SVB Asset Management Economic Book Q1 2013

Quarterly Economic Report 2013SVB Asset Management

Q1

http://www.svb.com

Table of Contents

SVB Asset Management | Quarterly Economic Report Q1 2013

Thoughts from our CIO 03

Overview 04

Domestic Economy 06

The Federal Reserve 16

Markets & Performance 20

Global Economy 31

Regulatory 37

Thoughts from our CIO 03

Overview 04

Domestic Economy 06

The Federal Reserve 16

Markets & Performance 20

Global Economy 31

Regulatory 37

U.S. economic stability that began forming in 2012 continued into the first quarter, and in some areas true signs of growth are emerging. From employment to housing, positive weekly and monthly statistics are diverting us from today’s all-too-gloomy feelings.

Growth for the fourth quarter was originally reported in the negative column, but very quickly has been revised well into additive territory with an outlook for positive integers left of the decimal place in the near future.

Europe is another story as the recent trials of Cyprus can attest. In particular, the threat to confiscate insured deposit funds is anathema to euro-savers. Today, numerous press reports assert that the decisions about Cyprus do not imply a model for any future action in the region. But I am not so sure.

However, there is no escaping the good news that the markets are ignoring such lunacy on the Continent.

Back in the U.S., Ben Bernanke and company are keeping their feet on the pedal with low rate targets and a continued pace of QE that is likely forcing investors into riskier asset classes than they would otherwise consider.

Geopolitical concerns are always in play. The most recent example is Kim Jong-Un’s decision to deploy mid-range missiles to North Korea’s east coast.

So, is it time for the National Anthem to end as we hear the announcement of the phrase ‘start your engines’ that sends us off to the races?

Perhaps not yet, but we remain in our fire-resistant suits checking all the dials and balances so that we shall be ready when the flag falls.

– Joe Morgan, Chief Investment Officer

SVB Asset Management | Quarterly Economic Report Q1 2013 3

Thoughts from our CIO

Start Your Engines…

Overview


The Fed has taken a strong stance that it will continue with quantitative easing until unemployment improves substantially with a 6.5% target and as long as inflation is contained below 2.5%.

Prolonged monetary policy has resulted in diminished results.

Q.E. 3, aka QE “Infinity”, amounts to $85B a month in the form of Treasury and MBS purchases.

By year end, at the current pace of asset purchases the U.S. balance sheet will hit $4T.

The Fed is keeping a close eye on inflation, unemployment and other economic markers before taking its foot off the gas pedal.

With interest rates at all -time lows, investors are reaching across asset classes seeking out yield.

Special Topic: The Fed Domestic Economy

Growth continues to be anemic despite the Fed’s aggressive pump of liquidity into the economy. Q4 GDP expanded at a dismal 0.4% due to cuts in defense spending and inventory.

There has been no acceleration in employment the last two years. There were 2.10M and 2.12M jobs added in 2011 and 2012, respectively. This is evidence of diminished returns of monetary policy.

Average jobs added in Q1 were 148K and the unemployment rate at the end of Q1 was 7.6%. The lower rate was due to the lowest participation rate in over 30 years.

Housing will be one of the main drivers of growth this year with acceleration in both home sales and home values. In Q4, residential investment increased by over 17%. With home values still down 25% from their peak, the recovery is incomplete.

The consumer appears to be resilient with sentiment rising in spite of higher taxes and modest growth. Consumption increased by a strong 2.1% in Q4 and retail sales had the largest gain in 5 months at 1.1% in February, right in the middle of fiscal negotiations.

Inflation continues to hover below target levels causing no immediate concerns. Core PCE currently stands at 1.3%, well below the Fed’s long-term 2% target level and below their monetary policy threshold of 2.5%.

Overview


Bond investors remain bullish as long-term yields remain relatively unchanged over the past year.

Price increases for energy and commodities look to have stalled as the global recovery hits a plateau.

Mergers and acquisitions and public offerings are gearing up for another good year.

The U.S. stock market is continuing its run up and finally getting a positive net inflow of funds from investors. Appetite and demand for investment opportunities remain strong.

Markets/Performance Global Economy Regulations are here to stay; with a lot of uncertainties swirling around, moral hazard, and financial institutions will be hamstrung until they find a way to live with the new regulations.

Dodd Frank started with 2300 pages and has metastasized to 8843 pages and will continue to grow. The large size of the document is an illustration of the complexity of implementing such a massive overhaul to the financial services industry.

Regulatory Europe: The European economy is poised to contract by 0.5% or more in 2013.

China: Positive trade data shows renewed strength in exports, trailing 6 month average at $26B trade surplus, the economy appears to have bottomed.

Asia–Japan: The economy is stagnant, but more easing is expected. Japan’s GDP at the end of December printed at +0.5% YoY.

The U.S. Dollar: Has benefited from economic woes in Europe and the UK and the prospects of further easing by the BOJ. 10-year yields have drifted from 1.76 at the end of December to 1.85 as of March 29, 2013.

Domestic Economy First Quarter 2013

SVB Asset Management

Domestic EconomyFirst Quarter 2013

-10.0%

-5.0%

0.0%

5.0%

10.0%

GDP Stuck in First Gear GDP

Source: Bureau of Economic Analysis (BEA), Congressional Budget Office (CBO) and SVB Asset Management. Note: GDP values shown in legend are % change vs. prior quarter annualized.

-50.0%

0.0%

50.0%

100.0%

150.0%

Consumption Government spending Investment ex-housing Residential Net exports

Components of GDP

$0.0

$1.0

$2.0

$3.0

Trill

ions

Domestic Business Household & Institutional Federal State & Local

Gross Domestic Investment

Q4 2012 GDP expanded at a rate of 0.4 percent, which was better than the initial two estimates. The improvement is attributed to a greater than estimated gains in business spending and a narrower trade gap.

The relatively lackluster Q4 GDP was caused by the biggest reduction in military spending since the 1970s and lower inventory building.

In response to anemic growth and slow job growth the Fed has stated it will continue with loose monetary policy and its current pace of quantitative easing at $85 billion a month.

Lower base could produce stronger Q1 2013 growth.

7 SVB Asset Management | Quarterly Economic Report Q1 2013

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Recession Period Unemployed 27 Weeks and Over

-15.0%

-5.0%

5.0%

15.0%

-1,000.0

-500.0

0.0

500.0

1,000.0

Thou

sand

s

Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)

Employment Acceleration Needed Employment Landscape

Source: U.S. Bureau of Labor and Statistics (BLS), SVB Asset Management, National Bureau of Economic Research (NBER). Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months.

0.0

5,000.0

10,000.0

100,000.0

105,000.0

110,000.0

115,000.0

120,000.0

125,000.0

Thou

sand

s

Thou

sand

s

Full Time Employment (LHS) Part Time for Economic Reasons (RHS)

Full-Time Employment

Long Term Unemployment Unemployment rate in the U.S. decreased to 7.7 percent in February 2013 from 7.9 percent in January 2013, driving the rate down to its lowest in over four years.

Total nonfarm payroll employment increased by 236,000 in February. The main sectors that added jobs were professional and business services, construction, and healthcare.

The number of long-term unemployed has not improved very much and remained close to 4.8 million in February, almost 40.2 percent of the unemployed are long-term .

Labor force participation continues to be low, as workers opt for early retirement or stop searching entirely.


Employment Acceleration Needed Fewer Workers Supporting Greater Population

Source: U.S. Bureau of Labor Statistics (BLS), SVB Asset Management.

Will the Recent Spike in Earnings Hold Up?

Hires and Quits Remain Depressed Workers as a percent of the total population remain depressed even as the unemployment rate declines due to people dropping out.

Average hourly earnings growth increased in recent quarter, but total hirings have yet to turn upward.

Turnover, as measured by job hires and quits remains depressed vs. recent growth trends.

57.0%

59.0%

61.0%

63.0%

65.0% 3.0%

5.0%

7.0%

9.0%

11.0%

Unemployment Rate (LHS) Employment to Population Rate (RHS)

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

62.0% 63.0% 64.0% 65.0% 66.0% 67.0% 68.0%

Labor Force Participation Rate (LHS) Avg Hourly Earnings Growth (RHS)

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

Job Hire Rate Job Quit Rate


40.0

60.0

80.0

100.0

120.0

Average

Consumption Seemingly Resilient Consumer Sentiment – University of Michigan

Source: U.S. Bureau of Economic Analysis (BEA), Census.gov, University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management.

$5.0

$10.0

$15.0

$20.0

$25.0

$250.0

$300.0

$350.0

$400.0

$450.0

Vehi

cle

Sal

es (M

illio

ns)

Ret

ail &

Foo

d S

ervi

ces

Sal

es (B

illio

ns)

Ex Autos Vehicle Sales

Retail & Food Services Sales

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Personal Consumption – % Change

In the midst of fiscal negotiations, the payroll tax hike, and higher gasoline prices, the consumer has been fairly resilient in terms of overall sentiment and spending.

Consumer sentiment in the first quarter ranged from 72-78, as shown by the University of Michigan index. This is above the five-year average of 69, but still below the 30-year average of 86.

Consumer purchases managed to rise at a healthy pace of 2.1 percent in the fourth quarter and strong retail sales in February signal continued growth in the first quarter of 2013.


Consumption Seemingly Resilient Personal Income

Source: U.S. Bureau of Economic Analysis (BEA), Federal Reserve, SVB Asset Management.

Personal Savings as a % of Disposable Income

Household Net Worth

Personal incomes dropped by 3.6 percent in January, one of the largest declines on record. This was mostly attributed to the payroll tax increase kicking in at the start of the year.

Consumers spent more and saved less as evidenced by a corresponding drop in the savings rate. Savings rates as a percentage of disposable income dropped to 2.4 percent in January, compared to 6.4 percent in December 2012.

On the other hand, household net worth is on the rise once again due to higher home values and rising equity prices. The net worth of U.S. households increased to $66.1 trillion, the highest level in five years and up 9 percent on a year-over-year basis.

11

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Mon

thly

Per

cent

age

Cha

nge

$0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0

Bill

ions

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%


Inflation Stable Expectations Component Distribution February 2013

Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS) and SVB Asset Management.

Core PCE

Consumer Price Index Producer Price Index

12

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

% c

hang

e fro

m p

rior y

ear

Core PCE Fed Target Monetary Policy Threshold

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

% c

hang

e fro

m p

rior y

ear

PPI Ex Food & Energy PPI

CPI Components 12-month ChangeFood & Bev. 1.6%Housing 1.9%Apparel 2.4%Transportation 3.1%Medical Care 3.9%Recreation 2.7%Educ. & Comm. 2.2%Other 2.7%Headline CPI 2.0%Less:

Energy 2.3%Food 1.6%

Core CPI 2.0%

41.0%

16.8%

15.3%

7.2%

6.8%

6.0%

2.8% 4.1%

Housing Transportation Food & Bev. Medical Care Educ. & Comm. Recreation Apparel less footwear Other

-5.0%

0.0%

5.0%

10.0%

15.0%

% c

hang

e fro

m p

rior y

ear

CPI Ex Food & Energy CPI


Inflation Stable Expectations Wage Growth: Average Hourly Earnings

Source: U.S. Bureau of Labor Statistics (BLS), U.S. Energy Information Administration (EIA), University of Michigan / Thomson Reuters - Survey of Consumers and SVB Asset Management.

Crude Oil – Spot & Futures

Univ. of Michigan Survey of Inflation Expectations Inflation continues to take a back seat as measures point to a steady inflationary environment. Furthermore, the Fed maintains its stance that longer-term expectations remain stable.

Core PCE, the Fed’s target measure, is currently running below its longer-run objective of 2 percent and below its monetary policy threshold of 2.5 percent.

Facing little threat of inflation, the Fed continues its accommodative monetary policy through low interest rates and additional bond purchases.

13

$0.0

$50.0

$100.0

$150.0

Pric

e pe

r bar

rel

Crude Oil Crude Oil Futures

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Ann

ual p

erce

ntag

e ch

ange

1.5%

2.5%

3.5%

4.5%

5.5%

1 Year Ahead 5-10 Year Ahead


0.0

5.0

10.0

15.0

3.0

5.0

7.0

9.0

Hom

e S

uppl

y (m

onth

s)

Hom

e S

ales

(Mill

ions

)

Total Sales (new & existing) Existing Home Supply

The Housing Market Key Economic Driver Home Sales & Supply

Source: National Association of Home Builders (NAHB), Census.gov, S&P, and SVB Asset Management.

0.0

0.5

1.0

1.5

2.0

2.5

Mill

ions

Housing Starts

90

140

190

240

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Case Schiller 20 City FHFA Purchase Median Home Price

Home Prices – Indexed to 100

Housing was a main driver of economic growth in the fourth quarter with residential fixed investment increasing 17.6 percent.

Home sales, both new and existing, continued their upward trend. Sales of existing homes hit a three-year high at an annual pace of 4.98 million in February.

Greater housing demand combined with lower home supply drove home values higher. As shown by the S&P/Case-Shiller index of property values, prices climbed over 8 percent on a year-over-year basis in their 20-city composite – the largest gain since 2006.


The Housing Market Key Economic Driver Homeownership Rate

Source: Census.gov, National Association of Realtors and SVB Asset Management.

Housing Affordability Composite Index

Home Foreclosures - % of Total Loans

The homeownership rate hovered around 65.5 percent last year, down from its peak of 69 percent in 2004, as we saw a shift towards renting over the past few years.

Record low interest rates caused by easy monetary policy and depressed home values prompted more home buyers to enter the market last year. Approximately a third of sales are cash buyers, however, and investors compromised the majority of these sales.

15

62.0%

64.0%

66.0%

68.0%

70.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

0.0%

5.0%

10.0%

15.0%

0.0

50.0

100.0

150.0

200.0

250.0

Affo

rdab

ility

Inde

x

Housing Affordability 30 Year Fixed Mortgage Rates


The Federal Reserve SVB Asset Management

The Federal Reserve

http://www.svb.com

Federal Reserve Top Gear

As the Federal Reserve embarks on more quantitative easing, the U.S. balance sheet continues to grow.

At the current pace of $85 billion dollars per month of combined mortgage backed securities and longer-term treasury purchases, the Fed’s balance sheet will be close to $4 trillion dollars by year end. That is more than quadruple where the balance sheet was at the start of the financial crisis.

Despite all the effort by the Federal Reserve with monetary policy, the U.S recovery is yet to pick up speed.

Source: Federal Reserve and SVB Asset Management.

Recent Balance Sheet Trends

17

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

Trill

ions

Other Fed Reserve Assets

Central Liquidity Swaps

Other

Aurora

Maiden Lane III

Maiden Lane II

Maiden Lane I

TALF

AIG

Seasonal Credit

Secondary Credit

Primary Credit

Other Loans

Treasury Currency Outstanding


Federal Reserve Trying to Get on Track

The Fed has continued with its QE3 program. As announced in the December FOMC meeting, the Committee will continue with purchases of mortgage backed securities at the pace of $40 billion per month and longer-term treasury securities at the pace of $45 billion a month.

The Fed is using the unemployment rate and inflation rate as thresholds to monitor the need for monetary policy. The unemployment target is set at 6.5 percent and looser monetary policy will continue as long as inflation remains below 2.5 percent.

The U.S. economy has a ways to go before reaching 6.5% unemployment, estimates are for another 2 years before reaching the target. Meanwhile, inflation remains muted.

Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS) and SVB Asset Management.

Fed Inflation, Employment Thresholds Worry Two of the Fed Presidents


U.S. Unemployment Target 6.5%

Core PCE Threshold 2.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.0%

1.0%

2.0%

3.0%

Core PCE (LHS) Core PCE Threshold (LHS)

U.S. Unemployment Rate (RHS) U.S. Unemployment Target (RHS)

QE 1 QE 2 Continuous Stimulus: Operation Twist,

Extension of Operation Twist & QE 3

600

800

1,000

1,200

1,400

1,600

1,800

150

170

190

210

230

250

Home Prices (LHS) S&P 500 (RHS)

Federal Reserve Wealth Effect Speeds Up There have been some visible effects of recent quantitative easing effort. The growth in equities and housing are both viewed as contributing to the wealth effect of the consumer.

With yields at all-time lows, many investors are hunting for yield. The search for yield has shifted many investors to a “risk-on” mentality causing equities to rally.

In addition, the housing sector is recovering, albeit slowly, thanks to record low mortgage rates, investors’ percentage of rental properties and improved consumer balance sheets. The housing recovery is a much anticipated improvement and if sustained should help propel growth.

Source: Federal Housing Finance Agency, Bloomberg and SVB Asset Management.

Note: 1 U.S. House Price Index - Purchase Only Index (Indexed to 100 in Q1 1990), by the Federal Housing Financing Agency

U.S. House Price Index1 vs. the Stock Market


Markets & Performance SVB Asset Management

Markets & Performance

http://www.svb.com

Funds Flow Investors Piling into the Driver’s Seat

Source: Bloomberg and SVB Asset Management.

Mutual Fund Flows

Treasury Curve Change

$0

$2,000

$4,000

$6,000

$8,000

Mill

ions

Total Equity Total Bond

Recent Fund Flows

Bond investors remain bullish, despite the low yield environment.

The curve has changed very little from a year earlier.

Equity mutual funds have experienced net inflow of cash since the beginning of the year.

Despite the increase in equity mutual funds, even more cash has flowed into bond funds over the same period.

21

0.0% 1.0% 2.0% 3.0% 4.0%

Mar-12 Mar-13

-$40,000

-$20,000

$0

$20,000

$40,000

$60,000

Mill

ions

Total Equity Total Bond


Bond Market Will the Momentum Continue?

Since 2008, bond markets have produced four consecutive years of positive total and excess returns.

Bonds exhibited positive performance led by Banking, Insurance, and Financial Services sectors. U.S. Treasuries had their third worst return in the last 16 years at 2.16 percent, compared to 2008, which had the best return at 13.98 percent.

The biggest long-term risk is a reversal in central bank policies. At record low yields, total returns would be significantly exposed to any tightening policy. However, this should not be a concern for 2013.

Source: Bloomberg, BoAML and SVB Asset Management.

U.S.

U.S.


Bond Sector Spreads Right Back at the Start Line

Source: Bloomberg, BoAML , Barcap Live, Citigroup and SVB Asset Management.

Credit spreads declined back to levels not seen since prior to the financial crisis of 2008, driven by tightening spreads, government funding programs, supply/demand factors and Fed actions on interest rates.

The post crisis period was defined by a shift towards the fixed income spread product and a preference away from equities. Strong performance across the credit markets will be sustained due to supply/demand nature of the markets and ongoing concerns about global economic growth.

Expectations are for no change in Fed policy, and as a result, credit will continue to benefit from tight spreads.

U.S.


Spread Performance by Asset Class

Bond Sector Spreads Tightening Struts

Source: Bloomberg, BoAML, Citigroup and SVB Asset Management.

10-year Range in Credit Spreads


All fixed income asset class categories closed 2012 solidly in the bottom quartile of their respective spread ranges.

Inverse Relationships Directional Indicators Improved Leverage Ratios Led to Improved Liquidity


VIX is the Directional Indicator for Equities (VIX - inverse scale)

Source: Bloomberg and SVB Asset Management


Index

Index

$270.0

$280.0

$290.0

$300.0

$310.0

$320.0

$330.0

$340.0

98.0%

100.0%

102.0%

104.0%

106.0%

108.0%

110.0%

Total Debt to Total Equity (LHS) Cash & ST Investments/Share (RHS)

10

12

14

16

18

20

22

24

26

28 1200

1250

1300

1350

1400

1450

1500

1550

1600

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

S&P 500 (LHS) VIX (RHS)

S&P 500 Companies Room to Accelerate

S&P 500 companies continue to conserve cash, although the level of growth in cash balances has tapered off in recent quarters.

On the other hand, S&P 500 companies have greatly reduced their leverage ratios, likely due to limited capital and investment opportunities.

Companies have plenty of dry powder on their balance sheets, both in cash and further leveraging up, to take advantage of opportunities if global economies improve.

Debt to Equity Ratio and Cash on Balance of S&P 500 Companies


$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

75.0%

95.0%

115.0%

135.0%

155.0%

175.0%

195.0%

215.0%

235.0%

Bill

ions

Total Debt to Total Equity (LHS) Cash & Equivalents (RHS)


Benchmark Performance

Investment Performance Where’s the Horsepower?

Ticker 1Q 2013 2012 2011 2010 2009 2008 2007 Short Benchmarks 3-Month Treasury Bill G0O1 0.000 0.111 0.103 0.126 0.207 2.057 5.004 3-Month Citi/Salomon CD SBMMCD3 0.031 0.307 0.289 0.310 0.822 3.442 5.448 6-Month Treasury Bill G0O2 0.018 0.171 0.268 0.365 0.579 3.582 5.607 6-Month Cit/Salomon CD SBMMCD6 0.047 0.488 0.389 0.437 1.611 3.756 5.459 1-yr Treasury Bill G0O3 0.020 0.204 0.496 0.792 0.813 4.746 5.948 Treasury 1-3 yr Treasury G1O2 0.094 0.434 1.554 2.348 0.785 6.609 7.317 3-5 yr Treasury G2O2 0.132 1.577 6.229 5.695 -0.672 12.153 9.836 Corporate/Govt (A Rated and Above) 1-3 yr Corp/Govt B110 0.141 1.188 1.527 2.641 2.766 5.184 6.981 3-5 yr Corp/Govt B210 0.233 3.077 5.479 5.925 2.958 6.174 8.324 Agencies 1-3 yr Agencies G1P0 0.057 0.847 1.536 2.338 2.189 7.034 6.735 3-5 yr Agencies G2P0 0.139 2.588 5.290 4.900 3.223 8.971 8.261 Municipals - Tax Exempt 1-3 yr Pre-refunded U1AF 0.300 0.520 1.800 0.923 3.189 5.875 4.710 3-7 yr Pre-refunded U2AF 0.409 1.539 4.951 2.087 5.345 7.992 5.390 Auto Asset Backed Securities ABS, Autos, Fixed Rate, (1.45yrs) R0U0 0.224 2.291 1.689 3.077 14.845 -0.682 5.723 Other Indices Dow Jones Industrial Average INDU 12.960 7.257 5.544 11.023 3.116 -33.762 6.432 S&P 500 SPX 12.030 13.405 2.110 12.783 23.454 -38.486 3.530 NASD CCMP 10.320 15.906 -1.799 16.910 43.888 -40.541 9.812 MSCI World Index MXWO 9.950 13.184 -7.615 9.262 27.283 -42.081 7.093 CRB Index (Commodities) CRY 1.173 -3.372 -8.264 15.430 23.563 -39.450 16.679


Source: Bloomberg, BoAML, Morgan Stanley.

$75.0

$90.0

$105.0

$120.0

Commodities At a Standstill Crude Futures – Per Barrel


$1,400.0

$1,500.0

$1,600.0

$1,700.0

$1,800.0

$1,900.0

Gold Prices – An Ounce

$75.0

$100.0

$125.0

$150.0

$175.0

$200.0

Iron Ore Futures – Per Ton

Prices seem to have flattened out with commodities, energy, and precious metals.

The slowdown in China has certainly affected crude and metal prices as construction has leveled off.

The recent uptrend for gold is tied to higher inflation expectations on the Federal Reserve’s continuing accommodative policy.


Banking How Far Can You Go? Net Interest Margin and Capital Ratio

Although banks have strong capital levels, lending is constrained due to low margins which may make it economically unfeasible for banks to lend.

Loans-to-Deposits Ratio

Loan-to-deposits ratio is the lowest since Q3 2000 and has fallen from 97 percent in Q2 2008 to 73 percent in Q4 2012.


Source: FDIC and SVB Asset Management.

3.1%

3.3%

3.5%

3.7%

3.9%

4.1%

4.3%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Tier 1 Risk-Based Capital Ratio (LHS)

Quarterly Net Interest Margin (RHS)

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

Q4 ‘12 73%

Q3 ‘00 97%

Debt / Capitalization Return On Average Assets % (ROAA)

Source: SNL and SVB Asset Management.

Insurance Gearing Up for a Future Race

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

While sustained low interest rates are constraining insurers profitability, improved leverage and capital positions continue to provide a cushion.


Global Economy SVB Asset Management

Global Economy

http://www.svb.com

-8.0%

-4.0%

0.0%

4.0%

8.0%

UK Germany France Italy Spain

Europe Could Use a Boost GDP


The euro zone economy is poised to contract by 0.5 percent or more in 2013, continuing the lackluster performance of the previous two years. Even Germany appears to be in danger of slipping into a recession.

Italy was downgraded by Fitch recently, while talk of a tax on bank deposits in Cyprus caused a ripple effect across Europe in mid-March. These types of occurrences illustrate the current fragility of sentiment in Europe.

The ECB is resisting further rate cuts for now, but will cut later this year.

What is needed by most struggling economies in Europe is economic growth to boost tax revenues and slow soaring unemployment . However, the deficit situation has handcuffed fiscal spending and retail spending is unlikely to rise unless confidence does.

Growth forecasts for the major European economies are if anything overly optimistic; it is hard to pinpoint a potential catalyst for growth in this environment.

-2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

UK Germany France Italy Spain

Consensus GDP Forecast


1.1

1.3

1.5

1.7

1.3

1.4

1.5

1.6

1.7

EU

R /

US

D

GB

P / U

SD

GBP EUR

Europe What Will Put the Brakes on the Euro? Currency Performance


The EUR is poised to go lower, weighed down by concerns about the debt crisis, a widening recession and continuing political uncertainty.

The GBP registered gains against the EUR for several months, but has begun to lose ground recently, as the economy struggles to recover from the economic downturn.

A lower EUR is in Europe’s interest, despite occasional talk to the contrary. It remains one of the few ways to stimulate growth, using a weak currency to fuel export competitiveness.

The EUR does not require a break up of the euro zone to head lower; economic and political uncertainty coupled with continuing subpar growth is sufficient to cause a further fall.

Lower yields would normally help boost economic activity, but sovereign spreads to Germany remain wide. As a result, the countries that would really benefit from lower borrowing costs don’t reap the benefit.

Longer term, the EUR could recover against the USD, assuming the euro zone survives this crisis. Europe has a stronger balance of payments position than the U.S. and a central bank with a single mandate of controlling inflation, which should lead to a less expansionary monetary policy. However, as John Maynard Keynes famously said, “In the long run we are all dead”.

0.0%

2.0%

4.0%

6.0%

8.0%

ES FR IT DE

10Y Sovereign Yields


China Steady As She Goes

Source: National Bureau of Statistics of China, Bloomberg and SVB Asset Management.

6.1

6.3

6.5

6.7

6.9

CN

Y /

US

D

Yuan Appreciates Steadily

-$25.0

$25.0

$75.0

$125.0

$175.0

Bill

ions

Trade Balance Exports Imports

Monthly Trade Balance

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

% G

DP

Cha

nge

YoY

Pace of Growth Moderating

February trade data showed renewed strength in exports, reversing recent declines and possibly signaling a resumption of reserve accumulation.

The central bank (PBoC) has maintained control of domestic monetary policy despite relaxing some capital controls and remains alert for signs of an asset price bubble.

GDP growth has moderated to a respectable 7.5 to 8 percent, but a far cry from the double digit growth of a few years ago.

The CNY is likely to continue its modest appreciation this year.


4.9% 4.4%

6.0%

3.3%

0.0% -1.6% -0.5% -0.3%

3.4% 3.9%

0.4% 0.5%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

% G

DP

Cha

nge

YoY

70

75

80

85

90

95

100

JPY

/ US

D

Asia Set to Stall? Yen Retreats

Source: Economic and Social Research Institute Japan, Bloomberg and SVB Asset Management.

40

45

50

55

60

INR

/ U

SD

Indian Rupee

Japan GDP Japan: The economy is stagnant and more easing is expected. The BOJ’s balance sheet has expanded by about 4 percent this year and is now over a third of GDP, the largest of any other G-4 country. The JPY has weakened significantly. While this trend could continue, additional sustained JPY weakness would require significant monetary easing beyond what is currently factored in.

India: Equity-related inflows from offshore investors have stabilized the INR recently. Rate cuts are priced in and are expected to provide a near-term boost to the economy. However, the longer-term outlook for a reduction in the twin budget and trade deficits appears unlikely. As a result, renewed INR weakness is possible in the medium term.


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

The U.S. Dollar Uphill Climb 10Yr U.S. Treasury Yield


The U.S. dollar has benefited from economic woes in Europe and the UK and the prospects of further easing by the BOJ.

Recent policy statements by central banks in many developed and emerging economies have signaled their intention to maintain monetary stimulus, thereby resulting in further weakness in their currencies.

The U.S. economy is growing faster than most developed countries and data in early 2013 has generally surprised to the upside, despite concerns about the lack of a longer-term deficit strategy.

Despite a slight uptick in recent weeks, treasury and other market yields remain close to historic lows and are a reflection of the dollar’s continuing role as the reserve currency of choice and a safe haven in uncertain times.

With global yields low, the dollar has not weakened in response to low U.S. yields as it has in the past.

Look for the dollar index to retest highs from last summer, possibly even as far back as 2010, in coming months. Longer term, concerns about the deficit and subpar economic growth will stall the rally, especially versus the more fiscally sound, faster growing emerging market currencies.

70

75

80

85

90

DXY USD Index


Regulatory Dodd Frank, Basel & Money Market Fund Reform


Domestic EconomyDodd Frank, Basel & Money Market Fund Reform

http://www.svb.com

Dodd Frank Act Quality Control

Orderly Liquidation Authority

Volcker Rule

Say on Pay Securitization Reform

Office of Financial Research

Stress Test/ CCAR

Examples of additional regulation included in Dodd-Frank. Source: Dodd-Frank Act, SVB Asset Management.

Consumer Financial Protection Bureau

Financial Stability Oversight Council


Dodd Frank was designed to address the risk management issues that reared their heads during the financial crisis. However, the amount of regulation would result in additional costs to the banking system.

Basel III Speed Bump Basel III Common Equity Tier-1 Ratio Requirements

Source: Bank for International Settlements and SVB Asset Management.

Beginning fiscal 2013, banks are recommended by BIS to begin adopting Basel III requirements. Most countries have begun to adopt their own interpretation of the requirements.

Banks are recommended to maintain a minimum common equity Tier 1 ratio of 3.5 percent and the requirements gradually increases to 7.0 percent on January 1, 2019.

Starting in 2016, globally systemically important banks(GSIBs) as designated by the Financial Stability Board (FSB), will have to maintain an additional buffer. The additional buffers range from 1.0 percent to as high as 3.5 percent, depending on the bucket assigned by FSB.

As such, some banks would be required to maintain CET1 ratio as high as 10.5 percent, though no banks have been assigned to the highest bucket as of November 2012.

Although this will result in larger buffers to absorb losses, it would be more expensive for the banks to operate due to the high capital intensity and banks will be passing this higher costs to their clients.

The banks would also need to adhere to new liquidity and funding requirements, although the exact details remain under discussion and is not expected to take place until 2015 and 2018 respectively.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

CET1 GSIB Buffer


Regulatory Environment Fog Ahead


Amendments to SEC 2a-7 rule have been in place since February 2010, to improve the stability of MMF industry.

As of March 2013, no additional SEC proposals have been put forward. However, the FSOC (Financial Stability Oversight Council) closed an extended comment period on February 25, 2013. The market is still waiting for an FSOC official recommendation.

Regulatory action is likely to come into play in 2013 as the pending recommendation by the FSOC would force a response by the SEC within 90 days of the release.

Op

tion

On

e

Floating NAV

Mark-to-market NAV valuation

Pro: Daily pricing would reflect gains and losses fostering greater transparency

Con: Causes a “first-mover advantage”

Op

tion

Tw

o

Stable NAV with a Capital Buffer & MBR

1 percent capital buffer and Minimum Balance at Risk (MBR)

MBR: 3 percent of investor’s highest account value above $100,000 will be subject to a redemption delay. Does not apply to Treasury MMFs

Pro: Eliminates “first-mover advantage”

Con: Undermines the principle characteristic of liquidity within the MMMF industry

Op

tion

Th

ree

Stable NAV with a Capital Buffer and Other Measures

3 percent capital buffer and more stringent regulatory standards

Pro: The investor is not subject to a MBR and the stable NAV feature continues

Con: Fund managers could pass on the costs of this buffer to the investor reducing net yield to a level that is not attractive

*Potential reforms are likely to be a combination of the above proposals by the FSOC however the SEC has not released any official insight into their own investigations

Potential Reform Proposals by the FSOC as of March 2013

Source: SVB Asset Management.

Our Team


Managing Director

Jeff Schnitz [email protected]

Chief Investment Officer

Joe Morgan, CFA [email protected]

Head of Credit Research

Melina Hadiwono, CFA [email protected]

Portfolio Managers

Minh Trang, CFA [email protected] Paula Solanes [email protected] Renuka Kumar [email protected] Jose Sevilla [email protected]

Credit and Risk

Sook Kuan Loh, CFA [email protected] Tim Lee, CFA [email protected] Kyle Balough [email protected]

Silicon Valley Bank Partners

Dave Bhagat Kelly Caviglia Priyanka Raju Girish Mallya Sudhakar Pattabiraman

Head of Portfolio Management

Ninh Chung [email protected]

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and its affiliates and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of SVB Asset Management. All trademarks, service marks and logos used in this material are trademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliates or other entities.

©2013 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value. B_SAM-13-12687 Rev. 04-11-2013 0413-0042


http://www.svb.com

SVB Asset Management 555 Mission Street, Suite 900 San Francisco, CA 94105

SVB Asset Management555 Mission Street, Suite 900San Francisco, CA 94105

http://www.svb.com

Economy & Finance

SVB Asset Management Economic Book Q1 2013