Update on Emerging MarketsCynthia Steer

EVP, BNY Mellon

Manager Research and Investment Solutions

3rd Annual Investor Country Conference, GEMLOC

June 12, 2012

1

Bad news and good news

• In 2011, I said the following:

− Last two plus years have been mostly good news.

− With the end of Quantitative Easing (QE2) in June 2011, the U.S. economy and debt markets will be much more uneven.

• In 2012, the global economic landscape is unpredictable with geopolitical risk rising

• For investors, returns and benchmarks are as volatile

2

Past performance is not indicative of future results.

The Great Transition Age: 2009 – 2025No Wonder Cash Balances are So High in 2011 – 2012

Cloud Computing

“Too Small to Save”Climate Change

Algorithmic Trading

Social Networking

Energy Security

Operation Twist 2.0Robotics

Globalization

Tail Risk Preparation

Arab Spring

Bubble Prevention

Resource Scarcity

Rise & Fall of Precious Metals

iPAD

Class War

Underwater Mortgages “Oppose Wall Street” Risk Parity

China Becomes World’s Largest

EconomyAlternative Energy

Fannie Mae & Freddie Mac

New Deal Revisited

Black & White SwansMicro Finance

European Contagion

3-D TV

Searching for Animal Spirits

Greece

Protectionism & Capital Controls

New Regulations

Geithner

Money Market Funds Run Low on New

Investment Supply

Baby-Boom Demographics

Russian Political Transition

Global Imbalances

Capitalism 4.0

Ireland

Pakistan

Bernanke

Alpha ScarcityHedge Funds

Structural UnemploymentTerrorism

Technological Innovation

Behemoth Corporate Cash Pile

“Prosperity Through Austerity”

Negative Yields

West Bank

Yen & Swiss Franc Interventions

Renminbi Floats

Fall of Housing

Rethink Economic & Financial Theory

Japan Tsunami & Nuclear Crisis

Revenue (Tax) Hike

Tea Party

U.S. Withdraws from U.S. & Afghanistan

QE2

Singularity

Deficits

Tax Reform

Dominance of Macro Styles

Narco-TerrorismIndex Selection

Cloud Computing

Consilience

“Great Recession”

Multi-Generation Rate Lows

Fed

Rogue Traders

G-0 World Equity

Food Inflation

European Bank Stress Tests, Liquidity/Capital Deficiency

LDITexting

Artificial Intelligence

Merkel

Digital Books

EFSFIran

Financial Sector Downsizing

Behavioral Finance

“The Lost or Found Decade”

Social Unrest

End of Dollar Reserve Currency Status

ETFsDodd-FrankMuni Bankruptcy

Risk Over-Stated

VATBRIC & Mist Deleveraging

Grand Convergence EM to AE

Health Care Reform

American Declinism

Double-Dip Recession

Active vs. Passive Management

EM Stars, then Fades

QE3Rating Agencies

Fate of Euro

Entitlement Reform (Benefits Cut)

Too Big Too Fail

Cyber Wars

2012 .U.S. Elections

ECBMortgage Mess

Super Budget CommitteeS&P Downgrades U.S. to AA+

Volcker & Buffet Rules

SRI

Basel III

High Vol & Correlations

Globalization

Private Equity

Repudiation of KeynesPortugal

China Growth Leveling

Infrastructure

Tri-Party Repo

3

Genomics

Neuroeconomic

YTD 2012

4

YTD As of May 31, 2011 Source: Commodities: S&P GSCI Total Return ; S&P 500: S&P 500 Index; U.S. high Yield: BofA Merrill Lynch U.S. High Yield ; Emerging Local Markets : JP Morgan ELM Index; JP Morgan Corp Emerging; Global Agg: Barclays Capital Global Agg Aggregate Bond Index; JP Morgan Government Bond Index-Emerging Markets (GBI-EM) Global div; JP Morgan Emerging Markets Bond Index Global (EMBIG); U.S. High Grade: Barclays US Aggregate Credit - Corporate - Investment Grade; US Treasury: Barclays US Aggregate Government –Treasury; EM equities: MSCI Emerging Markets Index; Gold :S&P GSCI Gold Total ReturnIndexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.

Perc

enta

ge

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

-18.2

-1.2

2.1

4.4 5.1 5.6

-1.8

9.28.1

9.6 9.8

0.2

-8.3

5.2 4.93.3

1.0 1.32.9

4.3

-0.6

1.9

2011

YTD May 2012

5

Global Equity Market Performance: 2012 YTD as of May 14, 2012

Venezuela: Venezuela Stock Market Index (IBC Index); Egypt: Egyptian Exchange EGX 30 Price Index; Vietnam: Ho Chi Minh Stock Index; Pakistan: Karachi Stock Exchange KSE100 Index; Spain: IBEX 35 Index; Sri Lanka: Sri Lanka Stock Market Colombo All-Share Index; Cyprus: Cyprus General Market Index; Ukraine: Ukranian Equities Index; Greece: Athens Stock Exchange General Index; Italy: FTSE MIB Index; Argentina: Argentina Merval Index; Slovakia: Slovak Share Index; Portugal: Portugal PSI 20 Index; Morocco: Morocco Casablanca Stock Exchange MASI Index; Estonia: OMX Tallin (OXMT) Index; Kenya: Nairobi Securities Exchange Ltd All Share Index (ASI); Philippines:Philippine Stock Exchange PSEi Index; Colombia: IGBC Index from the Colombia Stock Exchange; Lithuania: OMX Vilnius (OMXV) Index: Laos: Laos Composite IndexReturns measured in local currencySource: Bloomberg; BNY Mellon Asset Management

MSCI FM: MSCI Frontier Markets indexTotal Returns: Gross, local currencySource: FactSet; BNY Mellon Asset Management6

-40

-30

-20

-10

0

10

20

30

40 %

MSCI Frontier Markets: YTD Total Return (%) as ofApril 30, 2012

Higher Real Interest Rates Make Emerging Market Currencies More Attractive

7

Source: Trading Economics, Consensus Economics. Information as of April 30, 2012.

Please see Appendix and Disclosures for additional information.

Emerging Markets

Developed Countries

3.9

3.3

1.7

1.0

0.2

-1.3

-2.1-2.3

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Brazil China Russia India Japan Euro US UK

Rea

l Int

eres

t Rat

es, %

Real Interest Rates (Target Interest Rate - Expected inflation), %

Capital Market Maturation Ratio = Index eligible debt (U.S. $) as of April 30, 2012/2011 nominal GDP (U.S. $) per April 2012 IMF World Economic OutlookIndex eligible debt from Barclays Capital Multiverse, Global Inflation-Linked, U.S. Taxable Municipal , U.S. FRN, U.S. ABS FRN, and China Aggregate IndicesSource: Barclays Live; IMF; BNY Mellon Asset Management8

Average47.2%

0%

20%

40%

60%

80%

100%

120%

140%

Jap

anU

.K.

U.S

.N

eth

erla

nds

Luxe

mbo

urg

Fra

nce

Aus

tria

Italy

Sp

ain

Sw

eden

Can

ada

Bel

giu

mIr

elan

dG

erm

any

Den

mar

kF

inla

ndS

witz

erla

nd

Aus

tral

iaS

. Ko

rea

Slo

ven

iaM

alay

sia

New

Zea

lan

dC

zech

Rep

Sin

gap

ore

Po

lan

dN

orw

ayS

. Afr

ica

Ch

ina

Th

aila

ndIs

rael

Qat

arV

enez

uela

Hun

gar

yM

exic

oP

ort

ugal

Cro

atia

Uru

gua

yC

hile

Gre

ece

Tun

isia

Tai

wan

Advanced Economy

EmergingEconomy

Debt Capital Market Maturation Ratios: April 30, 2012

9

Asia, Oil Producing Countries, and Other may not exactly add up to World due to roundingAnnual values taken at year-endAsia Countries: China, Japan, India, Taiwan, South Korea, Singapore, Hong Kong, Malaysia, Thailand, Indonesia, Philippines, Laos, Pakistan, CambodiaOil Producing Countries: Algeria, Angola, Ecuador, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E., Venezuela, Russia, NorwaySource: Bloomberg; www.opec.org; BNY Mellon Asset Management

FX Reserves: World, Asia, & Oil Producers2003 to April 30, 2012

0.23 0.32 0.560.85

1.21 1.301.25 1.34 1.46 1.52

0.74 0.79 0.820.85 1.01 1.13

1.31 1.932.39 2.38

1.882.41

2.673.11

3.884.34

5.07

5.76

6.38 6.54

2.853.52

4.05

4.81

6.10

6.77

7.63

9.03

10.22 10.44

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 4/30/2012

World

16.86%

13.19%

Asia

16.14%

12.77%

Oil Producing Countries

25.34%

5.39%

Other

15.06%

21.96%

12/31/2003-4/30/2012 CAGR

12/31/2007-4/30/2012 CAGR

U.S. $Trillion

Emerging Market (EM) Economies are growing faster than developed countries - exceeding 6% in 2011

Global economic growth (%oya)

G-7 (France, Germany, Italy, Japan, U.S., U.K., Canada); Emerging Economies: Real GDP, as reported by World BankSource: J.P. Morgan, as of January 31, 2011Historical data is not indicative of future results. Indexes are unmanaged and cannot be invested in directly.Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that any stated expectations will occur.

10

*IMF estimates from April 2012 World Economic Outlook (WEO); otherwise most recent Bloomberg consensus estimate as of May 14, 2012**2011: Values per Bloomberg except France and Turkey (IMF April 2012 WEO)Source: Bloomberg; IMF; BNY Mellon Asset Management11

Global Real GDP Growth Forecasts: Austerity, Rebalancing, and Catch-Up

2011** 2012 2013 2014World 2.9 2.2 2.9 *3.7Euro area 1.5 -0.3 1.0 1.4France 1.7 0.4 1.1 *1.9Germany 3.0 0.7 1.6 1.9Italy 0.4 -1.5 0.2 *0.5Spain 0.7 -1.5 -0.2 1.0

United States 1.7 2.3 2.5 3.0China 9.2 8.3 8.5 8.3Japan -0.8 1.7 1.5 0.8United Kingdom 0.7 0.6 1.6 2.2Canada 2.5 2.1 2.3 2.6Brazil 2.8 3.4 4.5 *4.0Russia 4.3 3.7 3.9 4.0India 7.1 *6.9 *7.3 *7.5Indonesia 6.5 6.3 *6.6 *6.9Mexico 3.9 3.2 3.4 *3.8South Africa 3.2 2.7 3.7 *4.0Turkey 8.5 2.6 4.6 *4.0

Forecast

12

Road Going Forward

• Monetary policy going forward continues to be untested and unknown but individual country paths are beginning to diverge.

• Global coordination started to be harder in 2011 and will continue so.

• For investors, inflation and deflation are BOTH worries.

• Portfolio construction must simultaneously encompass both.

• Bipolar, bi-furcated, bi-regime, bi-something

Inflation

Deflation ProtectionDe-Risk

Tactical/Opportunistic Inflation ProtectionRe-Invest/Re-Risk

DeflationLiquidity

Illiquidity

CashCurrency

GoldU.S. Treasuries

U.S. Core Fixed IncomeSovereign Debt

Global Fixed IncomeLong Duration Fixed Income

Global TIPS or Linkers

Emerging Market DebtHigh Yield Fixed Income

Short Bias Short Bias

Macro Hedge FundReal Estate

Nat. Resources (Commodities)

Commodities (Derivatives)

InfrastructureTimber

Farmland

Developed International Equity

Emerging Markets Equity

Frontier Markets Equity

Domestic Equity(Dividend Equity)

14

“Non Traditional” Policy tools have made life better but more complex AND are expected to continue to do so

The Fed balance sheet still looks like this. But the balance sheet of emerging country central banks look like the Federal Reserve before early 2008

Source: Federal Reserve Board, as of January 2, 2008 to December 30, 2009Data is historical and is not indicative of future results.

*Germany, Japan, U.K., and U.S.Source: Global Financial Data; Bloomberg; BNY Mellon Asset Management15

Lowest Interest Rates in 140 Years:Average of Big Four* 10-Year Bellwethers 1871 to May 14, 2012 (Monthly)

Average = 5.15Jan. 18715.55

Max.Sep. 1981

12.58

Min.May 14, 2012

1.490

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011

%%

Average + 1 Std. Dev. = 7.08

Average - 1 Std. Dev. = 3.22

16

Bond Market Environment

Source: Federal Reserve Board Weekly Data, as of May 2002 to May 2012

Data is historical and is not indicative of future results.

-1

0

1

2

3

4

5

6

7

May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12

Yiel

ds in

per

cent

US Treasury Yields: 10 Year History

3 Mon

2 Year

5 Year

10 Year

30 Year

17

Bond Market Environment

Source: Federal Reserve Board Daily Data, November 2011 –May 2012

Data is historical and is not indicative of future results.

-0.5

0

0.5

1

1.5

2

2.5

Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12

Yiel

ds in

per

cent

US Treasury Yields: 6 month History

3 Mon

2 Year

5 Year

10 Year

18

Unemployment Rates on the Rise with Structural Issues

Source: Economy.com, as of December 31, 2000 to March 31, 2012Data is historical and is not indicative of future results.

-

2.00

4.00

6.00

8.00

10.00

12.00 D

ecem

ber-0

0M

arch

-01

June

-01

Sep

tem

ber-0

1D

ecem

ber-0

1M

arch

-02

June

-02

Sep

tem

ber-0

2D

ecem

ber-0

2M

arch

-03

June

-03

Sep

tem

ber-0

3D

ecem

ber-0

3M

arch

-04

June

-04

Sep

tem

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4D

ecem

ber-0

4M

arch

-05

June

-05

Sep

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ber-0

5D

ecem

ber-0

5M

arch

-06

June

-06

Sep

tem

ber-0

6D

ecem

ber-0

6M

arch

-07

June

-07

Sep

tem

ber-0

7D

ecem

ber-0

7M

arch

-08

June

-08

Sep

tem

ber-0

8D

ecem

ber-0

8M

arch

-09

June

-09

Sep

tem

ber-0

9D

ecem

ber-0

9M

arch

-10

June

-10

Sep

tem

ber-1

0D

ecem

ber-1

0M

arch

-11

June

-11

Sep

tem

ber-1

1D

ecem

ber-1

1M

arch

-12

US Rate

Eurozone Rate

Japan Rate

UK Rate

19

Global Increase of Spreads Between Corporate and Sovereign Debt

Spreads = Indexes – TreasuriesSource: Bloomberg,as of May 2002 to May 2012Data is historical and is not indicative of future results. Indexes are unmanaged and cannot be invested in directly.

Global and U.S. yields

0

1

2

3

4

5

6

7

8

9

10

Tsy/Agency

Corp

Global Broad

Global Broad plus

20

Summary

• Emerging market debt markets will see continued flows- especially in hard currency or corporates

• EM Linkers still seem an under-utilized asset class but may gain ground over next 2 years

• Sovereign risk will continue and investors must differentiate.

• Global investors, more and more, are having to grapple with disparate evaluations of risk and return with no “good” benchmarks. Issuers must look to communicate clearly as benchmarks will continue to confuse fiscal and governance realities.

• Capital flows need to be evenly distributed amongst asset classes and longer and shorter term country needs- this is an important structural issue and must be addressed strategically especially for infrastructure.

There is no guarantee that any stated expectations will occur.

21