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2012

Every month SYZ Asset Management publishes “1 month in 10 snapshots”, a review of global economic activity. Since an image can be more telling than words, every month we select 10 charts illustrating the key data that has marked economic and financial activity over the month, decoding their meaning with a brief explanation. A publication of the Research & Analysis team – SYZ Asset Management - Tel. +41 (0)58 799 10 00 - info@syzgroup.com Author: Adrien Pichoud This document is based on graphics the data of which were collected in the course of 2012.

At the start of this new year we have chosen to give you a review not of last December alone but of the year 2012 as a whole. So here is “1 year in 10 snapshops” 2012!

Index 1.

Global economy – The three announced disasters have been avoided

2.

United States – Right to the edge of the cliff…

3.

United States – The recovery in real estate speeds up

4.

Euro zone – Stabilization … in recession

5.

Euro zone – Mario Draghi, saviour of the euro

6.

Japan – Towards a much more accommodative monetary policy?

7.

Asia – Exports rebound

8.

Bonds – A one-way year

9.

The greenback regains its colour, but gold loses some of its radiance

10.

Energy – The American revolution

1. Global economy – The three announced disasters have been avoided •

A sigh of relief. That is probably a concise but accurate summary of the year 2012. None of the three major risks identified at the beginning of the year finally materialized. The fear that the U.S. economy might relapse into recession, caused by a slowdown in the number of jobs being created, was avoided thanks to the recovery in real estate, the drop in energy prices and the Fed’s interventions. The Chinese economy finally staged a “soft landing” for its growth, even showing signs of a recovery during the autumn. The euro zone did not break up and saw the level of stress in the financial system decrease considerably following the decisive intervention by the president of the ECB. Thus at the start of 2013 it has to be observed that the risks of imminent disaster have receded in each of the world’s three main economies. Which means we can look towards 2013 with a little more hope!

ACTIVITY INDICES IN CHINA AND THE U.S. AND EUR/USD 1.36

55

1.34 54

1.32

53 1.30

1.28

52

1.26 51

1.24

50 1.22

49 J F M A US - ISM MANUF ACT URING CHINA - PMI MANUF ACT URING EUR/USD(R.H.SCALE)

1.20 M

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Source: T homson Reuters Datastream

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.


2012

2. United States – Right to the edge of the cliff… •

After a first half-year marked by a slowdown in the dynamic in the United States, the economy showed signs of firming up during the 3rd quarter, driven in particular by the good performance of household consumption. However, the prospect of a sudden tightening of budgetary policy at the beginning of 2013 (the now-famous “fiscal cliff”, which could well have plunged the United States into recession if no agreement was reached between Republicans and Democrats) weighed on confidence and activity during the last few months of the year, in particular with regard to investment expenditures. Like what happened during the summer of 2011, uncertainty over future fiscal policy had a negative impact on domestic activity. This uncertainty was only partially dispelled during the very last hours of 2012...

SYZ US DOMESTIC ACTIVITY INDEX AND GDP (YOY %) 10

3

5

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0 1

-5 0 -10 -1 -15 -2 -20

-3 -25

-4

-30

-35

-5

2008 2009 2010 SYZ US domest ic act ivit y index (U. of Michigan-based) US G DP YoY%(R.H. SCALE)

2011

2012

Source: T homson Reut ers Dat ast ream

3. United States – The recovery in real estate speeds up •

After having collapsed from 2006 to 2008 and then stagnated in 2009/2010, construction had already shown signs of recovery in 2011. But 2012 was the year in which the return to growth was confirmed in this sector. Housing starts and building permits increased by 24% and 28% respectively and the homebuilders’ activity index improved strongly, reaching its highest level since 2006. This movement was made possible by a combination of favourable factors: the shorter supply of housing after two years of a virtual standstill of activity; the drop in the unemployment rate; the decline in mortgage interest rates to an all-time low (3.5% for a 30-year loan), fuelled by the Fed’s purchases of MBS. Thus the construction sector and real estate more generally (with the resumption of rising prices) again became an engine of US growth in 2012.

HOUSING STARTS, BUILDING PERMITS AND HOMEBUILDERS’ ACTIVITY INDEX 2400

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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 US - HO USI NG ST ART S US - BUI LDI NG PERMI T S US - NAHB HO MEBUI LDERS ACT I VI T Y I NDEX(R. H. SCALE) Source: T homson Reut ers Dat ast ream

4. Euro zone – A stabilization … in recession •

Three years after the beginning of the European sovereign debt crisis, the Euro zone “at last” officially went into recession in the 3rd quarter of 2012. The economies in the south of the monetary union had already been in recession since the end of 2011 but it will have taken a slowdown in the north of the zone for the whole of the currency area to post a negative growth rate for two consecutive quarters (and probably for the year 2012 as a whole). However, the activity indicators tended to stabilize from the middle of the year onwards, suggesting a halt in the deterioration thanks to the various measures announced by the political and monetary authorities (and probably helped by the rebound of activity in the rest of the world). European growth therefore appears to have stabilized during the last few months of 2012. But in negative territory…

PMI COMPOSITE INDICES (MANUFACTURING + SERVICES) 65

60

55

50

45

40

35

30 2006 EMU

2007 G ER

2008 FR A

2009 ITA

2010 S PA

2011

2012

2013

So urc e: B lo o m berg, SYZ A M

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.


2012

5. Euro zone – Mario Draghi, saviour of the euro •

The tensions in the euro zone quickly surfaced again in spring 2012, following a brief easing made possible by the ECB’s liquidity injections: a partial default and the risk of a disorderly exit from the euro zone by Greece, growing fears about the Spanish banks and a deterioration of Spain’s public finances… In July, Spanish 10-year interest-rate surged to above 7%, pushing systemic risk to a new peak. One man and one sentence were enough to change everything: the president of the ECB, Mario Draghi, declared on July 26 that “the ECB is ready to do whatever it takes to preserve the euro”. The ECB was now committed to acting as lender of last resort in order to ensure the sustainability of the monetary union. On the financial markets the risk premium for the risk of a break-up of the euro subsided, while interest-rate spreads narrowed again and the stock markets rose…

EURO ZONE: INTEREST RATES ON 10-YEAR GOVT. BONDS 9

26 July 2012

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G ER F RA BEL

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Source: T homson Reut ers Dat ast ream

6. Japan – Towards a much more accommodative monetary policy? •

The Japanese economy is suffering from many ills, which are the cause of persistent deflation and successive growth setbacks. One of the ills afflicting the Japanese economy lies in the high level of the yen, resulting from the relative conservatism displayed by the Bank of Japan on monetary policy. Thus any potential change has a direct influence on the currency. At the beginning of the year the hope of seeing the BoJ adopt a proactive quantitative easing programme had caused a first downward movement in the value of the yen, a hope which was soon dashed. In the autumn the election of Mr. Abe as Prime Minister on a programme that included a far-reaching reform of the way in which the BoJ functions, triggered a further depreciation in the yen, which reached its lowest level since mid-2010. Japanese equities greatly benefited from this. All they have to do now is live up to the expectations for 2013!

DOLLAR AGAINST YEN (USD/JPY) AND NIKKEI 225 IN 2012 88

125

86

120

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115

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105

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76

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J F M A M J USD/ JPY NIKKEI 225 (100 = 01. 01. 2012)(R.H. SCALE)

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Source: T homson Reut ers Dat ast ream

7. Asia – Exports rebound •

The slowdown in the growth of the emerging economies from early 2011 to mid-2012 may have been partially attributable to certain domestic factors (a return to normal of budgetary and monetary policies). But it is above all the slowdown in global growth that was the cause. The lack of dynamism in the United States, deflation in Japan and above all Europe’s slide into recession had heavily weighed on final demand for manufactured goods produced in the emerging economies. In this respect the rebound of the Asian economies’ exports from summer 2012 onwards is a good indicator of the reversal of the trend in global growth. Better-oriented consumption in the United States and the halting of the negative spiral in Europe enabled the main engine of growth in those economies to get moving again at the end of the year.

YEAR-ON-YEAR CHANGE IN EXPORTS IN ASIA 50

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-30 00 01 02 03 04 05 CHI NA - EXPO RT YoY 3M MAV KO REA - EXPO RT YoY 3M MAV HO NG KO NG - EXPO RT YoY 3M MAV

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07 08 09 10 11 12 I NDO NESI A - EXPO RT YoY 3M MAV Source: T homson Reut ers Dat ast ream

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.


2012

8. Bonds – A one-way year •

The fixed-income securities markets had a spectacular year in 2012, marked by a virtually uninterrupted upward trend and some spectacular performances: nearly 20% for High Yield or emerging debt, more than 10% for European bonds and nearly 5% for global government bonds, despite the low level of interest rates.

PERFORMANCE OF THE BOND INDICES IN 2012 120

115

This movement results from weak global growth, the absence of inflationary pressures and increasingly accommodative monetary policies in the developed world (QE 2.5 and 3.0 of the Fed, LTRO and potential OMT of the ECB, the BoE’s QE).

110

In a context of financial repression (manipulation of interest rates by the authorities to force savers to invest/consume), the search for yield is inexorably pushing investors towards increasingly risky assets.

100

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95 J F M A M CG BI W O RLD G O VERNMENT BO NDS Bof A EMU G O VERNMENT Bof A EMU CO RPO RAT E

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J A S O N Bof A ML G LO BAL HI G H YI ELD JPM EMBI G LO BAL CO MPO SI T E

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Source: T homson Reut ers Dat ast ream

9. The greenback regains its colour, but gold loses some of its radiance •

Since 2008 the US dollar has been hovering around its lowest level in line with investors’ risk aversion. While it remains the benchmark safe haven in times of peak tension (fall 2008, spring 2010, summer 2011) it suffers from ultra-expansionary monetary and budgetary policies when investors start searching again for yield. However, the gradual improvement in the U.S. economic situation and the incipient rebalancing of budgetary policy expected in 2013 offset the additional easing of the Fed’s policy and allowed the greenback to end the year at the same level it had started at. Gold, for its part, recorded a 12th consecutive year of rising prices in 2012, but its dynamic appeared to have run out of steam with the decrease in macro-economic risks. It’s not certain there will be a 13th year of rising gold prices…

GOLD (USD/OZ) AND US DOLLAR TRADE-WEIGHTED (INVERTED) 68

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600 2009 2010 2011 G O LD - (USD/ O Z ) US DO LLAR T RADE-W EI G HT ED - I NVERT ED SCALE(R. H. SCALE)

2012

Source: T homson Reut ers Dat ast ream

10. Energy – The American revolution •

Just below the surface of the U.S. economy’s good performance in 2012 is the now-famous energy revolution that is at work in the United States. The development of the exploitation of shale gas and oil was a major factor in the U.S. growth dynamic in 2012.

OIL AND GAS PRICES, IN NEW YORK AND LONDON 20

160

Oil price differential US/Europe

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140 16 120

The direct and indirect repercussions are indeed numerous: the energy cost differential between the United States and Europe or Asia affords US companies a sizeable competitive advantage and has a knock-on effect on their earnings and international positioning (it is one of the factors in the trend towards reindustrialization of the US economy). But exploration activities are also a substantial factor that has supported domestic demand, engendering investment expenditures, employment, demand for housing, consumption, tax revenues… The energy revolution is actively contributing to the recovery of the US economy.

14 100 12

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Gas price differential US/Europe

0 00 01 02 03 04 O I L - LO NDO N BRENT (USD/BBL) O I L - US W T I CUSHING (USD/BBL)

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07 08 09 10 11 12 NAT URAL G AS - LO NDO N I CE (USD/MMBT U)(R.

NAT URAL G AS - US HENRY HUB (USD/ MMBT U)(R.H.SCALE) Source: T homson Reut ers Datast ream

This document has been produced purely for the purpose of information and does not therefore constitute an offer or a recommendation to invest or to purchase or sell shares, nor is it a contractual document. The opinions expressed reflect our judgement on the date on which it was written and are therefore liable to be altered at any time without notice. We refuse to accept any liability in the event of any direct or indirect losses, caused by using the information supplied in this document.


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