HUNTER, CONSTANCEApril 0711

A Flock of Black Swans

Global Interdependence Center Rome - April 2011

Constance Hunter Managing Director and Chief Economist chunter@aladdincapital.com 203-326-6895

Global Equity Markets: Past, Present and Future 2003-2006

It’s a Wonderful Life

2007

The Tide Changes

2008

A Year of Reckoning

2009

A Rising Tide Lifted All Boats

2010

Low Rates, Refinancing and Top-Line Growth

2011

Low Rates, Stock Buy Backs, M&A and Black Swans

2

Wind in the Sails of Equity Markets... Black Swans on the Horizon

• Low Interest Rates

• Earthquake/Tsunami in Japan

• M&A to Accelerate

• Middle East Uprisings

• Share Buy Backs are Starting in Earnest

• European Debt Woes • US Debt Woes

• Cash on the Sidelines

• Chinese Hard Landing Fears

• Earnings Growth Momentum

• Rising Commodity Costs

• Profit Margins High but not Peaked

3

M&A Activity off to a Robust Start for Q1 High cash levels and low interest rates will buttress M&A activity this year

M&A Activity Breakdown

Target Industry

Volume ($bn)

Count

Oil & Gas

60.45

174

Telecommunications

59.46

169

Electric

45.39

72

REITs

41.52

85

Chemicals

24.45

117

Source: Bloomberg

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Significant Amount of Cash on the Sidelines‌ a Powerful Technical Factor Money Stock: Savings Deposits, including MoneyMarket Stock: Savings Deposits, including Money Deposit Accounts (SA, MMDAs Bil $) SA, Bil.$

6000

6000

5000

5000

4000

4000

3000

3000

2000

2000

1000

1000 96

97

98

99

00

01

02

Source: Federal Reserve Board/Haver Analytics

5

03

04

05

06

07

08

09

10

Outperforming Equity Markets are in Growing Economies Strong growth and inflation trump rate increases; markets outperforming Countries in Rate Hiking Mode 220 200

Indonesia

Turkey

South Korea

Brazil

Norway

Canada

China

180 160 140 120 100 80 60

Source: Haver Analytics 6

Mar-11

Dec-10

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

40

Quantitative Easing has yet to help equities as much as organic growth It does not help that countries engaging in QE also have high debt QE Countries Equity Market Performance Since LEH 130 UK

Germany

US

Japan

120 110 100 90 80 70 60

Source: Haver Analytics 7

Mar-11

Dec-10

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

50

Quantitative Easing Can’t Overcome the Burden of High Debt High debt hampers market performance, the US is underperforming Canada Countries with High Debt - Performance Since LEH 120 US

Portugal

Japan

Ireland

Greece

110 100 90 80 70 60 50

Source: Haver/Bloomberg 8

Mar-11

Dec-10

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Jun-09

Mar-09

Dec-08

Sep-08

40

Market Performance Since Lehman Brothers Collapse Countries with lower government debt are outperforming Government Debt and Equity Market Returns Post LEH 120.00% 100.00%

Indonesia Turkey

Return since Lehman

80.00% 60.00%

South Korea China

40.00%

Brazil Norway

20.00%

Germany Canada

0.00%

Spain

UK

US Portugal Japan

-20.00% Ireland -40.00%

Greece

-60.00% 0%

50%

100% 150% Gross Debt Level

Source: Haver/Bloomberg 9

200%

250%

When will U.S. Debt Levels Weigh on Profit Margins and Share Prices?

S&P 500 and Profit Margins 1700

15 14

1500

13 12 11

1100

10 9

900

8 S&P 500

7

700 Profit Margin

6

Source: Bloomberg 10

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

Sep-05

Mar-05

Sep-04

Mar-04

Sep-03

Mar-03

Sep-02

Mar-02

Sep-01

Mar-01

Sep-00

5 Mar-00

500

Profit Margin

S&P 500

1300

The Spanish Market is Weighed Down by the Poor Economy Spanish IBEX and Profit Margins 18000

25

16000 20

15

12000 10000

10

8000 IBEX

5

6000 Profit Margin

Source: Bloomberg 11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

Sep-05

Mar-05

Sep-04

Mar-04

Sep-03

Mar-03

Sep-02

Mar-02

Sep-01

0 Mar-01

4000

Profit Margin

IBEX

14000

Diverging Economies Will Lead to Diverging Markets Country / Region

GDP Q/Q Industrial Annualized % Production

CPI

Current Budget Balance Account as a PMI Reading as a % of GDP* % of GDP

US

3.1%

5.3

2.2%

-8.8

-3.4

59.9

Canada

3.3%

5.93

2.2%

-2.1

-2.5

69.3

UK

-1.9%

3.9

4.3%

-9.0

-1.7

55.0

Japan

-1.3%

1.8

0.1%

-7.9

3.3

51.0

EUR Area

1.1%

5.92

2.4%

-4.1

-0.3

58.2

China**

10.1%

27.69

5.0%

-1.7

4.1

51.7

Brazil

3.0%

2.75

5.9%

-2.5

-2.9

52.7

India**

2.6%

9.4

8.8%

-5.0

-2.7

56.5

Russia

11.4%

6.5

9.4%

-3.4

4.8

55.2

South Africa

4.4%

1.7

3.7%

-5.3

-5.5

54.8

South Korea

2.0%

17.3

4.5%

-1.6

2.0

53.4

Mexico

5.1%

7.2

3.5%

-2.1

-1.0

n/a

*The Economist poll or Economist Intelligence Unit Estimate FY2010 Source: Bloomberg, Haver, The Economist 12

** Y/Y data, not SAAR

Consensus Forecasts not Aligned with Fundamentals It does not help that countries engaging in QE also have high debt P/E

Forward P/E

Mean Forecast

Max Forecast

Min Forecast

US

14.2

12.7

11.45%

27.43%

-7.11%

Japan

17.6

16.7

23.72%

48.60%

1.68%

Norway

13.3

11.1

7.54%

36.93%

-14.18%

Turkey

11.0

10.0

14.63%

39.02%

-5.93%

Spain

9.4

10.6

11.71%

38.01%

-14.29%

Portugal

12.5

13.0

14.11%

34.23%

-7.40%

Greece

27.3

11.3

11.25%

44.99%

-6.53%

Ireland

neg

17.8

11.64%

45.25%

-3.24%

Source: Bloomberg Consensus Forecasts

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Divergent Performance over Past Two Years Annualized Return versus Volatility (2) High

40% FTSE 250

Commodities 35% Independent Credit Fund

30%

Return

S&P 500 25% CS Leveraged Loan Index

20% Barlays U.S. Credit Total Return

15%

Barclays U.S. Credit Excess Return

10%

Low

5% 0% Safe

2%

4%

6%

8%

10%

12%

14%

16%

Volatility

(1) Annualized

standard deviation of monthly returns ending with February 2011 Source: Barclays, Credit Suisse, Bloomberg, Aladdin Capital

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18%

20%

Risky (2)

23 months

US Forecast: Above Trend Growth for the Next Two Years Fiscal and Monetary Stimulus producing higher growth‌.. But can it last?

Year

Annual Rate

Year-End Forecast

GDP

PCE

Private Investment

Residential Investment

2010

2.4%

1.7%

6.2%

-4.2%

9.7%

1.6%

3.30%

2011

3.5%

3.1%

10.7%

-3.1%

8.0%

1.8%

3.65%

2012

4.3%

2.7%

11.0%

9.0%

7.5%

3.5%

5.10%

2013

2.6%

2.7%

5.0%

7.5%

7.0%

2.8%

4.50%

2014

2.9%

2.9%

4.9%

8.5%

6.5%

3.1%

4.80%

Source: Aladdin Research

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Unemployment Inflation 10-yr Yield

Conclusion • Equities have strong tailwinds… But caution is warranted • Strong GDP growth is necessary for equity markets to grow at rates that compensate for the volatility • QEII and Bush tax cut extensions function as a massive stimulus for the U.S. in 2011 • The U.S. economic recovery continues and gains momentum (3.5% real GDP for 2011).

• High debt levels borrow from future growth and equity markets seem to discount this.

• Restructuring and stimulative government policies continue to support markets…

• … But Black Swans hover on the horizon

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Constance Hunter - Bio

CONSTANCE HUNTER, Managing Director & Chief Economist. Prior to joining Aladdin, Ms. Hunter was with Galtere Ltd., a global macro hedge fund, where she served as a Chief Economist. Prior to and concurrently with, Galtere Ltd., she was the Managing Member and Chief Investment Officer of Coronat Asset Management. In that role, Ms. Hunter identified macro themes and invested in global equity and FX markets to capitalize on these themes.

Prior to founding Coronat, Ms. Hunter was a Partner and Portfolio Manager at Quantrarian Capital Management, a hedge fund that invests in Asian markets. In addition, she has worked as a Portfolio Manager at Salomon Smith Barney, Inc., and Firebird Management, LLC. Ms. Hunter received a Bachelor of Arts from New York University, as well as a Masters of International Affairs from Columbia University.

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Disclaimer This document was prepared by Aladdin Capital Management LLC, and reflects the current opinion of the contributor. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This document is for informational purposes only and does not constitute a solicitation or an offer to buy or sell any investment security, nor provide investment advice.

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