BARNES, MARTIN June 1610

MAKING A JUDGMENT CALL ABOUT THE MACRO OUTLOOK GIC Conference Paris, June 17-18, 2010

The Global Investment Outlook: Back To Basics Presentation by:

Martin Barnes

Managing Editor Bank Credit Analyst

1

MAKING A JUDGMENT CALL ABOUT THE MACRO OUTLOOK

Doomsday. The global economy falls back into recession, financial strains escalate and markets collapse. Avoid risk assets and focus on cash and perhaps some gold.

Limbo. The developed economies are trapped in a Japan-style environment of disappointing growth and chronic mild deflation.

Long-term government bond yields fall to 2% or below, and it is a trading range for risk assets.

Revival. A self-sustaining economic recovery takes hold and corporate earnings trend higher. Stocks and bonds are the preferred asset.

2

KEY EQUITY DRIVERS ARE MAINLY POSITIVE

3

U.S.

Europe

Japan

Emerging Markets

Valuations

Neutral

Positive

Negative

Neutral

Liquidity

Positive

Positive

Neutral

Negative

Earnings

Neutral

Neutral

Positive

Positive

Sentiment

Positive

Positive

Positive

Negative

Financial Stress

Positive

Negative

Positive

Positive

EQUITY VALUATIONS ARE REASONABLE

25

20

WORLD:

25

FORWARD PRICE EARNINGS RATIO*

20

15

15

10

10 PRICE-TO-BOOK RATIO**

3.5

3.5

2.5

2.5

1.5

1990 4

1.5

© BCA Research 2010

1994

1998

*SOURCE: THOMSON REUTERS/IBES **SOURCE: MSCI

2002

2006

2010

LIQUIDITY: INTEREST RATES ARE LOW, BUT... %

%

REAL G7*:

3

3

SHORT RATES**

2

2

1

1

0

0

Ann% Chg

Ann% Chg

MONEY GROWTH

10

10

8

8

6

6 4

4

2

© BCA Research 2010

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 5

*DEFLATED BY THE CONSUMER PRICE INDEX **3-MONTH EUROCURRENCY RATE

2

CORPORATE EARNINGS IN AN UPTREND 70

WORLD MSCI:

70

60 50

60 TRAILING EARNINGS

50

40

40

30

30

80

80

70

70 FORWARD EARNINGS

60 50

60

2006 6

50

© BCA Research 2010

2007

2008

2009

2010

AN IMPRESSIVE CORPORATE PERFORMANCE %

% U.S.: NON-FINANCIAL EBITD* MARGINS (LS) REAL GDP GROWTH (RS)

28

6

27 4

26 25

2

24

0

23 -2

22 © BCA Research 2010

1982 7

1986

1990

1994

1998

2002

*EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION NOTE: BOTH SERIES SHOWN AS A 4-QUARTER MOVING AVERAGE

2006

2010

NO EUPHORIA HERE 1500 1300

1500 1300

S&P 500

1100

1100

900

900

700

700 COMPOSITE SENTIMENT INDEX

60

60

50

50

40

40

30 2002 8

30

© BCA Research 2010

2004

2006

2008

2010

DISINFLATION: PILLAR ONE OF THE GREAT BULL MARKET %

% CORE INFLATION RATE

12 10 8 6 4 2

12 10 8 6 4 2

10-YR TREASURY YIELD

%

%

14

14

10

10

6

6 © BCA Research 2010

1970 9

1975

1980

1985

1990

1995

2000

2005

2010

PROFITABILITY REVIVAL: PILLAR TWO OF THE GREAT BULL MARKET %

12

% TOTAL PROFIT MARGINS

12

10

10

8

8

© BCA Research 2010

1970 10

1980

1990

2000

2010

IN STOCKS WE TRUST: PILLAR THREE OF THE GREAT BULL MARKET %

60

%

EQUITIES AS % OF PORTFOLIOS:

60

HOUSEHOLDS

50

50

40

40

30

30

%

%

60

PENSION FUNDS

60

50

50

40

40 © BCA Research 2010

1970 1975 1980 1985 1990 1995 2000 2005 2010 11

DECOMPOSING GLOBAL EQUITY RETURNS

Historical Average 1970-2007

Optimistic Status Quo Pessimistic Scenario* Scenario** Scenario*** 2010- 20 2010-20 2010-20

Nominal GDP

7.6

8.0

6.0

4.0

Earnings

7.3

9.0

6.0

3.0

+ Valuation Change

0.1

-0.5

-1.0

-2.5

= Growth in MSCI index

7.4

8.5

5.0

0.5

+ Reinvested dividends

3.2

2.3

2.3

2.3

10.6

10.8

7.3

2.8

= Total equity returns

* Assumes the trailing price-earnings ratio rises to 20 over the period ** Assumes that the price-earnings ratio ends the period at its 25-year median of 17.5 *** Assumes that the price-earnings ratio falls to 15 over the period

12

THE FINANCIAL ERA %

% TOTAL FINANCIAL ASSETS AS A % OF GDP

1000

1000

900

900

800

800

700

700

600

600

500

500 © BCA Research 2010

1960 13

1970

1980

1990

2000

2010

THE FINANCIAL SECTOR’S GLORY DAYS ARE OVER %

25

FINANCIAL SECTOR’S SHARE OF EQUITY MARKET CAPITALIZATION:

25

WORLD

20

20

15

15

%

%

U.S.

20

20

15

15

10

10

5

© BCA Research 2010

1975

1980

1985

1990

*DERIVED USING DATASTREAM MARKET INDEXES

14

%

1995

2000

2005

2010

5