

over the course of the next six months. We continue to believe that while the next US and

global economic recession is of course inevitable, it is not imminent.

We still advise investors not to underestimate the US consumer, particularly with real

disposable income growing at such a healthy pace. This may surprise those again calling for

US profit margins to continue rolling over. Such forecasts may both understate the negative

effect of energy sector earnings over the last year and a half and overstate its future role

given the sector’s now much diminished contribution to quoted index earnings.

Our favoured developed equity regions remain for the moment the US and Europe ex-UK.

With regards to the US, earnings expectations look achievable and valuations unremarkable,

while the reduced influence of energy sector earnings should be helpful as noted above.

Emerging Markets Equities: Neutral

The TAC moved their recommended position in Emerging Markets Equities up to Neutral in

January. The case for further meaningful downside is now harder to make in the context of

the underperformance already suffered by the space over the last several years. Much bad

news is already factored into our view, while the potential for a further dramatic ascent of the

US dollar, helpful in stoking fears of a repeat of the late 1990s, is also somewhat diminished

given a less extreme valuation.

Within Emerging Market Equities, Asia remains our preferred region, with Korea, Taiwan and

China (Offshore) our highest conviction country bets on a strategic basis. The expected pick

up in global trade is central to this view. We continue to watch US imports for any signs of

this.

Cash & Short-Maturity Bonds: Neutral

Given the recent severe market disturbances, cash continues to play a pivotal portfolio

insulation role. While the fixed income universe remains unattractive at current extreme

valuations, cash offers a source of funds to invest into other asset classes when appropriate

opportunities arise. Evidence of some returning inflation in the US needs to be watched very

carefully obviously.

Our favoured developed

equity regions remain

for the moment the US

and Europe ex-UK

In Focus 20 May 2016 8

Developed Government Bonds: Neutral

With nominal yields on large chunks of the government bond universe negative or close to it,

investors will likely have to work hard to make real returns from these levels over the next

several years. Our view remains that such valuations underestimate the underlying

inflationary pressures within the US economy in particular, something that incoming inflation

data pay some testament to. While the level of (returns insensitive) central bank ownership

suggests that the bond market may lag a pick-up in inflation, our continuing small strategic

and tactical allocation to the area suggests that higher real returns lie elsewhere.

Investment Grade Bonds: Underweight

The spread of investment grade credit over government bond yields remains close to its ten

year average. However, this leaves nominal yields in high quality corporate credit low in

absolute terms and may make the job of those trying to make positive real returns difficult.

High Yield & Emerging Markets Bonds: Underweight (Increased 18 April 2016)

Junk credit remains of tactical interest even after the impressive recent rally - yields in the ex-

energy space are still consistent with levels of defaults that we regard as unlikely in the

context of our view of the immediate prospects for the US economy. With oil prices still

depressed, pressure on energy credits is likely to remain, though opportunities for the risk

aware may lie here too amidst still somewhat indiscriminate market activity. Emerging

Markets Bonds are expensive and remain vulnerable to a reversal of inflows during the slow

process of monetary normalisation. However the level of our conviction is somewhat

reduced, with emerging economies starting to find a floor and commodity prices looking

better supported amidst improving data out China’s property sector.

Commodities: Neutral (Increased 13 May 2016)

We have now closed our long held underweight in the commodity complex. US monetary

normalisation will likely provide a headwind, but the bounce in China’s property market

indicators looks sufficient to offset this.

Investors are likely best served by tilting their commodity exposure towards oil and away

from gold where possible, with the latter still particularly vulnerable to further US interest

rate rises. We see oil prices continuing to drift higher over the coming 12 – 18 months as the

market’s worst fears on China fail to materialise and a smaller than suspected surplus is

worked through.

Real Estate: Neutral

Recent volatility has served as a timely reminder of the importance of maintaining a

diversified portfolio with the ability to weather a number of market environments, and we

continue to encourage clients to ensure that they are fully allocated to Real Estate.

Alternative Trading Strategies: Underweight (Reduced 13 May)

The previous underweight in commodities shifts to Alternative Trading Strategies (ATS). This

is primarily a function of the difference in volatilities for the two asset classes. There is less

risk being underweight the lower volatility ATS in the current market environment in our

opinion. Regulation and lower leverage leave this diversifying asset class however without

tactical appeal.

Some returning inflation

is central to our current

tactical posture

In Focus 20 May 2016 9

Equities

MSCI indices Yield

Total Return Performance

Global Market

Capitalisation

(%)

EPS growth (%)

P/E ratio (x)

2016 2017 LTM1

10 Year Ave.

LTM1 1 Week YTD 5Yr Ann. 2016 2017

Developed markets 2.7 -1.3 -1.1 6.1 90.3 1.8 13.1 16.7 14.7 17.0 15.0

US 2.2 -1.1 0.1 10.2 53.6 1.3 13.8 17.9 15.7 18.1 15.7

Europe ex UK 3.4 -2.0 -5.0 0.8 15.0 2.4 12.2 15.2 13.5 15.4 13.6

UK 4.3 0.0 -2.1 1.8 6.6 -5.7 17.8 16.7 14.2 16.3 12.4

Japan 2.2 -1.2 -5.4 4.9 7.8 16.4 7.3 13.0 12.1 14.7 n/m

Asia ex Japan 2.8 -2.0 -4.6 -1.4 8.3 3.3 11.1 12.3 11.0 12.6 13.8

Emerging markets 2.8 -3.1 -1.0 -5.0 9.7 7.4 13.6 12.1 10.7 12.7 12.5 1 LTM = Last Twelve Months, i.e. trailing. Source: FactSet, Datastream, Barclays

Developed markets - sectors

MSCI indices Yield

Total Return Performance

Global Market

Capitalisation

(%)

EPS growth (%)

P/E ratio (x)

2016 2017 LTM1

10 Year Ave.

LTM1 1 Week YTD 5Yr Ann. 2016 2017

Developed markets 2.7 -1.3 -1.1 6.1 90.3 1.8 13.1 16.7 14.7 17.0 15.0

Energy 3.9 -0.8 9.7 -3.5 6.0 -50.3 140.1 52.8 22.0 34.6 43.8

Materials 2.7 -1.4 6.7 -4.6 4.3 -9.5 18.7 18.9 15.9 17.7 17.2

Industrials 2.5 -1.7 2.6 5.8 9.9 12.2 10.0 16.4 14.9 16.6 17.0

Cons. Discretionary 2.1 -2.2 -4.0 10.4 11.6 12.1 11.8 15.9 14.2 16.5 20.8

Consumer Staples 2.6 -2.6 3.4 10.0 9.9 4.4 9.5 21.7 19.8 21.2 18.2

Health Care 2.0 -0.7 -5.6 12.7 11.8 7.0 10.5 16.5 14.9 16.6 18.8

Financials 3.3 -0.5 -5.7 3.9 17.9 -0.1 9.1 12.5 11.5 11.8 n/m

IT 1.7 0.0 -3.5 10.1 12.5 1.6 12.1 16.8 15.0 16.5 20.3

Telecom. Services 4.1 -2.8 4.7 6.5 3.3 7.1 8.5 15.6 14.4 15.6 15.5

Utilities 3.8 -2.8 5.6 4.2 3.1 -2.2 3.6 16.4 15.9 15.5 16.6 1 LTM = Last Twelve Months, i.e. trailing. Source: FactSet, Datastream, Barclays

Fixed income Total Return Performance

95

100

105

31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Mar

US 10 Year Government Global IG Global high yield

Key Fixed Income Indices (31-Dec-14=100, USD Hedged)

Index Yield 1 Week YTD 5Yr Ann.

Global inv. grade 2.6 -0.3 4.2 4.9

Financials 2.4 -0.3 2.7 5.0

Industrials 2.8 -0.4 5.2 4.7

Utilities 2.7 -0.3 5.4 5.8

High yield global 7.1 -0.2 6.5 6.2

US 7.6 -0.2 6.8 5.2

Europe 4.8 0.1 3.8 7.9

US 10Y 1.8 -0.8 4.7 5.2

Euro 10Y 0.2 -0.2 5.2 7.9

UK 10Y 1.4 -0.2 5.2 6.7

Performance represents local currency/USD hedged returns.

Commodities

Price Level

Total Return Performance

45

55

65

75

85

95

105

31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Mar

Overall Ener. Ind. met. Prec. met. Agri.

Key Commodity Indices (31-Dec-14=100, USD)

DJ-UBS 1 Week YTD 5Yr Ann.

Energy 1.3 4.7 -20.6

Brent crude 49.28 $/bbl 2.0 19.2 -17.2

Industrial metals -0.5 0.4 -13.5

Copper 4,594 $/tonne -0.6 -3.9 -13.6

Precious metals -1.9 18.6 -6.7

Gold 1249.5 $/oz -1.2 18.4 -3.9

Agriculture -0.2 9.2 -8.8

Corn 3.74 $/bushel 0.3 6.5 -11.6

Commodities -0.1 7.9 -12.0

Source for all figures on this page: FactSet, Datastream, Barclays.

All data as of close of business (COB) 19th May and in USD unless stated otherwise – see following page for more performance figures.

In Focus 20 May 2016 10

Performance

Equities

Total Return Performance

QTD YTD 1 Year

2 Yr

Ann.

3 Yr

Ann.

5 Yr

Ann.

12m to

19.05.15

12m to

19.05.14

12m to

19.05.13

12m to

19.05.12 2015 2014 2013 2012 2011

Developed markets -0.8 -1.1 -7.9 0.2 4.5 6.1 9.0 13.7 31.3 -10.4 -0.9 4.9 26.7 15.8 -5.5

US -0.7 0.1 -3.3 5.3 8.4 10.2 14.6 14.9 30.8 -2.2 0.7 12.7 31.8 15.3 1.4

Europe ex UK -2.4 -5.0 -15.0 -8.1 1.0 0.8 -0.7 22.1 37.0 -26.3 -0.6 -6.5 27.6 21.3 -15.3

UK 0.3 -2.1 -15.7 -9.6 -1.5 1.8 -2.9 16.9 27.2 -10.0 -7.6 -5.4 20.7 15.3 -2.6

Japan 1.2 -5.4 -10.5 3.9 0.6 4.9 20.7 -5.6 37.1 -9.3 9.6 -4.0 27.2 8.2 -14.3

Asia ex Japan -6.2 -4.6 -22.4 -6.3 -3.0 -1.4 13.1 3.9 22.8 -17.0 -9.2 4.8 3.1 22.4 -17.3

Emerging markets -6.4 -1.0 -23.0 -11.0 -7.1 -5.0 2.9 1.4 18.3 -18.5 -14.9 -2.2 -2.6 18.2 -18.4

Developed markets – sectors

Total Return Performance

QTD YTD 1 Year

2 Yr

Ann.

3 Yr

Ann.

5 Yr

Ann.

12m to

19.05.15

12m to

19.05.14

12m to

19.05.13

12m to

19.05.12 2015 2014 2013 2012 2011

Developed markets 0.8 4.2 3.6 3.5 3.3 4.9 3.4 3.0 8.1 6.4 -0.2 7.6 0.1 10.9 4.8

Energy 4.4 9.7 -15.9 -16.6 -6.6 -3.5 -17.4 17.3 20.7 -15.0 -22.8 -11.6 18.1 1.9 0.2

Materials 2.2 6.7 -15.8 -9.1 -2.7 -4.6 -1.8 11.3 14.0 -24.5 -15.3 -5.1 3.4 11.3 -19.8

Industrials -0.8 2.6 -4.8 0.1 5.4 5.8 5.3 16.8 32.1 -14.2 -2.1 0.4 32.1 16.0 -8.2

Cons. Discretionary -3.2 -4.0 -7.4 4.4 6.8 10.4 17.8 11.9 39.9 -4.1 5.5 3.9 39.2 24.3 -4.7

Consumer Staples -1.1 3.4 4.1 6.1 6.9 10.0 8.2 8.6 28.9 1.9 6.4 7.3 21.3 13.4 8.6

Health Care 1.3 -5.6 -10.1 5.6 10.1 12.7 24.0 19.9 38.7 -1.7 6.6 18.1 36.3 17.5 9.5

Financials 0.7 -5.7 -13.6 -3.2 0.9 3.9 8.5 9.6 47.9 -20.2 -3.4 3.2 27.3 29.4 -18.5

IT -4.5 -3.5 -4.8 7.4 10.7 10.1 21.2 17.6 18.9 0.3 4.8 16.1 28.7 13.3 -2.5

Telecom. Services -2.0 4.7 0.7 1.6 6.2 6.5 2.6 15.8 25.6 -8.9 2.5 -1.9 31.2 6.4 0.8

Utilities -2.8 5.6 0.5 2.0 4.4 4.2 3.4 9.3 18.4 -8.8 -6.6 15.3 12.6 1.8 -3.3

Fixed income

Total Return Performance

QTD YTD 1 Year

2 Yr

Ann.

3 Yr

Ann.

5 Yr

Ann.

12m to

19.05.15

12m to

19.05.14

12m to

19.05.13

12m to

19.05.12 2015 2014 2013 2012 2011

Investment grade 0.8 4.2 3.6 3.5 3.3 4.9 3.4 3.0 8.1 6.4 -0.2 7.6 0.1 10.9 4.8

Financials 0.7 2.7 3.2 3.5 3.5 5.0 3.8 3.4 11.0 3.8 1.4 6.7 2.0 14.4 1.6

Industrials 0.8 5.2 3.5 3.2 3.0 4.7 2.9 2.7 5.7 8.9 -1.4 7.8 -1.4 8.2 8.0

Utilities 1.2 5.4 5.2 5.0 4.3 5.8 4.8 2.9 7.5 8.5 -0.6 11.3 -0.8 9.2 6.1

High yield global 2.9 6.5 0.9 1.9 3.4 6.2 2.8 6.4 17.7 3.9 -0.7 2.6 6.5 19.2 3.6

US 3.3 6.8 -1.7 0.1 2.2 5.2 2.0 6.4 15.9 4.1 -4.5 2.5 7.4 15.8 5.0

Europe 1.6 3.8 2.3 3.5 5.6 7.9 4.8 9.8 23.2 0.7 2.0 5.8 10.5 28.8 -2.5

US 10Y -0.1 4.7 6.1 5.3 2.8 5.2 4.6 -2.1 0.9 17.3 1.0 10.9 -7.6 4.3 16.9

Euro 10Y -0.2 5.2 5.7 7.2 5.8 7.9 8.8 2.9 3.4 19.8 0.2 16.7 -2.6 7.6 13.9

UK 10Y 0.0 5.2 7.6 8.1 4.7 6.7 8.6 -1.7 1.4 18.8 0.8 15.6 -6.1 3.8 18.4

Performance represents local currency/USD hedged returns.

Commodities

Total Return Performance

QTD YTD 1 Year

2 Yr

Ann.

3 Yr

Ann.

5 Yr

Ann.

12m to

19.05.15

12m to

19.05.14

12m to

19.05.13

12m to

19.05.12 2015 2014 2013 2012 2011

Energy 15.4 4.7 -37.8 -39.5 -26.9 -20.6 -41.1 6.5 4.8 -22.7 -38.9 -39.3 5.2 -9.4 -16.0

Brent crude 19.7 19.2 -36.2 -41.7 -27.9 -17.2 -46.7 9.9 3.6 0.3 -45.6 -47.6 7.2 7.6 16.8

Industrial metals -1.8 0.4 -24.7 -17.9 -12.4 -13.5 -10.5 -0.4 -10.5 -19.4 -26.9 -6.9 -13.6 0.7 -24.2

Copper -5.9 -3.9 -28.3 -19.9 -15.3 -13.6 -10.6 -5.1 -5.9 -16.1 -25.1 -16.6 -8.8 5.0 -24.4

Precious metals 2.9 18.6 1.5 -3.6 -5.0 -6.7 -8.4 -7.9 -17.1 -0.3 -11.5 -6.7 -30.8 6.3 4.6

Gold 1.6 18.4 3.7 -1.8 -3.1 -3.9 -7.0 -5.6 -14.9 6.0 -10.9 -1.7 -28.7 6.1 9.6

Agriculture 8.4 9.2 2.0 -14.6 -9.3 -8.8 -28.5 2.3 0.0 -15.3 -15.6 -9.2 -14.3 4.0 -14.4

Corn 10.1 6.5 -1.7 -17.8 -18.4 -11.6 -31.2 -19.8 15.3 -13.9 -19.2 -13.3 -30.3 19.0 1.1

Commodities 7.5 7.9 -17.5 -20.9 -13.6 -12.0 -24.2 3.1 -3.1 -15.4 -24.7 -17.0 -9.5 -1.1 -13.3

Source for all figures on this page: FactSet, Datastream, Barclays.

All data as of close of business (COB) 19th May and in USD unless stated otherwise.

In Focus 20 May 2016 11

Barclays key macroeconomic projections

Figure 1: Real GDP and consumer prices (% y-o-y)

Real GDP Consumer prices

2015F

2016F

2017F

2015F

2016F

2017F

Global 3.2

3.1

3.7

2.0

2.6

3.0

Advanced 1.9

1.5

2.0

0.2

0.8

1.9

Emerging 4.2

4.3

4.9

4.9

5.4

4.6

United States 2.4

1.7

2.4

0.1

1.5

2.6

Euro area 1.5

1.6

1.7

0.0

0.0

1.0

Japan 0.5

0.4

1.0

0.5

-0.3

1.8

United Kingdom 2.3

1.5

1.9

0.0

0.7

1.6

China 6.9

6.4

5.8

1.4

2.2

1.8

Brazil -3.8

-3.1

0.6

9.0

8.7

6.4

India 7.3

7.6

8.0

4.9

4.8

5.1

Russia -3.7

-1.0

1.5

15.5

8.4

6.8

Source: Barclays Research, Global Economics Weekly, 13 May 2016

Note: Arrows appear next to numbers if current forecasts differ from previous week by 0.2pp or more. Weights used for real GDP are based on

IMF PPP-based GDP (5yr centred moving averages). Weights used for consumer prices are based on IMF nominal GDP (5yr centred moving

averages). There can be no guarantees that these projections will be achieved.

In Focus 20 May 2016 12

Markets in a nutshell

Global real GDP

Growth is the norm, not the exception.

Most years, world output grows because of the simple interaction of new technology and the learning curve.

The inference is that you have to find good reasons for betting against that trend and not with it, as has been the prevailing wisdom in the aftermath of the great financial crisis.

Source: Datastream, Barclays

Growth of global GDP and asset classes

The future is of course unknowable. However, in addition to being able to suggest that it is more likely that the world will grow than not, we can also point to historic performance of the major asset classes relative to cash and both nominal and real GDP as an argument for both diversification and being invested in the first place.

As our colleagues in Behavioural Finance are regularly at pains to point out, it is not so much about timing the market but time in the market.

Source: Datastream, Barclays

Historical frequency of equity market gains/losses

Historically, equity market returns have been positive a lot more than 50% of the time over the long term.

Although equity markets are not the only source of investor returns, it is stocks that are going to provide the bulk of the long-term returns to investment portfolios.

This ultimately means that an investor looking to grow assets above inflation will likely have to accept an investment portfolio that will be reasonably correlated to equity markets over time.

Source: Datastream, Barclays

100

120

130

110

140

1970-'79 1990-'991980-'89 2000-'09

Global

Real GDP (Index of logarithm, 1960=100)

80

100

120

160

140

180

1970-'79 1990-'991980-'89 2000-'09

Real GDP

Nominal GDP

Equities

Bonds

Cash

Index (USD, logarithm,1973=100)

53% 56%61%

78%

89%

-47% -44%-39%

-22%-11%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1 Day 1 Week 1 Month 1 Year 5 Years

Losses Gains

Historical frequency of MSCI World gains/losses since index inception at the end of 1969

(USD)

In Focus 20 May 2016 13

Promising signs of US manufacturing rebound

Our favourite lead indicator, the ISM Manufacturing Index rebounded in March, consolidating a little in April, after spending the past few months in contraction.

The forward looking activity components still suggest that this rebound might be sustainable for the next few months.

We may be starting to see signs of stabilisation for the US manufacturing sector, after being weighed down by 2015’s plunge in energy capex and dollar strength.

Source: Datastream, Barclays

Rebound in Chinese real estate should lead to near term stabilisation

The nascent rebound in Chinese property market indicators is important to keep an eye on.

Property investment and sales have surged since the end of 2015. While long term risks regarding overinvestment and speculative bubbles need to be acknowledged, this should lead to a short term stabilisation for the Chinese economy.

This would in turn buy some much needed breathing room for the authorities as they struggle to walk the delicate balance between maintaining growth and rebalancing the economy.

Source: Datastream, Barclays

48

50

52

54

56

58

60

62

64

'13'12'11'10 '15'14

Manufacturing

- new orders

- production

US ISM surveys

0

10

-10

20

30

40

50

60

70

'13'12'11'10'09 '15'08 '14'07

Newly started

Sold

China floor space commercial business

buildings

Year on year (%)

In Focus 20 May 2016 14

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