1. Global Economic Shifts in 2007 and Beyond Robert F. Wescott, Ph.D. Pioneer Investments Colloquia Prague 29 November 2006

2. A Major Geopolitical Shift

3. Global Liquidity Now Slowing U.S. monetary base plus world foreign exchange holdings (percent change, year on year) Sources: Federal Reserve, IMF COFER database

4. Oil: A Continuing Burden on the World Economy Source: EIA, IMF WEO Global Slowdown Trigger Level?

5. What’s Hurting Investment Climate “A Lot”? 54% 53% 52% 36% 26% Source: UBS Index of Investor Optimism, Nov. 27, 2006

6. Housing Prices Rising Worldwide Percent Change, 1997-2005 Source: The Economist

7. Housing’s Disproportionate Contribution to U.S. Job Growth Source: BLS

8. Mortgage Equity Withdrawal Can Almost Entirely Explain the Decline in U.S. Saving Source: Federal Reserve, BEA, Office of Thrift Supervision, ISI

9. Housing’s Contribution to U.S. GDP Growth, 2001-05 Channel Growth, ‘01-’05 Effect on GDP Contribution to GDP Growth Residential Investment $343 billion 100% Housing Wealth $4,286 billion 7% $300 billion Cash Out From Refinancing $1,219 billion 100% Total housing contribution to GDP growth: $1,862 billion Total U.S. GDP growth: $2,918 billion Housing share of GDP growth (percent): 64%

11. U.S. Housing Downturns Tend to be Deep Decline in Housing Starts, Last Five Housing Market Downturns Source: Census Bureau Average Decline: 51.2%

12. U.S. Housing Bubble Already Burst! Source: National Association of Home Builders NAHB/Wells Fargo Housing Market Index, 2002-2006

13. 8 Ways Global Economy Will Change in 2007 and Beyond 1. Centers of activity will shift 1. Centers of activity will shift 2. Consumer landscape will change 2. Consumer landscape will change 3. Energy and environmental problems will grow 3. Energy and environmental problems will grow 4. Emerging markets will have both inflationary and deflationary effects 4. Emerging markets will have both inflationary and deflationary effects 5. Battleground for talent will heat up 5. Battleground for talent will heat up 6. Emerging markets will have faster productivity growth and appreciating currencies 6. Emerging markets will have faster productivity growth and appreciating currencies 7. Investors beware: diversification will keep falling 7. Investors beware: diversification will keep falling 8. Disequilibrium pressures will correct 8. Disequilibrium pressures will correct

14. 1. Centers of economic activity will shift profoundly – globally and regionally Today Asia (excluding Japan) represents 13% of world GDP; the E.U. represents 30%. Today Asia (excluding Japan) represents 13% of world GDP; the E.U. represents 30%. In 2025 Asia and the E.U. will each be 20%- 22% of the world economy. In 2025 Asia and the E.U. will each be 20%- 22% of the world economy. The U.S. will remain the world’s largest economy. The U.S. will remain the world’s largest economy. Regional shifts: toward regional capital cities (Kansei, Kanto) Regional shifts: toward regional capital cities (Kansei, Kanto)

15. China’s Trend Has Been Sharply Upward Source: IMF

16. Sources: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund China, 1980-2005 U.K., 1820-1870U.S., 1860-1913 Japan, 1950-1974 GDP, % of World Total, PPP Basis

17. 2. The consumer landscape will expand significantly $5,000 in income is a threshold above which spending can go to discretionary items (like Italian silk scarves) $5,000 in income is a threshold above which spending can go to discretionary items (like Italian silk scarves) Spending power in emerging markets will jump from $4 trillion today to $10 trillion in 2025. Spending power in emerging markets will jump from $4 trillion today to $10 trillion in 2025. Already Poland has more people with a Danish income level than Denmark. Already Poland has more people with a Danish income level than Denmark. Soon China will have more people with a German income level than Germany. Soon China will have more people with a German income level than Germany.

18. Vehicles Registered per Capita Vehicle Registration Country/Year Per Capita Income 0.01 (1 in 100) China, 1997 $3,695 Korea, 1973 $3,465 0.05 (1 in 20) Korea, 1988 $8,934 Taiwan, 1981 $6,628 Mexico, 1974 $7,639 0.1 (1 in 10) Korea, 1991 $10,973 Taiwan, 1987 $9,992 Mexico, 1981 $10,030 0.2 (1 in 5) Japan, 1971 $11,400 Korea, 1995 $13,864 Taiwan, 1992 $13,458

19. 3. Demand for natural resources will grow; put strain on the environment Oil demand projected to grow 50% in the next 20 years Oil demand projected to grow 50% in the next 20 years But China cannot use oil and coal as U.S. and Europe do But China cannot use oil and coal as U.S. and Europe do Growing demands for steel, aluminum, copper, minerals, water Growing demands for steel, aluminum, copper, minerals, water Pressing need for alternate fuels, new transportation technology Pressing need for alternate fuels, new transportation technology

20. 4. For Goods that China Buys… China’s Share of World Imports of Metal Ores & Concentrates Source: UN ComTrade

21. …Prices Go Up Source: United States Geological Survey Average US Market Spot Prices, Indexed to 1996 Prices

22. But for Goods that China Sells… China’s exports have increased 3X in 5 years

23. …Prices Are Held Down U.S. Import Non- energy Import Price Index 1990 = 100 U.S. Core CPI, Index 1990 = 100

24. 5. Battleground for talent will shift Shift from production to knowledge-intensive industries (science, technology, culture, arts, entertainment) Shift from production to knowledge-intensive industries (science, technology, culture, arts, entertainment) In U.S., 5% of jobs were in these industries in 1900, but 40% today are. In U.S., 5% of jobs were in these industries in 1900, but 40% today are. In Italy, 13% are today, but this will increase. In Italy, 13% are today, but this will increase. 33 million university-educated young professionals in developing countries today (more than twice the number in advanced countries) 33 million university-educated young professionals in developing countries today (more than twice the number in advanced countries)

25. Talent Percent of population ages 25-64 with a B.A. degree or above Source: Florida and Tinagli, “Europe in the Creative Age,” Feb. 2004

26. 6. Key Attractions of Emerging Markets: Rapid Productivity Growth & Appreciating Currencies Source: IMF While Poland’s productivity has increased 4.2% a year, the Zloty has appreciated by roughly 3% per year against the currencies of all its trading partners. Polish Zloty, real effective exchange rate, % change from 1995

27. Average Correlation Between US & Emerging Market Equity Indices 7. Global Markets Move as One! Tighter Linkages Between Equity Markets Source: Global Financial Data. Equity market indices for Argentina, Brazil, China, India, Mexico, South Africa, South Korea, Taiwan, Turkey, Venezuela, and the United States.

28. 8. Risk: Can Disequilibrium Continue? Source: IMF WEO Current Account Balance as a Percent of GDP China Produces The US Consumes