REVIEW &Outlook

D E C E M B E R 3 1 , 2 0 1 3

Global Financial Markets

Q4 2013Q1 2014

C O N T E N T S

World Markets

North American Stock Markets

Latin American Stock Markets

European Stock Markets

Pacific Rim Stock Markets

Bermuda and Cayman Stocks

Global Bond Markets

World Currency Markets

Outlook

Economics

Bonds

Currencies

Commodities

Equities

Conclusion and Strategy Points

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Review Q4 2013

Outlook Q1 2014

This literature does not constitute an offer to sell or a solicitation of an offer to purchase any security and cannot discloseall risks and significant elements of such a purchase. BIAS’ services are only for suitable investors who are able to understandthe associated risks, including but not limited to fees and conflicts of interest. A more complete description of risks are pre-sented in BIAS’ Form ADV. Examine the information contained in BIAS’ Form ADV carefully before deciding to invest.

B E R M U D A • C A Y M A N

Investment ManagersSecurities Analysts

Outlook Q1 2014

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Global Stock Markets• In the Fourth Quarter 2013, the global

equity advance continued on the backof an improving global economy withthe US once again in the lead. Thepro-cyclical sectors fared best withConsumer Discretionary leading theway, up 35.3 percent in the year, withHealth Care and Industrials followingbehind. Lagging sectors wereMaterials faring worst up 0.6 percentfor the year, followed by Utilities andEnergy.

• Most emerging markets lagged devel-oped markets in what appears to bean allocation shift from debt towarddeveloped market equities.

Bond Markets• Longer-maturity Treasury yields rose

and the yield curve steepened on im-proving economic growth and theFed’s announcement of tapering.

• The ECB cut the benchmark interestrate by a quarter-point to a record low0.25 percent after a drop in inflationthreatened the central bank’s missionto keep prices stable.

Currency Markets• Sterling advanced against the dollar

backed by the UK’s improving eco-nomic performance.

• ‘Abenomics’ continued to weigh onthe Japanese yen, which weakenedagainst most major currencies.

Stock, Bond, Currency Overview

W O R L D M A R K E T S Q U A R T E R L Y R E V I E W

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*Source: Bloomberg

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DJIA 10.2%

S&P 500 10.5%

NASDAQ 11.1%

TSX 3.9%

BSX 2.5%

Bolsa 8.1%

Bovespa -7.2%

Merval 0.8%

UK FTSE 7.7%

CAC 6.2%

DAX 13.4%

Kospi 2.7%

Nikkei 5.4%

Hang Seng 2.2%

Straits Times -0.2%

ASX -1.1%

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The S&P GlobalIndex closed

up 8.0 percent. All figuresshown are

for the quarter ended December 31,2013 and areexpressed in

US dollar terms.

December 31, 2013

North American Stock Markets

US markets ledglobal equityreturns as all

indices hit new all-time highs.

Quarterly ChangeIndices 30 Sep 2013 31 Dec 2013 Local Curr. US$

US Dow Jones Industrial 15,129.70 16,576.70 10.2% 10.2%

US S&P 500 1,681.55 1,848.36 10.5% 10.5%

US NASDAQ 3,771.48 4,176.59 11.1% 11.1%

Canada TSX 12,787.20 13,621.50 7.3% 3.9%

S&P Global 1200 1,716.72 1,845.40 8.0% 8.0%

Source: Bloomberg

• In October Apple introduced the colorfuliPhone 5c, a less-expensive version of Apple’ssmartphone, to “serve more customers”around the world. Three surveys early inDecember said the company’s new high-endmodel was outselling the cheaper version bymore than two to one. It turned out peoplewere far more interested in the pricier, fea-ture-rich iPhone 5s. Apple signed a distribu-tion deal with China Mobile, improvingApple’s market share in the country to 12 per-cent from three percent. For the quarter,Apple’s share price rose 17.7 percent.

• On November 13 consumer confidence, asmeasured by the University of Michigan, washigher than expected ahead of the Christmasshopping season. This helped create a tone ofoptimism as traditional stores opened on theThanksgiving holiday hoping to compete withthe ever increasing “on-line marketplace”.However, spending for the four-day weekendwas only $57.4 billion, down 2.9 percentfrom the prior year. Interesting to note werea significant number of “mission shoppers”who went for one or two specific items andthen went home and shopped on-line, as ev-idenced by total e-commerce sales of $20.6billion for the weekend, up 31 percent fromthe prior year. Amazon was the most visitedsite followed by eBay and stock prices of thetwo companies rose 27.6 percent and de-clined 1.7 percent respectively in the quarter.

• On December 11 Hilton Worldwide Holdingswent public again after being taken private bythe publicly traded Private Equity firmBlackstone for $26 billion in 2007. Blackstone

and their investors then put $6.5 billion intothe Hilton turnaround, increasing room countby a third. The IPO (Initial Public Offering)came to market at approximately $19.7 bil-lion and gave Blackstone an unrealized gainof $8.5 billion, the second largest paper profitamong equity buyouts. Blackstone rose 26.6percent in the quarter.

• On December 11 MasterCard, the secondbiggest bank card network, announced an 83percent dividend increase and a 10 to 1 stocksplit. The company raised the quarterly divi-dend to $1.10 a share. MasterCard also author-ized a repurchase of $3.5 billion of their stock.For the quarter, MasterCard rose 24.2 percent.

• On December 19 Target (TGT), the US retailerexperienced a major data breach of 40 mil-lion credit and debit card records right beforeChristmas. Target was just one of the 600 pub-licly disclosed data breaches in 2013.Importantly, credit cards provide better fraudprotection than debit cards. When a creditcard number is stolen and used, the fraudsteris stealing the bank’s money. If a debit cardis stolen and used, they are stealing the indi-vidual’s money who will then have to appealto the bank for refund. With debit cards, theirmaximum liability is $50, if the individual no-tifies the bank within two days. After that, theliability jumps to $500. All money stolen fromchecking accounts could be lost for failing toreport a fraud within 60 days of receiving abank statement. Visa and MasterCard prom-ise “zero liability” on debit card transactionsif the customer chooses to sign for the trans-action rather than use a PIN.

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Latin American Stock Markets

Latin Americanmarkets deliveredmixed results onceagain. Mexico wasthe performanceleader.

• Most Latin American Markets lagged theirNorth American counterparts in the FourthQuarter 2013 as declining commodity pricesweighed on returns. Latin American marketsare heavily weighted in commodity produc-tion and financial companies, consequentlydeclining commodity prices have an outsizedeffect on results. Mexico was the bright spotas Prime Minister Nieto’s aggressive policy ef-forts buoyed investors’ hopes that Mexico’seconomic potential might soon be realized. Ina more recent development, Mexico’s lowerhouse passed energy legislation that will openMexico’s oil and gas industry to private for-eign companies. This legislation passed de-spite very strong opposition from the left.

• On October 13 Empresas ICA SAB (ICA),Mexico’s biggest construction company,dropped the most on the country’s bench-mark index as Bank of America Corp. cut ICA’srating to neutral on concern the builder faceshigher taxes due to a law change. The sharesdeclined 4.3 percent to 26.88 pesos at 12:39p.m. in Mexico City, the most since July 8. TheMexican Stock Exchange slipped 0.6 percent.In an email to clients, Bank of America ana-lysts wrote ICA may face a new liability of 4.6billion pesos ($355 million) based on “the ex-pected reduction in deferred taxes related totax payables from fiscal deconsolidation.”

• On October 21 a group led by PetroleoBrasileiro SA, the state-run oil company knownas Petrobras, won a license to develop Brazil’sbiggest oil discovery under terms that exceededanalysts’ estimates. Petrobras and partnersRoyal Dutch Shell Plc, Total SA, CNOOC Ltd.and China National Petroleum Corp., pledged

to the Government a minimum 41.65 percentof profits earned through oil sales to win the 35-year project in deep waters of the AtlanticOcean. The companies will pay a 15 billion-real($6.9 billion) signing fee. The Libra field is thefirst auction of subsea prospects known as pre-salt using a production-sharing model thatmakes Petrobras the operator of all new proj-ects and requires it to own at least a 30 percentstake. Brazil increased its control of the oil in-dustry under former President Luiz Inacio Lulada Silva after the discovery of at least 50 billionbarrels of oil trapped under a layer of salt twomiles below the seabed. Shares of Petrobras fell7.0 percent in the quarter.

• On November 26 Enersis S.A., one of LatinAmerica’s largest power suppliers generatingand transmitting electricity in Chile,Argentina, Peru, Colombia, and Brazil, an-nounced a dividend payment of 1.43 pesosper share from profits from the first ninemonths of the year. This was a 21 percent in-crease over the same period in 2012. Sharesof Enersis jumped 3.3 percent on the news.

• On December 16 CEMEX, a global buildingmaterials company domiciled in Mexico, an-nounced that it was selected as part of a con-sortium to provide over 550,000 squaremeters of ready-mix concrete for the firstphase of what will be Malaysia’s largest infra-structure project, the Klang Valley Mass RapidTransit (MRT) system. The first line of the proj-ect is the Sungai Buloh – Kajang Line, compris-ing 31 stations, including seven undergroundstations covering a span of 51km across theheart of Kuala Lumpur. CEMEX stock rose 4.6percent in the quarter.

Quarterly ChangeIndices 30 Sep 2013 31 Dec 2013 Local Curr. US$

Mexico Bolsa 40,185.20 47,727.10 7.6% 8.1%

Brazil Bovespa 52,338.20 51,507.20 -1.6% -7.2%

Argentina Merval 4,783.77 5,391.03 13.5% 0.8%

Chile IPSA 3,823.85 3,699.19 -3.3% -7.1%

S&P Global 1200 1,716.72 1,845.40 8.0% 8.0%

Source: Bloomberg

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European Stock Markets

• On October 11 the Royal Mail Group Ltd,Britain’s 360-year-old postal service, closed38 percent higher on its trading debut. Thestock was sold to investors at 330 pence andended the day up 125 pence to close at 455pence in London, valuing the company at£4.55 billion. The price performance raisedcriticism by opposition politicians that the ini-tial public offering was under priced.

• On November 20 Nokia Oyj shareholderscleared the sale of the company’s mobilephone unit to Microsoft Corp. in a deal worth€5.44 billion ($7.4 billion). More than 99 per-cent of the share-holders voted for the deal,which will enable Nokia to focus more on net-work equipment and free up the unprofitabledivision where it has been unable to competewith Apple and Samsung. The deal is thelargest strategic change for Nokia since itstopped making rubber boots and tires andleft businesses such as paper almost twodecades ago. Shares of Nokia rose 19.8 per-cent in Helsinki trading in the quarter.

• On December 4 Deutsche Bank AG and RoyalBank of Scotland Group Plc (RBS) togetherwith four other companies were fined arecord €1.7 billion ($2.3 billion) by theEuropean Union for rigging interest rateslinked to Libor. Deutsche Bank was fined€725 million and RBS €391 million. Thefines are the largest ever EU penalties. Bothstocks were down 5.0 and 6.0 percent respec-tively following the news.

• On December 6 the stock price of Swiss com-pany Givaudan SA dropped 5.3 percent afterNestle SA initiated a process to sell its entirestake in the world’s largest flavors and fra-grance maker. Nestle had acquired a 10 per-cent stake in the company in 2002 for $450million, which is now valued at $1.27 billionat current market price. The move is part ofthe company’s strategy to clean the balancesheet and dispose of assets which are notcore to its strategic business.

• On December 9 European Aeronautic,Defence & Space Co. (EADS) announcedplans to trim 5,800 jobs as the parent com-pany Airbus SAS combines space and defenseunits suffering from slack government spend-ing. The job eliminations are the first majorcuts since 2007, when the company cut10,000 jobs to improve efficiency. The stockis up 91.7 percent in the year – its secondbest annual performance since the stock firsttraded in 2000.

• On December 10 Tesco Plc, the UK’s largestretailer, acquired a minor stake in Lazada, aseller of non-food goods in Southeast Asia.The deal will strengthen the company’s e-commerce capabilities as it continues to in-vest heavily in the online marketplace. Lazadacurrently sells electronic goods, books, cloth-ing, toys, home-ware and cameras inThailand, Malaysia, Indonesia, Vietnam andthe Philippines. Shares of Tesco fell 5.7 per-cent in the quarter.

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Quarterly ChangeIndices 30 Sep 2013 31 Dec 2013 Local Curr. US$

UK FTSE 6,462.22 6,749.09 5.2% 7.7%

Germany DAX 8,594.40 9,552.16 11.1% 13.4%

France CAC 40 4,143.44 4,295.95 4.2% 6.2%

Spain IBEX 35 9,186.10 9,916.70 9.3% 11.4%

S&P Global 1200 1,716.72 1,845.40 8.0% 8.0%

S&P Europe 350 1,267.08 1,338.51 6.1% 8.1%

Source: Bloomberg

European stockmarkets delivered

strong returnswith Germany and

Spain leading.

Pacific Rim Stock Markets

• On November 11 Panasonic Corp. announcedthat it is looking for a deal worth ¥100 billion($1 billion) to expand the company’s automo-tive and housing businesses. Panasonic isheading towards a first annual profit in threeyears after having eliminated 71,000 jobs andhalted some smart phone and plasma paneloperations. The company also won a contractto supply energy cells to Tesla for their electricvehicles in a deal that may generate $7 billionin revenue. The stock was up 12.3 percent inNovember and up 93.1 percent for the yearin US dollar terms.

• On November 13 PetroChina Co., the coun-try’s biggest oil and natural gas producer,bought Petrobras’ assets in Peru for $2.6 bil-lion, expanding its portfolio in the region.The deal will help PetroChina to diversify as-sets internationally and learn operating les-sons from their partners, which they couldapply elsewhere. For the quarter, PetroChinawas down one percent on the Hong Kongexchange.

• On November 15 Sony Corp. launched theirmuch anticipated Play Station 4 gaming con-sole. The product was well received and soldone million units in the first 24 hours of saleand over 2.1 million units in the month of

November. The company is competing withUS rival Microsoft’s Xbox One. The stockgained 58.2 percent in USD terms in the year.

• On November 15 the Communist Party inChina unveiled a 60-point reform documentwhich highlighted the role of markets in de-termining prices, freeing the exchange rateand interest rates, creating efficiencies in stateowned enterprises, tackling corruption and re-forming fiscal and social policies. While ex-perts critiqued the document for its openlanguage and lack of specific details, investorsreacted positively as the Hang Seng gained4.3 percent and Shanghai climbed 1.4 per-cent upon publication.

• On December 5 Qantas Airlines announcedthat they will slash 1,000 jobs in the next12 months and announced half year lossesof at least AU$250 million. The airline hassuffered from low demand, a historicallystrong Australian dollar and volatile fuelcosts. The stock plummeted close to 12 per-cent on the news.

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Quarterly ChangeIndices 30 Sep 2013 31 Dec 2013 Local Curr. US$

Japan Nikkei 14,455.80 16,291.31 12.8% 5.4%

Hong Kong Hang Seng 22,859.90 23,306.40 2.2% 2.2%

Hang Seng Red Chip 4,380.23 4,553.64 4.1% 4.2%

Korea Kospi 100 1,996.96 2,011.34 0.7% 2.7%

Singapore STI 3,167.87 3,167.43 0.4% -0.2%

Taiwan TWSE 8,173.87 8,611.51 5.4% 4.5%

Australia ASX 200 5,218.88 5,352.20 3.4% -1.1%

S&P Global 1200 1,716.72 1,845.40 8.0% 8.0%

FTSE Pacific ex-Japan 475.09 479.63 1.5% 1.5%

Source: Bloomberg

Asian marketsrose for the mostpart in thequarter, but theylagged the broaderglobal index.

Bermuda & Cayman Stocks

• On November 5 Renaissance Re HoldingsLtd. reported a slight decrease in net incomefor the Third Quarter. Net income was$179.7 million per diluted common sharefor the third quarter, compared to $180.7million diluted common share in the ThirdQuarter of 2012. The stock rose 7.2 percentin the quarter.

• On November 13 Consolidated Water re-ported a 30 percent drop in third-quarterprofit as retail sales fell in the Cayman Islands.Net income fell $1.3 million as higher rainfallvolume resulted in a decline in water pur-chases by large customers such as beach re-sorts and restaurants. Consolidated Wateralso expanded beyond the Caribbean in 2013,providing a 100 million gallon a day water-pu-rifying desalination pilot plan in BajaCalifornia Mexico and a seawater reverse-os-mosis facility on Bali in Indonesia. The stockfell 5.8 percent in the quarter.

• On November 25 Enstar Group Limited to-gether with Stone Point Capital announcedthe acquisition of Atrium Underwriting Group.This acquisition is expected to boost the de-velopment of Enstar’s life underwriting busi-ness. Atrium, a part of Lloyd’s of London is aspecialist insurance business and was pur-

chased for $158 million following the pay-ment of a $25 million pre-completion divi-dend. Enstar Group share price rose 1.7percent for the Fourth Quarter.

• On December 16 Argus Group HoldingsLimited announced a net profit of $1.6 mil-lion for the six months ended September 30,2013, compared to a net profit of $7.1 millionfor the corresponding period in 2012. AlisonHill, Chief Executive Officer of the ArgusGroup, commented: “Although modest, thisprofit is supported by strong performancefrom our core business operations of $7.5million as a result of achieving high client re-tention levels in a competitive environmentand managing operating expenses.” Argusrose 9.1 percent in the period.

• In early December the Bermuda governmentlaunched an auction for a $50 million domes-tic bond issuance to round off their three yearfunding programme. The issue, underwrittenby Butterfield Bank, was fully subscribed atthe coupon rate of 4.75 percent for the 10year deal.

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Quarterly ChangeIndices 30 Sep 2013 31 Dec 2013 Local Curr. US$

BSX Index 1,183.46 1,201.05 2.5% 2.5%

BSX Insurance Index 1,356.33 1,486.75 9.6% 9.6%

S&P Global 1200 1,716.72 1,845.40 8.0% 8.0%

Stocks

ACE Ltd. 93.56 103.53 10.7% 10.7%

Ascendant Group Ltd. 11.50 10.25 -9.1% -9.1%

Butterfield Bank 1.39 1.49 8.0% 8.0%

Caribbean Utilities 10.41 11.06 7.8% 7.8%

Consolidated Water Co. 14.97 14.10 -5.3% -5.3%

XL Capital Ltd. 30.82 31.84 3.8% 3.8%

Source: Bloomberg - Numbers shown include dividends

The BermudaInsurance Indexdelivered strong

results in thequarter, whilst the

Bermuda StockExchange lagged

global benchmarks.

Global Bond Markets

• On November 6 the ECB cut the benchmarkinterest rate by a quarter-point to 0.25 per-cent, a record low, after a drop in inflation tothe slowest pace in four years threatened thecentral bank’s mission to keep prices stable.In the press conference following the deci-sion, ECB President Mario Draghi said ECBpolicy makers were wholly in agreement onthe need to act and that the ECB was ‘techni-cally ready’ for a negative deposit rate.

• German yields rose in the Fourth Quarter asthe eurozone emerged from recession and de-mand for safe-haven German bonds vanishedamid improvement in the region’s peripheralnations. Additionally, domestic economic datawas strong in the quarter, with business con-fidence climbing to the highest level in morethan a year. On December 30 the 10-yearGerman bund yield reached a three-monthhigh of 1.929 percent.

• On December 18 the Federal Reserve an-nounced plans to trim its aggressive bond-buying programme but sought to temper thelong-awaited move by suggesting its key in-terest rate would stay lower for even longerthan previously promised. The central banksaid it would reduce monthly bond purchasesby $10 billion to total $75 billion, the cuts to

be evenly divided between mortgage andTreasury bonds. The move was a nod to betterprospects for the economy and labour marketand marked a historic turning point for thelargest monetary policy experiment ever.Treasury yields rose upon the announcement.The Fed’s announcement combined with im-proving economic data pushed longer-matu-rity yields higher, while yields on bondsmaturing within two years were firmly an-chored by the Fed’s low interest rate commit-ment. On December 31 the 10-year Treasuryyield reached a three-month high of 3.028percent.

• Corporate bonds outperformed Treasuries inthe Fourth Quarter as improving economicgrowth boosted prospects for companies andas the Fed announced a reduction in pur-chases of Treasuries starting in January 2014.Further adding to the performance of corpo-rate bonds was strong investor demand forbetter yielding assets. For the quarter,Citigroup’s 1-10 year corporate benchmarkwas up 0.76 percent, while the 1-10 yearTreasury benchmark was down 0.44 percent.

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Benchmark (Yield to Maturity) Total ReturnsIndices 30 Sep 2013 31 Dec 2013 Local Curr. US$

US 2 Year 0.32% 0.38% 0.10% 0.10%US 10 Year 2.61% 3.03% -2.45% -2.45%US 30 Year 3.68% 3.97% -3.57% -3.57%Canadian 10 year 2.54% 2.76% -1.19% -4.11%Australian 10 year 3.81% 4.24% -1.83% -6.04%UK Gilt 10 Year 2.72% 3.02% -1.86% 0.40%German Bund 10 Year 1.78% 1.93% -0.81% 0.78%Japanese 10 Year 0.68% 0.74% -0.16% -6.84%

Citigroup

3-7 Year Treasury Index 1,336.53 1,327.99 -0.64% -0.64%7-10 year Treasury Index 1,625.54 1,593.49 -1.97% -1.97%1-10 Year US Corp. Bond Index 1,573.55 1,585.44 0.76% 0.76%World Gov't 7-10 Yr Bond Index 1,202.86 1,186.84 -1.33% -1.33%

Source: Bloomberg

Most interestrates rose on theannouncementthat the US Fedwould reduceasset purchases.

World Currency Markets

• The Australian dollar weakened against the USdollar in the Fourth Quarter as economic growthin Australia continued to slow following the endof the mining boom. Governor Stevens of thenation’s central bank said that he is “open-minded” about currency intervention to weakenthe currency further. Additionally, Australia’sTreasurer Hockney rejected US based Archer-Daniels-Midlands Co’s planned AU$2.2 billiontakeover of Grancorp Ltd – ruling foreign controlof the nation’s biggest crop handler is not in thenational interest. For the quarter, the aussieweakened 4.29 percent against the dollar.

• ‘Abenomics’, i.e. policy measures to resolveJapan’s macroeconomic problems, continuedto weigh on the Japanese yen, which weakenedagainst most major currencies in the quarter.Japan’s Prime Minister Shinzo Abe’s policymoves were successful as inflation rose, con-sumer spending increased and stock pricesgained. Bank of Japan’s Governor Kurodaadded to the yen’s weakness, saying he will dohis utmost to restrict an increase in long-termyields to help spur inflation. For the quarter, theyen weakened 6.69 percent against the dollar.

• Sterling had another strong quarter and ad-vanced against the dollar backed by improvingeconomic performance. In fact, Bank of England(BoE) Governor Mark Carney said Britain has“one of the strongest recoveries in the advancedworld” and BoE’s Martin Weale said the UKeconomy may pick up faster than officials pre-dict. For the quarter, Sterling gained 2.25 percentagainst the dollar and reached a two-year highagainst the dollar on December 31.

• Norway’s krona weakened against both the dollarand the euro in the Fourth Quarter as the nation’scentral bank Governor said the krona played a

role in interest rate decisions, fuelling speculationthat interest rates would stay low to prevent thekrona from strengthening. The biggest singleblow to the krona came on November 8 afterPrime Minister Erna Solberg said her Governmentis ready to cut its budget proposal should the ex-change rate prove too strong for exporters to staycompetitive. For the quarter, the krona weakened0.95 percent against the dollar and 2.56 percentagainst the euro.

• On December 27 the Canadian dollar toucheda three-year low against the US dollar on spec-ulation that slowing growth and cooling infla-tion outweigh an improvement in the labourmarket. This led to expectations of the Bank ofCanada holding the benchmark rate unchangeduntil the second half of 2015 even while the USFed starts tapering. For the quarter the loonieweakened 2.96 percent against the greenback.

• The Mexican peso advanced against the dollarin the quarter as Mexico’s central bank keptborrowing costs unchanged at a record low3.5 percent in December. The central banksaid the economy was showing the first signsof recovery, citing plans by President EnriquePena Nieto to increase spending in 2014 toboost growth. Over the quarter, the peso ad-vanced 0.42 percent against the dollar.

• On December 30 the euro reached thestrongest level since October 2011 against thedollar after European Bank Governing CouncilMember and German Bundesbank PresidentJens Weidmann said the ECB “must take careto raise interest rates again in a timely mannershould inflation pressures build” and that keep-ing interest rates low may endanger politicalreforms. Weidmann’s comments surprised themarket as inflation in the region is low.8

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Value of Currency US$1 = value in local currency

Currency 30 Sep 2013 31 Dec 2013 Change

Australian Dollar 1.0732 1.1214 -4.3%

Brazilian Real 2.2170 2.3621 -6.1%

British Pound 0.6178 0.6040 2.3%

Canadian Dollar 1.0309 1.0623 -3.0%

Euro 0.7393 0.7277 1.6%

Japanese Yen 98.2730 105.3100 -6.7%

Swiss Franc 0.9049 0.8929 0.4%

Source: Bloomberg

The US dollaradvanced

against all majorcurrencies

except Sterlingand the euro.

Outlookfor the First Quarter 2014

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As noted by Credit Suisse andBarclay’s, positive changes toglobal growth are becoming moreevident as GDP improvement inthe eurozone gathers momentumwhile economic conditions in Asiaare bouncing back. • The 2014 global economy looks to be the

most orderly in many years, comprising a sta-ble triangle of modest growth, low inflation,and slowly improving jobs growth.

• We expect global growth to accelerate to 3.7percent in 2014 on top of a 2.9 percent gainin 2013. More of the momentum will happenin developed market economies, narrowingthe growth gap with emerging nations.

• Upside risks to our forecast are centered oncapital investment; in the near term downsiderisks are partly clarified on the announcementthat the US Fed will start to moderate assetpurchases in 2014 by $10 billion.

• Europe is exiting recession and, barring someexogenous shock, positive GDP growth is ex-pected in Spain and Italy in the First Quarter.

Longer dated interest ratesshould drift higher acrossdeveloped markets as economicdata improve. • Globally, monetary policy is likely to remain

both stimulative and highly innovative.

• We do not expect any of the major centralbanks to raise their benchmark rates in 2014.

• Longer dated interest rates in the US shouldrise modestly along the curve as the economyand labour market improve.

We agree with Credit Suisse’sview that the dollar is likely tobegin a multi-year rally as USmonetary policy is gradually“normalized”. • We expect the yen to weaken against the dol-

lar on further aggressive monetary easing bythe Bank of Japan.

• Sterling is likely to stay strong relative to thedollar in the First Quarter as UK growth con-tinues its positive trend from 2013.

• The Australian and Canadian dollar will beweak versus the US dollar on their laggingeconomic performance.

Our view that commodities haveseen the peak of a “supercycle”remains unchanged. • Almost three years into the commodity bear

market, we hold the opinion that returns inthe asset class will be sluggish.

• Base metals are in over-supply and there is anabsence of any significant catalyst to driveprices higher.

US equities will likely rally earlyin the First Quarter. • We see global markets responding positively

to ongoing evidence of economic stability andgrowth.

• We expect improving results in the global in-dustrial and manufacturing sectors to gainstrength into 2014 and likely broaden.

Outlookfor the First Quarter 2014

Information has been obtainedfrom sources believed to be reli-able, but its accuracy and com-pleteness, and the opinionsbased thereon, are not guaran-teed and no responsibility is as-sumed for errors and omissions.

Certain statements containedwithin are forward looking state-ments including, but not limitedto, statements that are predic-tions of or indicate future events,trends, plans or objectives.Undue reliance should not beplaced on such statements be-cause by their nature they aresubject to known and unknownrisks and uncertainties.D

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EconomicsEconomicsThe WorldPositive changes to global growth are gatheringmomentum evidenced by improvement in theeurozone and emerging markets. Nevertheless,the broad themes of our economic and marketoutlook remain unchanged as volatility is lowand returns from stocks will exceed those ofbonds. Emerging market growth will gather mo-mentum due largely to stabilization in China.

Efforts by central banks to increase liquiditythrough asset purchases have helped both bondsand more recently equities. The key to medium-term prosperity as Credit Suisse points out willrely on sustained strength in corporate invest-ment, which so far has been halting. In effect,macro conditions for 2014 are such that whileeconomic output has largely recovered; jobshave not.

North AmericaThe angst about the Fed withdrawing stimulus isnow clarified on the announcement that a mod-eration of asset purchases will begin in Januaryamounting to a reduction of $10 billion. This willallow investors to refocus on economic and mar-ket fundamentals more heavily.

The US has endured a fiscal drag for the last

three years, capped by 2013’s tax increases andspending sequestration. Barring more fiscal ad-justment, unlikely in our view, the sequential fis-cal drag lightens over the next 1.5 years, leadingto the consensus expectation of real growth ac-celerating toward three percent. If achieved, thatwould be the fastest US growth since 2005.Positive momentum in final demand coupledwith incoming data, specifically the unemploy-ment rate, suggests three percent Y-o-Y GDP

growth in the FirstQuarter. We expect theUS to have a fifth yearof business improve-ment that is somewhatfaster than the last four.

According to Bloomberg,Canada’s GDP will likelygrow slightly below thatof the US rising 2.0 per-cent Y-o-Y. In the FirstQuarter as fiscal re-straint drags on, growthand domestic demandwill be constrained by areduced pace of con-sumer spending andhousing-related activity.Looking ahead, how-

ever, Canadian output gains should be supportedby the gradual increase in demand emanatingfrom the nation’s two largest trading partners,the United States and Europe.

Europe The euro area has left its double-dip recession be-hind, but we expect the recovery to be qualita-tively similar to the US’– persistent but not robustenough to reduce a massive overhang of unem-ployed resources. Only Germany remains firmlyentrenched in a recovery that we believe will con-tinue as evidenced by low unemployment andconsistently good economic data.

Growth in the eurozone’s peripheral countrieslooks set to remain below the rates needed to ad-dress high unemployment and crippling debt.Hopes of a more accommodating stance amongst

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31, 2013

Source: Credit Suisse, Thompson Reuters DataStream, Haver Analytics

YEA

R O

VER

YEA

R %

Global

Developed Markets

Emerging Markets

Projected Global Growth

“We cannot keeplurching from

crisis to crisis. It’s having a very

detrimental effecton investments for

the trade group’smembers, including

layoffs and lessmoney for research

and development,that prevents

businesses frombeing able to plan ahead.”

Dan Stohr, spokesmanfor the Aerospace

Industries Association,November 28, 2013

the core countries after the German election lookunlikely to be fulfilled and steps towards bankingand fiscal union remain painfully slow. Againstthis background, the region’s debt crisis remainsunresolved and the lingering prospect of addi-tional bail-outs and even sovereign debt restruc-turings could yet see market pressures re-escalate.Consequently, consensus is for the eurozone togrow by 1.3 percent in 2014. Meanwhile growthprospects are particularly promising in the UKsupported by buoyant business confidence, whichshould pave the way for increased corporatespending. We expect the UK economy to grow byclose to three percent next year.

Pacific Basin Consensus expectations for slightly fastergrowth in Japan are accurate in our view.Specifically, additional monetary easing and fur-ther demand stimulus measures, such as pri-vately financed infrastructure investment,should offset the drag resulting from the recentsales tax increase. Japan is making progress infighting deflation. The nation's so-called "corecore" CPI, which excludes energy and freshfood, rose 0.3 percent in November, the firstgain for five years and the biggest increase since1998. Unemployment held steady at four per-cent, while manufacturing PMI rose to 55.1most recently, indicating expansion.

GDP growth for Australia will likely rise 2.7 per-cent in 2014, despite stabilization in China, asthe resources boom has entered its final stage.This is evidenced by mining investment return-ing to a more normal level over the next fewyears. In the short term, though, we think thatfalling mining investment will dominate and welook for sub par growth this year, with the out-look improving in 2015 as Australian growth isinexorably tied to China demand.

With economic improvement in the UnitedStates, European Union, and Japan, emergingmarket growth should improve to 5.3 percent in2014 from 4.7 percent in 2013 according toCredit Suisse’s economics team. China's growthhas stabilized and we agree with the view thatsteady growth between 7.5 and 8.0 percent is

sustainable, as (1) infrastructure projects, mainlycity infrastructure investments, are restarted; (2)housing transactions and construction pick upsignificantly; (3) exports show positive growthagain; and 4) public policy reforms.Furthermore, even industrial investment byState Owned Entities seems to be accelerating.

Latin America Mexico, like China, is another case where pub-lic policy reforms can make a big difference tothe efficiency of capital investment. Here, theissue is most visible in the energy sector. Thenewly installed government has put forwardproposals to permit broader private-sector par-ticipation in the energy industry, which theyhope would increase the volume and efficiencyof capital expenditures. Upon implementation,we see Mexico as beginning the march towarda truly modern economy in nearly all respects.Although national control of the Mexican en-ergy company, PEMEX, will not change, theentry of private companies in the explorationand production of Mexico’s untapped energyresources will likely improve economic growthsubstantially.

In Brazil, economic uncertainty is high. Theprospects of low real wage growth and some de-celeration in domestic credit are likely to weighon household consumption. The decline in busi-ness confidence and the deceleration in capitalgoods production raise the probability of asharp slowdown in investments in 2014. On theother hand, a stronger expansion in govern-ment consumption will likely support economicperformance. Consequently, the fiscal deficitshould increase even further next year, whichwill likely lead the central bank to keep the Selic(Brazil’s version of the Fed Funds Rate) basic in-terest rate at a much higher level than in mostother countries. Despite that, inflation shouldremain high, well above the centre of the infla-tion target.

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“Am I the last person in the worldunderweightJapan?”

Garry Evans, Global Head of Equity Strategy at HSBC, December 4, 2013

Bonds Bonds Interest rates should drift higher across devel-oped markets as economic data improve.Globally, monetary policy is likely to remain bothstimulative and highly innovative. We do not ex-pect any of the major central banks to raise theirbenchmark rates in 2014.

We expect interest rates in the US to rise mod-estly across the curve as the economy andlabour market improves and the Fed starts totaper in January. However, these upward pres-sures on interest rates will partly be offset by lowinflation, which will prevent yields from risingsharply. While the Fed starts to reduce monthlyasset purchases by $10 billion, stimulus is stillsignificant at $75 billion a month. Going for-ward, the Fed will continue to reduce bond pur-chases at upcoming FOMC meetings as long asincoming data support tapering. However, thecentral bank will use strong forward guidance togive companies and households confidence thatthe Fed Funds rate will remain on hold even forlonger. This forward guidance is likely to lockdown the front end of the yield curve for longer,while tapering pushes longer-dated yields higher.If tapering and forward guidance are successfullyexecuted, market volatility should be lower com-pared with 2013’s “taper talk” but bouts ofvolatility could periodically result from the mar-ket challenging the Fed’s low interest rate com-mitment.

The US Treasury is set to introduce the first newproduct in 17 years in 2014. At the November2013 refunding, the Treasury noted that it in-tends to announce the details of the initialFloating Rate Note (FRN) auction on January 23,2014 with the first auction occurring on January29. FRN issuance is likely to replace issuance ofsome Treasury bills rather than longer-maturitycoupon bonds as the expected investor base –money market funds – is largely the same.

The acute phase of the eurozone crisis seems tobe behind us, and the ECB is likely to hold thebenchmark rate unchanged at 0.25 percent. Theregion’s inflation outlook suggests that the ECBwill retain an easing bias and could be on holdpast 2015. The biggest risk to this scenario is ifinflation continues to surprise to the downside,which could lead the ECB to cut the interest rates(even to negative deposit rates), stronger for-ward guidance, or perhaps asset purchases. Weexpect German interest rates to rise less thanthose in the US as growth in the latter is ex-pected to be stronger and the Fed starts to taper.

Interest rates in the UK should move higher asgrowth expectations rise and as unemploymentfalls closer to the Bank of England’s seven per-cent threshold. The Bank of England’s forwardguidance on interest rates can anchor rates ma-turing within two years, but further out, yieldswill be dependant on the pace of the economicrecovery.

Canadian yields will follow the direction of USyields. The very shortest yields in Canada willstay low as inflation is below the central bank’starget and longer-maturity yields will graduallyclimb as the economy recovers.

Corporate health will continue as the economyimproves. Investment grade corporate bondswill generate excess returns relative to Treasuriesowing to their better yields, but lack of liquiditymay cause pricing to be volatile.

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31, 2013

“Treasury yieldsshould gradually

drift higherthrough the first

half of next year asthe Fed will likelyremain attuned to

unwarranted tight-ening of financial

conditions.”

Barclays, Global Rates

Outlook 2014

CurrenciesCurrenciesThe trade-weighted dollar asmeasured relative to an index ofother major currencies is likely tobegin a multi-year rally (chart 1)as US monetary policy is gradu-ally “normalised”. The dollar bullstory is a function of the likely di-rection of monetary policyamong major central banks(chart 2). The Fed will start reduc-ing monthly asset purchases inJanuary, beginning a gradualprocess of “normalising” policy,while the ECB and the Bank ofJapan (BoJ) remain focused onstimulating their economies. Weexpect the yen to weaken againstthe dollar on further aggressivemonetary easing by the Bank ofJapan. Despite diverging paths of the Fed andthe ECB, we expect the euro to only weakenmarginally against the dollar as the euro willbenefit from capital flows to the region asgrowth improves and the eurozone crisis fades.

Sterling is likely to stay strong relative to the dollarin the First Quarter as UK growth continues the pos-itive trend from 2013. While the Bank of England(BoE) is unlikely to hike interest rates, improvinggrowth and employment levels are likely to spur ex-pectations of reduced monetary stimulus.

The Canadian dollar is most likely to stay weakagainst the US dollar as the nation’s economicrecovery will lag that of the US and as oil pricesstay range-bound. In addition, the Bank ofCanada will likely hold benchmark rates low tomeet inflation targets.

The Australian dollar should weaken furtheragainst the greenback as Chinese growth, whileimproving, is historically slow and as commodityprices are expected to stay low. Additionally, theReserve Bank of Australia (RBA) has raised con-cern about the relatively strong Australian dollar

in recent months and will do whatit can to weaken the currency.

As the Fed begins to normalizemonetary policy, emerging mar-ket currencies could come underpressure. Countries such as SouthAfrica and Brazil, with big budgetdeficits and structural issues arelikely to see the most pressure ontheir respective currencies. TheMexican peso will be one of thestronger emerging market cur-rencies, poised to benefit from animproving US growth scenarioand President Enrique PenaNieto’s reformist agenda.

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Chart 1: Trade weighted dollar expected to strengthen

*REER = Real Exchange Weighted US dollarSource: Credit Suisse, the BLOOMBERG PROFESSIONALTM service

Chart 2: Diverging paths of central banks

EASING TIGHTENING

Source: Credit Suisse, the BLOOMBERG PROFESSIONALTM service

“2014: the year ofthe dollar, withmonetary policydivergence in thedriving seat.”

Credit Suisse, 2014 Global Outlook, November 19, 2013

CommoditiesCommoditiesAlmost three years into the commodity bearmarket, we continue to hold the opinion that re-turns in the asset class will be sluggish this year.The long term downward trajectory for theCommodity Resource Board Index (CRB) mayflatten moving forward as global economies con-tinue to recover but we do not expect over-whelming demand to come in and push upprices. Smaller cycles may continue to form forspecific commodities at different times nextyear but our long term outlook for commoditiesas a whole is weak.

In base metals, there are no apparent catalysts todrive prices higher as markets are in a state ofover-supply. In this quarter, developed economieswill continue their monetary efforts to encouragegrowth and try to meet inflation targets but weexpect their grinding recovery to contribute littletowards metals demand. We expect China andemerging economies to remain the key demanddriver for base metals. Growth in power infra-structure, general industrial pick-up and improv-ing PMI’s will create greater demand, movingforward, but opportunistic buying and timelystockpiling will keep prices level at best.

After weak performance in 2013, we believe thatfundamentals militate against rising gold pricesthis year as we anticipate higher US treasuryyields, a stronger US dollar, and low inflation.This follows from the US Federal Reserve’s deci-sion to taper the bond purchase program. Whilegold reacted negatively on the initial announce-ment to tapering, as anticipated, we believe fur-ther reduction in the bond purchases isdiscounted in prices and downside may be lim-

ited as the metal approaches a long term tech-nical support line. Again, as mentioned in ourprevious ‘Commodity Outlook’, physical de-mand may move prices seasonally but funda-mental shifts will keep gold from outperformingother assets in the long term.

In energy, upstream supply dynamics are strongas the US continues to lead non OPEC supplygrowth. Disruptions in the Middle East and out-ages in Nigeria, however, have kept the marketfrom going into a glut. In our opinion, the shale

revolution has removed concerns of immediatedepreciation of world reserves and prices willstay comfortably within its present 90-110$ perbbl range. If prices move higher, China, Russia,and Argentina, who also have sizable provenshale reserves, will begin field development andtheir contribution to supply will keep prices incheck. On the flipside, lower prices will forcehigh cost fields to halt operations, moving pricesup. Due to these inherent dynamics of crude oilsupply, we believe prices will stay range boundin 2014. On the demand side, refined oil prod-ucts will see gradual growth as developedeconomies improve and household spending in-creases. In emerging markets, however, steepcurrency depreciation will curtail fuel spendingwhich will put a drag on demand growth slightly.

In grains, weak prices set a precedent last yearand as such may gain merely because of the lowbase. Output, however, continues to exceed ex-pectations as there have been no severe weatherdisruptions in key crop producing nations andsupply dynamics remain intact.

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QTD Performance (%) YTD Performance (%)

“Investors see anemic or slowingeconomic growth

in the world’smature and

emerging-marketeconomies, while

there’s moresupply on hand.

That translates tolower prices.”

Michael Cuggino,Permanent PortfolioFamily of Funds Inc.

Prices as of December 19, 2013

EquitiesEquitiesGlobal equity markets will continue to rise in2014 as 1) key central banks continue to main-tain their monetary easing programs and keepinterest rates low which means current multipleswill sustain if not marginally expand further, 2)valuations remain intact and corporate profitscontinue to grow and 3) cyclical sectors begin tocontribute as developed economies showmarked improvement in manufacturing, as indi-cated by rising PMI numbers. A key catalyst sup-porting equity markets momentum is the Fedannouncement to taper bond purchases inJanuary. This will lower the risk premium thatwas previously associated with the event and re-duce volatility.

As indicated in the economic outlook, the US ison track for continued economic improvementsin 2014. Now that the overhang of US Fed taper-ing is behind us, we believe, US equity marketswill once again respond to fundamental factors.While multiple-expansion may continue as inter-est rates stay low despite the start to recent ta-pering efforts, the key catalyst in the US willcome from corporate earnings gaining tractionin 2014. Bloomberg estimates show a consensusof 10.2 percent earnings growth for the US, upfrom 4.8 percent expected at the end of 2013.With a further two percent dividend yield, wecan expect the US indices to gain in the vicinityof 12 percent in this year, at current earningsmultiples.

European equities remain a mixed basket. TheUnited Kingdom was quick to initiate austeritymeasures and resolve structural issues in theireconomy and economists now believe that theymay be close to achieving self-sustaining growth.Their recent data also suggests a strong recoverywith both services and manufacturing PMI’s atrecent highs. UK equities, however, will lag eco-nomic improvements as Financials and Energy,the top two weighted sectors in the index, stillface regulatory risks and weak fundamentals.German equities, on the other hand, will standout in Europe in our opinion. Low interest ratesin the Eurozone and improving demand fromperipheral Europe and emerging markets will re-

sult in strong market multiples and healthy cor-porate bottom-line growth. Bloomberg consen-sus estimates corporate earnings to grow by10.3 percent and 12.9 percent in the next twofinancial years.

In Asia, Japanese equity markets are expectedto continue marching upwards on the back ofAbenomics. A very aggressive monetary policy,higher taxes and growth in Japanese exportsafter a multi-decade slump will augur well for acontinuation of the Nikkei bull market. In emerg-ing markets, we view China and Mexicofavourably as both markets are expected to seean improvement in their manufacturing and ex-ports, which will translate to equity marketgains. Furthermore, both countries are in theprocess of instituting political and economic re-forms, which have been well received by in-vestors.

In sector allocation, we believe that theIndustrial, Consumer Discretionary, Technologyand Health Care sectors will lead the way; par-ticularly those “disrupters” who are bringingnew solutions, products and services to theglobal marketplace. In the Technology sector, weare focused on the mobile computing trend,cloud services, and cyber security stocks. InHealth Care, our attention is centred onBiotechnology where new medical treatmentsare advancing faster than in traditional drugcompanies, Life Science Tools, particularly genesequencing instruments used to develop newtreatments, and the transition to electronic med-ical records. On the Consumer side, we favourthe successful e-commerce companies for serv-ices such as travel, movies, professional recruit-ing, and broad on-line shopping. Given our view,we also favour the pro-cyclical Industrial sectorwhich should participate in the global recovery.

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“Scared or not, you have to buy stocks.”

Russ Koesterich, Chief InvestmentStrategist, BlackRock

Conclusion and Strategy PointsEquitiesREGIONAL STRATEGY• Neutral Japan at 7.9 percent.

• Overweight Germany at 4.9 percent (versus an index weighting of 3.4 percent).

• Overweight Latin America at 2.5 percent (versus an index weighting of 1.5 percent).

INDUSTRY SECTOR STRATEGY• Overweight Consumer Discretionary at 15.2 percent (versus an index weighting of 11.5 percent).

• Overweight Health Care at 13.3 percent (versus an index weighting of 11.0 percent).

• Overweight Industrials, Materials, and Technology at 11.6, 6.3, and 14.4 percent, respectively (versus index weights of 10.8, 6.1, and 12.1 percent, respectively).

• Underweight Consumer Staples, Telecom, and Utilities 6.7, 3.9, and 1.3 percent, respectively (versus index weights of 10.4, 4.2, and 3.3 percent, respectively).

GEOGRAPHIC ALLOCATION

Conclusion and Strategy Points

Financials 20.6%Telecom Services 3.9%Consumer Disc. 15.2%Health Care 13.3%Technology 14.4%Consumer Staples 6.6%Industrials 11.6%Utilities 1.3%Energy 6.9%Basic Materials 6.3%

North America 54.2%

Europe 26.6%

Smaller Asia 3.3%

Japan 7.9%

Latin America 2.5%

Australia 2.8%

Other 2.7%

SECTOR ALLOCATION

16

Bonds

AAA 1%AA+ 51%AA 15%AA- 16%A+ 5%A 7%A- 5%

• Stay neutral benchmark duration.

• Hold floating rate notes to take advantage of rising interest rates.

• Hold shorter-dated high quality bonds for their yield advantage relative to US Treasuries.

BIAS structures portfolios according to the needs and risk profile of a specific investor. Some systemic risks should be acknowledged over whichBIAS and other asset managers have no control including: trading on exchanges not regulated by any US Government agency, the BermudaMonetary Authority, or the Cayman Islands Monetary Authority; possible failure of brokerage firms or clearing exchanges; illiquid markets whichmay make liquidating a position at a given price more difficult. For more details on these and other risk factors, please refer to BIAS’ Form ADV as filedwith the US Securities and Exchange Commission.

CREDIT RATINGS

BONDS STRATEGY ALLOCATION

LIBOR FRN 7%

CPI FRN 2%

0-1 yr 9%

1-3 yr 67%

3-5 yr 12%

Cash 3%

17

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