AAM

MAC Econ201GDPannuincreCons

Exhi

M 2013

CRO-ECO

nomic grow4 (Exhibit

P growth to ualized increase in invsumer spen

ibit 1: Real

So

Sector R

• • • • • • •

NOMIC R

wth accelera1). Real GDa 3.7% an

rease durinventory bu

nding also im

U.S. GDP

‐10

‐8

‐6

‐4

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0

2

4

6

2006

Real GDP %

ource: Bureau of

Review a

T

Macro-EcCore FixeCorporateStructureMunicipaHigh YieldConvertib

REVIEW AN

ated during DP increasennualized pg the first hild-up whicmproved du

Growth

2007 2008

f Economic Analy

nd 2014

Table of Co

onomic Revd Income O

e Creditd Productsls d and Bankle Securitie

ND OUTLO

the seconded 3.2% (aace during half of the ch could puring the se

2009 20

ysis, Bloomberg

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4 Outlook

ntents

view and Ou

Outlook Sum

k Loans es

OOK

d half of 20annualized)

the secondyear. Part o

prove to beecond half o

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k

Pautlook mmary 4

2 2 2 2

013 boostinduring the

d half of thof the impre temporaryof the year.

2012 2013

Q

4

Febr

age 1 4 5

21 24 26 26

ng optimism fourth qua

he year. Thirovement iny if deman

3 2014

Q/Q %

4Q/4Q %

Foreca

ruary 7, 2

m for growtharter of 201s compares

n growth wand does no

2015

ast

2014

h going into13, bringings to a 1.8%as due to anot pick up

o g

% n .

In 2imprthe spendue increwagebusiprof

WithpresConsFedeand

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2013, GDP rovement inhousing se

nding. AAMto concerneases in jobes as avernesses to sit margins.

h limited wssure for insumption Eeral Reservprovided th

ibit 2: Avera

So

en the imprxpecting th

uction in puction in thation rates ent levels f

und mid-20ward the tim

increased n growth is ector, less

M believes ths over the sbs averaginage hourly significantl

age gains cnflation to Expendituree’s long-terhe Federal R

age Hourly

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

11/1/200

8

2/1/2009

Wages, YoY % Change

ource: Bureau of

oving econohe Fed to urchases ateir asset pubelow the

for some tim015. An upming for the

2.7%. For being led bdrag from

he risks to strength of g only 182earnings

y increase

constrainingmove highs Price Indrm target ofReserve roo

Earnings

2/1/2009

5/1/2009

8/1/2009

11/1/200

9

f Labor Statistics,

omic outlooend their t each Fedurchase proFed’s long

me. The mapward movefirst rate in

2014, ecoby an expec

fiscal polithe growth the consum

2,000 per mare up onltheir hiring

g labor coser over the

dex is just af 2%. Markom to maint

2/1/2010

5/1/2010

8/1/2010

11/1/201

0

, Bloomberg

ok, Fed poliasset purch

d meeting. ogram is nog-term targarket is curement in inncrease (Ex

2

onomic growcted pickupicy, and anforecasts f

mer. Payrollmonth. Wealy 1.8% og in 2014,

sts and globe next twelabove 1% oket expectattain an acco

//

2/1/2011

5/1/2011

8/1/2011

11/1/201

1

icy should bhase prograThe Fed ht the same et; they wirrently pricinflation or hibit 3).

wth is expep in consumn improvedfor 2014 arl growth waak job growtn a year-o, especially

bal growth lve monthson a year-ovtions for inommodative

11/1/201

1

2/1/2012

5/1/2012

8/1/2012

become lesam this yeas attemptas a tighte

ill most liking in the fstronger th

ected to bemer spendind climate fre skewed tas weak in 2th has led

over-year bay given our

remaining s (Exhibit 2ver-year baflation move monetary

11/1/201

2

2/1/2013

5/1/2013

8/1/2013

ss accommoear by annoted to assuening of mokely keep tfirst increashan expecte

e modestly g, continue

for increaseto the down2013 with tto limited iasis. We dexpectatio

soft, we se2). The Cosis and weved lower dpolicy.

11/1/201

3

odative in 2ouncing a ure the maronetary polithe Fed Fuse by the Fed growth

better. Theed growth ined businessnside mainlythe monthlyincreases inon’t expec

on for softe

ee very littleore Personall below the

during 2013

2014. AAM$10 billionrkets that acy and withnds rate a

Fed to occucould move

e n s y y n t r

e al e 3

M n a h t r e

Exhi

A lessign3.5%beniFed rate

Exhi

ibit 3: Mark

ss accommificant incr% in 2014ign during Funds rate

.

ibit 4: 10-Y

So

ket Expecta

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Fed Fu

Source

odative Fedrease in lon (Exhibit 4the year. Se and we ex

Year Nomina

‐4

‐2

0

2

4

6

8

10

12/1/1993

8/1/19

94

4/1/19

95

12/1/1995

Rate (%)

ource: US Treasu

tions of Fed

Mar Jun

2014

unds Rate (%)

: Federal Reserve

d in 2014 sng-term rate4). Our 10-yShorter-termxpect the y

al and Real

12/1/1995

8/1/19

96

4/1/19

97

12/1/1997

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98

//

ury, Bureau of La

d Funds Ra

Sep

Dec

4

e, Bloomberg

should tranes as the yiyear yield fm rates wilyield curve

l Treasury Y

4/1/19

99

12/1/1999

8/1/20

00

4/1/20

01

12/1/2001

10yr Treasur

abor Statistics, Bl

3

ate

Mar Jun

2015

slate into hield on the forecast is l be heavilyto flatten o

Yields

8/1/20

02

4/1/20

03

12/1/2003

8/1/20

04

4 /1/20

05

ry Yield 1

loomberg

Sep

Dec

higher Treas10-year Trpredicatedy influenceonce the Fe

//

12/1/2005

8/1/20

06

4/1/20

07

12/1/2007

8/1/20

08

10yr Real  Yield

Mar Jun

2016

sury rates. Wreasury note on inflatio

ed by markeed begins t

8/1/20

08

4/1/20

09

12/1/2009

8/1/20

10

4/1/20

11Sep

Dec

We are not e should reon remaininet expectatto raise the

12/1/2011

8/1/20

12

4/1/20

13

12/1/2013

expecting aemain belowng relativelyions for the

e Fed Funds

a w y e s

COR The poinReseeasisellobeininveclea Exhi

The the activrateanticenouTrearang So finveJapaartifmarkas th

RE FIXED

fixed incomnts (bps) frerve in Mayng (QE3) poff was not ng the hardstment gradr leader wh

ibit 5: Barc

Inde

MBSCMBABSCorpTaxaSoveTax-

Trea

1 Ye2 Ye3 Ye5 Ye10 Y30 Y

Source

primary qusteepness vity, likely m. We expecipation of ugh to movasury markege on the 10

far in 2014stors causianese Yen icially low kets. With he growth i

INCOME

me market dom 5 to 3y of 2013 rogram. Mjust in Tre

dest hit on de sectors aile short CM

clays Aggre

ex

S BS S porate Securiable Municipaereign, Foreig-exempt Mun

asury Return

ear ear ear ear Year Year e: Barclays

uestion fromof the yieldmeaning thect that the

a change ve 10-year et will conti0-year tradi

4, we have sing a sellohave causthroughoutthe curren

n some em

OUTLOO

during 2010 years. Twhen they

arket particasuries buta duration

as reportedMBS was th

gate Excess

ties al gn Agency, Sicipal

ns

m our cliend curve, it at the Fed

e curve willin Fed posTreasury rnue to be vng between

seen a flighff in all ri

sed some mt the globe,t stress on erging mark

K SUMMA

3 generateThe selloff y announcecipants soldt across all n adjusted by Barclay

he absolute

s Returns

12/Dur

33379

upra 54

12/Dur

01249

2

ts coming is apparenwill begin steepen ature. Howates above

volatile and n 2.60 and

ht to qualitysk assets.market disl, they encothe market

ket countrie

4

ARY

d negative was trigged a future

d longer durinvestmentbasis. Yo

ys. Adjustinnon- adjus

/31/12 ration

1D

3.18 3.11 3.12 7.18 9.72 5.41 4.98 /31/12 ration

1D

0.94 1.99 2.94 4.93 9.36 1.10

into 2014:nt that the discussing

as the econwever, we do

3.50% bydriven by s3.40% thr

y rally as u The weak

location. ourage the t there has es slowed, t

returns as ered by a c

reduction ration securt grade secou can see ng for duratsted winner.

2/31/13 Duration

5.11 3.16 2.49 6.80 8.71 5.15 5.48

2/31/13 Duration

0.95 1.99 2.94 4.90 9.02

18.60

: where aremarket is (late in 20

nomy plods o not beliey the end subtle chanoughout the

ncertainty ikness in eWith Centruse of levebeen a disthere were

interest ratchange in pof purchasrities from

ctors, with Tin Exhibit

tion, the co.

2013 Return

-1.27% -0.17% -0.71% -1.50% -5.86% -3.33% -2.55% 2013

Return 0.29% 0.30% -0.05% -2.47% -7.81%

-15.03%

e rates headpricing an

014) an incalong at c

eve that ecoof 2014. T

nges in econe year.

in emergingmerging mral banks erage in lescussion of wild curren

tes rose oveposture of ses in the May to SepTax-exemptt 5 the retorporate sec

2013 Excess Return

98 97 24

286 208 -68 n/a

ded? Whenincrease i

rease in thecurrent growonomic actThe longer nomic outlo

g markets hmarkets as

keeping inss liquid, m1998. In

ncy fluctuat

er 100 basisthe Federaquantitative

ptember; the municipalsurns of thector was the

n looking an economice Fed fundswth rates inivity will beend of the

ook with the

has spookedwell as theterest rates

more volatileearly 1998tions in Asia

s al e e s e e

t c s n e e e

d e s e , a

and the Lehmthe g For gradMBS COR 201 The Trea Exhi

Markpart them Fromlevecomassefinaninter201

Basi

s Po

ints

significantfailure of tman Brotheglobe is a c

2014, we ede universe S and Treas

RPORATE

3 Review

investmenasuries, afte

ibit 6: U.S.

Source: Barclays

ket performof the mat

mselves from

m a fundamraged buyopanies that

et spin-offs ncial comprest coverag3 (6 bps) w

110

115

120

125

130

135

140

145

150

155

160

distress ashe Long Teers. Althougcause for co

expect that with Corpo

suries throu

E CREDIT

t grade coer a strong f

Corporate

s

mance was turity curvem rising rat

mental perspouts (LBOst avoided thand increaanies in 20ge, while cwith spreads

s the leveraerm Capital gh we do nooncern.

Tax-exemporate bondsghout the y

rporate fixefourth quart

Investment

driven by Be underperfoes and liab

pective, thes). Activishem, manased share r

013, with aash levels rs more affe

age across tManageme

ot expect a

pt municipas a close syear, we bel

ed income ter of sprea

t Grade OAS

BBB rated sormed, as tility driven

e year startest shareholdagement tearepurchasesmodest inc

remained hected by the

5

the globe uent hedge frepeat of t

als will be tsecond. Wlieve these

market cload tightenin

S Exh

securities atotal return investors b

ed with a diders targetams workeds and dividecrease in le

high. That be expectatio

unwound—rfund (amonhose events

the best peWith the Fed

sectors to b

osed the yeng (Exhibit 6

ibit 7: 201

Source: Ba

and financiinvestors l

bought the l

sruptive tonted a multd to preempends. Credeverage andbeing said, on for highe

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

resulting in ng others), as, the curre

rforming sed steadily be the wors

ear with 286).

3 Excess R

arclays, AAM

als (Exhibiooked to thong end aft

ne with thretitude of spt their pardit metrics d decrease spread vol

er interest r

AAU

Ut

I

In

F

Fi

28

the defauland the neent leverage

ector in thereducing p

st performer

86 bps of

Return Comp

t 7). The ihe short enter rates ros

ee companisectors, andrticipation, eroded sligin EBITDA atility remarates than f

A/AAAUte A

te BBB

nd A

d BBB

Fin A

n BBB

86 basis points

t of Russiaar failure o

e throughou

e investmenurchases ors.

return ove

position

ntermediated to protecse in June.

ies pursuingd for thoseannouncing

ghtly for nonmargin and

ained low inundamenta

, f t

t f

r

e t

g e g n d n al

deteand low rate the

As waffeccorpby laand Globincreremaactivdefla Exhi

201 Econdisadragbe macco 1 Dia2.

erioration. more stablwith 77 deof 2.3% (2

10-year ave

we had expcted by ris

porate fund arge issues acquisition

bal merger eased to aained flat ive sector wation and m

ibit 8: Merg

4 Outlook –

nomic growppoint, the

g, which remmodestly poommodative

ne Vazza, Glo

Rating actie economic

efaulters in 2% in the erage of 3.7

pected, perfing interesflows weresuch as th

ns.

and acquia 10-year hn the U.S.

was telecommargin comp

gers & Acqu

Source: Bloomb

– Entering t

wth in the Ure is a highmoved apprositive, ande. Specific

obal Corporate

0%

5%

10%

15%

20%

25%

30%

ons have bc environme2013, tranU.S.), whic

7% per S&P

formance fot rates. D

e positive foe $17 billi

isition (M&high (Exhib, and fell imunicationpression.

uisition Hist

berg, AAM

the Late Sta

United Stateh degree of roximately 1d if growth cally, Ireland

e Default Tally

ecome unfaent to borronslating to ach is lower P1.

or the inveespite sellior 2013. Ton Apple a

&A) volume bit 8). Ren develope

ns, which is

tory

age of the C

es is projectcertainty th1.5% from

disappointd and Spai

y Declines to

Volume

6

avorable, asow and retuan estimatethan both

estment grang that oc

The new issnd $49 bil

increased egionally, Med Asia, Eass not surpris

Credit Cycle

ted to be 2hat growth wGDP growtts or disinfn’s econom

77 Issuers As

e Avg 

s companieurn cash to ed global spthe 25-yea

ade fixed inccurred fromsue market lion Verizon

slightly veM&A activitstern Europsing since

e

.8% in 201will exceed h in 2013.flation wors

mies are imp

s 2013 Come

Premium

es took advashareholde

peculative-gar historica

ncome markm May to Jexceeded 2

n deals to f

ersus 2012ty increasepe and Latithat sector

14, and wh2% due to

. Europeansens, the Eproving, wh

es to a Close, J

0

0

1

1

2

2

3

3

4

4

antage of thers. Defaultgrade corpol average o

ket was noJuly, invest2012’s voluund share r

2, but premd in Westein Americahas experi

hile growth the reduct

n growth is ECB is expehile growth

January 2, 20

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

$ Trillions (volum

e)

he low ratests remained

orate defaulf 4.2% and

ot negativelytment gradeume, fueledrepurchases

miums paidern Europe. The mosenced price

may slightlyion of fiscaexpected toected to bein Italy and

014, Page 1-

s d t d

y e d s

d e, t e

y al o e d

Franbetwstym Chinthe fromprobsuffeBrazmarkpriminter Mov201fromrelat3% highloweinterare a Exhi

Capcom

nce remainween soveremied efforts

na is expectregime will

m China, thblem for coering from zil, India, Iket growth

mary risks torest in the

ving from m2 was the a

m falling rawted benefitswith appro

her equity mer quality erest and taapproaching

ibit 9: Cash

Source: Cap

ital spendimodity pr

0%

20%

40%

60%

80%

100%

120%

140%

s problemaeigns and of regulato

ted to growprioritize g

he improvinuntries withinflation, sndonesia, ais an impo

o outperformMiddle East

macro to miallocation ow material s to grow eoximately 7multiples, wearnings pex savings). g lofty leve

h Flows Incr

ital IQ, AAM

ng by inveices curta

atic. We the financ

ors to sever

w between 7growth in thng outlook h current astagnating and Turkey

ortant drivermance in 20t increase t

cro, the laof free cash

prices, conearnings. I7% EBITDAwe believe mr share gro While ma

ls as a perc

reasingly Sp

estment grailed spend

remain caial sector. the explicit

7.0 - 7.5%,eir second for develoccount defincomes, py give voterr for many 014. Anoththe risk of a

rgest deviatflow toward

ntinued lown 2014, re

A growth, wmanagemenwth in 201

anagement centage of o

pent to Rew

ade compading by m

7

autious on Disagreem

t bank-sove

balancing year, keepiped countricits. Polit

political reprs the oppoinvestmenther risk to ga significant

tion in nonds share re

w wage increvenue growwhich shoulnt will need13 (e.g., shhas room t

overall free

ward Shareh

nies has bmetals and

European ments amonereign links.

growth objng commodries puts etical uphea

pression or ortunity to t grade issugrowth is a t incident t

n-financial cpurchases (reases as wwth for nond allow ma

d to achievehare repurcto increase cash flow.

holders

been fairly mining c

banks givengst EU m.

jectives witdity prices emerging mval is a riscorruption.voice thoseuers; therefspike in oi

this year.

company fu(Exhibit 9).well as low -financials argins to ee organic e

chase, dividshare repu

robust untcompanies,

en the codembers ha

h reforms. relatively st

market flowsk in countr. General e concerns.fore, that isl prices, as

undamenta Companieinterest rais expectexpand. To

earnings grodend payouurchase pro

til 2013 w and eco

Net M&A/CF

Net Share re

Dividends/C

Capex/CFO

Share repo /

dependenceave thus fa

We believetable. Aways at risk, aries that areelections in. Emergings one of ouconflicts o

ls 2013 vses benefitedates and taxd to exceedo justify theowth vs. thet increasesgrams, they

when fallingonomic and

FO

epo/CFO

CFO

/ FCF

e r

e y a e n g r f

s. d x d e e s, y

g d

politcapiand Exhi

Source

We oppoare Addas wlikelto be Exhi

tical/tax/heatal spendinmining com

ibit 10: Driv

e: Capital IQ, AA

expect maortunities agrowth chaitionally, w

we have seey outcome e relatively

ibit 11: Ind

200

alth care rng to be slimpanies, as

vers of Cap

AM

anagement nd to expan

allenged (Exe expect men in the Rof this restbenign from

dustry Growt

OveAutoBuilCheHeaInsuMedMetOil &PapPipeREITTecTran

Source:

200807

related uncghtly lower

s they redep

ital Spendi

will look nd margins xhibit 11),

managementREIT, Mediatructuring am a ratings

th Expectat

r o lding Producmicals

althcare urance dia als & Mining& Gas er eline Ts hnology nsportation Capital IQ, AAM

20102009

certainty afr in 2014, ploy cash to

ng by Secto

more to via realizedare being

t will becoma, Energy, and acquisperspective

tions for 20

cts

g

M

220110

8

ffected madriven prim

o de-lever a

or

M&A this d synergiesrewarded b

me more crand Pharmition activite.

014 vs. Mar

UnderAerospaBankingConsumElectricManufaPharmaRetail Telecom

2013E2012

anufacturingmarily by a nd reward s

year to g. The acquby shareholreative with

maceutical sty; however

rket Average

ace & Defensg

mer Productsc Utilities cturing

aceuticals

mmunication

-20

-15

-10

-5%

0%

5%

10

15

20

2014E

g spendingreduction

shareholder

row in theuirers, especlders when h asset divesectors. Inr, we expec

e

se

s

ns

0%

5%

0%

%

%

%

0%

5%

0%

Ann

ual I

ncre

ase

O

T

P

M

E

T

g. We arein spendingrs (Exhibit 1

e absence cially in inddeals are

estitures anncreasing let the major

Other Industrials

Telecom

Pipeline

Metals and Mining

Energy

Total

e projectingg by metals10).

of organicdustries thaannounced

nd spin-offseverage is arity of deals

g

g s

c t .

s, a s

Wheof tapprexpeWhithanpart Thussupp The outpInduthe fundthe tightreacexpe(Exhthe Exhi

ereas we hathe marketroximately ect fixed inle the markn 2013. W

of the curs, we belieportive for t

OAS of theperformanceustrial basisstart of th

damentals fsector withtened in 20

ch for yield.ect spreadshibit 12). Onext 12 mo

ibit 12: Pro

ve a neutra. Gross c15%) while

ncome invesket is expec

We believe trve. Moreoeve Corporthe long end

e Index cloe was drives (defined ae year to -for Financia net supply013 from 7. Our projes to tightenOur expectaonths.

ojected 201

al view on Ccorporate de demand isstors to concting Treasthis is suppver, as equrate bonds d of the cur

osed the yeaen by Finaas Finance -5 bps. Wals are expy expected 79 to 60 bection is fo

moderatelyation is for t

14 Excess R

Source: AAM

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Corporate fudebt supplys sustainedntinue to losury rates toportive for muity valuatio

have becorve.

ar at 114 bancials doinOAS minus

We expect tected to reto be lowe

bps, and wr this to tigy in 2014,the OAS to

Returns Com

140 bas

9

undamentaly is expect. In this loook to Corpo move higmutual funons have risome more

bps, movingng better ts Industrial his relation

emain fairlyr than 201e believe tghten more resulting remain wit

mposition

sis points

ls, we have ted to rem

ow interest porate bondgher, the exd flows, ansen, pensioattractive

g inside outhan we haOAS per B

nship to bey stable and3. Similarhat should modestly in excess rthin a range

Industrial

Finance

Utilities

a positive main elevatrate and de

ds, overweigxpected mond in particon funding for pensio

ur 125 bps ad expectearclays) tig

e sustainedd technicalrly, the BBB continue tin 2014 (5eturns vs. e of 100 to

s

view on theted (net suefault envirghting the ove in 2014cular, the ilevels have

on account

target for ed, as the htened from throughouls remain fB to A Induto tighten a

5-10 bps). Treasuries

o 140 basis

e technicalsupply downronment, weasset class4 is smallentermediatee increaseds. This is

2013. TheFinance to

m 20 bps aut 2014, asavorable foustrial basisas investorsOverall, weof 140 bps

s points ove

s n e s. r e . s

e o t s r s s e s r

Cred A pelongThe credthe the shalcompoinstagconvmom Fundapprincrethis grow Exhi

2 Dra

dit Fundame

ertinent queger than themedian du

dit cycles. recession thcurrent 54lower, supppany cautio

nt, we are mge before “dvertible mamentum in t

damentallyroaching hieased spenyear, givin

wth challeng

ibit 13: Lev

So

ho, Jason et a

entals and

estion to ase last creditration pre 1For instanchat began i4. We areported by tousness) ha

moving fromdownturn.” rkets, and the fourth q

, we are wstoric high

nding on shng companged, we exp

verage is Hi

ource: Capital IQ

al., “2014 St

0%

5%

10%

15%

20%

25%

30%

35%

40%

the Cycle

sk is where t cycle, alth1990 and pce, spreads n 2001. T

e not surprthe Federalave likely re

m the “recov Signs of the investm

quarter 201

witnessing s (Exhibit

hare buybacies the abipect a highe

igh

Q, AAM

rategy Outloo

we are in thhough it is spost war is troughed 1

The average rised this c Reserve, aesulted in pvery” part olate stage ment grade13.

more pur13). Cashcks and divlity to grow

er level of M

k,” Morgan S

Cash/De

10

he credit cyshorter than41 months

10 months post war e

cycle has and the strpreventing of the creditbehavior at

e market m

poseful levh balances vidends. Pw earnings M&A.

tanley U.S. E

ebt Deb

ycle. At 60n the bull ms. Economibefore the conomic relasted longructural heaexcesses frt cycle to tht a market

may not be

veraging byremain hig

Positively, gorganically

Equity Strategy

bt/EBITDA

0 months, tmarket in thc cycles tylast recess

ecovery is 5ger since tadwinds (crom buildinhe “expanslevel exist that far be

y companigh but havegrowth is exy. For tho

y, December

his recoveryhe 1990s (7pically last ion and 4 y8 months che recoveryonsumer de

ng2. We beionary” parin the hig

ehind given

es with De fallen maxpected to ose industri

3, 2013, Pag

 ‐

 0.5

 1.0

 1.5

 2.0

 2.5

y has lasted79 months)longer than

years beforecompared toy has beeneleveraginglieve at thisrt or the lasgh yield andn the strong

ebt/EBITDAainly due tobe strongeies that are

ge 12-13.

d . n e o n g, s t d g

A o r e

Margfor slargegrowmedreacwondow ExhiRally

Exhi

gins have rsmall to lae and very wth forecastdian figures ching historder how mun, as comp

ibit 14: Poty

ibit 15: Ma

eached histrge companlarge comp

t this year. (Exhibit 15

ic highs, teuch cost opanies spend

tential Magn

Source: Thom

rgins are So

torically hignies. Specpanies, we In fact, loo

5), we see mechnology spptimization d more on c

nitude of Fu

mson Reuters, Mo

oftening

Source: Ca

10%

12%

14%

16%

18%

20%

22%

EBITDA Margin

gh levels focifically for do not exp

oking at themargins sofpending begremains. Fcapital vers

uture Smal

organ Stanley Res

apital IQ, AAM

EBITDA M

11

or very largethe invest

pect margine companieftening overginning to w

Free cash flous the low

l-Cap Marg

search

argin FCF/

e companietment gradens to improes in the invr the past ywane, and cow continuein 2009.

in Expansio

/Revenues

s (Exhibit 1e market, wove materiavestment gyear. With capacity utes to be rob

on Could M

0%

2%

4%

6%

8%

10%

12%

FCF/Re

venu

es

14), with rowhich inclually despiterade markerevenues peilization incbust but ha

ean More L

oom to growudes mainlye the higheet and usinger employeecreasing, wes also come

Legs to

w y r g e e e

Whienterisk,detecapi Eme The MayAccofundcurrdepron cgrowmanmark Chinmarkthe Juneauthshouindumarkposisuppreforcurrpres

3 PabGloba4 Gold

le we are ner the expan, tight spreerioration. talizing on

erging Mark

Fed’s tapey 2013, at ording to Hds betweenency volatreciation, sconcerns thwth was unmnaged their ket does no

na is the lkets as a wimpact thae 2013, ithorities injeuld slow crustries with kets. The ntive growthport, we exprms are iment accoun

ssures, as n

blo Goldberg, al Emerging Mdberg, “Emer

not expectinsionary pheads, BBBWe remai

opportuniti

ket Outlook

ring commea time w

HSBC3, arou May and ility, hastetructural re

hat the Fedmanageable

economiesot want to se

argest conwhole expect the high rts leverageecting liquiredit expansover capac

new regime trend in 2pect growth

mplemented t balance aoted by its

“Emerging M

Markets Multirging Markets

ng a downthase, or late-A basis cin diligent ies.

entary couphen low inund $100 December

ening emereforms, andd would raise. While ths or Brazilee China su

tributor of ted to contrate of crede (credit/GDdity despitesion and incity and loce rolled out 014. We b

h for 2014 and the g

are positive relatively lo

arkets Strateg-Asset StrategStrategist – 2

turn in 20e stage of tcompression

with our

pled with Chnterest ratebillion left2013. Th

rging markd interest rase its benc

he market is that needuffer from a

global grotribute 85%dit growth wDP) was 1e their desncrease noncal governma bold masbelieve growto exceed 7overnment and its sav

ow credit de

gist – 2014 Ogy, Page 6. 2014 Outlook

12

14, we arethe credit cn, below acredit wor

hina’s weaks had enco fixed incohis exodus ket policy ates. A simchmark rates aware of cds structuraa hard landi

owth expect% of total gwill have on198%4. Funsire to slown-performin

ment debt anster reform wth remains7%. That sworks to s

vings/GDP isefault swap

Outlook: Baby

k: Baby Steps

e expecting cycle. Thisaverage sprk to avoid

k economic ouraged in

ome and eqbrought domakers’ d

ilar combine earlier thcountries sual reforms ing.

ted for 20lobal growtn the econonding pres

w credit grong loans, and support plan and ims its prioritsaid, we exslow credit s ample, m

p (CDS) spre

Steps on Sha

on Shaky Gro

the invests means heread volatid the deter

data took ivestments quity dedicown equitydecisions ination occuan forecastuch as Argeto propel

014 (Exhibh. The ma

omy and thessures haveowth. Highllowing autthe expans

mportantly, ty and with xpect headl

growth. Itmaking it lesead.

aky Ground,”

ound,” Page 4

tment gradeeightened idlity, and friorating cr

investors byin emergin

cated emergy prices andin terms ourred in Janted and Chentina that economic

it 16), witain concerne financial e become her market-thorities to sion of the pledged toplentiful re

ine related ts real poliss vulnerabl

HSBC Global

48.

e market todiosyncraticundamentaredits while

y surprise inng marketsging marked increasedof currencynuary 2014hina’s credihave poorlygrowth, the

th emerging in China issystem. Aacute withbased ratesrestructurepublic deb

o maintain aesources fovolatility ascy rate andle to marke

l Research –

o c al e

n s. t d y , t y e

g s t h s e t a r s d t

Exhi

Asidbecomonthosidiosgrow Mar GrosdecrThe acquin thcorpapprFina4% reacfactofromNotaand Piperates

ibit 16: Em

Source

de from a Come catalysnitor economse markets syncratic rewth.

ket Liquidit

ss investmereased 1% year end t

uisitions wihe US Bankporate bondroximately ancials to bto 258 bil

ching near-tors in both

m sectors suably, two ofTelecom 2

elines (4%)s, strong ca

merging Mar

e: HSBC

Chinese harsts for an inmic and poin the world

elated risk p

ty and New

ent grade versus the total was 2th debt andk, Basic Ma issuance t15%. Withe basically lion, driventerm lows, the US and

uch as Heaf the larges

27%. Lastly) and Electash balance

kets to Con

d landing oncreased syolitical envdwide econpremiums t

w Issue Expe

corporate b2012 tota

22% above d others takaterials, andto decreasehin that totaunchanged

n mostly byfinancial

d Europe wialthcare/Phast sectors ay, we expectrics (10%)

es, and subd

ntribute 85%

or a broad ystemic riskironments

nomy generao increase

ectations

bond issual, issuance the origina

king advantd Technologe approximaal, we exped at $585 by a decreasfirms may ill drive suparmaceuticare expectedt Utilities t. Overall ndued growth

13

% of World’

deep sell-ok premium of several ally and Bafor those c

ance for 20was still h

al estimate tage of lowegy sectors. ately 2% toct Financiabillion. Withse of 11%

see opporpply trends.als +14%, d to slow. to increase non-financih and inves

’s Growth, M

off in equitiin Corporatemerging m

asic Industrredits relyin

013 totaleigh versus for 2013 er financingFor 2014, w

o $900 billals to decrehin Financiin US Bantunities to . Within NoReal EstatWe expect 8% to $80al issuance

stment need

Most of It C

ies, emergite credit spmarkets givries specificng on coun

d $918 bhistorical sdue to mo

g rates. Exawe expect gion and nease 6% to als, we expks to $110issue but

on-Financiae +59%, aEnergy iss

0 billion, dre should mds.

Coming Out

ng marketsreads. We ven the imcally. We wtries such a

illion. Evenstandards (Eore companamples incgross investt issuance $316 billio

pect Banks 0 billion. W

ultimatelyls, we expec

and Technouance to driven by an

moderate du

of Asia

s should nocontinue toportance o

would expecas Brazil fo

n though iExhibit 17)nies fundinglude issuerstment gradeto decrease

on and Nonto decrease

With spreadsy, regulatoryct increaseslogy +23%ecrease 7%increase in

ue to highe

t o f t r

t . g s e e -e s y s .

% n r

Exhi

In teprefexpe20110 ytrajesteepens One occuof tmarkaver(Exh15%postbps liquadvadrive

5 Mel15-1

bit 17: Tech

Source: JP M

erms of wher the 7 to ected return3, as total year spreadectory of inper 5 to 1sion investo

market teurring todayhe bond mket, as mearage trade shibit 18). % since thet financial csince inve

idity, we aantage, esper of excess

i, Jeffrey, “G6.

$755

‐500

0

500

1,000

1,500

2004

Net iss ($bn)

hnicals Expe

Morgan

here on the9 and 30 y

n based on return inve

d curve steenterest rates10s curve. ors.

echnical wey based on

market. Prasured by Bsize of moreMoreover, t

e credit criscrisis, Barcestors needare able to ecially in ys returns.

lobal Credit O

$1,084

$1,489

2005 200

ected to Rem

e curve to iyear parts ocarry and

estors lookeepened signs, we belieAt the sam

e do not eTRACE datimary dealeBarclays. Te than $5 mthe averagesis, to just lays believe

d to be comparticipate

years like 2

Outlook 2014

$1,491

06 2007

main Support

invest, we of the sprearoll-down i

ed to immunnificantly. Weve that totme time, h

expect to cta, they areers hold le

The percentmillion has de block tradover $11 m

es it will bempensated e in the se014 when

– Spreads Ca

1

$173 $3

2008 2009

2

14

tive

are recommd curve. Wen most secnize againsWith a hightal return ihigher rates

change is se smaller aness than 1%tage of bondeclined frode in investmillion. W structurallfor this il

econdary msecurity se

arry Returns,”

329 $34$1

2010 2011

2010 coupons = $699

2011 coup$757

mending a e believe th

ctors. The ft higher int

her comfort nvestors ws should co

secondary nd have fai% of the inds in the iom 5% to ltment grad

With an incry difficult flliquidity5. market dueelection is e

Barclays Cre

188

$700 $

1 2012 2

ons = 

2012 coupons = $787 2013

mix to stahe 7 to 9 yeront end outerest rateslevel with

ill look to ontinue to

supply. Wled to keepnvestment investment less than 1%de above $5reased bid-for the mar Despite t to our sizexpected to

edit Research,

$862

$747

2013 F2014

3 coupons = $721 2014 coupon

$668

rt 2014. Wear area offutperformed. As a resuthe Fed tatake advanattract ins

While morep pace withgrade corpgrade mar

% in the pa5 million hask spread ket OAS to

this changeze. This go be a more

, December 6

CLOs

ABS

CMBS

Agency M

Non‐age

Build Am

EM Sove

EM Corp

HY corpo

IG corpo

Total sprnet issua

s = 

We currentlyers the besd sharply inult, the 5 toper and the

ntage of thesurance and

trades areh the growthporate bondrket with anast six yearsas declinedof 3.5 bpspierce 100

e in markegives us ane significan

6, 2013, Page

MBS

ncy MBS

merica Bonds

reign

orates

orates

rates

read productance

y t n o e e d

e h d n s d s 0 t n t

e

Exhi

SEC IND AfteFinafor owithConshigh Exhi

Note: return

ibit 18: Per

CTOR OUTL

USTRIALS

r two yearancials this outperform underperfosumer Cycl

hlights AAM

ibit 19: Pro

AAM's expectatifor corporate ma

rcent of Inv

OOKS

rs of undeyear, as Fiance in Baormance coical and No’s analysts’

ojected Sect

on for excess rearket)

estment Gr

Source: Marke

rperformingnancials beasics, Comoming fromoncyclical, ’ views rega

tor Excess R

eturns in 2014 f

 (30)

 (20)

 (10)

 ‐

 10

 20

 30

 40

 50

Basis Po

ints

rade Bonds

etAccess, Barclay

g, we expeegin the yeamunication the more Energy, Tec

arding one o

Returns vs.

for the Barclays

15

with Averag

ys Research

ect Industrar with an Ons, Transpodefensive achnology anor two sub-s

Corporate

sectors vs. the B

ge Trade Si

rials and UOAS inside ortation, Baand event rnd REITs (Esectors for e

Market in 2

Barclays Corpora

ize > $5 Mi

Utilities to of Industria

anking, Insrisk prone sExhibit 19)each broad

2014

ate Market (exces

illion

perform ials. Our exurance, ansectors, Cap. The followcategory.

ss return for sec

n line withxpectation isd Pipelinespital Goodswing section

ctor minus exces

h s s s, n

ss

Bas Meta Our a revolatequaimprChinexpehalf 201MancontshouspenwouM&Astratand supp The indethromore Capi Envi Our whicof teconcontdiscrevein 2rema The this

sic Industrie

tals and Min

recommendlatively stabtile given tation. The crovement. Gna, given itected to gro

of 2013, 4, we expe

nagement tetainment auld help tonding to beld fall evenA for the ytegy. We wwill stay aw

ply/demand

OAS of theex and is 3ughout thee cyclical a

ital Goods

ironmental

recommench are widehis sector, nomic envirtinued impriplined witnues are ex

2014 helpeain stable a

OAS of thequiet secto

es

ning (Attrac

dation for tble fundamhe high emconsensus Growth froms huge infrow similar twe saw meect metals eams of mend more c

o improve fe down aboun more if cyear. Notabwill continuway from si profile (alu

e sector wa36 bps wide year givensset investm

(Attractive)

dation for relative to given the

ronment in rovement inh pricing axpected to ed by slightas more rob

e sector is or along wit

ctive)

his sector iental perfo

merging marestimate fo

m emerging rastructure to 2013 at etals pricesprices to

etals and mcareful capfree cash fut 15%. Baommodity

bly, this is e to focus ingle commuminum/ste

as unchangde of its thn the expecments.

)

this sectora broader sessential

the U.S. Wn housing aand will conbe up 3.3%tly lower caust cash flo

121, whichh carry sho

s “attractivrmance verrket involveor 2014 glomarkets, esbuild, reprabout 7.5%

s begin to be flat giv

mining comital allocatlow and prased on feeprices trenone of theour attenti

modity focuseel).

ged in 2013hree year mctation of s

r is “attracset of mid tnature of

We expect vand oilfield ntinue to b% with EBIapital spenow is used f

h is 106% uld help th

16

ve” given rersus 2013. ement on bobal GDP gspecially Chresents abo% with dowstabilize wen relative

mpanies havion. Lower reserve crededback fromd lower thae few sectoon on the msed credits

3 at 183. Tminimum. Tstabilizing g

ctive” givento high tripits service,olumes to gwaste oppoenefit fromTDA up 5.6ding and cfor tuck-in

of the induis sector ou

elatively widThat said,

both the sugrowth is 2.hina, is a la

out 40% ofwnside estimwhile endingly low demve switched

capital spdit measurem manageman expectedors in the more diversespecially

The OAS isThe spreadglobal dem

n solid funle-B Indust, should regrow slightlortunities. W

m CPI-linked6% We arecost improvacquisition

ustrial indexutperform th

de spreads the sector pply and th8%, and warge source f global memates of arg the year

mand coupld their focupending ovees. For 20

ment, we bed. In additcorporate msified globathose whic

s 160% of of this seand and in

damental ptrial creditsesonate wey with modWe expect d contract

e forecastingvements. Cs and share

x. Modest she market.

and our exhas the pothe demand we do not ex

of demandetals demanround 7%. well off thed with ris

us from groer the nex14, we expelieve capition, we expmarket emal players inch carry an

the broadeector shoulncreasing c

prospects a. The defenll given th

dest upside the industrprice increg better freredit mease buybacks.

spread tigh

pectation otential to beside of the

xpect muchd for metalsnd. China isIn the back

he lows. Fosing supplyowth to cost few yearspect capitatal spendingpect limitedploying thisn the sectounfavorable

er Corporated compressomfort with

and spreadsnsive qualitye uncertainto GDP and

ry to remaineases. 2014ee cash flowures should.

tening from

f e e h s. s k r

y. t s

al g d s r e

e s h

s y n d n 4 w d

m

Cons Reta We relatconsboossmatickethe spenthe strugsuffein cdeve Moretradwe tfor t Cons Phar Our sprelevemosprotexpeoccuefforsmadetebuy Zoetutilizadva

The perf

sumer Disc

ail (Unattrac

have an “utively tight sumer spenst sales thrrter in termet items, inhousing manding. Revehigh-end anggle with aer from newlass performelopments i

e than half ing retailersthink the spthe retail se

sumer Nond

rmaceutica

recommeneads when craged sectot profitableection, incected to be urred a fewrt to boost ller (Abbot

eriorate. In after a ma

tis or AbbVzed for a ganced/wealt

OAS of theorm especia

retionary

active)

unattractivespreads anding and evough heavy

ms of bargancluding maarket improenues in thend low-end

a plan to diw retail chamers (Macyncluding th

of the sects, which wepecialty retector was 91

discretionar

als (Unattrac

dation for compared tors in Indue companiecreased com

up 2% whw years ago shareholdett, Pfizer, short, even

ajor transacie. The ovegrowing oldthy.

e sector is ally for a se

e” recommend key fundvent risk. Hy promotionain shoppinajor applianoves and see retail secretailers dfferentiate llenges, suc’s, Kroger),

he drug reta

tor, from a e believe wiailers will r1, which is

ry

ctive)

this sector o a larger ustrials. Ma

es in the wmpetition, hich is low

ahead of tr return, laJ&J, Merct risk rema

ction occursrall secularer generati

82, which ector we thi

endation fodamental c

Holiday salen. The typicg. Last yea

nces and caecular trendtor are expeo fairly welthemselves

ch as online and those

ailers.

debt markeill have a dremain volaabout 80%

is “unattrauniverse of ny of the corld. Howeand a laccompared tthe expecterge cap phack). So nains high. Ws or to buy r characterion of adult

is 72% of nk is movin

17

r the Retaiconcerns. Ts in 2013 wcal consumar, there waars. We expds in the auected to bel. The midds and somee shoppingcompanies

et value perifficult time

atile and co% of the cor

active” basIndustrial ccredits in Pver, growthkluster newto many othed deep toparmaceuticturally, we

We have fouone of the

stics of thets and pop

the broadeng down the

l sector. OThe main cowere disapp

mer remainsas a significpect that treuto space lee up about dle market e specialty . We prefers that are b

rspective, ie tightening

ould see sprporate inde

ed on fundcredits. ThiPharmaceuth has been w product her Industrp line losseal compani

e have seend the bese lower ratee industry aulations in

er Corporatee ratings sp

Our recommoncern withpointing, ass cautious acant increaend to contend themse2% in 201retailers (Sretailers (B

r to focus obenefitting f

s compriseg from currread widenex OAS.

damental cos sector is ticals are aheld backpipeline.

rial sectors.es due to lies are spliten credit mt way to inved, spun- oare strong, a

emerging

e index. Thpectrum.

mendation h the sectos retailers aand has bease in spentinue througelves to inc14. We contSears, JCP) Best Buy, Rur investmefrom import

d of high qrent levels. ing in 201

oncerns anone of the

among the by the losRevenue fo A wave of oss of patetting up anmeasures avest in this off companas more memarkets be

is makes it

is based onor relates toattempted tocome muchding on biggh 2014 as

creased autotinue to seecontinue to

RadioShackents on bestant secula

quality, tighIn addition4. The OAS

d very tighmost undelargest and

ss of patenor 2014 ismega M&A

ents. In and becomingand ratingssector is toies such asedicines areecome more

t difficult to

n o o h g s o e o ) t r

t ,

S

t r d t s A n g s o s e e

o

Ener We for srealiwhicsharnot com Inde We and markgas reve Oil S We cashdepegrouare hurt Com Despthe risk. Tele Teleand consprogremaCab(i.e.althoto incarrEuroThe

rgy (Fair)

believe thastable oil anized on 20ch should reholder retforesee fupression pr

ependents (

have a neuintegrated,

ket price. liquid pricnue, margi

Service & C

have a neuh flow growendent on cup we will mexpecting a utilization

mmunication

pite the yieIndex, we a.

ecommunica

ecom and Chigh speed

scious congramming cain elevatele to be so, Comcast)ough regulancrease, asiers in European carrie

high degre

t the Energnd natural g013. Moreolimit reventurns in Enundamentalrospects lea

(Fair) and In

utral fundam, collectiveGiven our e

ces, top linns and cash

Contract Dri

utral fundamwth of the capital spemonitor closa meaningfrates and f

ns

eld advantagare investin

ations (Una

able compad Internet. sumer, rev

costs that ad. This in

old, most li) to raise catory approvs (1) domesrope and thers seek scee of even

gy sector angas prices, over, Indep

nue growth ergy will bes material

ads us to as

ntegrateds (

mental viewly) generateexpectation e should bh flows how

llers (Fair)

mental viewOil Servicending of thsely is the dful increaseforward day

ge over theng selective

attractive) /

anies have bAs those p

venue groware rising ancreases thkely to Chacash. Thaval is unlikstic compahe opportucale benefitt risk in t

nd each of revenues anpendents a

by the Oie generatedly improvinssign a “fair

(Fair)

w of Indepees revenue for strong

be similar iwever, will li

w of the Oie subsectorhe Independdeepwater ce of newly rates.

e Index andely in the C

Media Cab

benefited frproducts mawth is becat a faster e need forarter with tat may caukely under tnies like Anity to enhts related the U.S. an

18

its subsectnd margins nd Integratil Service Sd via sharehng in conjr” sector re

endents andby producioil prices, fn 2014 toikely be par

l Service sr to deceledents, Integcontract drbuilt drillsh

d the potenommunicat

ble (Unattrac

rom growth ature, and woming diffpace than consolidatthe potentiause DirecTVthis AdminiAT&T take ahance the o capital exnd Europe,

tors are fairshould be

teds will bSector. Thholder frienjunction wlative value

d Integrateding oil and flat natural

o what has rtially offset

sector. We erate in 20grateds andilling comphips to ent

tial for outtions sector

active)

in new prowith improvficult. EB revenuestion, and tal for systeV and Dishistration. Wadvantage value of thxpenditures modest g

rly valued. similar in 2

be focused herefore, wndly actionswith limitede opinion fo

ds. The up natural ga gas pricesbeen reali

t by shareh

expect the014. Thed National panies. In tter the mar

performancr due to the

oducts like wvements in BITDA is bwhile saleshis year we

em sales toh to resumWe expect of the loweheir wireless, pricing, growth expe

Given our 2014 to whon capital

we believe s. The factd income or the Energ

pstream (inas and sellis and stabilized in 20older friend

e pace of re Oil ServicOil Companthe upcomirketplace, w

ce in the nee high degr

wireless (smtechnology

being press and marke expect T

o other cabe merger dEuropean rer equity mss businessand cost oectations, h

expectationat has been efficiencyincrementat that we doand spread

gy sector.

ndependentsng it at theized natura13. Stabledly actions.

revenue andce sector isnies. Oneing year, wewhich could

ear term vsree of even

martphonesy and a cosssured fromketing costsime Warnele operatorsdiscussionselated M&A

multiples foses and (2ptimizationhigh capita

n n y, al o d

s e al e

d s e e d

s. t

) t

m s r s

s, A r ) .

al

expecaus Med Advepolitagenviewwithdollamea Assuto fomoreprefsateoppo Tran Rail Our sprefundcounsingWe the Areainclulow carlostrenextrabe uare singsectthe The charshou

enditure reqse us to be

dia Non-Cab

ertising revtical advertncies. Telewing, benefi

branded vars. Moreoaningful for

uming cableollow. Cabe difficult er investingllite) and ortunities a

nsportation

lroads (Attra

recommeneads relativedamental pontry. In addgle digit pribelieve thademand de

as of strenguding buildnatural gasoads would ngth of theaneous factup 8.7% wistrong, and

gle-A. Free or. Event rilast 25 yea

OAS of theracteristics uld outpace

quirementscautious w

ble (Fair) / E

enues are tising), drivevision advtting from tvideo on deover, the Suthe broadc

e and satelble networkto raise feeg in the adbroadcast s a result o

active)

ndation for e to the brooint of view

dition, bettece improvet trends in erived chargth were se

ding producs prices and

have beene economy tors such ath revenuesd we have cash flow wsk related trs.

e sector is 1and solid

e the broade

, and the lhen investi

Entertainme

expected toing revenueertising hasthe declineemand offeupreme Couast network

lite consoliks need scaes as cabledvertising anetworks. f M&A activ

the rails ioader Indusw. Shippinger service leements. Vol

rail car loaracteristics een in petts and lumd a disappo up by almbecause grs natural gas increasingseen a pos

will continuto M&A is l

116 which ifundament

er index.

ikelihood ong in these

ent (Fair)

o increasee growth fos continued of print ad

erings via aurt is expecks and their

idation takeale to compe companiegencies an For the vity or othe

s “attractivstrial index.g by rail is evels along umes for th

adings are aof the rail roleum prober. Grain a

ointing cropost 3.5% forain and coas prices ag 5.2%. Thsitive moveue to be limow given th

is roughly etals should

19

of increasinsectors.

5% in the or cable netd to rise dedvertising. uthenticatected to ruler ability to e

es place, wpete for ories get larged cable nelatter two, r event risk

ve” based We continthe most cwith improvhe industrya good indi

industry. oducts, motand coal we

p yield. If yoor the year.oal have lesnd weatheris should im

e in credit mited basedhe large am

equal to thed result in

ng leverage

U.S. this tworks, broespite the We expect

ed apps to e on the Aeearn retrans

we would exiginal progrer and onlinetworks vs.

we believk.

on solid fnue to view cost effectivving efficie

y should mocation of thRail car lotor vehiclesere down suou take the. We believss to do wir patterns. mprove maratings for

d on the higmount of con

e OAS for thmodest sp

and downw

year (3% eoadcast netincreasing the networretain view

ereo case thsmission rev

xpect cable ramming cone advertisthe distrib

ve there w

undamentathe rail indve way to m

ency are expove with Ghe strengthadings for s, and houubstantiallyese segmenve this is a ith demandEBITDA fo

rgins to ovethe sector

gh capital nsolidation

he Corporatepread tight

ward rating

excluding Oworks, andusage of t

ks to get mwers and/or his year, whvenue.

network coontent and ing is prior

butors (telecill be mor

als and reladustry favormove goodspected to reDP growth

h of the eco2013 weresing relate

y for the yeats out of thbetter refle

d and moreor 2014 is er 42%. Crer to high-trspending nthat has oc

e index. Strening in 2

gs migration

Olympic and advertisingtime shifted

more creativeadvertising

hich will be

onsolidationwill find i

ritized. Wecom, cablee attractive

atively widerably from as across theesult in lowin the U.S

onomy givene up 1.8%d segmentsar reflectinghe equationection of thee to do withexpected toedit metricsiple-B, low

needs of theccurred ove

rong secula2013 which

n

d g d e g e

n t e

e, e

e a e -. n . s g , e h o s -e r

r h

UTIL We hour unat Natu We imprgroufee. deteGDPnumdivean OGas Elec Verylevesubswill retumargpricepotetransissuyear FINA Ban We indureducontactivtheirimpoactivrecetheirdebt

LITIES

have a fair relative valuttractive.

ural Gas Pip

have an “aroving fund

up is comp Changes

ermined by P growth gimber of reso

rsity for thoOAS about – Pipeline

ctric (Unattr

y similar to ls that it tsector is nebe relying rns. Addgins shouldes), mitigatential is hisaction in ers will atter.

ANCE

ks (Fair)

expect moustrial basisuced supplytinues to imvity continur return-onosed by Dovities to theeding, and wr credit spret requireme

relative valuue opinion

pelines (ML

attractive” damentals rised of coin shipmendomestic

iven the heource basinose compan40 bps gresectors offe

ractive)

2013, we trades at warly two staon the rathitionally, wd be flat bted by weagh for con2012 and empt to red

odest tightes. Offsettiy expectatimprove. Hue to suppre-equity targ

odd-Frank ae detrimentwe note thaeads rally. ents as a co

ue opinion of Natural G

LPs) (Attrac

relative valand substa

ompanies wnts of oil, rGDP. Volueightened ds being ser

nies in this ater than ters an attra

have an “uwith limitedandard deviher meager

we currentlybased on hker demand

nsolidation/Mthe MidAm

duce their o

ening in thng valuatioons. Bank

However, peess top-linegets in the

and Basel It of creditorat most of th

The one aromponent o

of Utilities Gas Pipelin

tive)

lue opinionantial incomwhich transrefined pro

umes of natdemand frorved will lesector. Thhe overall Ictive risk ad

nattractive”d spread cations tight109 bps O

y have a nehigher electd via continM&A in th

merican/NV perating lev

he bank seon concernk capital anersistent loe revenue gre low revenII constrainrs. The litihe banks threa of residuof the expe

20

due to our es is attrac

n the Naturme advantaport hydrocducts, natutural gas liom the chead to great

he improvingndustrial sdjusted retu

” relative vacompressionter than its OAS incomutral fundatricity pricenued efficieis sector fEnergy traverage by d

ector in 20ns are still nd excess lw interest rowth. Whinue growthns managemgation over

hat have chual event riected Order

opposing vctive, but we

ral Gas – Page over thcarbons on ural gas aniquids shouemical secter size, casg fundamenector, leadsurn opportu

alue opinion opportunthree year e for the m

amental opies (caused ency prografollowing thnsaction in

divesting un

014, reflecstrong cre

liquidity rerates, as w

ile banks wh environmements’ abilrhang relateosen to pursk for the sly Liquidat

views of the e believe E

Pipeline grohe broad C

their netwnd natural guld probabltor. Additish flow genntals of thes us to conunity.

n of Electrnities. Theaverage, wh

majority of nion of theby modes

ams. We che Duke En 2013. Innregulated a

cting the aedit fundamemain robuswell as red

will continueent, the stity to pursued to legacyrsue global sector is theion Authori

two major lectrics are

oup (MLPs)Corporate inwork of pipegas liquidsy increase ionally, thenerating cae sector comnclude that

ics given the OAS of thich suggesthe subsec

e sector. Rstly higher continue to Energy/Progrn this vein,assets in th

lready tighmentals anst, while aduced capie to struggletrict regulaue shareholy mortgage settlement

e prospect oity (OLA) ru

subsectors

) due to itsndex. Thiselines for a

s are largelyfaster than

e expandingpability andmbined withthe Natura

he very tighthe Electricsts investorstor’s excess

Revenue andnatural gasbelieve the

ress Energy we believee upcoming

ht financialnd modestlysset qualitytal marketse to achievetory regimeder friendlybusiness is

ts have seenof minimumule proposa

:

s s a y n g d h al

t c s s d s e y e g

-y y s e e y s n m al

fromabso Insu The balainsumargthe equi The and capalosse US hAct incre The excethe s Rea REITof thlow evenrelatdo nmarkformespestan STR Struoverundeperfcomloneprice

m regulatorsorbable und

urance (Attr

US insuraance sheet france sectogins and coUS life insity markets

US properteventually

acity and ies, US P&C

health insuimplement

easingly blu

US insuraeeds the Cosector’s sta

l Estate Inv

T balance she cycle. Mcoupons an

ntually imptive to highnot see neakets. At th

mation. Theecially in Rdard REIT

RUCTURE

ctured Prorall portfolioer the QE3orming secmercial mo

e bright spoes of other,

s. Howeveder most sce

active)

nce industfundamentaor is expectonsistent casurance secand benign

ty & casuaweaken (f

increased cC insurers s

rers are exptation, buturred roles

ance industorporate indable credit p

vestment Tr

sheet fundaManagementnd replace sact both fu

h cost matuar-term thrhe same tie relative u

REITs that covenant p

ED PRODU

ducts provio performa3 program,ctor within ortgage bacots due to t, longer ma

er, we belieenarios.

ry in 2014als, improveted to prodapital deploctor due to n credit ma

lty sector isfollowing twcompetitionhould rema

pected to sut earnings between pa

try should dex. The USperformance

usts (REITs

amentals ret teams havsecured mounding costuring debt. reats to occime, modeunderperfortrade at a ackage.

UCTS

ided relativnce. Desp Agency Rthe Struct

ked securitheir limited

aturity fixed

eve any ad

4 is expected liability

duce improvoyment. Thehigher inte

rkets).

s expected wo years ofn for businain profitabl

uccessfully could be

ayers, provid

perform weS insurancee and attrac

s) (Fair)

main strongve taken adortgage debtts and valuAlthough t

cupancy orrate GDP gmance of Rdiscount to

vely mediocpite considResidential ture Producties (CMBS)d exposure income se

21

dditional ne

ed to mainprofiles an

ved earningere is potenerest rates

to producef rising preness. Unlesle in 2014.

manage chmore vola

ders and ho

ell in 201e benchmarctive relativ

g, with levevantage of t with unseuations, thethe growth r rental rategrowth shoREITs in tho NAV. Ho

cre returns erable supMortgage cts Univers) and the ato rising in

ecurities. Lo

ew issue s

ntain a stabd stable op

gs driven byntial for addand suppo

e stable resemium ratesss there ar

hanges brouatile due tospital syste

4 as the Urk spread pve value.

erage and cthe low rate

ecured bondere are stilin operatines given m

ould drive the equity mowever, our

in 2013 aport from Backed Sese. Shorteasset backenterest ratesooking towa

upply drive

ble credit perating pery single digditional earrtive financ

sults as prics) due to are significa

ught about to greater ems.

US insuranremium is

coverage rate environmds. While rl funding b

ng results ismodest newtenant expamarket has r bonds rem

and weren’tFederal Re

ecurities (Rer maturityd security (s that causard 2014, w

en by OLA

position durformance. git sales grornings imprcial market

cing is likeabundant untly large

by the Affocompetitio

nce benchmlikely to na

tios at theirent to termising interebenefits to s likely to l

w constructiansion andbegun to

main protec

t major coneserve BankRMBS) werey securities (ABS) sectoed a steep we believe

A should be

ue to strongThe US life

owth, stableovement fos (favorable

ly to flattenunderwritingcatastrophe

ordable Careon and the

mark spreadarrow due to

r best levels out debt a

est rates wilbe derived

evel off, weion in mosd householddrive M&Acted by the

ntributors tok purchasese the wors

within theors were thedrop in thethat agency

e

g e e r e

n g e

e e

d o

s t l d e t d

A, e

o s t e e e y

RMBbett The of 2and RMBthey Fed theybegilikelthe well outloRMB One impr13%increLookaltho Exhi

BS will onceer return po

agency RM013, the Fcurrently h

BS sector sy were most

purchases y announcednning in Jay continue late fall. Lfor the pe

ook is comBS will perf

supportiverovement in

% over the ceases were king towardough there

ibit 20: S&

Source: Bloo

0

50

100

150

200

250

Inde

x Va

lue

e again proossibilities.

MBS marketFed purchasholds approsignificantly comparabl

are going td that they anuary of 2to reduce p

Losing the lerformancebined with form much

e element on the state course of 20

broad based 2014, ware some fo

P/Case-Shil

omberg; Data as

0

0

0

0

0

0S&PPric

vide lack lu

t continues sed an averoximately 2y underperfle at the be

o be slowlywould redu

2014. In aplanned puargest sour of pass-thwhat are rbetter in 20

f both the aof the hou

013 as meaed and all

we expect aorecasts exp

ller 20 City

of 10/31/2013

P Case Shiller 2ce Index

uster return

to be heavage of $50

27% of the formed simeginning of t

terminateduce monthlyaddition, Crchases overce of purchhrough secrather stretc014 than th

agency andusing markeasured by tmajor metr

additional ppecting pric

Price Inde

20 City Home

22

s and that

vily influenc0 billion per

outstandinilar, 4-Yeathe year.

d over the cy purchaseshairman Beer the courshasing poweurities in tched valuathey did in 2

d non-agencet. Nationahe Case-Shropolitan arprice improce increases

x

Date

CMBS and

ced by the Fr month of ng supply. r maturity

course of 20s of mortgagernanke exse of 2014 er in the mthe year ahtion levels; 2013.

cy RMBS mally, prices hiller housinreas of the ovements os of as muc

shorter ma

Federal Resmortgage pDespite thifixed incom

014. At thge backed splained thauntil purch

marketplace head. Whwe aren’t

market durinare expect

ng price indcountry pa

on the magch as 10%.

aturity ABS

serve. Overpass-througis support, me securitie

eir Decembsecurities bat the Fed hases comecertainly den the poooptimistic

ng 2013 waed to rise i

dex (Exhibitarticipated gnitude of

will provide

r the coursegh securities

the agencyes to which

ber meetingby $5 billionwould mos

e to a halt inoesn’t bodeor technicathat agency

as the rapidin excess ot 20). Pricein the rally3% to 5%

 

e

e s y h

g, n t n e al y

d f e y. %

Risinoppovalumortthe the t The greadecrliqunon-amoleve On tMucmearesulead Exhi

Unfoorigipropover

ng home prortunities foations duetgage markeimprovemetapering of

non-agencater levels oreases the idation of f-agency RMount of the ls in excess

the CMBS ch like residasured by tlts coupled to marked

ibit 21: Mo

Source:

ortunately, ination of lperty can rerly lenient r

0

30

60

90

120

150

180

210

Inde

x Va

lue

rices increaor previous

e to higher et that is innt in housiFed securit

cy market sof homeowlikelihood oforeclosed p

MBS securitrecent pric

s of the NA

side, we ardential homhe Moody’s

d with a lacly higher pr

ody’s/RCA C

Moody’s; Data as

these impoans backi

epresent an repayment

se consumely underwaturnover

ncreasing trng will be ty purchase

should benener equity of future dproperties dties. Unforcing trend iIC category

re relativelyme prices, cs/RCA com

ck of new corices in man

Commercia

as of 11/30/2013

proved funng CMBS unappealinterms shift

er confidenter homeowin the hourading at prsufficient t

es.

efit from swhich encefaults. Indecrease, wrtunately, itn security p1 pricing l

y optimisticcommercialmercial proonstructionny property

l Property P

3

damentals securitizating investmet an excess

23

ce which spwners. Thisusing stockices at or bto offset th

stronger houourages hon the actuawhich ultim appears thprices as mevels.

c about und property poperty price and develomarkets.

Price Index

are encouons much ent opportusive amoun

Date

purs housins activity te

k which leabelow par. We negative

using priceomeowners al event of

mately leadshat the mar

most major

derlying coprices are ee index (Exopment and

(CPPI)

uraging agglike we saw

unity if encunt of risk fr

MoodyProper

ng activity aends to supads to fastWhile beneeffects of

es as well. to invest idefault, lo

s to higher rket has alrmarket tran

mmercial pexpected toxhibit 21).d an influx

gressive lew back in umbered wirom the bo

y's/Real National Corty Price Index

and creates pport agencter prepaymeficial, we dcurrent val

Higher prn their prosses realizeforecast re

ready disconsactions h

property fun rise 15% Improvinof foreign

ending acti2006. Evith too mucorrower to t

ommercial

refinancingcy mortgagements for adon’t believeuations and

rices createoperties anded from theecoveries founted a faiave been a

ndamentalsin 2013 as

ng operatingcapital, has

ons in theen a trophych debt or ithe security

g e a e d

e d e r r t

s. s g s

e y f y

holdCMB AsseYieldanticprov Siminterperfconsnomattrabond MU RelatechResesignthirdbps,bps.rema In relargefourtyieldof toconsinfraover In cMutdataconslongheadcredweakmomconsinco

der. CarefuBS securitiz

essing valuds of intercipate thatvides modes

milarly we vrmediate teormed verysumer recei

minal yields active optiods.

NICIPALS

ative tax-exehnicals. Stroerve, has gificant decd quarter, r, the fourth . With the mains attract

eviewing suely a resultth quarter wds has dramotal supply servative in astructure srall supply l

ontrast to tual fund de

a provided bsecutive ouger-term fudline risk tdit profiles ok retail de

mentum thsistently beome and pot

ully analyzinzations will

ations, we mediate C they shoust yield enh

view shorteerm portfoly well durinivables. Asare quite m

on relative

S

empt perforonger econgenerally pline in newresulting inquarter co

move, “AAAtive.

upply technt of the higwas 90 bpsmatically redduring the their budg

spending haevels durin

the drop in emand is onby Lipper, tflows throunds, whichied to credof Puerto Rmand for mroughout t

een providintential relat

ng propertiebe critically

perceive CMBS are r

uld track coancement r

er maturity lio. Looking the crisis

s we evaluamodest, solto higher

rmance duromic data

pressured yw issue supn 10-year mntinued the

A” 10-year

nicals, mungher interes higher thaduced the afirst five meting for neas remaineg the quart

supply levne area thamutual funugh the endh underscoit concerns

Rico and Illmutual funthe secondng a competive value a

es and indiy important

CMBS to beoughly on orporate borelative to o

ABS as ang back ons which waste the sectlid credit fucoupon mo

ring the fouand concerields highe

pply and immunicipal ne tighteningmunicipal t

icipals havest rate env

an yield leveattractivene

months of thew spendinged near 10-er to fall by

els, the det has seen d outflows d of the yeaore investos related toinois exaceds, deman

d half of elling entry ppreciation

24

ividual loant in making

e fairly valpar with i

onds closelyother altern

a key compn the finans reflected or’s prospeundamentaortgage bac

urth quarterrns over taper, but mu

mproving denominal yieg trend withtax-adjusted

e exhibitedvironment. els at the stess of refinahe year. Addg measures-year lows. y 19% relat

mand profisignificant for 2013 w

ar. $51.9 bor concernso the Detroierbated the d for tax-ethe year. point for i

n versus tax

n terms in tg investmen

ued relativntermediaty. For shoatives with

ponent in tncial crisisin the perf

ects for 201ls and predcked secur

r of 2013 cpering of q

uni relative mand. Afte

eld spreads h spreads md spreads e

a dwindlinThe averagtart of 2013ancings, whditionally, ms. ConsequeThe conflu

tive to the f

le for munweakness f

were a recobillion or 79s over higit bankruptredemption

exempt bonAttractive

investors seable bonds

the underlyt decisions

ve to other te corporateorter maturlimited int

the construs, consumeformance o14, we beliedictable casrities and

continued touantitative valuations

er a powerfto Treasur

moving tightended the y

ng new issuge 10-year 3. This signhich made municipalitently, new-muence of thfourth quart

icipals has for most of ord $66 bil9% of the rgher interestcy filing ann trends. Hnds has se

muni releeking both.

ying collate.

fixed incoe debt andrity needs, erest rate r

uction of ar non-mort

of securitieseve that altsh flows mahigh qualit

o improve oeasing by

s were buoful rally clories contracter by an adyear at 101

ue cycle thayield level

nificant moup approximies have remmoney issuahese factorster of 2012

generally bthe year. Alion, with 3redemptionst rates. And deteriora

However, ouen a graduative valuah superior t

eral pools o

me sectorsd we wouldCMBS stil

isk.

any short totgage credis backed bythough theiake ABS anty corporate

on favorablethe Federa

oyed by theosed out thecting by 23dditional 19 bps, which

at has been during theve higher inmately 40%mained veryance tied tos has led to2.

been mixedAccording to32 weeks os were from

Additionallyation in thetside of the

ual build inations havetax-adjusted

f

s. d l

o t y r n e

e al e e 3 9 h

n e n

% y o o

. o f

m y, e e n e d

In lofavoexpeFebrAlthincoovercom Supestim$33a sumon In teissuand not this exhiissuaveryearlikelThe sinc Outscontsee statethe withissuprojeleverema InterecoFedeenoucashbuildprovfavo

ooking at thrable for soected to remruary coupough mutu

ome levels frall demanpression in

ply technicmated at $0 billion. H

ubstantial dney supply f

erms of deaance in thi41% in 20expected tosource. A

bited over tance for prrage of $24r-over-year qy that newcombinatioe 2001.

side of somtinued stabmodest ime and local 14th conse an increaers are seeects, cuts il, where onain in a dili

rest rate coord number eral Reservugh level toh to meet od in momevided an enrable dema

he outlook olid performmain mutedons/calls/m

ual fund flofor municipd. These tax-exemp

cals should305 billion

However, codecline of $for infrastru

als classifies category,012. With o provide edditionally,the last sevroject spend46 billion foquarterly p issuance ton of these

e headline ilization in

mprovement level rema

ecutive quaase of 11%ing slow pron services

nly 43,000 igent and co

oncerns areof redempt

ve’s quantito compel a utflows. Hontum that o

ntry point foand technic

for the mumance durind at current maturities aows are exppals from in

supply/demt yield spre

d provide an, which woompared to $75 billion ucture are e

ed as pure o which wouinterest ratnough savi the dilige

veral years iding has avor the sevenroperty tax tied to infrafactors sho

risk tied tothe credit in line wit

ins in an uparter of gro

% versus thoperty tax gand have pjobs were aonservative

e expected ttions in 201tative easinturnaround

owever, overoccurred duor crossoveals, combin

nicipal mag the first tinterest rat

are expectepected to rstitutional

mand imbaeads to Trea

a major infould be a mthe averagor 19.7%.

xpected to

or straight ruld equate tes expectengs to enticent and cois expectedveraged $15n year periorevenue gr

astructure sould result

o isolated crprofile for tth the slowpward trajecwth year-ov

he same qugrowth. Theprovided a madded durin mode unti

to provide t13 based inng programd in this cycrall interesturing the seer investors ned with th

25

rket for thetwo monthste levels, poed to resulremain a dbuyers shoualances shasuries duri

fluence on modest dece over the . Significanbe the prim

refinancingsto 26% of d to contince issuers tonservative to remain 52 billion, od from 200rowth of onspending win the seco

redit eventsthe sector.

w growth inctory. Per Uver-year, wiuarter in 2e modest incmuted growng 2013. Bl better grow

the largest n large part . Until intecle, mutualt in the muecond half during per

e expected

e first quarts of the yeaowerful reinlt in net rag on demuld continu

hould proving the quar

relative vacline of $2last 10 yeant declines mary catalys

s, estimatetotal expec

nue their upto reach fobudgeting in place. Inwhich is $904 to 2010nly .6% ovewill see a suond lowest

s, demand sUnderlying GDP level

U.S. Censusith sales an012. Howecreases hav

wth pattern Budgeting bwth levels h

drag on deon the tim

erest rate l funds will ni market sof 2013, wriods of sumuted sup

ter of 2014r. With refinvestment fnegative sumand, the ue to providide the imrter.

alue for 205 billion o

ars of $380in refinanc

sts for the d

es for 2014cted supplypward trajer additionaprofile th

n the last t95 billion o0. With locaer the last ubstantial inew issuan

should cong credit funls. Overall s data, second income ever, as mve contributin employmby local muhave been a

emand flowing questioevels stabicontinue t

should contwhen attracpply/demanpply cycle,

4, technicanancing-relflows from Jupply of $attractive t

de a continumpetus for

014. New r 7.5% ver

0 billion, thcings and mdeclining su

4 call for $8y versus 34ectory, refinl budgetaryat these ishree years, or 38% lowal issuers efour quart

improvemennce cycle fo

tinue to bedamentals revenue gr

ond quartertaxes leadentioned eted to delay

ment levels unicipalitiesachieved.

ws. Mutual fons over taplize and reo see presstinue to expctive relativend imbalanprovide the

als look verylated supplyJanuary and$16 billiontax-adjustedued build inr a furthe

issuance isrsus 2013’sat would bemuted newupply cycle.

80 billion in4% in 2013nancings arey relief fromssuers havenew money

wer than theexperiencingers, it’s nont in 2014or the secto

nefit from acontinue toowth at ther growth wasing the way

earlier, locays in capitaat the loca

s is likely to

funds saw apering of theeach a highsure to raiseperience thee valuationsces. These

e sector with

y y d . d n r

s s e -.

n 3 e

m e y e g t . r

a o e s y

al al al o

a e h e e s e h

a deenvi NON HIG FolloLoanoutpa coshousecuexperates We havecrisiexpeLBOprimto fidrop Goincontweakinsuso th CON Insuenjoa favAmethe consWheperfmov201 Entenotiophen

efensive prronment.

N-CORE S

GH YIELD

owing anothns total reperforming oorporate creuld continuurity selectect both His rise given

believe core extended s lows. Th

ecting defaO default whmarily for th

nancing acp in refinanc

ng forward,tinued unwkness durinrance inveshey are pos

NVERTIBL

urance comoyed very stvorable corerica/Merrillupward mosidered ‘Eqen viewed iormed in

vements wit3.

ering 2013onal outstanomenon w

rofile that

SECTORS

AND SEN

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26

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