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Global Strategic Outlook1st Quarter 2012

Q12012

Contents

RCM is a global investment advisory organization, consisting of separate affiliated firms, which operates under the brand name RCM. The affiliated firms include RCM Capital Management LLC, an investment adviser registered with the US Securities and Exchange Commission; RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; RCM Capital Management Pty Limited, licensed by the Australian Securities and Investments Commission; and RCM Japan Co., Ltd., registered in Japan as a Financial Instruments Dealer. This presentation constitutes advertising as defined in section 31(2) of the German Securities Trading Act.

Section oneExecutive summary 7Section two Sector allocation summary 11Section threeThematic piece 13Section fourStrategy summary and global economic outlook 15Section fiveEquities outlook 20Section sixFixed income outlook 31Section sevenMulti asset outlook 36Section eightSustainability Research – long term trends 38Section nineEconomic forecast and valuation review 39Section tenMarket valuations 42Section elevenRCM overview 58Section twelveGlobal Policy Council biographies 59

As we head into 2012, I will focus on the themes likely to shape the direction of capital markets and provide a brief outlook for each major asset class. As has now become customary, I shall highlight our predictions from one year ago and contrast those with actual events. Finally, I will formulate the outlook for the main variables for 2012.

Economic outlook

Our predictions for 2011: trend economic growth will remain lower than before the crisis; however, given the low level of central bank rates, high cash positions of the corporate sector and solid demand from emerging markets, economic growth should be reasonable.

While 2011 growth was indeed solid, we clearly are facing a significant slowdown in economic activity in 2012. The rise in the oil price in 1H 2011, tighter monetary policy in emerging markets and, of course, fiscal tightening in the US and Europe are all taking their toll on growth. Since the summer, tensions in the financial markets have added further pressure: with financing conditions for banks becoming more difficult, we expect this to have a negative impact on credit growth in future. Already, lending surveys are pointing to a headwind for the credit cycle.

Still, we do not expect most developed economies to fall into recession, as real interest rates remain ultra-low and, also, because the private sector is in a position to spend out of cash flow. We are also expecting emerging market growth to remain solid, supported by increasing domestic demand.

However, growth risks clearly are increasing. This is particularly true for Europe, where fiscal tightening is most pronounced. This could be exacerbated if the stressed financial system, notably the banks, continues to see balance-sheet contraction in response to the crisis, which would further reduce credit availability to the private sector at a time when it is needed most. A recession in the core eurozone economies is now almost certain.

Our medium-term outlook remains unchanged: in times of high public-sector debts, and private- and public-sector de-leveraging, trend growth will be lower than before the bubble burst. This period is likely to last for several years.

Budget deficits

Our predictions for 2011: while major sovereign defaults have been averted, the spectre of debt restructuring or even default for some of the eurozone’s peripheral countries will continue to haunt the markets.

While our expectations for ongoing debt problems in the eurozone have turned out to be correct, we did not and could not have anticipated the kind of escalation of the debt crisis we have witnessed since the summer.

Dear reader

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Andreas UtermannGlobal Chief InvestmentOfficer, RCM

RCMRCM is an investment division of Allianz Global Investors, a global asset management company committed to helping clients achieve sustainable success. As a global asset manager, RCM’s investment platform operates across four continents, six time zones and from six international offices – Frankfurt, Hong Kong, London, San Francisco, Sydney and Tokyo. Within RCM we have over 450 investment, business and research professionals all dedicated to delivering an information advantage to our clients.

Global Strategic Outlook - 1st Quarter 2012


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Given the complexity of the problems, a quick fix is unlikely. Political actions that can realistically be implemented – i.e., fiscal tightening as well as tighter harmonisation of economic and fiscal policy in Europe – take a long time to be implemented and even longer to be effective, in our view most likely too long for financial markets. The longer the debt crisis looms, the bigger the political risk. As the recent developments in Greece show, there is a real threat of a break-up of the eurozone if political processes get out of control.

While debt monetisation is already on the agenda in the US and the UK, this process is not yet on the agenda in the European Monetary Union (EMU), even though the European Central Bank (ECB) has become more ‘Fed-like’ recently. Medium-term, though, we think that a more active and aggressive role for the ECB is a likely outcome. This necessitates decisions by policymakers to build a much more fiscally and politically integrated eurozone, including sanctions for countries with unsound fiscal policies.

Inflation

Our predictions for 2011: we will see diverging inflation trends, with continued moderate inflation within the central banks’ comfort zone in the more highly indebted countries, and higher inflation in the countries with trend or above-trend growth.

Indeed, inflation has risen in emerging markets, in some cases to double-digit rates. Central banks have reacted accordingly and embarked on a tightening cycle. In 2H 2011, rates peaked but even now remain at comparatively high levels. In the developed world, inflation rates clearly are below the levels witnessed in emerging markets. However, they have also risen to new cyclical highs and are now above the levels central banks are aiming for in the medium term.

The rise in the oil price at the beginning of the year is not the only explanation for a pick-up in commodity prices. Core inflation has started to increase as well in developed markets; in emerging markets, wage pressure has added to price increases.

We think that the cyclical moderation will trigger a moderation in inflation rates again. Given the low level of real interest rates, ongoing central bank balance sheet expansion and our expectations of continued solid growth in Asia, we don’t expect a return of deflationary fears, despite weakening growth. On the other hand, with demand for money strong in the current period of de-leveraging, neither is inflation likely to be a threat in the foreseeable future.

Interest rates and bonds

Our predictions for 2011: we anticipate little movement in short rates for the major OECD economies but gradual tightening in the emerging markets. We would be very cautious toward medium- to long-term maturities globally, which we feel are significantly overvalued owing to quantitative easing activity and undue risk aversion.

The ECB hiked interest rates twice in 2011 but has now started to back-pedal and cut rates again. US and UK interest rates have remained extremely low, whilst in emerging markets, the ongoing cycle of rate hikes has come to an end and, in fact, several emerging economies have recently started to cut rates.


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Looking ahead, we expect rates to start to come down further in the eurozone, whilst emerging markets are likely to continue to reduce rates. In the US, the UK and Japan, we expect the policy of extremely low interest rates to continue into the foreseeable future.

While our expectations for the short end of the yield curve turned out to be reasonably correct, the long end of the yield curve has behaved differently. In the US and the UK, ongoing sovereign bond purchases by the central banks, in addition to weaker economic data since the spring, have brought bond yields down. As we do not anticipate a major reversal in the economic newsflow, and as the Fed and the Bank of England (BoE) may continue to buy bonds again on a large scale, the downside to bond prices in both markets clearly is limited. Bond returns in both markets likely will be around the current redemption yield.

In Europe, bond markets are very much driven by political developments. Admittedly, bonds in the EMU periphery very much discount potential losses. However, as long as political uncertainty persists and economic data remain weak, we expect risk aversion to prevail. Bunds are likely to remain safe-haven assets for the time being.

A ‘risk-on’ trade within the European bond markets is only likely to start once economic data starts to improve or the ECB takes a more active role in solving the debt crisis.

Longer-term, we remain cautious on sovereign bonds at current yields. Even if nominal returns may turn out to be positive, we expect real – i.e., inflation-adjusted – returns to be disappointing.

Equities

Our predictions for 2011: political tensions or sovereign debt fears would be another buying opportunity for those who want to establish longer-term positions. Note that these preferences could reverse following a bout of risk aversion, during which emerging market equities would probably underperform.

After strong performance in 1H 2011, equity prices have fallen significantly from their calendar-year highs and now are slightly below the levels seen at the beginning of the year in the US, down around 20% in Europe and down 17% in Japan. Emerging markets, too, have fallen in absolute terms. Some of the headwinds, which explain the reversal in stock prices in 2011, likely will stay with us in the coming months and could continue to weigh on equities next year. In particular, the EMU debt crisis remains unsolved even though the most recent decisions are a step in the right direction. Still, markets likely will continue to price in the continuation of the debt crisis for longer. This, per se, also increases the risk of policy failures, which may cause electorates to start to question the concept of a European currency union altogether. The most recent developments in Greece and Italy show that this risk is not abstract but very real.

Against this backdrop, and with economic activity slowing down globally and moderate equity returns, we prefer stocks with relatively high dividends and pay-out ratios. Dividend payments should offer investors some protection in the current environment.

A lasting rebound in equity markets is expected to take place only if markets can start to price in a credible solution to the EMU debt crisis and/or when economic data point toward a stabilisation in economic activity.


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Currencies

Our predictions for 2011: the US dollar currently could rally somewhat against the euro. Longer-term, we continue to expect emerging market currencies to appreciate against the US dollar and somewhat less against the euro.

The US dollar has range-traded against the euro this year. In future, we expect some appreciation of the US dollar due to the still unsolved eurozone debt crisis. In addition, the US dollar looks somewhat undervalued relative to the euro.

Emerging markets turned out to be weaker this year than we originally expected. With the exception of the renminbi, which has continued to show solid and steady appreciation against developed market currencies, the picture for other emerging markets is rather mixed. The Brazilian real and Indian rupee, in particular, depreciated against the US dollar, due to both risk aversion and relatively high valuations.

Strategically, we will hold on to our expectation of appreciating emerging market currencies due to superior growth (and productivity gains). We are waiting for an attractive entry point to re-enter this asset class.

Emerging markets

Our predictions for 2011: the strategic importance of emerging markets has been confirmed and 2011 will see a continuation of this theme. Goodbye G7; hello G20.

Emerging markets remain strategically important and the slowdown in economic activity will end, in our opinion, in a soft rather than hard landing. The reasons for our relative optimism are the negative real interest rates, the rather low level of total indebtedness and strong underlying demand. Our positive view on emerging markets leads us to a strategically positive view on emerging market assets, be they equities, bonds or currencies, valuations notwithstanding.

In conclusion, we expect 2012 to be similar to 2011: bouts of risk aversion followed by increases in risk appetite, all against a background of relatively low growth and great political uncertainties in all regions (US elections; eurozone fiscal-consolidation ratification concerns; Iran, North Korea, North Africa). Countercyclical and long-term–oriented investment behaviour will be imperative for market participants.

I wish all readers a healthy and prosperous 2012.

Andreas UtermannGlobal Chief Investment Officer, RCM


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Sector allocationThe biggest influence on our future sector positioning will probably be the handling of the European debt crisis and its repercussions on the global cycle. Our general macroeconomic scenario still justifies a slightly defensive positioning – our economic base scenario now includes a eurozone recession but not a globally spread recession. We are underweight financials, driven by the intensified stress in the global financial system, but will be prepared to adjust this if conditions improve and/or bond spreads in the EMU periphery decrease sustainably. We continue to have a balanced view on commodity-related sectors and remain positively orientated on commodities. On defensive sectors, we are moderately overweight, with a clear preference for healthcare stocks. Within cyclical sectors, we have retained a preference for technology stocks, as they appear attractive on some valuation measures. We remain cautious on consumer discretionary stocks, as in many economies consumers increasingly feel severe austerity measures and/or their real purchasing power has decreased as inflation has absorbed wage increases in 2011.

Thematic piece: Crystal maze perspectives from RCM’s European equity investorsIn this quarter’s thematic view Neil Dwane, CIO Europe, considers the prospects for investing in European equities over 2012.

Equity market volatility – especially elevated in 2011 – has dissuaded a lot of investors from leaving money and bond markets behind to invest in equities again, especially as many now fear austerity will bring recessions back. However, we find not only quality companies to be attractive, being valued at the same levels as weaker companies, but also companies that offer strong and sustainable dividends. Furthermore, over the medium term, we expect a higher proportion of the equity return to be generated through the return of cash to shareholders and thus offer investors some measure of protection against de-leveraging, deflationary pressures and fears of inflation if central bankers resort to more quantitative easing. We see further challenges ahead, however, as financial regulation standards tighten and political pressures return through the EU electoral cycle.

Global and economic outlookWe think that global markets currently are facing three challenges that are interrelated and show different dynamics: firstly, we identify a structural headwind of lower growth in developed economies due to the necessary de-leveraging both of private and public sectors. The cyclical weakness, the second headwind for capital markets, is partially a consequence of the policy reaction by central banks. Tight fiscal policy is directly dragging down economic activity in developed economies. The big risk, though, to our growth outlook is related to the third headwind capital markets faced in 2011: the EMU crisis. If the current stress in the EMU financial system accelerates, we cannot exclude negative spillovers to the rest of world, which could even lead to a global recession. The EMU debt crisis has morphed during the past two years from being a Greek debt problem into a wider EMU-periphery crisis until it ultimately turned into a fundamental lack of trust in the financial architecture of the EMU.

In 2012, we think the developed world will face a hard landing . The oil price increase has worked as a tax on consumers in developed economies. Still, we are of the opinion that we can avoid a global recession. While we are reiterating our view that the final outcome of this crisis is a tighter fiscal and political European union, the risk of a break-up of the monetary union is not negligible. Ultimately, voters in each member country will have to decide if they accept fiscal austerity (in the economically weak countries), financial guarantees (in the economically strong countries) and the partial ceding of sovereignty rights (for example to an EU supervisory body or the EU Court of Justice).

1 Executive summary

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Bond and equity marketsBased on our analysis, our equity market outlook for 2012 overall is moderate. Economic weakness clearly will be a headwind for stock prices. The recent rise in economic surprise indicators may be coming to an end soon – surprise indicators have in the past usually started to turn down at current levels.

Bonds could continue to benefit from a cyclical tailwind. This is particularly true for US treasuries, Bunds and gilts. However, from a long-term perspective, valuations are too high. Most EMU sovereign bond markets except Bunds are, on our numbers, attractively priced. In particular, Italian and Spanish bonds, which are priced for a 30% haircut (10-year maturity) look attractive. On valuation grounds, we are also constructive on corporate bonds relative to government bonds. With EU policymakers addressing the underlying problems of the EMU financial architecture, the downside from here is limited. Greek debt levels, however, are not sustainable on our numbers. We doubt that the currently envisaged 50% haircut on Greek government bonds is sufficient. On valuation grounds, we are also constructive on corporate bonds relative to government bonds. Temporarily, the cyclical weakness in Europe could still be a drag on this asset class.

Asset allocationFor long-term investors, global equity valuations offer attractive entry points. Regionally, we prefer US equities in the current economic downturn: growth data are showing signs of bottoming out and share buy-backs are an additional reason to be long US stocks in a global equity portfolio. We remain cautious on European equities. We will be keen to add to Europe once spreads in the government bond as well as money and swap markets tighten. We are underweight Japanese equities because of the high cyclicality of the equity market. While remaining structurally constructive on emerging markets, we think it is currently time to trim back the exposure. Our only long position at this juncture is China, which is moderately priced, and has one of the highest growth potentials as well as still strong corporate profitability.

US equities outlookWe remain impressed by the ability of the US economy to eke out some sort of 2H 2011 reacceleration, albeit a relatively mild one, despite the global slowdown. However, we still remain sceptical of the staying power of this wave going into 2012. Certainly, employment growth has improved, but with headline inflation having temporarily reached almost 4% in Q3 2011, real disposable income growth has slowed down to around 1%. We also hold reservations about capital spending. With the labour market moderately picking up and commodity prices not really falling but stabilising, companies’ cost bases are rising. All this takes place in times of lower growth rates in the rest of the world. The most recently published leading indicators for the US housing market, however, show a moderate improvement after one year of stagnation post a major collapse and net exports also have recently contributed slightly positively to growth.

The big question remains: how much fiscal policy tightening will we see this year? The Bush payroll tax cuts have just been extended by another two months until February. The odds are that we will see a further extension until the end of 2012.

European equities outlookGoing into 2012, consensus expectations are for flat GDP growth in Europe, which we see as perhaps too optimistic; however, the bigger question for investors is the resultant effect on earnings growth. Q1 is likely to see a continuation of high levels of volatility in markets. Recently, we have seen some improvement in some peripheral credit spreads, yet there are still many risks, such as a lack of proper implementation of reforms. We also need a large and credible buyer of last resort for sovereign debt. A key event for the quarter will be



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the EU summit in January that will deal with measures to encourage economic growth as well as increasing employment. Given that the expectation is for flat growth in Europe, any encouraging moves at the summit could be very positive for markets.

Asia-Pacific equities outlookAsia is likely to continue facing volatility due to uncertainty from slowing developed markets and regional political events, while slowing in China is likely to have reached a nadir. We maintain our view, however, that the long-term fundamental macroeconomic outlook for Asia remains quite robust and does not include a hard landing or the persistence of a stagflationary environment of rising inflation and slowing growth. The potential for de-leveraging from European banks in the current environment could weigh on Asia as liquidity flees. With a substantial amount of eurozone debt maturing in the coming months, the pressures on the banking systems could begin to take a visible hold on the European economies if there is not sufficient support from the ECB. Disregarding external macro factors, within Asia inflation will be the key metric to watch into and through the early part of next year. Particularly for inflation-sensitive markets like India, signs of falling inflation will be welcome as fiscal and current account balances take a heavy toll in environments of high inflation.

The political environment in Asia should add some excitement to the investment environment this year. Upcoming presidential and legislative elections in South Korea, Taiwan and India, as well as the establishment of new leaders in China and Hong Kong, should make way for more constructive growth policies. Currencies in the region still look quite attractive as higher interest rates and still robust growth opportunities make the market attractive.

Equities outlook – styleAs investment style favourites, like positive earnings revisions, strong growth and high price momentum were ahead of the benchmark, 2011 was a solid year for style investors. Among the long-term investment style winners, only value lagged. In future, as we expect the global economy to continue to cope with its problems, investors should look for growth stocks with reasonable valuation and some support from earnings revisions and price momentum as their preferred investment styles. Dividends as an investment theme can help to position the portfolio for the increased risk of a renewed recession.

Global fixed income outlookWhile conditions are rather mixed around the globe and although growth is likely to remain below potential – in particular in developed nations – the world economy is not on the brink of recession at this stage. Overall, we expect different growth paths in the US and the eurozone going into next year. The sovereign debt crisis in Europe likely will remain the dominant theme for global bond markets in 2012.

European fixed income outlookEuropean fixed income markets will continue to be driven this year by developments in the sovereign debt crisis. After hopes of a resolution were regularly dashed in 2011, 2012 is shaping up as a watershed year that comes down to a simple choice – either European leaders manage to, finally, set up an integrated and credible European project or the eurozone runs the risk of disintegration. However, the ECB has begun a generous policy to allocate liquidity. While its firm attitude regarding requests regarding debt monetisation may disappoint some, it has expanded its firepower of unconventional tools in impressive fashion.

While government bond investments are subject to political factors and therefore offer little visibility, we are


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taking a much more constructive approach to corporate issuers, including High Yield issuers. Seldom have companies faced an economic slowdown with so much going for them, including cash hoards on their balance sheets, solid free cash flow, moderate debt and historically high EBITDA-to-interest coverage.

Asia-Pacific fixed income outlookEven though Asia boasts strong economic and fiscal fundamentals, it is not immune from global market turbulence and external shocks. However, Asia has several buffers to contain such negative spillovers. High currency reserves are a major one. While Asian economies, not to mention the even more susceptible capital markets, will not be able to fully decouple from a global slowdown, they are supported by higher indigenous growth and much greater room for fiscal policy stimulus, should that be required by a further deterioration of global growth. Asia is also not burdened by high refinancing needs or concerns about sovereign debt. Given secular economic growth prospects and sound fiscal fundamentals, Asian bond markets remain an attractive investment target, even if currency appreciation will most likely remain subdued or postponed until the global big picture has improved. For longer-term investors, short-term currency weakness driven by global turbulence should offer an attractive entry point.

Global multi asset outlookAs we begin 2012, many investors have a relatively high cash allocation and in combination with new risk budgets this paves the way for reinvestment across a plethora of different asset classes. However, 2012 is likely to be marked by uncertainty driven by political events and risks caused by the global growth trajectory, eroding the conviction of any allocation decision. Right now, it is unclear whether we are more likely to experience range-bound markets or strong trends. If a credible and rapid solution to the EMU crisis is not forthcoming, and is combined with a low growth environment, investors will persist in trading on policy and politics, and a continuation of the prevailing risk-on/risk-off pattern is likely. Our market cycle model, in combination with our market selection indicators, recommends precisely this portfolio allocation; overall it suggests a moderately defensive position to address the absolute risks stemming from uncertainty. Asset allocation decisions should be taken within a clearly defined risk-budget approach as at any point the underlying factors could change.

In addition to proposing to overweight high yielding assets, and underweight low yielding assets and those with a low carry to profit from a volatile range-bound market, we also recommend investing in concepts that are short in volatility.

Sustainability research outlookWe believe that companies will be under growing pressure to demonstrate value creation in addition to the products and services they provide. Companies will be expected to behave ethically, with integrity and transparency, and to take the lead in helping to solve social and environmental problems. Expectations will continue to rise with evidence of concrete action being taken by companies rather than a corporate responsibility agenda that is driven by a public relations exercise or ‘green washing’. The UK government–led Kay Review will further scrutinise how the equity market functions and examine whether there is a problem with short-termism debasing the performance of companies and investors.


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2 Sector allocation summary

Looking back on 2011, our moderately defensive sector positioning paid off. Within global MSCI sectors, healthcare and consumer staples were the best-performing sectors, while basic resources and financials – banks worse than insurance – were on the other side of the spectrum.

Within Q4 2011 and going into 2012, we have made the first small step toward reducing the defensive tilt in our sector positioning while not completely abandoning it. The main argument behind this is the considerable shift in relative valuations: cyclically exposed sectors became cheaper, while sectors like consumer staples entered expensive territories in relative terms. Nevertheless, our general macroeconomic scenario still justifies a slightly defensive positioning, reflecting, firstly, the clear deceleration in economic growth momentum we witnessed in 2H 2012, most notably demonstrated by the rolling over of purchasing manager indices (PMI) in Europe and parts of Asia and, second, the adverse developments in global financial conditions. Our economic base scenario now includes a eurozone recession but not a globally spread recession. That is why we have balancing overweight positions in sectors like IT and energy. The biggest influence on our future sector positioning will probably be the handling of the European debt crisis and its repercussions on the global cycle. As a general theme, we have identified dividends: companies with a proven willingness and ability to pay dividends (often characterised by high payout ratios) have the opportunity to outperform the market over the coming cycle.

We decided to underweight financials, driven by the intensified stress in the global financial system spreading from the eurozone. This stress is characterised by rising swap spreads, a dysfunctional interbank lending market in the eurozone and, connected to this, more expensive funding for banks in the eurozone and elsewhere. The sector continues to suffer from its correlation to sovereign risks and up to now we have not seen a sustainable relaxation of sovereign bond spreads in peripheral eurozone bond markets. The sluggish relative performance of financials is still highly correlated with developments of EMU peripheral government bond spreads (versus German bonds). The long-term challenges, including stricter regulations and, connected to this, a higher cost of capital, remain. Taking into account all these strong arguments, there are two reasons a underweight in the financial sector demands a lot of attention: firstly, valuations are now lower than at the March 2009 trough on price-to-book ratios, and second, the sector remains a consensus underweight position in global equity portfolios, according to surveys. Therefore, we may have to adjust the position promptly if financial conditions improve and/or bond spreads in the EMU periphery decrease sustainably. The generous liquidity provision over a three-year period of the ECB and the addressing of financial sustainability on the 9th December 2011 EU summit could be first steps in the right direction.

Currently, we continue to have a balanced view on commodity-related sectors. We continue to overweight the energy sector and underweight the materials sector. This reflects the global growth slowdown and its dampening effect on commodity prices, which has been more pronounced in industrial metals than for oil, also driven by tighter monetary policy in several emerging markets earlier in 2011. However, we envisage that the tightening cycle has peaked. Indeed, there have been initial rate cuts in several emerging markets and reserve rate requirements have eased in China, almost coinciding with the peak of the inflation rate in China in October. This would improve the outlook for commodities. Additionally, the relative valuation of mining stocks has come down markedly and implies lower commodity prices in the future. Hence, we will consider a more constructive view on this sector going forward but we are waiting for signals that confirm growth resilience in China, as well as other developing markets, and a less risk-averse global market environment.

Longer-term, we remain positively orientated on commodities, given significant pent-up demand in developing nations, supply constraints and the negative real interest environment created by many central banks globally.

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On defensive sectors, we are moderately overweight, with a clear preference for healthcare stocks. The rolling over of various leading indicators, witnessed since spring 2011, is typically an environment in which non-cyclical stocks perform reasonably well. Relative valuation, in the meantime, is a much less compelling argument. For that reason, we have cut the overweight in the consumer staples sector, as it shows relative valuation almost at record highs on our blended valuation measure. We prefer telecoms versus utilities for valuation reasons, which are most pronounced on relative P/E and dividend yield measures. In both sectors, regional considerations are important, as in southern European countries higher taxation of regulated telecom and utility industries has been discussed. Looking ahead, as we see tentative signs of a stabilisation in global PMI data, further weight reductions in defensive sectors may soon be on the agenda.

Within cyclical sectors, we have retained a preference for technology stocks, as they appear attractive on some valuation measures, especially Price/Earnings (P/E). They continue to benefit from the, so far, relatively resilient capital expenditure from the corporate sector, of which some is structural growth in areas like automation and efficiency through the use of modern software. Select companies could also benefit from well-received innovations in the consumer electronics space (such as tablet computers). We reduced the underweight in industrial stocks, which became more attractive valuation-wise but continued to suffer from sharp deterioration in earnings revisions. This might turn in the coming months, as various global industry sentiment data at least stabilise going into 2012. We remain cautious on consumer discretionary stocks, as in many economies consumers increasingly feel severe austerity measures and/or their real purchasing power has decreased as inflation has absorbed wage increases in 2011.


Legend:

N = Neutral

OW = Overweight

UW = Underweight

Sector Allocation - Virtual GPC Portfolio

Global Sectors

Consumer Discr.

Consumer Staples Energy Financials

Health Care Industrials IT Materials

Telecom Services Utilities

Active Weight U O O U O U O U N U

BMK Weight 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%

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3 Thematic piece: Crystal maze perspectives from RCM’s European equity investors

As RCM’s investors survey the investment opportunities of 2012, many may conclude that markets are wrongly attributing the difficulties caused by excessive debts and de-leveraging to the equity markets, where – excluding financials – there remain many very strong and well-positioned companies. Clearly, equity market volatility – especially elevated in 2011 – has dissuaded a lot of investors from leaving money and bond markets behind to invest in equities again, especially as many now fear austerity will bring recessions back. However, RCM finds not only quality companies to be attractive, being valued at the same levels as weaker companies, but also companies that offer strong and sustainable dividends. Furthermore, over the medium term, we expect a higher proportion of the equity return to be generated through the return of cash to shareholders and thus offer investors some measure of protection against de-leveraging, deflationary pressures and fears of inflation if central bankers resort to more quantitative easing. As ever, an alternative way to describe the attractions of equity can be described as ‘a living economic organism with proven powers of monetary adaption.’

Within the talismanic banking sector, so conjoined with the EU sovereign debt crisis, under such pressure in 2011, RCM sees further challenges ahead as financial regulation standards tighten and political pressures return through the EU electoral cycle. The ECB has offered much assistance to the EU banking system with the three-year long-term refinancing operation (LTRO) as well as the Federal Reserve unlimited US dollar swaps, such that banks should be able to achieve an orderly de-leveraging to meet Basel III restrictions. Unfortunately, shareholders will receive little dividend relief over this period.

Gold is also seen as an effective hedge against the threat of monetisation of government debt as well as an attractive investment for emerging country central banks, which own substantially less gold than OECD banks do. Within this theme, we find many global gold stocks to be attractive investments, having seen their share prices underperform gold itself.

Within Europe, we see many German companies as very attractive to domestic and international investors, as they offer not only good and growing exposures to emerging markets but also a strong domestic franchise relative to other EU countries. Nevertheless, we expect a period of austerity in the eurozone and the UK as credit and banking de-leveraging lessen and inhibit corporate investment in 2012. The scale of the recession will be decided in 2012 by the eventual scope and timing of any ECB intervention as a lender of last resort after the completion of the new EU ‘enhanced fiscal compact,’ if achieved.

We expect to see some exciting elections in both the US at the end of the year as well as in Russia, and this volatility will unnerve and shape investor perceptions during this year as well as hinder the management of economic policy if trouble occurs. Possibly one of the most powerful transitions will occur in Beijing in the autumn, where the regime shift will be one of the most profound for global growth prospects into 2013. We expect, however, that the rise of the BRIC consumer will continue to accelerate, which will promote both higher living and food standards and also generate demand for many Western consumer goods.

Neil Dwane

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Thematically, we still expect to see gas and coal as beneficiaries from medium-term global energy needs, boosted by the Japanese energy shift – much of its nuclear power industry has closed following the tsunami. Whilst many of the energy miners are seen as a play on China’s growth, we believe they will benefit from a need to keep the Chinese economy going through the transition in 2012. Excitingly, we are beginning to expect a rising production profile of new drugs from pharma as well as further gripping technology transitions as smart mobility and cloud services emerge through the year. We also expect to see, post-Kyoto negotiations, dramatic changes in the price of carbon and the consequent investment incentives for utility companies, which may in fact store up energy constraints for many economies in the future.


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Global Strategic Outlook - 1st Quarter 2012 Global | US | Europe | Asia-Pacific

4 Strategy summary and global economic outlook

In 2011, global equities lost around 8% (as of the day of writing), while global bonds are up approximately 6%. In Q4 2011, both asset classes showed a marginally positive performance.

Regionally, US equities were almost unchanged over the year, while the more cyclical market in Japan is down almost 20%, similar to Europe. Global emerging markets ‘only’ lost 13%. In the bond markets, we find a similar regional ranking: US government bonds up around 10%, followed by emerging market bonds (up 7%), while Japan (up 3%) and the EMU (up 1.5%) are clearly lagging. In both asset classes (bonds and equities), Europe slightly outperformed in Q4, while emerging markets and Japan both underperformed.

What are the underlying forces characterising last year’s capital market developments? How will they develop going forward?

We think that global markets currently are facing three challenges that are interrelated and show different dynamics: firstly, we identify a structural headwind of lower growth in developed economies due to the necessary de-leveraging both of private and public sectors. As history shows, countries undergoing the process of debt reduction face a prolonged period of trend growth significantly below the growth rate observed while leverage in the economy is increased. This is quite understandable, as the private sector no longer runs at extremely low or even negative savings rates; the public sector, too, needs to cut expenses and increase taxes in order to trim its debt ratios. We estimate that trend growth in developed economies will be around 0.5% lower compared to the years prior to 2007. While economic growth strategies in general may have a positive impact on economic activity in future, any growth-enhancing structural reforms will only show their effect over a medium-term, multi-year horizon.

As a consequence of the ongoing de-leveraging and tighter fiscal policy, central banks have reduced rates massively and provided additional liquidity to the system. We expect real rates to be extremely low or even negative in years to come.

The cyclical weakness, which has been the second headwind for capital markets, is partially a consequence of the policy reaction described here. Tight fiscal policy is directly dragging down economic activity in developed economies. This could, at least to some extent, be compensated by strong demand from emerging markets. However, due to substantial capital inflows until mid 2011, emerging markets had to react by tightening monetary policy. Low interest rates have additionally added to speculative demand for commodities, thereby adding to inflationary pressure, in particular in emerging markets. As a consequence of monetary policy tightening, demand in emerging markets has slowed down.

The oil price increase, fuelled by initially strong demand from emerging markets, financial investments in commodities and political uncertainty in the Middle East, has worked as a tax on consumers in developed economies. In five out of six previous oil price spikes similar to the one we had in early 2011, the Western world fell into recession. In 2012, we think the developed world will face a hard landing as well.

Still, we are of the opinion that we can avoid a global recession. The private sector is cash-flow positive and, hence, is able to compensate for lower government spending. Admittedly, there are limits to driving down the savings rate, as the private sector is no longer able or willing to increase its leverage, as was the case in the mid 2000s. Still, private-sector demand can dampen the slowdown.

Stefan Hofrichter

16

Global | US | Europe | Asia-Pacific

Monetary policy, too, remains highly accommodative. Real short rates are negative in most economies; central bank balance sheets are expanding via non-conventional measures. For instance, the ECB has just provided EUR489 billion over a period of three years to the EMU banking sector – more than enough to secure banks’ refinancing needs. This should certainly lead to an improvement in lending conditions, which have started to tighten again since summer.

Finally, we see the first signs that the slowdown in emerging markets is coming to an end. Central banks in many emerging markets globally have started to ease again. Consequently, the yield curves in many emerging economies, especially in Asia, have started to steepen.

The big risk, though, to our growth outlook is related to the third headwind capital markets faced in 2011: the EMU crisis. If the current stress in the EMU financial system accelerates, we cannot exclude negative spillovers to the rest of world, which could even lead to a global recession. For the EMU itself, a recession has already become our base-case scenario for next year.

The EMU debt crisis has morphed during the past two years from being a Greek debt problem into a wider EMU-periphery crisis until it ultimately turned into a fundamental lack of trust in the financial architecture of the EMU. How else can we explain that markets are pricing in a haircut on 10-year Spanish sovereign bonds of around 25%, of 30% for Italian, of close to 50% on Irish and almost 67% on Portuguese bonds, not to speak of the 90% for Greek bonds.

How could this happen and how can policymakers restore confidence? Let us take a step back. When setting up the euro area in the 1990s, the decision was taken to use a common, independent central bank and a common currency as an instrument to promote tighter political union. However, this architecture implied that the set-up of the eurozone was incomplete from its start. According to economic theory and practice, a functioning monetary union requires several ingredients and preconditions to make sure that growth within the monetary union does not diverge too much and that imbalances within the region can be financed: a high degree of labour mobility so that labour moves within the monetary union to jobs and regions where labour is scarce; high capital mobility, i.e. surplus regions financing deficit regions; fiscal transfers, i.e. a partial redistribution of income from rich to poor regions; low public debt, so that deficit regions are able to conduct anti-cyclical fiscal policy; and, finally, a harmonised economic policy to avoid economic imbalances in the first place.

In particular, the last three aspects have not been in place in the past. While there are transfers in place to enhance structural growth, the EMU does not have a permanent fiscal transfer system in place. One could argue that the European Financial Stability Facility (EFSF) and, in future, the European Stability Mechanism (ESM) will take over this role in times of crisis.

Because of excessive private-sector debt in some countries such as Spain and Ireland, however, growth rates as well as international competitiveness within the EMU diverged strongly. Ireland and Spain have started to implement structural reforms since the burst of the real estate bubble but must continue work to reduce unit labour costs. The same holds true for Portugal. The rise in public-sector debt during the financial crisis in these countries is collateral damage, as tax revenues collapsed and banks had to be bailed out once the debt-driven bubble burst three years ago. On the other side, in Greece as well as in Italy, high public-sector debt has its roots in an inefficient tax system. One could also argue that even the two biggest economies in the region, Germany and France, have to accept part of the blame for the current public debt crisis, as neither countries complied with Maastricht criteria in 2003, but they did not pay a fine for breaking the Stability and Growth Pact.


17

Global | US | Europe | Asia-PacificGlobal Strategic Outlook - 1st Quarter 2012

The current structural and cyclical headwinds have clearly amplified the fears about the sustainability of the EMU financial architecture. What can policymakers do to soothe markets at this juncture? Simply speaking, they need to address the fundamental weakness of the EMU structure. We think that policymakers have actually started doing this. The decisions taken on 9th December in Brussels are definitely going in the right direction to improve fiscal prudence: countries with excessive deficits will face a semi-automatic sanctioning mechanism and debt ceilings will be introduced in each member country’s constitution. Decisions taken in previous months target a better harmonisation of fiscal and economic policy, and the introduction of measures and processes to better identify and tackle economic imbalances within the region. The next EU summit, in January 2012, will have the labour market and economic growth on the agenda. On a national level, too, governments are trying to implement fiscal austerity measures as well as structural reform plans.

Are all those reforms sufficient to restore confidence and regain trust in the EMU architecture? Time and market participants will tell, but the possibility of a positive outcome has clearly increased during the past few weeks. Nevertheless, there are still implementation and execution risks. Markets may stay cautious until the majority of all reform plans have been implemented.

That may be the reason why investors are calling for two more rescue packages: a major ECB purchase programme of sovereign bonds as well as the introduction of eurobonds.

An intervention by the ECB in the bond markets could clearly help in the short term, as it could buy time until the structural reforms are at work. The costs related to that are that the ECB could lose its credibility to fight inflation. We, therefore, think that the ECB will postpone any bond purchase programme for as long as possible. However, in case of a further significant spread widening of sovereign bonds in the EMU, the ECB may be forced to rethink its current position. A trigger for this could be a deeper recession in the EMU than currently forecast and more stress in the financial system, to name a couple. We think the ECB could also justify an increase of its security market programme (SMP) in case further spread widening leads to a sharp economic slowdown and raises the risk of deflation.

The introduction of a eurobond – or ‘stability bond’ as it was called recently by Mr. Barroso, President of the European Commission – only makes sense, in our opinion, if the moral hazard problem is solved. This requires severe sanctions and the ceding of sovereignty rights for governments with excessive debts and deficits. The institutional set-up in Europe is not yet prepared for eurobonds.

While we are reiterating our view that the final outcome of this crisis is a tighter fiscal and political European union, the risk of a break-up of the monetary union is not negligible. Ultimately, voters in each member country will have to decide if they accept fiscal austerity (in the economically weak countries), financial guarantees (in the economically strong countries) and the partial ceding of sovereignty rights (for example to an EU supervisory body or the EU Court of Justice).

Based on our analysis, our equity market outlook for 2012 overall is moderate. Economic weakness clearly will be a headwind for stock prices. The recent rise in economic surprise indicators may be coming to an end soon – surprise indicators have in the past usually started to turn down at current levels. Nevertheless, the steepening of the Asian yield curves could provide a better market backdrop in the course of next year.

The second driving factor for markets will be signs of a credible step toward a solution of the EMU debt crisis, which could not only be supportive for EMU stocks but also for all risky assets. Still,

18

sovereign spreads remain wide in absolute terms, indicating that markets are still quite sceptical. However, the yield curve in some markets, notably the Italian yield curve, has steepened again – probably a first indication for a change in the market’s perception of the EMU debt crisis.

In summary, we expect the volatile market environment to continue but envisage a slight rise in stock prices in the coming years. For long-term investors, though, global equity valuations offer attractive entry points.

Regionally, we prefer US equities in the current economic downturn. In addition, US growth data are showing signs of bottoming out. While valuations are not overly attractive, share buy-backs are an additional reason to be long US stocks in a global equity portfolio.

For the time being, we remain cautious on European equities. We are keen to add to Europe once spreads in the government bond as well as money and swap markets tighten. From a valuation point of view, European equities are attractive. The Graham-Dodd P/E of around 12 is at one of the lowest levels on record. This particularly is true for the EMU-periphery equity markets.

Japan, too, is a market we do not favour at this juncture. Even though the strong yen is currently no driving factor for equities – the correlation between yen and the Tokyo Price Index (TOPIX) is close to zero – we are underweight Japanese equities because of the high cyclicality of the equity market.

While remaining structurally constructive on emerging markets, we think it is currently time to trim back the exposure. In times of high uncertainty, high beta markets usually suffer. As long as capital is leaving emerging markets, we prefer a more neutral portfolio exposure. Our only long position at this juncture is China, which is moderately priced, and has one of the highest growth potentials as well as still strong corporate profitability.

Bonds could continue to benefit from a cyclical tailwind. This is particularly true for US treasuries, Bunds and gilts. However, from a long-term perspective, valuations are too high. The downside in nominal terms is limited, though, as central banks will have to keep interest rates at extremely low levels for longer to not break the economic cycle. In real terms, however, returns for sovereign bonds are likely to be very low, probably even negative.

Most EMU sovereign bond markets except Bunds are, on our numbers, attractively priced. The implied haircuts and default rates are higher than what we think is realistic. In particular, Italian and Spanish bonds, which are priced for a 30% haircut (10-year maturity) look attractive. Based on our estimates, both government debts are on a sustainable debt path. With EU policymakers addressing the underlying problems of the EMU financial architecture, the downside from here is limited. We are becoming more favourable on sovereign bonds issued by these two countries.

The situation is different for Greece, for which the market is currently pricing in a 90% haircut for 10-year maturity bonds. However, Greek debt levels are not sustainable on our numbers. We doubt that the currently envisaged 50% haircut on Greek government bonds is sufficient.

On valuation grounds, we are also constructive on corporate bonds relative to government bonds. Temporarily, the cyclical weakness in Europe could still be a drag on this asset class.

We have trimmed our commodity exposure in the last couple of months. Commodities are a leveraged play on the global and emerging markets cycle. As long as cyclical data are weak, commodities are likely to continue underperforming.


19


Asset Allocation - Virtual GPC Portfolio*

Global TAA

MSCI World

Citi Global BIG

DJ UBS TR

Euribor 1M

Active Weight N N U O

BMK Weight 60% 30% 5% 5%

Equity Regions

MSCI USA

MSCI EMU

MSCI UK

MSCI Japan

MSCI EM

China A Shares

Active Weight O U N U N O

BMK Weight 35% 25% 10% 15% 15% 0%

USA EMU UK Japan Cash

FI Regions

JP USA

ML US Corp

JP EMU

ML EMU Corporate

JPM UK

JPM Japan

Euribor 1M

Active Weight N O N O N U U

BMK Weight 20% 15% 20% 15% 10% 10% 10%

Global FX EUR GBP JPY CHF AUD Emerging RMB

Active Weight UW N UW N UW N OW

BMK1 0% 0% 0% 0% 0% 0% 0%

1 BMK (long/short PF). *The hypothetical or virtual portfolio has some inherent limitations. The asset allocation for a portfolio actually managed by RCM or its affiliates will differ from those presented here, due in part to a portfolio’s investment objective and guidelines and market and economic conditions that would impact RCM’s decision-making when managing actual portfolios. There is no guarantee that these investment strategies will work under all market conditions. Each sector of the bond market entails risk. The guarantee of Treasury and Government Bonds is the timely repayment of interest, and does not eliminate market risk. Mortgage-backed securities & Corporate Bonds may be sensitive to interest rates. When interest rates rise the value of fixed-income securities generally declines. There is no assurance that private guarantors or insurers will meet their obligations. An investment in high-yield securities generally involves greater risk to principal than an investment in higher-rated bonds. Equity investing is subject to the basic stock market risk that a particular security or securities, in general, may decrease in value. Investing in foreign securities may entail risk due to foreign economic and political developments and may be increased when investing in emerging markets. The securities of emerging markets may be less liquid and subject to the risks of currency fluctuations and political developments.

Legend:N = Neutral

OW = Overweight

UW = Underweight

Our currency preference also reflects our views on the global cycle as well as the discussion on EMU: we prefer the US dollar over the euro due to the ongoing discussions about the EMU debt crisis and our expectations of additional ECB rate cuts. The downside for the euro is unlikely to be dramatic, though, as many market participants have already implemented a short position, as can be seen in Commodity Futures Trading Commission (CFTC) data.

In line with our regional equity and commodity allocation, we are short the overvalued yen as well as currencies of commodity-exporting economies, like the Australian dollar. Among emerging market currencies, our preferred currency is the renminbi. We are waiting for better entry points for other emerging market currencies.


20

2012 surprising on the upside – but still below trendWith profit growth becoming increasingly scarce around the world, equity investors despondent, and pressures building in the streets around the world on policy makers to do something – anything – to reduce or diffuse the pain, we want to be especially vigilant about a possible shift in the tides in 2012. We remain impressed by the ability of the US economy to eke out some sort of 2H 2011 reacceleration, albeit a relatively mild one, despite the global slowdown.

However, we still remain sceptical of the staying power of this wave going into 2012. Certainly, employment growth has improved: non-farm payrolls have been increasing by close to $140 thousand per month since the end of 2010 and private sector labour income growth has been around 4% annualised. However, with headline inflation having temporarily reached almost 4% in Q3 2011, real disposable income growth has slowed down to around 1%. The revival in consumer spending in 2H 2011 has been fuelled in no small part by reducing the savings rate, which is now running at around 3.5%, down from 5.2% at the end of 2010. Can the savings rate decline further? Not by much or for too long, as the private household sector is still sitting on a high stock of debt and will not be able nor willing to add new net debt to finance consumption. Admittedly, inflation rates will likely come down in the course of 2012, unless energy prices reaccelerate and, consequently, have a positive impact on real disposable income in future. Nevertheless, we expect consumer spending to slightly moderate next year.

We also hold reservations about capital spending. True, the Institute for Supply Management (ISM) new orders have bounced back much more strongly than we ever anticipated, but there is simply no follow through in the Commerce Department new orders results. More importantly, capital goods and industrial equipment analysts report that US companies have gone quiet on guidance after being very constructive in the prior quarter; the Oracle shortfall has also put technology sector investors on alert. This should not come as a big surprise: earnings, the major driver for investments at this juncture, and margins are cyclically high. With the labour market moderately picking up and commodity prices not really falling but stabilising, companies’ cost bases are rising. All this takes place in times of lower growth rates in the rest of the world, in particular in EMU. Consequently, business investment in structures as well as in business equipment and software is expected to moderate from current high single digit figures.

Residential housing, though, may edge upwards and be a marginally positive contributor to economic growth. The most recently published leading indicators for the US housing market show a moderate improvement after one year of stagnation post a major collapse.

Net exports also have recently contributed slightly positively to growth. This may continue. We are seeing the first signs for a stabilisation in Asian growth – monetary leading indicators are pointing at a trough in activity – and we also expect European growth to trough in 1H 2012. All this should prove positive in terms of demand from outside the US. Indeed, the ISM export order component has stabilised as well and remains solidly above 50 – indicating ongoing expansion.

The big question remains: how much fiscal policy tightening will we see this year? The Bush payroll tax cuts have just been extended by another two months until February. The odds are that we will see a further extension until the end of 2012.


5 Equities outlook - US

Rob Parenteau


21


If our expectations on fiscal policy turn out to be correct, we feel comfortable with our GDP growth estimate of around 1.75% for 2012. Still, this figure is slightly below trend growth and below our growth expectation for Q4 2011 of 2.5%, but is much better than expected by many market participants during summer and autumn of last year.

Economic surprise indicators, measuring to what extent economic data releases have been better (or worse) than anticipated by consensus, have increased substantially since September. If history is a guide for the future also this time, however, the next direction in the surprise indicator for the US is down, as a lot of the improvements have already been reflected in consensus estimates. Clearly, this could temporarily put pressure on US assets.

Nevertheless, the US economy may be able to show the strongest growth dynamics in the developed world in 2012 against a backdrop of global slowdown. This is the reason why we are holding on to our overweight in US equities.

We believe 2013, however, will be challenging, as fiscal policy tightening will be hard to avoid. For investors, we think this will become a major theme only in 2H 2012.

Citi economic surprise indicator for US

Source: Bloomberg

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With the turbulent backdrop of 2011 in mind, one can be excused for feeling somewhat anxious going into 2012. We have seen economic, social and political unrest in Europe in recent times that has left us hard to shock. The result was a year that experienced record volatility in equity markets on an intraday basis as well as very high intra-sector correlation, making the environment challenging for stock pickers. Going into 2012, consensus expectations are for flat GDP growth in Europe, which we see as perhaps too optimistic; however, the bigger question for investors is the resultant effect on earnings growth. The one beacon of financial strength remains the corporate balance sheet.

Statistically, market performance in Q1 has set the tone for the rest of the year and this will largely be determined by the release of 2011 results and 2012 outlook statements. However, the macro picture will remain a very big driver of markets. There is a large amount of eurozone government debt due to be refinanced in the quarter (see chart). Market participants have short attention spans as evidenced by the fast-changing subject of focus; in recent weeks, the EU crisis has also been less prominent. These issues could quickly bring attention back to the solvency and liquidity problems facing sovereign borrowers in the region.

A key event for the quarter will be the EU summit on 30th January that will deal with measures to encourage economic growth as well as increasing employment. Given that the expectation is for flat growth in Europe, any encouraging moves at the summit could be very positive for markets. The previous summit saw politicians disappoint expectations, and Greece surprise investors the world over by calling a referendum on its bailout.

Recently, we have seen some improvement in some peripheral credit spreads (see chart), yet there are still many risks, such as a lack of proper implementation of reforms. We also lack a large and credible buyer of last resort for sovereign debt. The ECB’s Securities Market Programme remains limited, while the larger borrowing countries such as France and Italy have recently attracted negative speculation. This is worrying but seems to be contagion rather than well-founded fears concerning solvency and liquidity.

Germany will continue to be instrumental in proceedings, given its strength and ultimate role as the ‘backstop’ for the euro. To date, Chancellor Merkel has been resolute in refusing to support quantitative easing or eurobonds, but a break-up of the European Monetary Union (EMU) would lead to a stronger currency for Germany – not desirable, as a big exporter. Once again, politics is likely to be key, as Merkel tries to placate her voters by being tough with the fiscal renegades, but she must acknowledge the need to bail out the eurozone to some extent. The recent decision by the UK to veto changes to the Lisbon Treaty has led to talk of its being isolated, which is arguably true, but whether that is such a bad thing is debatable. Suggested reforms would have seen the large UK financial sector negatively affected, yet this split within the EU is a worrying occurrence at a time when solidarity is required. The UK’s Credit Default Swap (CDS) continues to trade below that of Germany.

In April, we have the French elections – likely to heighten the political posturing by Sarkozy in Q2 2012 and, more importantly for the crisis, at the January summit. During the quarter, there will also be IMF reviews of Greece and Ireland; while most have written off the former, negative news on the latter would refocus negative attention on the weak periphery. It was good, though, to see a realisation in 2011 that these peripheral countries for the most part are not that material to the eurozone, with the exception of Spain. Spain is the fourth largest economy in Europe and, given its high level of exposure

Equities outlook - Europe

Neil Dwane


23


to property and construction and increasing unemployment, it is much more vulnerable than Italy and France going into 2012.

Q1 is likely to see a continuation of high levels of volatility in markets. With expectations for flat to negative GDP growth in the region, it looks like Earnings Per Share estimates may be optimistic, but the rating of the market, and particularly the more cyclical stocks, seems to account for this. The consensual negativity concerning the problems we face with talk of reinstatement of pre-euro currencies is somewhat comforting, as it feels we are getting close to a nadir in sentiment. The table shows the extent to which sovereign bond yields are pricing in default and hint to a break-up of the EMU. To gain confidence, we will need to see strict implementation of budgetary reforms and a more unified approach within Europe to solving the current problems. Realistic and innovative growth initiatives at the January summit would be very supportive for markets and help to show that the politicians are finally tackling the need to act quickly and effectively.

Figure 1: Q1 Debt Maturity

Source: BloombergFrance Italy Spain

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Figure 2: Q1 5 Year CDS spread

Source: BloombergSpain Portugal Ireland Italy France

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Figure 3: Implied default rates by EMU countries

Implicit “Hair cut” (100% probability) 2 Years

Within 5 Years 10 Years

Hair cut to reduce debt to EMU average

Greece 80% 84% 93% 55%

Ireland 13% 27% 45% 30%

Portugal 23% 49% 64% 10%

Spain 5% 15% 27% -

Italy 8% 22% 38% 30%

France 1% 6% 12% 0%

Belgium 3% 11% 20% 15%

Austria 1% 7% 11% -

Source: RCM


25


The key risks to Asia in 2012 still primarily emanate from outside the region, predominantly Europe. Asia is likely to continue facing volatility due to uncertainty from slowing developed markets and regional political events, while slowing in China is likely to have reached a nadir. We also maintain our view that the long-term fundamental macroeconomic outlook for Asia remains quite robust and does not include a hard landing or the persistence of a stagflationary environment of rising inflation and slowing growth.

As the majority of external lending into Asia comes from European institutions, the potential for de-leveraging from European banks in the current environment could weigh on Asia as liquidity flees. With a substantial amount of eurozone debt maturing in the coming months, the pressures on the banking systems could begin to take a visible hold on the European economies if there is not sufficient support from the ECB. Overall, it appears that South Korea has the greatest exposure, followed by Singapore and Indonesia, if European banks (excluding the UK) are forced to retrench their balance sheets. Other Asian, US and Japanese banks are also present; the largest single foreign presence in Asia is made up of UK international banks. However, while eurozone banks may be forced to de-lever, UK international banks are not likely to be forced to de-lever, while some are even expanding in parts of the region. Ultimately, while not a healthy situation, should any de-leveraging occur by European banks (excluding the UK), the headwinds for Asian economies would be much less of an issue at the aggregate level than it theoretically could be in other emerging markets.

Specifically, with regards to China, we maintain our view that the risk of hard landing (real GDP growth falling to 5%–6% or lower over the near term) is not high in China. We believe that real GDP growth will moderate from a slowdown that has largely been engineered through the tightening of credit and other property market tightening measures. External factors have also started contributing to slowing, as we have seen falling export growth juxtaposed with rising imports, signaling robust domestic consumption, contrary to slowing in China’s export sector. This realignment of the trade balance is likely to take some of the pressure off renminbi appreciation in the near term.

In time, we would find it quite reasonable for growth in China to find a lower, more sustainable threshold than we have seen over the past decade. As such, it does not yet appear that the Chinese government feels that growth is too slow to begin actively promoting growth through interest rate hikes or other means of aggressive loosening. We would expect a continuation of some policy easing over the coming months, as well as through the increase of loan quotas and the potential for additional reductions in the required reserve ratio. However, we do not expect an interest rate cut at this point in time.

Disregarding external macro factors, within Asia inflation will be the key metric to watch into and through the early part of next year. Particularly for inflation-sensitive markets like India, signs of falling inflation will be welcome as fiscal and current account balances take a heavy toll in environments of high inflation. India’s trade deficit continues to worsen, the rupee has reached a new low and industrial production has fallen for the first time in 28 months; we do not expect that the worst is over for India and will remain underweight.

Japan’s economy is at an interesting crossroads and a number of catalysts, both positive and negative, are likely to drive the market this year. On the positive side, the four supplemental budgets passed for the reconstruction of the earthquake-damaged areas represent more than 3% of GDP, most of which is expected to be carried out in 2012, and has led Japan to have the highest 2012 consensus growth

Equities outlook - Asia-Pacific

Raymond Chan

26


estimates amongst all developed markets. On the negative side, however, are mounting concerns for the sustainability of Japan’s indebtedness and the increasing prospects for political confrontation surrounding the impending debate on the need to significantly increase taxes. As well, in the near term, there is the effect of the strong yen on corporate earnings and the difficulty that Japan will have in addressing this.

Indonesia, which now has the highest real interest rate in the region (with the exception of Australia), has already started to reduce interest rates and we would expect at least another interest rate cut into next year. The recent passage of the highly anticipated land acquisition legislation should catalyse increased investment in infrastructure. Indonesia’s upgrade to investment grade by Fitch and the overall positive sentiment for Indonesian sovereign and corporate debt should lead to continued downward pressure on borrowing costs. This is likely to support a continued wave of investment, just as the consumer sector is starting to look a little overleveraged.

The political environment in Asia should add some excitement to the investment environment this year. Upcoming presidential and legislative elections in South Korea, Taiwan and India, as well as the establishment of new leaders in China and Hong Kong, should make way for more constructive growth policies into 2H 2012. Perennial regional/global wildcard, North Korea, continues to remain a factor following the death of Kim Jong-il in December. The uncertainty is highlighted by the wide perception that potential outcomes range from peaceful reforms to violent confrontation; anything is possible as the heir presumptive turned heir apparent, Kim Jong-un, takes control.

Currencies in the region still look quite attractive as higher interest rates and still robust growth opportunities make the market attractive. Also, earnings expectations have already been reduced and stock prices have already started to reflect an environment of slower growth. Under the assumption that the eurozone does not collapse and Chinese authorities do not tighten too much, too long, Asian equities look very compelling, as many are trading at the low end of their historical trading range.

27


A solid year for style investors: 2011As most investment style favourites, like positive earnings revisions, strong growth and high price momentum, were ahead of the benchmark (see chart), 2011 has been a solid year for style investors. Among the long-term investment style winners, only value lagged.

Style investors have witnessed a routine year in 2011 whereas it has been a non-routine year for investorsWith markets driven by the triple challenges of high debt, slowing growth and dithering politicians, 2011 has been an arduous year for investors. However, for style investors, 2011 was more of a routine year, as levels of style volatility have been low and most investment styles performed in line with historical patterns.

The performance of investment styles largely followed the historical investment style pattern associated with a muddling-through environmentAs shown in the chart, this is true for trend-following strategies, like price momentum or earnings revisions, which typically underperform in the first few months after the cyclical trough in economic activity but then adapt to the new market environment and return to efficiency. And this is also true for growth strategies that are expected to do well in a muddling-through environment, as investors are typically willing to pay an extra premium for those stocks that can sustain high growth rates in an environment of uncertain growth perspectives. But the historical pattern did not emerge for value strategies, where the underperformance, although not very pronounced, was not to be expected at this stage of the macroeconomic cycle. However, it has been our view for quite some time that value stocks might find it difficult to repeat the strong performance witnessed in past recoveries, as investors might demand a higher risk premium in future for typically more cyclical and highly geared value stocks in times of persistently higher uncertainties ahead. This should dampen the performance of value stocks and, hence, the below par performance of value stocks in this cycle has not come as a surprise to us.

Which investment styles do we favour going forward?The investment style outlook is highly binary on the overall economic outlook. If the current muddling-through environment continues into 2012, most long-term investment style winners are expected to do well, with growth taking the lead followed by value, momentum and revisions (see chart). However, if the global economy slips into another recession, style investing becomes much more challenging. The investment styles growth, momentum and revisions – generally the most effective investment styles — will then be less effective.

Value – also an investment style favourite – has done quite well on average in past recessions, although with large variations from recession to recession that compromise its investment case. So investment style winners in a muddling-through phase, like value or growth, are less effective in a recession. On the other hand, typically less effective investment styles, like high quality and low risk, take the lead but still remain less effective than growth, value, momentum and revisions in other market environments. Hence, in a recession, investors should deviate from the long-term preference for growth, value, momentum and revisions, and seek some protection from difficult markets through high-quality and low-risk stocks. However, this protection comes along with an uncomfortable timing risk.

Equities outlook - style

Klaus Teloeken


28


Investors must be prepared to quickly unwind these positions in case of an economic recovery, as high quality and low risk are poor performers in the risk rally at the initial stage of a recovery. In this market phase, contrarian value takes the lead.

Growth is our favourite investment theme for 2012In our base scenario, we expect the global recovery to muddle through in 2012, with the risk of renewed recession being uncomfortably high. As described earlier, in a muddling-through environment, investors should look for growth stocks and some support from valuation, earnings revisions and price momentum. To account for the higher risk of a renewed global recession, investors should reduce exposure to lowest-quality and highest-risk names. Also, dividends as an investment theme can help to position the portfolio for a possible recession.

Dividend yield is the best-performing valuation metric in a recession, dividend growth the most effective growth measure and dividend stability among the most rewarded quality measures.

Regionally, given that the risk of a renewed recession is much higher in Europe than in the rest of the world, we put more weight on dividends as well as on high quality and low risk in Europe. Less weight is put on price momentum and earnings revisions, as these investment styles generally are less effective in a recession, as higher macro uncertainties threaten the stability of trends in prices and earnings.

In this environment, longer-term price momentum strategies continue to be reasonably effective, albeit less effective than in other market environments. Shorter-term price momentum strategies are much more vulnerable in times of higher uncertainty than longer-term momentum strategies. Hence, investors should be wary when buying into shorter-term momentum. On the other hand, buying into shorter-term losers with improving fundamentals could be a winning investment strategy in this environment.

We favour large cap over small cap on the grounds of a weaker cyclical outlook and widening credit spreads coupled with more-attractive valuations. Large cap is typically less cyclical and can access capital more easily; hence, it performs better than small cap in times of an economic slowdown and when credit is harder to obtain. However, although small cap as an asset class might not be particularly attractive at this juncture, overweighting small cap in an active portfolio might still be warranted due to the higher stock selection alpha within small cap, even in the expected absence of any small cap risk premium over the coming quarters. The case for large cap vs. small cap is stronger in Europe than elsewhere.

When would we change our investment style preference for growth?Growth strategies perform well whenever earnings growth is perceived as becoming scarce. As long as the current muddling-through environment prevails and growth fears linger, growth strategies should continue to do well. However, a strong reacceleration of leading indicators clearly would mean a risk for growth strategies and could trigger a change of our investment style preference from growth to value.

29


SummaryAs investment style favourites, like positive earnings revisions, strong growth and high price momentum were ahead of the benchmark, 2011 was a solid year for style investors. Among the long-term investment style winners, only value lagged. In future, as we expect the global economy to continue to cope with its problems, investors should look for growth stocks with reasonable valuation and some support from earnings revisions and price momentum as their preferred investment styles. Dividends as an investment theme can help to position the portfolio for the increased risk of a renewed recession.

Source: RCM research, as at 27 December 2011

Figure 1: Relative performance of investment styles vs. MSCI World in %

2011

-8.0 -4.0 0.0 4.0 8.0

Q1 Q2 Q3 Q4

Value 1.2 -0.4 -4.1 0.7

Growth 1.2 0.8 -2.5 2.7

Quality 1.5 2.6 1.3 2.4

Momentum 1.1 3.1 -1.4 2.8

Revisions 0.5 1.7 0.3 1.3

Risk 2.1 -1.9 -7.2 -0.3

Small Cap 0.1 -2.1 -2.7 -2.3

Figure 2: Relative performance of investment styles in a muddling-through environment

Source: RCMValue Growth Revisions Momentum

Quality High Risk Small Cap

0.90

0.95

1.00

1.05

1.10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

The chart shows the average performance of investment strategies over time starting with the initial peak of the OECD leading indicator after a recession trough. The analysis covers Europe, Japan and the US over the period from 1987 to 2011.


30


Figure 3: Relative performance of investment styles in a recessionary slowdown

Source: RCMValue Growth Revisions Momentum

Quality High Risk Small Cap

0.90

0.95

1.00

1.05

1.10

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

The chart shows the average performance of investment strategies over time starting with the peak of the economic cycle. The analysis covers Europe, Japan and the US over the period from 1987 to 2011.


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6 Fixed income outlook - global

While conditions are rather mixed around the globe and although growth is likely to remain below potential – in particular in developed nations – the world economy is not on the brink of recession at this stage. Overall, we expect different growth paths in the US and the eurozone going into next year. The sovereign debt crisis in Europe likely will remain the dominant theme for global bond markets in 2012.

Europe has seen conditions continue to worsen after a strong start in early 2011. The negative feedback loop between sovereigns, banks and the real economy has certainly increased recession risks in Europe. Austerity measures are increasingly having a negative impact on the economy, resulting in an improving outlook for inflation. Nonetheless, we think the current situation is materially different from late 2008. While a relapse into negative-growth territory now appears possible, it should be shallow and of rather brief duration, as the real economy is much more efficient today and leaves much less scope for adjustment on the capacity side after the large realignment during the deep recession of 2008–2009.

European debt markets will likely remain volatile as the announced reform measures on the EU level and in individual countries require time to bear fruit. While the ECB is reluctant to significantly step up its bond purchase programme for sovereign debt, in its role as a lender of last resort for the European banking system the ECB has shown its willingness to support the markets. Long-term refinancing operations have been extended to up to three years, while collateral rules as well as minimum reserve requirements have been lowered. These liquidity-improving support measures will stabilise the financial system significantly going forward. We expect the ECB to lower official rates below 1% in 2012.

On the other hand, US economic data further indicate that activity strengthened in 2H 2012 after a very disappointing 1H 2011. We expect the US to grow throughout 2012, albeit below its potential. While the US housing market and job market appear to have found a bottom, rising fiscal challenges and potential political deadlock should limit further advances. Therefore, we are convinced that the outlook for inflation will improve not only in Europe but also in the US due to declining energy prices, low capacity utilisation and, on balance, still relatively high unemployment.

US government bonds entered the new year near historic low yield levels. While any fading in European-related risks should pressure US yields higher, a sharp sell-off remains unlikely. Although the Fed is set to adjust its communication strategy and to guide forward expectations even lower, official interest rates should remain unchanged in 2012. We see a significant chance that the Fed will introduce a third round of quantitative easing, potentially focusing on mortgage-backed securities.

Ingo Mainert


32


European fixed income markets will continue to be driven this year by developments in the sovereign debt crisis. After hopes of a resolution were regularly dashed in 2011, 2012 is shaping up as a watershed year that comes down to a simple choice – either European leaders manage to, finally, set up an integrated and credible European project or the eurozone runs the risk of disintegration.

Two taboos came to pass in 2011: 1) private-sector involvement in restructuring of Greek debt spelled out to investors that eurozone government bonds do indeed carry the risk of a loss of principal; and 2) recent statements by political leaders in France and Germany opened a new front by explicitly raising the possibility that a country – Greece, in this case – could leave the EMU. These repeated political errors, paired with often disappointing ‘last-chance summits,’ have undermined investor confidence for some time to come and have triggered contagion to Spain, Italy and, to a lesser extent, France.

Even so, the latest headway is significant.

At the government level, credible adjustment efforts were announced and have begun to be implemented, particularly in Spain and Italy. Italy, recently the sum of all fears, has managed to secure the political resources for structural reforms, which should ultimately give it greater control over its public finances, including the generation of primary surpluses that reassure on its solvency. The market’s reaction was at first positive, with a significant steepening in the curve, but ultimately moderate when considering the mixed success of recent auctions. Investors’ return to Italian debt is far from being a sure thing. With needs of about EUR110 billion, Italy faces a refinancing wall in Q1 2012; while our fears are receding in terms of solvency, the basic problem remains whether investors will reassume ‘peripheral’ risk and, thus, allow Italy’s continued access to the market, especially as the ECB refuses to extend the Securities Market Programme – whose purpose is to ease the transmission of monetary policy – and to play an explicit role as lender of last resort.

However, the ECB has not sat on its hands and has begun a generous policy to allocate liquidity. While its firm attitude regarding requests – mainly from France – regarding debt monetisation may disappoint some, it has expanded its firepower of unconventional tools in impressive fashion. The success of the first three-month Long-Term Refinancing Operation, with EUR489 billion allotted, proved that this was necessary to allow eurozone banks to bypass the market, which continues to offer very poor refinancing terms.

Against a backdrop of further market uncertainty, in which governments still have much to do in moving closer to a final resolution of the crisis, we have taken note of the latest developments by reducing our underweight of Spain and Italy. We are moving closer to neutrality while remaining overexposed to German debt, which is still the ultimate risk-free investment. We continue to underweight France, which in a critical election year will be clearly unable to consider credible measures for reducing spending, something that would exacerbate its spread versus Germany.

While government bond investments are subject to political factors and therefore offer little visibility, we are taking a much more constructive approach to corporate issuers, including High Yield issuers. Seldom have companies faced an economic slowdown with so much

Fixed income outlook - Europe

Franck Dixmier


33


going for them, including cash hoards on their balance sheets, solid free cash flow, moderate debt and historically high EBITDA-to-interest coverage. Ratings agencies clearly agree, as they forecast default rates of 2% –3% in 2012. Under a scenario in which systemic risk fed by a turn for the worse in the debt crisis is avoided – and this is our core scenario – current spreads are pricing in a record illiquidity premium that is especially attractive for long-term investors who can free themselves of short-term volatility.

Implied 5 year cumulative default rate probability

Recovery rate x over 5 year 50% 40% 30% 20% 10%

1200 68.2% 61.5% 55.9% 51.1% 47.1%

1100 65.0% 58.3% 52.8% 48.1% 44.2%

1000 61.5% 54.9% 49.4% 44.9% 41.2%

900 57.7% 51.1% 45.9% 41.6% 38.0%

800 53.4% 47.1% 42.1% 38.0% 34.6%

700 48.8% 42.7% 38.0% 34.2% 31.0%

600 43.6% 38.0% 33.6% 30.1% 27.3%

500 38.0% 32.8% 28.9% 25.8% 23.3%

400 31.8% 27.3% 23.9% 21.2% 19.1%

300 24.9% 21.2% 18.5% 16.4% 14.7%

Implied cumulative default rate = 1 - exp ( - Spd / (1 - recovery rate) x Maturity).Source: Allianz Global Investors, data as at 3 January 2012.


34


Asian local bond markets delivered another year of solid returns in 2011 (see chart). Returns looked even better before the concerns about peripheral Europe caused global market turbulence in the summer and a bout of global risk aversion caused Asian currencies to lose gains made in 1H 2011.

Even though Asia can boast strong economic and fiscal fundamentals, it is not immune from global market turbulence and external shocks. Portfolio adjustments and capital outflows driven by global risk aversion have an immediate impact on Asian currencies. And Asia’s export-strong trade orientation results in an inevitable spillover of weaker demand in developed economies into Asia. However, Asia has several buffers to contain such negative spillovers. High currency reserves are a major one.

South Korea is commonly considered an economy heavily geared on the global economic cycle. In addition, external short-term funding and the risk of its sudden withdrawal was a major concern in previous phases of global capital market distress. Now, South Korea’s foreign currency reserves are about twice the size of its short-term external debt and about three times the size of South Korean banks’ short-term external debt. In addition, the South Korean central bank has secured significant currency swap lines from other major central banks. Just recently, South Korea and Japan increased their bilateral swap arrangement to $70 billion.

While Asian economies, not to mention the even more susceptible capital markets, will not be able to fully decouple from a global slowdown, they are supported by higher indigenous growth and much greater room for fiscal policy stimulus, should that be required by a further deterioration of global growth. In addition, global investors that need to diversify away from the risks of mature economies should provide Asia with a more stable investor base and a structural demand for investments that are not just motivated by expected short-term returns.

Asia is not burdened by high refinancing needs or concerns about sovereign debt. According to the Asia Development Bank, the size of Asian bond markets has risen 5.5% year-on-year to reach $5.5 trillion at the end of Q3 2011. However, this was mainly due to strong growth in corporate bond issuance. There is no sovereign debt overhang in Asia at all. Asian sovereign debt is not in abundant supply and this trend does not look likely to change soon. For example, net new issuance is expected to fall in 2012 for South Korea, which is Asia’s second largest bond market after China. Looking at CDS spreads, the risk assessment of Asian markets compared to that of European markets has drastically changed from that during the global financial crisis (see chart).

Whereas even the US was downgraded and the remaining AAA-rated European countries are on the watch list of credit rating agencies, Indonesia was recently upgraded to investment grade by Fitch, raising the long-term foreign and local currency debt ratings to BBB- from BB+. Fitch cited ‘the country’s strong and resilient economic growth, low and declining public-debt ratios, strengthened external liquidity, and a prudent overall macro policy framework.’ Standard & Poor’s raised its outlook on the Philippines’ BB sovereign credit rating from stable to positive, indicating strong external liquidity and improving growth prospects.

Given secular economic growth prospects and sound fiscal fundamentals, Asian bond markets remain an attractive investment target, even if currency appreciation will most likely remain subdued or postponed until the global big picture has improved. For longer-term investors, short-term currency weakness driven by global turbulence should offer an attractive entry point.

Asia has been ahead of the global monetary cycle and, as such, has more room for interest rate cuts. Even though inflation rates in Asia show initial signs of having peaked and we have seen first easing

Fixed income outlook - Asia-Pacific

Eugen Loeffler


35


Asian bond market returns

HSBC ALBI (Asia Local Bond Index)

Total Return in USD Total Return in local currency

2011 YTD 2010 2009

2011 YTD 2010 2009

China 9.5% 5.0% -0.2% 5.4% 1.4% -0.2%

India -9.8% 9.5% -0.5% 6.4% 5.2% -4.9%

Indonesia 18.6% 28.3% 43.8% 20.5% 21.1% 22.3%

Korea 3.7% 11.8% 10.8% 6.3% 8.3% 2.1%

Malaysia 1.2% 17.9% 0.9% 4.8% 4.9% 0.3%

Philippines 12.6% 18.5% 11.2% 12.9% 12.1% 8.2%

Singapore 5.3% 12.4% 3.1% 6.3% 2.7% 0.8%

Taiwan -0.1% 11.4% 4.3% 3.8% 1.6% 1.7%

Thailand 1.2% 17.0% 0.7% 5.2% 5.4% -3.2%

Total 5.3% 12.2% 6.3%

Source: Bloomberg, as at 22 December 2011.

moves by China, Indonesia and Thailand, we expect many Asian central banks to delay rate cuts until this trend has been more clearly confirmed, as containing inflation has been the major economic policy priority for Asian countries in 2011. A strong rebound from the global financial crisis combined with rising food prices had driven Asian inflation rates above the ceiling of central banks’ inflation corridors. Significant falls in Asian yields would require either a sustained further fall of inflation rates or a further deterioration of the global economy.

Nevertheless, 2012 looks like another year where Asian bond markets will deliver value to global investors. Double-digit returns, such as in 2010, supported by strong currency gains look less likely as long as global uncertainties and risk aversion persist. Still, given both strong fundamentals and positive yield differentials compared to developed economies, Asian bond markets continue to offer attractive risk-adjusted expected returns to investors.

5 Year CDS spreads

Source: BloombergItaly Spain France Indonesia Korea Malaysia

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

2008 2009 2010 2011

(bps

)

36


7 Multi asset outlook

Herold Rohweder

Asset allocation in times of risk and uncertaintyGrowing economic risks, particularly in the eurozone, and negative feedback effects resulting from the persistent EU debt crisis, accompanied by fading confidence, led to a reduction of risky assets in many balanced multi asset portfolios. This was especially true for multi asset portfolios with a predefined risk budget that was, at least partly, exhausted by the declining equity markets prices and the widening of peripheral bond spreads. As we begin 2012, many investors have a relatively high cash allocation and in combination with new risk budgets this paves the way for reinvestment across a plethora of different asset classes. However, 2012 is likely to be marked by uncertainty driven by political events and risks caused by the global growth trajectory, eroding the conviction of any allocation decision. Right now, it is unclear whether we are more likely to experience range-bound markets or strong trends. If a credible and rapid solution to the EMU crisis is not forthcoming, and is combined with a low growth environment, investors will persist in trading on policy and politics, and a continuation of the prevailing risk-on/risk-off pattern is likely. However, due to the erratic shifts in policy actions, investors can easily be caught on the wrong foot. A sound strategy for a range-bound market environment is to buy assets with a high positive carry and avoid assets with a low, or even negative, carry.

Our market cycle model, in combination with our market selection indicators, recommends precisely this portfolio allocation; overall it suggests a moderately defensive position to address the absolute risks stemming from uncertainty. In the bond space our model portfolio favours credit, corporate, emerging market and inflation linked bonds. Within global equities it proposes an overweight in US equities and high dividend investments. We are currently not recommending investments in commodities as most of the commodity curves are in contango, implying a negative carry. Within the commodities segment we prefer precious metals because they tend to be uncorrelated to most other asset classes and exhibit a pattern of positively skewed returns, i.e., they tend to mitigate event risk.

However, asset allocation decisions should be taken within a clearly defined risk-budget approach as at any point the underlying factors could change. For example, a gradual easing of sovereign risk (as a quick solution for the eurozone emerges) in combination with stronger than expected economic growth could lead to a meaningfully positive trend for risky assets. Or, probably more likely, a worsening of the eurozone debt crisis, destabilising policy errors and negative economic data could prompt a prolonged downward trend in risky assets. In the former scenario an increase in the equity exposure is probably the most effective reaction; in the latter, a further reduction of equity and other risky assets would be appropriate. Hence, even if we think it is prudent to start 2012 with a global multi asset position designed for a range-bound market environment, an investor should focus closely on events that could change this base case scenario and give rise to strong trends in either direction.

Current investment themesWe favour investments in Indonesia and Singapore on a country level basis and high dividend investments in Asian equities, supported by macroeconomic indicators. The valuation argument for European convertible bonds with a low delta is moderately compelling. Compared with similarly rated corporate bonds, the implied option premiums of these kinds of convertibles are at depressed levels.

37


Within the hedge fund segment we recommend global macro strategies. Our analysis is based on the HFRI Macro Index and shows favourable scores for trend, sentiment and macro indicators. Global macro strategies can be simultaneously short and long in different markets. Therefore, they can take advantage of falling markets and typically display, unlike most of the other hedge fund categories, a symmetrical return pattern without a negative skew in their return distribution.

In addition to proposing to overweight high yielding assets, and underweight low yielding assets and those with a low carry to profit from a volatile range-bound market, we also recommend investing in concepts that are short in volatility. Volatility and other risk measures are currently at elevated levels and, therefore, the collectable premiums are attractive.


38

Companies will be under growing pressure to demonstrate value creation in addition to the products and services they provide.

Market participants will be scrutinised for their short-term approach.

Both the global financial crisis and drawn-out European financial woes have resulted in a growing unease and an undermining of trust in politicians and business by investors, consumers and citizens, which is set to continue into 2012. Politicians have been accused of inefficiency in failing to bring about a speedy solution to the European financial crisis whilst businesses and financial institutions have been targeted for their ‘greed’, short-termism and unethical business conduct. Helped by the rise in social media, individuals will increasingly speak out to a global audience about any misbehaviour or double standards exhibited by organisations or institutions on a real-time basis. The consequence will be that corporations will be expected to raise their game and start demonstrating that the products and services they provide create real value. Companies will be expected to behave ethically, with integrity and transparency, and to take the lead in helping to solve social and environmental problems. Expectations will continue to rise with evidence of concrete action being taken by companies rather than a corporate responsibility agenda that is driven by a public relations exercise or ‘green washing’.

The UK government–led Kay Review will further scrutinise how the equity market functions and examine whether there is a problem with short-termism debasing the performance of companies and investors. The review will examine the mechanisms of corporate control and accountability and their impact on the long-term competitive performance of UK businesses. We expect that, among the many factors considered, long-termism, within the context of the management of environmental, social, and governance risks and opportunities, will be one prominent feature of the review. Our expectation is that that this will be another important step toward the embedding of ‘non-financial’ risks and opportunities across the investment value chain, as companies and investors will be expected to strengthen their commitment, understanding and transparency of all the long-term risks they face, including environmental, social and governance factors.

8 Sustainability Research – long term trends

Bozena Jankowska


39

9 RCM economic forecast summary

2011 2012

RCM Consensus RCM Consensus

USReal GDP % chg SAAR 1.70 1.80 1.80 1.90CPI 3.20 3.20 2.30 2.10Short-Term (official) Rates 0.0-0.25 0.0-0.25 0.0-0.2510 Year Rates 1.88 2.50 2.25US Dollar Index 80 80 79UKReal GDP % chg SAAR 1.00 0.90 0.90 0.60HCPI 4.50 4.50 2.70 2.80Short-Term (official) Rates 0.50 0.50 0.5010 Year Rates 1.99 2.70 2.55GBP/USD 1.55 1.57 1.60EurolandReal GDP % chg SAAR 1.60 1.60 -0.20 -0.30CPI 2.70 2.70 1.70 1.80Short-Term (official) Rates 1.00 0.75 0.7510 Year Rates (Germany) 1.83 2.80 2.30EUR/USD 1.30 1.33 1.35JapanReal GDP % chg SAAR -0.80 -0.30 1.70 2.00CPI -0.30 -0.30 -0.30 -0.20Short-Term (official) Rates 0.0-0.10 0.0-0.10 0.0-0.1010 Year Rates 0.99 1.40 1.25JPY/USD 76.99 82.00 80.35ChinaReal GDP % chg SAAR 9.20 9.20 8.30 8.20CPI 5.60 5.40 3.50 3.801 Y Lending Rate 6.56 6.06 6.5010 Year Rates 3,45* 3.00 n/aUSDCNY 6.30 5.85 6.06Hong KongReal GDP % chg SAAR 5.40 5.40 4.00 3.90CPI 5.00 5.20 4.40 4.503 M Interbank Rate 0.38 0.30 0.3010 Year Rates 1,51* 2.20 1.70USD/HKD 7.77 7.80 7.78CommoditiesGold 1576 1800 1580

Oil (WTI) 98.80 95 100

*Bloomberg generic yields. Source: RCM.


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Financial markets review

31-Dec-11(1)

Qtr-to-date30-Sep-1131-Dec-11

Yr-to-date31-Dec-1031-Dec-11

% Change From CalendarYear2010

CalendarYear High

CalendarYear Low

Equities USS&P 500 2158.94 11.82% 2.11% -6.37% 15.09% 15.06%NASDAQ 2605.15 7.86% -1.80% -9.34% 11.53% 16.91%MS Value 6224.82 12.30% 1.49% -7.87% 15.87% 14.37%MS Growth 4182.99 11.10% 2.39% -6.46% 14.22% 16.53%S&P 500 VIX 23.40 -45.53% 31.83% -51.25% 60.05% -18.13%NASDAQ VIX 23.13 -48.58% 18.74% -50.38% 45.93% -10.02%Equities JapanNikkei 225 8455.35 -2.82% -17.34% -22.12% 3.62% -3.01%Equities EuropeDJ Euro Stoxx 50 2369.52 9.72% -8.39% -14.42% 16.84% 0.04%FTSE 100 5572.28 8.65% -5.55% -8.52% 12.70% 9.00%Dax 30 5839.05 5.24% -15.55% -22.97% 15.96% 16.06%Cac 40 3159.81 5.96% -16.95% -23.99% 13.59% -3.34%Equities Asia-PacificMSCI Asia-Pacific ex-Japan (USD) 1111.30 5.16% -16.25% -22.00% 12.59% 12.67%Currencieseuro/usd 1.2939 -4.18% -3.17% -13.06% 0.39% -7.25%usd/yen 76.9600 -0.14% -5.19% -9.96% 1.50% -12.64%gbp/usd 1.5541 -0.24% -0.74% -6.96% 1.30% -3.05%Commoditiesoil brent 108.28 1.94% 16.67% -14.45% 16.67% 19.91%gold (usd) 1574.57 -2.67% 11.07% -17.05% 18.76% 29.35%S&P Goldman Sachs Commodity Index 4885.25 8.96% -1.18% -15.41% 11.79% 9.03%Shot-Term Rates Yield ChangeFed Funds Target 0.25% 0 bps 0 bps 0 bps 0 bps 0 bps3-Month T-Bill 0.02% 0 bps -10 bps -14 bps 2 bps 6 bps3-Month Euro 1.36% -20 bps 35 bps -26 bps 36 bps 31 bps3-Month Yen 0.33% 0 bps -1 bps -1 bps 0 bps -13 bpsLong-Term Government Bonds2-Year Treasuries 0.23% -3 bps -36 bps -62 bps 8 bps -55 bps5-Year Treasuries 0.81% -12 bps -118 bps -159 bps 4 bps -69 bps10-Year Treasuries 1.88% -5 bps -143 bps -185 bps 16 bps -53 bps10-Year Bund 1.83% -7 bps -106 bps -166 bps 14 bps -50 bps10-Year JGB 0.99% -4 bps -13 bps -35 bps 4 bps -16 bpsUS Corporate BondsBarclays US Aggregate AAA 10+ years 3.79% -37 bps -31 bps -50 bps 16 bps -26 bpsBarclays US Aggregate BAA 10+ years 5.40% -18 bps -57 bps -81 bps 16 bps -46 bpsspread BAA/AAA 1.61% 19 bps -26 bps -31 bps 0 bps -20 bpsBarclays High Yield 12.16% -118 bps 229 bps -224 bps 357 bps -179 bpsEMU Corporate BondsBarclays Euro Aggregate AAA 2.06% -5 bps -50 bps -117 bps 9 bps -25 bpsBarclays Euro Aggregate BAA 3.71% -66 bps -16 bps -131 bps 0 bps 69 bpsspread BAA/AAA 1.65% -61 bps 34 bps -14 bps -9 bps 94 bps

*The periodic changes for equity indices are percentage changes, whilst for bond indices the change is given in basis points. A 1% point change is equivalent to 100 basis points. The calendar high and low columns represent the deviation of the index in percentage or basis

points terms accordingly, compared to the index level at the end of the period of review. Source: Datastream.


41

Implied EPS growth (10-year)

Global sectors

RCM top-down 5 year earnings growth

estimate (p.a.)

Market implied 5 year earnings growth

(p.a.)

Estimated growth > < market implied

growth

Oil & Gas 1.3% -2.5% 3.8%

Materials -0.7% 0.5% -1.2%

Industrials 0.3% 2.0% -1.7%

Consumer Goods 1.3% 5.4% -4.1%

Consumer Services 1.4% 7.4% -5.9%

Health Care 1.9% 7.4% -5.4%

Telecom 0.7% 3.2% -2.4%

Utilities 1.1% 4.5% -3.5%

Financials 1.0% -2.9% 3.9%

Banks 1.7% -3.5% 5.2%

Insurance 1.1% -4.1% 5.2%

Technology 1.6% 5.3% -3.7%

Source: Economics & Strategy

4242


10 Market valuations - US: Equity valuations

US S&P 500 P/B ratio

Source: BloombergAverageRolling 12-months standard deviationPrice to book ratio

1.0

2.0

3.0

4.0

5.0

6.0

Mar

97

Sep

97M

ar 9

8Se

p 98

Mar

99

Sep

99M

ar 0

0Se

p 00

Mar

01

Sep

01M

ar 0

2Se

p 02

Mar

03

Sep

03M

ar 0

4Se

p 04

Mar

05

Sep

05M

ar 0

6Se

p 06

Mar

07

Sep

07M

ar 0

8Se

p 08

Mar

09

Sep

09M

ar 1

0Se

p 10

Mar

11

Sep

11

US S&P 500 P/E ratio

Source: DatastreamAverageRolling 12-months standard deviationPrice to earnings ratio

0

5

10

15

20

25

30

35

Aug

95Fe

b 96

Aug

96Fe

b 97

Aug

97Fe

b 98

Aug

98Fe

b 99

Aug

99Fe

b 00

Aug

00Fe

b 01

Aug

01Fe

b 02

Aug

02Fe

b 03

Aug

03Fe

b 04

Aug

04Fe

b 05

Aug

05Fe

b 06

Aug

06Fe

b 07

Aug

07Fe

b 08

Aug

08Fe

b 09

Aug

09Fe

b 10

Aug

10Fe

b 11

Aug

11

US S&P 500 real earnings yield

Source: BloombergAverageS&P 500 earnings yield - US inflation YoY

-2%

0%

2%

4%

6%

8%

10%

12%

Oct

93Ap

r 94

Oct

94Ap

r 95

Oct

95Ap

r 96

Oct

96Ap

r 97

Oct

97Ap

r 98

Oct

98Ap

r 99

Oct

99Ap

r 00

Oct

00Ap

r 01

Oct

01Ap

r 02

Oct

02Ap

r 03

Oct

03Ap

r 04

Oct

04Ap

r 05

Oct

05Ap

r 06

Oct

06Ap

r 07

Oct

07Ap

r 08

Oct

08Ap

r 09

Oct

09Ap

r 10

Oct

10Ap

r 11

Oct

11


43


S&P earnings expectations

Source: DatastreamS&P IBES equity earnings expectations

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%Q

2 19

85Q

1 19

86Q

4 19

86Q

3 19

87Q

2 19

88Q

1 19

89Q

4 19

89Q

3 19

90Q

2 19

91Q

1 19

92Q

4 19

92Q

3 19

93Q

2 19

94Q

1 19

95Q

4 19

95Q

3 19

96Q

2 19

97Q

1 19

98Q

4 19

98Q

3 19

99Q

2 20

00Q

1 20

01Q

4 20

01Q

3 20

02Q

2 20

03Q

1 20

04Q

4 20

04Q

3 20

05Q

2 20

06Q

1 20

07Q

4 20

07Q

3 20

08Q

2 20

09Q

1 20

10Q

4 20

10Q

3 20

11

S&P 500 earnings gap

Source: BloombergAverageRolling 12-month standard deviation S&P 500 earnings gapS&P 500 real earnings yield – 10-year US treasury yield

-4%

-2%

0%

2%

4%

6%

8%

Sep

95M

ar 9

6Se

p 96

Mar

97

Sep

97M

ar 9

8Se

p 98

Mar

99

Sep

99M

ar 0

0Se

p 00

Mar

01

Sep

01M

ar 0

2Se

p 02

Mar

03

Sep

03M

ar 0

4Se

p 04

Mar

05

Sep

05M

ar 0

6Se

p 06

Mar

07

Sep

07M

ar 0

8Se

p 08

Mar

09

Sep

09M

ar 1

0Se

p 10

Mar

11

Sep

11



44

Market valuations - US: Bond valuations

US real yield (10-year – CPI)

Source: Bloomberg10-year US treasury yield less US CPI YoY

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Oct

93Ap

r 94

Oct

94Ap

r 95

Oct

95Ap

r 96

Oct

96Ap

r 97

Oct

97Ap

r 98

Oct

98Ap

r 99

Oct

99Ap

r 00

Oct

00Ap

r 01

Oct

01Ap

r 02

Oct

02Ap

r 03

Oct

03Ap

r 04

Oct

04Ap

r 05

Oct

05Ap

r 06

Oct

06Ap

r 07

Oct

07Ap

r 08

Oct

08Ap

r 09

Oct

09Ap

r 10

Oct

10Ap

r 11

Oct

11

US investment grade corporate bond yield spread

Source: BloombergUS investment grade corporate bond yield spread

-100

0

100

200

300

400

500

600

700

Jan

80

Jul 8

1

Jan

83

Jul 8

4

Jan

86

Jul 8

7

Jan

89

Jul 9

0

Jan

92

Jul 9

3

Jan

95

Jul 9

6

Jan

98

Jul 9

9

Jan

01

Jul 0

2

Jan

04

Jul 0

5

Jan

07

Jul 0

8

Jan

10

Jul 1

1

Basis

Poi

nts


US High Yield Corporate Bond Spread

Source: BloombergUS High Yield Corporate Bond Spread

0

500

1000

1500

2000

2500

Feb

87

Apr 8

8

Jun

89

Aug

90

Oct

91

Dec 9

2

Feb

94

Apr 9

5

Jun

96

Aug

97

Oct

98

Dec 9

9

Feb

01

Apr 0

2

Jun

03

Aug

04

Oct

05

Dec 0

6

Feb

08

Apr 0

9

Jun

10

Aug

11

Basis

Poi

nts


45

US inflation expectations

Source: Bloomberg10-year US treasury yield less 10-year US inflation linked bond yield

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Apr 9

7Se

p 97

Feb

98Ju

l 98

Dec 9

8M

ay 9

9O

ct 99

Mar

00

Aug

00Ja

n 01

Jun

01No

v 01

Apr 0

2Se

p 02

Feb

03Ju

l 03

Dec 0

3M

ay 0

4O

ct 04

Mar

05

Aug

05Ja

n 06

Jun

06No

v 06

Apr 0

7Se

p 07

Feb

08Ju

l 08

Dec 0

8M

ay 0

9O

ct 09

Mar

10

Aug

10Ja

n 11

Jun

11No

v 11



46


Market valuations - Europe: Equity valuations

CAC 40 P/B ratio

Source: DatastreamAverageRolling 12-months standard deviationPrice to book ratio

0.50.81.01.31.51.82.02.32.5

Aug

03No

v 03

Feb

04M

ay 0

4Au

g 04

Nov

04Fe

b 05

May

05

Aug

05No

v 05

Feb

06M

ay 0

6Au

g 06

Nov

06Fe

b 07

May

07

Aug

07No

v 07

Feb

08M

ay 0

8Au

g 08

Nov

08Fe

b 09

May

09

Aug

09No

v 09

Feb

10M

ay 1

0Au

g 10

Nov

10Fe

b 11

May

11

Aug

11No

v 11

DAX P/B ratio


0.5

1.0

1.5

2.0

2.5

3.0

3.5

Nov

01

May

02

Nov

02

May

03

Nov

03

May

04

Nov

04

May

05

Nov

05

May

06

Nov

06

May

07

Nov

07

May

08

Nov

08

May

09

Nov

09

May

10

Nov

10

May

11

Nov

11

FTSE 100 P/B ratio


1.0

2.0

3.0

4.0

5.0

6.0

Jun

97De

c 97

Jun

98De

c 98

Jun

99De

c 99

Jun

00De

c 00

Jun

01De

c 01

Jun

02De

c 02

Jun

03De

c 03

Jun

04De

c 04

Jun

05De

c 05

Jun

06De

c 06

Jun

07De

c 07

Jun

08De

c 08

Jun

09De

c 09

Jun

10De

c 10

Jun

11De

c 11


47


DAX P/E ratio


5

10

15

20

25

30

Aug

95Fe

b 96

Aug

96Fe

b 97

Aug

97Fe

b 98

Aug

98Fe

b 99

Aug

99Fe

b 00

Aug

00Fe

b 01

Aug

01Fe

b 02

Aug

02Fe

b 03

Aug

03Fe

b 04

Aug

04Fe

b 05

Aug

05Fe

b 06

Aug

06Fe

b 07

Aug

07Fe

b 08

Aug

08Fe

b 09

Aug

09Fe

b 10

Aug

10Fe

b 11

Aug

11

FTSE P/E ratio


0

5

10

15

20

25

30

35

Aug

95Fe

b 96

Aug

96Fe

b 97

Aug

97Fe

b 98

Aug

98Fe

b 99

Aug

99Fe

b 00

Aug

00Fe

b 01

Aug

01Fe

b 02

Aug

02Fe

b 03

Aug

03Fe

b 04

Aug

04Fe

b 05

Aug

05Fe

b 06

Aug

06Fe

b 07

Aug

07Fe

b 08

Aug

08Fe

b 09

Aug

09Fe

b 10

Aug

10Fe

b 11

Aug

11

CAC 40 P/E ratio


5

10

15

20

25

30

Aug

95Fe

b 96

Aug

96Fe

b 97

Aug

97Fe

b 98

Aug

98Fe

b 99

Aug

99Fe

b 00

Aug

00Fe

b 01

Aug

01Fe

b 02

Aug

02Fe

b 03

Aug

03Fe

b 04

Aug

04Fe

b 05

Aug

05Fe

b 06

Aug

06Fe

b 07

Aug

07Fe

b 08

Aug

08Fe

b 09

Aug

09Fe

b 10

Aug

10Fe

b 11

Aug

11


48


CAC real earnings yield

Source: BloombergAverage CAC real earnings yieldCAC earnings yield - French inflation YoY

0%2%4%6%8%10%12%14%16%

Oct

93Ap

r 94

Oct

94Ap

r 95

Oct

95Ap

r 96

Oct

96Ap

r 97

Oct

97Ap

r 98

Oct

98Ap

r 99

Oct

99Ap

r 00

Oct

00Ap

r 01

Oct

01Ap

r 02

Oct

02Ap

r 03

Oct

03Ap

r 04

Oct

04Ap

r 05

Oct

05Ap

r 06

Oct

06Ap

r 07

Oct

07Ap

r 08

Oct

08Ap

r 09

Oct

09Ap

r 10

Oct

10Ap

r 11

Oct

11

DAX real earnings yield

Source: BloombergAverageDAX earnings yield - German inflation YoY

0%

2%

4%

6%

8%

10%

Jan

96Ju

l 96

Jan

97Ju

l 97

Jan

98Ju

l 98

Jan

99Ju

l 99

Jan

00Ju

l 00

Jan

01Ju

l 01

Jan

02Ju

l 02

Jan

03Ju

l 03

Jan

04Ju

l 04

Jan

05Ju

l 05

Jan

06Ju

l 06

Jan

07Ju

l 07

Jan

08Ju

l 08

Jan

09Ju

l 09

Jan

10Ju

l 10

Jan

11Ju

l 11

Jan

12

FTSE real earnings yield

Source: BloombergAverage (since inception - 25 January 1980)FTSE earnings yield - UK inflation YoY

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Oct

93Ap

r 94

Oct

94Ap

r 95

Oct

95Ap

r 96

Oct

96Ap

r 97

Oct

97Ap

r 98

Oct

98Ap

r 99

Oct

99Ap

r 00

Oct

00Ap

r 01

Oct

01Ap

r 02

Oct

02Ap

r 03

Oct

03Ap

r 04

Oct

04Ap

r 05

Oct

05Ap

r 06

Oct

06Ap

r 07

Oct

07Ap

r 08

Oct

08Ap

r 09

Oct

09Ap

r 10

Oct

10Ap

r 11

Oct

11


49


DAX earnings gap

Source: BloombergAverageRolling 12-month standard deviation DAX earnings gapDAX real earnings yield – 10-year German government bond yield

-4%

-2%

0%

2%

4%

6%

8%

10%

Sep

95M

ar 9

6Se

p 96

Mar

97

Sep

97M

ar 9

8Se

p 98

Mar

99

Sep

99M

ar 0

0Se

p 00

Mar

01

Sep

01M

ar 0

2Se

p 02

Mar

03

Sep

03M

ar 0

4Se

p 04

Mar

05

Sep

05M

ar 0

6Se

p 06

Mar

07

Sep

07M

ar 0

8Se

p 08

Mar

09

Sep

09M

ar 1

0Se

p 10

Mar

11

Sep

11

FTSE earnings gap

Source: BloombergAverageRolling 12-month standard deviation FTSE earnings gapFTSE real earnings yield – 10-year gilt yield

-4%-2%0%2%4%6%8%10%12%

Jun

96De

c 96

Jun

97De

c 97

Jun

98De

c 98

Jun

99De

c 99

Jun

00De

c 00

Jun

01De

c 01

Jun

02De

c 02

Jun

03De

c 03

Jun

04De

c 04

Jun

05De

c 05

Jun

06De

c 06

Jun

07De

c 07

Jun

08De

c 08

Jun

09De

c 09

Jun

10De

c 10

Jun

11De

c 11

CAC 40 earnings gap

Source: BloombergAverageRolling 12-month standard deviation CAC earnings gapCAC real earnings yield – 10-year French government bond yield

-4%-2%0%2%4%6%8%

10%12%

Sep

95M

ar 9

6Se

p 96

Mar

97

Sep

97M

ar 9

8Se

p 98

Mar

99

Sep

99M

ar 0

0Se

p 00

Mar

01

Sep

01M

ar 0

2Se

p 02

Mar

03

Sep

03M

ar 0

4Se

p 04

Mar

05

Sep

05M

ar 0

6Se

p 06

Mar

07

Sep

07M

ar 0

8Se

p 08

Mar

09

Sep

09M

ar 1

0Se

p 10

Mar

11

Sep

11


50


-50.0%

-30.0%

-10.0%

10.0%

30.0%

50.0%

70.0%

90.0%

Q2

1988

Q1

1989

Q4

1989

Q3

1990

Q2

1991

Q1

1992

Q4

1992

Q3

1993

Q2

1994

Q1

1995

Q4

1995

Q3

1996

Q2

1997

Q1

1998

Q4

1998

Q3

1999

Q2

2000

Q1

2001

Q4

2001

Q3

2002

Q2

2003

Q1

2004

Q4

2004

Q3

2005

Q2

2006

Q1

2007

Q4

2007

Q3

2008

Q2

2009

Q1

2010

Q4

2010

Q3

2011

DAX earnings expectations

Source: DatastreamDAX IBES equity earnings expectations

FTSE earnings expectations

Source: BloombergFTSE IBES equity earnings expectations

-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%40.0%50.0%

Q4

1987

Q3

1988

Q2

1989

Q1

1990

Q4

1990

Q3

1991

Q2

1992

Q1

1993

Q4

1993

Q3

1994

Q2

1995

Q1

1996

Q4

1996

Q3

1997

Q2

1998

Q1

1999

Q4

1999

Q3

2000

Q2

2001

Q1

2002

Q4

2002

Q3

2003

Q2

2004

Q1

2005

Q4

2005

Q3

2006

Q2

2007

Q1

2008

Q4

2008

Q3

2009

Q2

2010

Q1

2011

Q4

2011

CAC earnings expectations

Source: DatastreamCAC IBES equity earnings expectations

-50.0%

-30.0%

-10.0%

10.0%

30.0%

50.0%

70.0%

90.0%

Q2

1988

Q1

1989

Q4

1989

Q3

1990

Q2

1991

Q1

1992

Q4

1992

Q3

1993

Q2

1994

Q1

1995

Q4

1995

Q3

1996

Q2

1997

Q1

1998

Q4

1998

Q3

1999

Q2

2000

Q1

2001

Q4

2001

Q3

2002

Q2

2003

Q1

2004

Q4

2004

Q3

2005

Q2

2006

Q1

2007

Q4

2007

Q3

2008

Q2

2009

Q1

2010

Q4

2010

Q3

2011


51

Market valuations - Europe: Bond valuations


France real yield (10-year – CPI)

Source: Bloomberg10-year French government bond yield - French CPI YoY%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Oct

93Ap

r 94

Oct

94Ap

r 95

Oct

95Ap

r 96

Oct

96Ap

r 97

Oct

97Ap

r 98

Oct

98Ap

r 99

Oct

99Ap

r 00

Oct

00Ap

r 01

Oct

01Ap

r 02

Oct

02Ap

r 03

Oct

03Ap

r 04

Oct

04Ap

r 05

Oct

05Ap

r 06

Oct

06Ap

r 07

Oct

07Ap

r 08

Oct

08Ap

r 09

Oct

09Ap

r 10

Oct

10Ap

r 11

Oct

11

Germany real yield (10-year – CPI)

Source: Datastream10-year German government bond yield - French CPI YoY%

-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%

Jan

96Ju

l 96

Jan

97Ju

l 97

Jan

98Ju

l 98

Jan

99Ju

l 99

Jan

00Ju

l 00

Jan

01Ju

l 01

Jan

02Ju

l 02

Jan

03Ju

l 03

Jan

04Ju

l 04

Jan

05Ju

l 05

Jan

06Ju

l 06

Jan

07Ju

l 07

Jan

08Ju

l 08

Jan

09Ju

l 09

Jan

10Ju

l 10

Jan

11Ju

l 11

Jan

12

UK real yield (10-year – CPI)

Source: Bloomberg10 year gilt yield - UK CPI YoY%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

Jun

96De

c 96

Jun

97De

c 97

Jun

98De

c 98

Jun

99De

c 99

Jun

00De

c 00

Jun

01De

c 01

Jun

02De

c 02

Jun

03De

c 03

Jun

04De

c 04

Jun

05De

c 05

Jun

06De

c 06

Jun

07De

c 07

Jun

08De

c 08

Jun

09De

c 09

Jun

10De

c 10

Jun

11De

c 11

52


EU inflation expectations

Source: Datastream

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Nov

04Fe

b 05

May

05

Aug

05No

v 05

Feb

06M

ay 0

6Au

g 06

Nov

06Fe

b 07

May

07

Aug

07No

v 07

Feb

08M

ay 0

8Au

g 08

Nov

08Fe

b 09

May

09

Aug

09No

v 09

Feb

10M

ay 1

0Au

g 10

Nov

10Fe

b 11

May

11

Aug

11No

v 11

UK inflation expectations

Source: Bloomberg10-year UK gilt yield less 10-year UK inflation linked bond yield

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Oct

04Ja

n 05

Apr 0

5Ju

l 05

Oct

05Ja

n 06

Apr 0

6Ju

l 06

Oct

06Ja

n 07

Apr 0

7Ju

l 07

Oct

07Ja

n 08

Apr 0

8Ju

l 08

Oct

08Ja

n 09

Apr 0

9Ju

l 09

Oct

09Ja

n 10

Apr 1

0Ju

l 10

Oct

10Ja

n 11

Apr 1

1Ju

l 11

Oct

11

EU Investment Grade Corporate Bond Yield Spread

Source: BloombergEU Investment Grade Corporate Bond Yield Spread

0

100

200

300

400

500

Aug

98De

c 98

Apr 9

9Au

g 99

Dec

99Ap

r 00

Aug

00De

c 00

Apr 0

1Au

g 01

Dec

01Ap

r 02

Aug

02De

c 02

Apr 0

3Au

g 03

Dec

03Ap

r 04

Aug

04De

c 04

Apr 0

5Au

g 05

Dec

05Ap

r 06

Aug

06De

c 06

Apr 0

7Au

g 07

Dec

07Ap

r 08

Aug

08De

c 08

Apr 0

9Au

g 09

Dec

09Ap

r 10

Aug

10De

c 10

Apr 1

1Au

g 11

Dec

11

Basis

Poi

nts

53


EU High Yield Corporate Bond Spread

Source: BloombergEU High Yield Corporate Bond Spread

0200400600800100012001400160018002000

Feb

99Ju

n 99

Oct

99

Feb

00Ju

n 00

Oct

00

Feb

01Ju

n 01

Oct

01

Feb

02Ju

n 02

Oct

02

Feb

03Ju

n 03

Oct

03

Feb

04Ju

n 04

Oct

04

Feb

05Ju

n 05

Oct

05

Feb

06Ju

n 06

Oct

06

Feb

07Ju

n 07

Oct

07

Feb

08Ju

n 08

Oct

08

Feb

09Ju

n 09

Oct

09

Feb

10Ju

n 10

Oct

10

Feb

11Ju

n 11

Oct

11

Basis

Poi

nts

UK Investment Grade Corporate Bond Yield Spread

Source: BloombergBarclays GBP corporate bond average spread vs. UK gilts

0

100

200

300

400

500

600

Jan

98

Jan

99

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Basis

Poi

nts


54


Market valuations - Asia-Pacific: Equity valuations

Hang Seng P/B ratio

Source: BloombergAverageRolling 12-month standard deviationPrice to book ratio

1.0

1.5

2.0

2.5

3.0

3.5

Mar

97

Sep

97M

ar 9

8Se

p 98

Mar

99

Sep

99M

ar 0

0Se

p 00

Mar

01

Sep

01M

ar 0

2Se

p 02

Mar

03

Sep

03M

ar 0

4Se

p 04

Mar

05

Sep

05M

ar 0

6Se

p 06

Mar

07

Sep

07M

ar 0

8Se

p 08

Mar

09

Sep

09M

ar 1

0Se

p 10

Mar

11

Sep

11

Nikkei P/B ratio


0.5

1.0

1.5

2.0

2.5

Jun

02Se

p 02

Dec 0

2M

ar 0

3Ju

n 03

Sep

03De

c 03

Mar

04

Jun

04Se

p 04

Dec 0

4M

ar 0

5Ju

n 05

Sep

05De

c 05

Mar

06

Jun

06Se

p 06

Dec 0

6M

ar 0

7Ju

n 07

Sep

07De

c 07

Mar

08

Jun

08Se

p 08

Dec 0

8M

ar 0

9Ju

n 09

Sep

09De

c 09

Mar

10

Jun

10Se

p 10

Dec 1

0M

ar 1

1Ju

n 11

Sep

11De

c 11

Hang Seng P/E ratio

Source: DatastreamAverageRolling 12-month standard deviationPrice to earnings ratio

5

10

15

20

25

30

Aug

95Fe

b 96

Aug

96Fe

b 97

Aug

97Fe

b 98

Aug

98Fe

b 99

Aug

99Fe

b 00

Aug

00Fe

b 01

Aug

01Fe

b 02

Aug

02Fe

b 03

Aug

03Fe

b 04

Aug

04Fe

b 05

Aug

05Fe

b 06

Aug

06Fe

b 07

Aug

07Fe

b 08

Aug

08Fe

b 09

Aug

09Fe

b 10

Aug

10Fe

b 11

Aug

11


55


Hang Seng real earnings yield

Source: BloombergAverageHang Seng earnings yield - Hong Kong inflation YoY

-6%

-3%

0%

3%

6%

9%

12%

15%

Oct

93Ap

r 94

Oct

94Ap

r 95

Oct

95Ap

r 96

Oct

96Ap

r 97

Oct

97Ap

r 98

Oct

98Ap

r 99

Oct

99Ap

r 00

Oct

00Ap

r 01

Oct

01Ap

r 02

Oct

02Ap

r 03

Oct

03Ap

r 04

Oct

04Ap

r 05

Oct

05Ap

r 06

Oct

06Ap

r 07

Oct

07Ap

r 08

Oct

08Ap

r 09

Oct

09Ap

r 10

Oct

10Ap

r 11

Oct

11

TOPIX real earnings yield

Source: BloombergAverageTOPIX earnings yield - Japanese inflation YoY

0%1%2%3%4%5%6%7%8%9%

Jan

01Ap

r 01

Jul 0

1O

ct 01

Jan

02Ap

r 02

Jul 0

2O

ct 02

Jan

03Ap

r 03

Jul 0

3O

ct 03

Jan

04Ap

r 04

Jul 0

4O

ct 04

Jan

05Ap

r 05

Jul 0

5O

ct 05

Jan

06Ap

r 06

Jul 0

6O

ct 06

Jan

07Ap

r 07

Jul 0

7O

ct 07

Jan

08Ap

r 08

Jul 0

8O

ct 08

Jan

09Ap

r 09

Jul 0

9O

ct 09

Jan

10Ap

r 10

Jul 1

0O

ct 10

Jan

11Ap

r 11

Jul 1

1O

ct 11

Jan

12

Topix P/E ratio

Source: DatastreamAverageRolling 12-month standard deviationPrice to earnings ratio

0.005.0010.0015.0020.0025.0030.0035.0040.0045.00

Sep

04

Mar

05

Sep

05

Mar

06

Sep

06

Mar

07

Sep

07

Mar

08

Sep

08

Mar

09

Sep

09

Mar

10

Sep

10

Mar

11

Sep

11

56


Hang Seng earnings gap

Source: DatastreamAverageRolling 12-month standard deviation Hang Seng earnings gapHang Seng real earnings yield – 10-year US treasury yield

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Dec 0

2

Jun

03

Dec 0

3

Jun

04

Dec 0

4

Jun

05

Dec 0

5

Jun

06

Dec 0

6

Jun

07

Dec 0

7

Jun

08

Dec 0

8

Jun

09

Dec 0

9

Jun

10

Dec 1

0

Jun

11

Dec 1

1


TOPIX earnings gap

Source: BloombergAverageRolling 12-month standard deviationTOPIX earnings gap (real earnings yield less real bond yield)

0.0%

2.0%

4.0%

6.0%

8.0%

Dec 0

2

Jun

03

Dec 0

3

Jun

04

Dec 0

4

Jun

05

Dec 0

5

Jun

06

Dec 0

6

Jun

07

Dec 0

7

Jun

08

Dec 0

8

Jun

09

Dec 0

9

Jun

10

Dec 1

0

Jun

11

Dec 1

1

TOPIX earnings expectations

Source: DatastreamTOPIX IBES equity earnings expectations

-500%

0%

500%

1000%

1500%

2000%

2500%

Q2

1988

Q1

1989

Q4

1989

Q3

1990

Q2

1991

Q1

1992

Q4

1992

Q3

1993

Q2

1994

Q1

1995

Q4

1995

Q3

1996

Q2

1997

Q1

1998

Q4

1998

Q3

1999

Q2

2000

Q1

2001

Q4

2001

Q3

2002

Q2

2003

Q1

2004

Q4

2004

Q3

2005

Q2

2006

Q1

2007

Q4

2007

Q3

2008

Q2

2009

Q1

2010

Q4

2010

Q3

2011

57


Market valuations - Asia-Pacific: Bond valuations

Japan real yield (10-year – CPI)

Source: Bloomberg10-year Japanese government bond yield - Japanese inflation YoY

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Oct

93Ap

r 94

Oct

94Ap

r 95

Oct

95Ap

r 96

Oct

96Ap

r 97

Oct

97Ap

r 98

Oct

98Ap

r 99

Oct

99Ap

r 00

Oct

00Ap

r 01

Oct

01Ap

r 02

Oct

02Ap

r 03

Oct

03Ap

r 04

Oct

04Ap

r 05

Oct

05Ap

r 06

Oct

06Ap

r 07

Oct

07Ap

r 08

Oct

08Ap

r 09

Oct

09Ap

r 10

Oct

10Ap

r 11

Oct

11

Hong Kong Real Yield (7-Year – CPI)

Source: BloombergHong Kong Real Yield (7-Year – CPI)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Dec 9

5Ju

n 96

Dec 9

6Ju

n 97

Dec 9

7Ju

n 98

Dec 9

8Ju

n 99

Dec 9

9Ju

n 00

Dec 0

0Ju

n 01

Dec 0

1Ju

n 02

Dec 0

2Ju

n 03

Dec 0

3Ju

n 04

Dec 0

4Ju

n 05

Dec 0

5Ju

n 06

Dec 0

6Ju

n 07

Dec 0

7Ju

n 08

Dec 0

8Ju

n 09

Dec 0

9Ju

n 10

Dec 1

0Ju

n 11

Dec 1

1


58

We believe that by generating and exploiting an information advantage we will be able to drive superior and consistent investment results for the benefit of our clients. It is a philosophy that we apply to all areas of our company, from investment management to our commitment to engage with clients. The result is an organisation with many distinctive features, including: an emphasis on a global structure, innovative proprietary research and an investment led culture.

Global StructureAs a global asset manager, RCM’s investment platform operates across four continents, six time zones and from six international offices – Frankfurt, Hong Kong, London, San Francisco, Sydney and Tokyo. Within RCM we have over 450 investment, business and research professionals all dedicated to delivering an information advantage to our clients.

Innovative Proprietary ResearchRCM’s investment platform is built upon a strong investment culture and heritage based on bottom-up, independent research. Investment professionals (both fund managers and analysts) in each office cover their regional markets, and contribute investment insights to the overall global equity platform, which drives our investment process. As a complement to fundamental research we use a proprietary network of Grassroots® analysts, who apply innovative market research techniques to identify stock and sector specific trends.

Using specialised proprietary tools, analyst recommendations are communicated in real-time to fund managers, who are responsible for portfolio construction. Risk control tools ensure portfolios are constructed and continuously monitored with full adherence to client guidelines. The critical functions of performance and risk management are, therefore, fully embedded into our portfolio management process.

11 RCM overview

Source: RCM, as at 30 September 2011.

Americas

>50 Investment Professionals

Europe


Asia-Pacific



59

The Global Policy Council (GPC) is a monthly meeting of RCM’s regional CIOs, Economics and Strategy team and senior investment professionals chaired by our Global CIO, Andreas Utermann. The council focuses on the direction of the global economy, regional economic outlooks, prospects for the global bond and equity markets, and periodic thematic pieces of proprietary research. Each month the GPC produces a forecast for regional equity, bond, currency markets on tactical and strategic horizons. The tactical horizon is expected to be roughly three months, while the strategic focus is expected to be longer than one year. The allocations suggested are not reflective of any single RCM product or recommendation and may differ from other existing RCM products. The members share seven votes between them, which determines the ‘virtual’ portfolios.

Andreas E F Utermann Global Chief Investment Officer, Equities, RCMAndreas Utermann joined RCM in October 2002 as Global CIO and is a board member of Allianz Global Investors AG. As Global CIO of RCM, he is co-chair of the RCM Executive Committee and chairs the firm’s Global Policy Council. Prior to joining, Andreas worked for 12 years at Merrill Lynch Investment Managers (formerly Mercury Asset Management), where he was the Global Head and CIO, Equities. Before joining MLIM, Andreas worked for two years at Deutsche Bank AG. He holds a BSc in Economics from the London School of Economics and an MA in Economics from Katholieke Universiteit Leuven. Andreas is an Associate of the Institute of Investment Management and Research and is fluent in English, German, French and Dutch.

Raymond Chan, CFA Chief Investment Officer, Asia-PacificRaymond is responsible for all investment professionals in Asia ex-Japan, reporting to the Global CIO in London, and is the Chairman of the Hong Kong Balanced Investment Committee in Hong Kong. Raymond has overall responsibility for the investment process and performance and is a full member of the Global Equity Team. He has over eighteen years of portfolio management experience in the region and is the lead manager for RCM’s Core Regional (Asia-Pacific ex-Japan equity) and Korean equity products. Prior to joining the Group, Raymond was an Associate Director with Barclays Global Investors in Hong Kong and Head of their Greater China team, where he specialised in Hong Kong, China and Taiwan stockmarkets and managed single country and regional portfolios. Raymond’s Hong Kong Fund at Barclays was ranked no. 1 offshore fund in 1997. He is a CFA charterholder and holds an M.A. in Finance and Investment from the University of Exeter and a B.A. (Hons) in Economics from the University of Durham, UK.

Neil Dwane, ACA Chief Investment Officer Europe, FrankfurtNeil is Chief Investment Officer Europe for RCM, based in Frankfurt, and is responsible for all portfolio management, research and trading activities in Frankfurt and London. Neil is a member of the Global RCM Executive Committee and is Chairperson of the European Equity Management Group, which consists of the most senior investment team leaders in Europe. Neil joined RCM in 2001 as Head of UK and European Equity Management from JP Morgan Investment Management where he had been a UK and European specialist portfolio manager since 1996. He began his investment career in 1988 with Kleinwort Benson Investment Management as an analyst, later as a fund manager before moving to Fleming Investment Management in 1992. Neil holds a BA in Classics from Durham University and is a member of the Institute of Chartered Accountants.

Scott T. Migliori, CFA Chief Investment Officer, San FranciscoScott joined RCM in 2003 as a Senior Portfolio Manager on the US Large Cap Equity Portfolio Management Team. He is currently the CIO of the firm’s US Large Cap Select Growth and Focused Growth strategies. In 2010, Scott was promoted to CIO of RCM San Francisco, and continues to actively drive the investment process for the Large Cap Select Growth and Focused Growth products. Prior to joining RCM, he was with Provident Investment Counsel, Inc. where he co-managed over $2 billion in large cap growth portfolios and had also served as a Portfolio Manager and Analyst on mid and small cap growth funds. Prior to his investment career, Scott served as a business litigation attorney. He received his BS in Accounting from the University of Southern California, his JD from the Boalt Hall School of Law at the University of California, Berkeley, and his MBA from the Anderson School at the University of California, Los Angeles. Scott holds a CFA charter.

12 Global Policy Council: Biographies

Andreas Utermann

Raymond Chan

Neil Dwane

Scott T. Migliori


60

Stefan Hofrichter, CFA Head of Global Economics and Strategy Group, RCM, FrankfurtAs Head of RCM’s Global Economics and Strategy Group, Stefan’s research primarily covers global economics, as well as global and European multi-asset allocation, and equity country, sector and style allocation. Stefan joined the firm in 1996 as an equity portfolio manager, moving to an economist and strategist role in 1998. Between 2004 and 2010, he additionally had responsibility for various retail and institutional mandates, including global and European classic balanced funds, global multi-asset absolute return and multi-manager alpha-porting funds. Stefan became a member of the RCM Global Policy Council in 2004, and in January 2010 was appointed chair of the RCM European Asset Allocation Committee. He holds a degree in economics from the University of Konstanz (1995) and in business administration from the University of Applied Sciences of the Deutsche Bundesbank, Hachenburg (1991). Stefan became a CFA Charterholder in 2000.

Ingo Mainert Managing Director and Co-CIO Multi Asset EuropeIngo joined RCM from Cominvest in February 2009, following Commerzbank’s purchase of Dresdner Bank. Ingo is a Managing Director and Co-CIO Multi Asset Europe. Ingo takes this role within RCM having headed Asset Management of Cominvest since June 2006. Ingo started his professional career with Commerzbank in 1988 and first held analyst and currency specialist functions following his traineeship, before taking management responsibility in Commerzbank as Team Head Equity Strategy Germany in 1994 and Head of Fixed Income Research in 1998 before moving to the Asset Management side of the business as Head of Global Markets Research Division in 2001 at Commerz Asset Managers. Since 2002 he held a position as Head of Balanced Portfolio Management Division at Cominvest, was then named Head of Asset Management Private Banking at Commerzbank in August 2004 and was finally appointed Managing Director and CIO of Cominvest. Ingo is a Certified Investment Analyst and a board member of the DVFA Society of Investment Professionals in Germany; he graduated from the Johann Wolfgang Goethe-University with a Diploma in Business Administration.

Franck Dixmier CIO Fixed Income EuropeFranck Dixmier holds a Master’s degree in General Management with a specialisation in Finance and a Master in Economics from Paris Dauphine Business School. He joined AllianzGI France in 1995 as Head of Fixed Income. Since 2008 he has been working as CIO of AllianzGI France and in 2011 was named CIO of Fixed Income for AllianzGI Europe. He was also nominated in 2011 as CEO of AllianzGI France. Franck has 21 years of experience in the finance industry.

Eugen Loeffler Chief Investment Officer, AllianzGi Asia-PacificDr. Eugen Loeffler is Chief Investment Officer Fixed Income Asia Pacific for Allianz Global Investors and is based in Korea. Dr. Loeffler has been with the Allianz group for 20 years, having worked in various roles within the group. His main focus has been on capital market research and investment management. Before relocating to Asia in early 2010, Dr. Loeffler was Chief Investment Officer of Allianz Suisse in Zurich, responsible for the investments of Allianz Life and Non-Life insurance companies in Switzerland. Dr. Loeffler has a doctoral degree in Business administration and studied Business administration as well as German literature and History at Johann Wolfgang Goethe University in Frankfurt.

Stefan Hofrichter

Ingo Mainert

Franck Dixmier

Eugen Loeffler


61

Klaus Teloeken Chief Investment Officer RCM Equity Multi Styles, Frankfurt Dr. Klaus Teloeken is the Co-CIO of the RCM Equity Multi Styles team. He joined RCM in 1996 as aquantitative analyst, and in 2001 he assumed the role as Head of RCM Equity Multi Styles. He overseesmore than EUR9 billion of assets under management, and is responsible for the development and themanagement of systematic investment strategies for equities. In this role, Klaus has developed the team’s Best Styles product line as well as the structured equity business. He is also responsible for theBest Styles Global product. Klaus studied mathematics and computer science in Dortmund, Germany.

Contributors – non GPC members

Bozena Jankowska Director, Global Head of Sustainability, London Bozena is the Global Head of Sustainability Research at RCM. She is based in London and is responsible for running sustainability research which involves on-going evolution of the RCM sustainable research and investment philosophy, strategy and process at a global level, as well as client relationship management. Bozena is also responsible for spearheading RCM’s work as a thought leader in Sustainability Research within the industry and responsible for the establishment and management of partnerships within other entities of Allianz as well as external research providers such as universities and think-tanks. From 2006 to 2010, Bozena was also responsible for the design, launch and management of the Global Ecotrends Fund, a clean technology themed fund strategy which evolved into a successful global franchise representing over a billion Euro in assets. Before joining RCM in 2000, Bozena worked for the construction firm, John Laing Plc as their Business and Environment Adviser developing and implementing corporate sustainability policy and strategy. She graduated from the University of Sussex with a BSc (Hons) in Environmental Science and gained an MSc in Environmental Technology with Distinction, from Imperial College of Science, Technology and Medicine, specialising in Business and Environment. Bozena obtained her Investment Management Certificate in July 2001.

Dr. Herold Rohweder Global CIO Multi Asset, FrankfurtHerold Rohweder is a managing director and the Global Chief Investment Officer of RCM Multi Asset at RCM/Allianz Global Investors. He is a member of the RCM Executive Committee and the Global RCM Equity Management Group. He began his career as an equity and multi-asset portfolio manager at Allianz in 1989, and initiated the Quantitative Asset Management effort at Allianz Asset Management in 1998. RCM Multi Asset covers multi-asset & absolute return products. Herold Rohweder graduated from Wayne State University with a MA in Economics and received a PhD in Economics from the University of Kiel.

Robert Parenteau, CFA Economist, External Advisor, San FranciscoAs the sole proprietor of MacroStrategy Edge, Rob employs macroeconomic insights to contribute to assetallocation and equity sector selection. Rob received his BA (Hons.) in political economy from Williams College in January 1983 and earned his CFA in 1989. Rob also serves as a research associate of the Levy Institute.commercial enterprises.

Klaus Teloeken

Bozena Jankowska

Robert Parenteau

Herold Rohweder


62

This presentation is being distributed by the following investment advisory firms: RCM Capital Management LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Europe GmbH, a licensed provider of financial services (Finanzdienstleistungsinstitut) in Germany, subject to the supervision of the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and an investment adviser registered with the U.S. Securities and Exchange Commission; RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; RCM Capital Management Pty Limited, licensed by the Australian Securities and Investments Commission; and RCM Japan Co., Ltd., registered in Japan as a Financial Instruments Dealer.

This presentation constitutes advertising as defined in section 31(2) of the German Securities Trading Act.

Past performance is no guarantee of future results. Investments in securities markets are subject to certain risks. Securities will fluctuate in value and may be worth more or less than the original cost when sold.

This document contains the current opinions of the authors, and such opinions are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. This document has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee that the information is accurate, current or complete.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

Copyright © 2012 RCM

Web site:

http://www.rcm.com

Disclaimer


63

Frankfurt

RCM Germany Allianz Global InvestorsKapitalanlagegesellschaft MBH Mainzer Landstrasse 11-13 60329 FrankfurtGermany

Telephone: +49 69 263 14157

Hong Kong

RCM Asia-Pacific Ltd27th Floor, ICBC Tower3 Garden RoadCentralHong Kong

Telephone: +852 2238 8888

London

RCM UK Ltd155 BishopsgateLondon, EC2M 3ADUnited Kingdom

Telephone: +44 (0)20 7859 9000

San Francisco

RCM555 Mission Street, Suite 1700San Francisco, California94105USA

Telephone: +1 415 954 5400

Sydney

RCM Capital Management Pty LtdLevel 57, 19-29 Martin PlaceSydney, N.S.W. 2000Australia

Telephone: +61 2 9238 2070

Tokyo

RCM Japan Co. LtdIzumi Garden Tower 14F6-1, Roppongi 1-ChomeMinato-Ku Tokyo 106-6014Japan

Telephone: +813 6229 0200

Global offices

www.rcm.com

RCM (UK) Ltd., 155 Bishopsgate, London, EC2M 3AD

Switchboard: +44 (0)20 7859 9000 www.rcm.com

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