1. 1 The Global Macro Outlook: Investing In Turbulent Times Peter Berezin Chief Strategist Bank Credit Analyst May 2013

2. 2 THE THREE KEY QUESTIONS THAT INVESTORS NEED TO CONSIDER: © BCA Research 2013 Will U.S. growth accelerate anytime soon? Will the euro crisis be resolved? Will China suffer a hard landing?

3. 3 U.S. GROWTH TO STAY SLUGGISH FOR MOST OF THE YEAR © BCA Research 2013 3.5 3.0 2.5 2.0 201020112012 3.5 3.0 2.5 2.0 50 0 -50 -100 50 0 -50 -100 BLOOMBERG CONSENSUS ECONOMIC FORECAST FOR U.S. GDP FULL-YEAR 2012 FULL-YEAR 2013 FULL-YEAR 2014 Ann% Chg Ann% Chg U.S. ECONOMIC SURPRISE INDEX* SOURCE: CITIGROUP GLOBAL MARKETS INC. 2013 * ROLLING 3-MONTH STANDARD DEVIATION OF DATA SURPRISES, SMOOTHED.

4. 4 PLENTY OF PENT-UP DEMAND 3 2 1 0 1950196019701980199020002010 3 2 1 0 30 26 22 18 30 26 22 18 5-YEAR PERCENT CHANGE, ANNUALIZED: REAL PRIVATE-SECTOR CAPITAL STOCK PER CAPITA % % U.S. CYCLICAL SPENDING (PERCENT OF POTENTIAL GDP) % Of GDP % Of GDP NOTE: SHADED AREAS REPRESENT NBER-DESIGNATED PERIODS OF RECESSIONS. © BCA Research 2013

5. 5 GROWTH SHOULD ACCELERATE BY THE END OF THE YEAR © BCA Research 2013 5 4 3 2 2000200220042006200820102012 70 60 50 40 30 20 10 U.S. RESIDENTIAL CONSTRUCTION (PERCENT OF GDP) (LS) NAHB* HOMEBUILDERS OPTIMISM (ADVANCED) (RS) % Of GDP * NATIONAL ASSOCIATION OF HOMEBUILDERS. Housing on the mend

6. 6 HOUSEHOLD DEBT HAS COME DOWN 14 13 12 11 10 2000200220042006200820102012 14 13 12 11 10 130 120 110 100 90 130 120 110 100 90 HOUSEHOLD DEBT-SERVICE PAYMENTS (PERCENT OF DISPOSABLE INCOME) % U.S. HOUSEHOLD DEBT (PERCENT OF DISPOSABLE INCOME) % © BCA Research 2013

7. 7 LESS DRAG FROM STATE AND LOCAL GOVERNMENTS © BCA Research 2013.4.2 0 -.2 -.4 20002002200420062008201020122014 0 50 100 150 U.S. CONTRIBUTION TO REAL GDP GROWTH FROM STATE & LOCAL GOVERNMENTS (LS) STATE BUDGET SHORTFALLS* (INVERTED) (RS) % Bn US$ * REVENUES COLLECTED BY STATES MINUS PROJECTED CURRENT SERVICES SPENDING. SOURCE: CENTER ON BUDGET AND POLICY PRIORITIES.

8. 8 WITH THE EXCEPTION OF GREECE, IRRESPONSIBLE FISCAL POLICIES DID NOT CAUSE THE EURO CRISIS © BCA Research 2013 80 60 40 199520002005 2010 80 60 40 110 100 90 80 110 100 90 80 SPAIN % Of GDP % Of GDP GOVERNMENT DEBT-TO-GDP RATIO: GIIPS* % Of GDP % Of GDP * GIIPS = GREECE, IRELAND, ITALY, PORTUGAL AND SPAIN. SOURCE: IMF AND EUROPEAN COMMISSION.

9. 9 SPANISH GOVERNMENT DEBT HAS INCREASED DESPITE FISCAL AUSTERITY © BCA Research 2013 60 55 50 45 2007200820092010201120122013 60 55 50 45 130 125 120 115 110 105 130 125 120 115 110 105 GOVERNMENT SPENDING ON GOODS AND SERVICES € Bn € PUBLIC-SECTOR EMPLOYEE COMPENSATION IMF ESTIMATES AND PROJECTIONS FOR SPAIN MADE IN 2008 MADE IN 2012 Bn € € NOTE: BASED ON IMF STAFF REPORTS FOR ARTICLE IV CONSULTATIONS WITH SPAIN. 6% 23%

10. 10 THE MAIN REASON DEBT HAS INCREASED IS BECAUSE GROWTH HAS COLLAPSED © BCA Research 2013 1400 1300 1200 1100 1000 900 200520062007200820092010201120122013 1400 1300 1200 1100 1000 900 NOMINAL GDP: IMF ESTIMATES AND PROJECTIONS FOR SPAIN MADE IN 2007 MADE IN 2012 € Bn € NOTE: BASED ON IMF STAFF REPORTS FOR ARTICLE IV CONSULTATIONS WITH SPAIN. THE PROJECTION FOR NOMINAL GDP IN 2013 IS BASED ON THE EXPECTED GROWTH RATE IN THAT YEAR, AS PUBLISHED IN THE IMF'S 2008 ARTICLE IV CONSULTATION. All OTHER DATAPOINTS IN THIS SERIES ARE BASED ON THE 2007 ARTICLE IV CONSULTATION. 26%

11. 11 THE CREATION OF THE EURO SOWED THE SEEDS OF ITS OWN DEMISE © BCA Research 2013 6 4 2 0 -2 19992000200120022003200420052006 6 4 2 0 -2 8 6 4 2 8 6 4 2 REAL INTEREST RATES** % 2-YEAR GOVERNMENT BOND YIELD*GREECE IRELAND PORTUGAL SPAIN ITALY FRANCE GERMANY % * SOURCE: THOMSON REUTERS. ** 2-YEAR GOVERNMENT BOND YIELD DEFLATED BY CPI.

12. 12 THE EVOLUTION OF EURO AREA UNIT LABOR COSTS © BCA Research 2013 130 120 110 100 19962000200420082012 130 120 110 100 UNIT LABOR COSTS GIIPS* EURO AREA EXCLUDING GIIPS* * GDP-WEIGHTED AVERAGE OF GREECE, IRELAND, ITALY, SPAIN AND PORTUGAL. NOTE: ALL SERIES SHOWN REBASED TO 2000 = 100. SOURCE: EUROPEAN COMMISSION.

13. 13 FISCAL ADJUSTMENT IN THE PERIPHERY: MISSION ACCOMPLISHED? © BCA Research 2013 1 0 -2 2008201020122014 1 0 -2 2 0 -4 2 0 -2 -4 FISCAL IMPULSE*** % Of GDP % Of GDP GIIPS* CYCLICALLY-ADJUSTED PRIMARY BALANCE** % Of GDP % Of GDP * GDP-WEIGHTED AVERAGE OF GREECE, IRELAND, ITALY, PORTUGAL AND SPAIN. ** AS A SHARE OF POTENTIAL GDP. *** CHANGE IN THE PRIMARY STRUCTURAL BUDGET BALANCE AS A SHARE OF POTENTIAL GDP. 2009201120132015 SOURCE: IMF, INCLUDES ESTIMATES AND PROJECTIONS.

14. 14 WILL CHINA SUFFER A HARD LANDING? 1000 800 600 400 200 200220042006200820102012 1000 800 600 400 200 NUMBER OF ARTICLES MENTIONING CHINESE HARD LANDING* * SOURCE: FACTIVA. © BCA Research 2013

15. 15 CHINA: GROWTH HAS SURPRISED TO THE DOWNSIDE © BCA Research 2013 100 50 0 -50 201020112012 100 50 0 -50 CHINESE ECONOMIC SURPRISE INDEX* *SHOWN AS A 5-DAY MOVING AVERAGE; SOURCE: CITIGROUP GLOBAL MARKETS INC.

16. 16 MONETARY EASING SHOULD HELP BOOST GROWTH LATER THIS YEAR 36 32 28 24 20 16 2006200820102012 36 32 28 24 20 16 CHINA: TOTAL SOCIAL FINANCING Ann% Chg Ann% Chg NOTE: SUM OF TOTAL FUNDRAISING BY CHINESE NON-STATE ENTITIES, INCLUDING INDIVIDUALS AND NON-FINANCIAL CORPORATES.

17. 17 LITTLE EVIDENCE OF A CREDIT BUBBLE © BCA Research 2013 80 60 40 20 2000200220042006200820102012 80 60 40 20 8 6 4 2 115 110 105 100 95 HOUSEHOLD DEBT-TO-GDP RATIO: U.S. CHINA % of GDP % of GDP CHINESE NEW RMB LOANS* (LS) DOMESTIC BANK CREDIT (RS) Tn RMB % of GDP * SHOWN AS A 12-MONTH MOVING TOTAL.

18. 18 CHINA: MANY YEARS OF RAPID GROWTH AHEAD © BCA Research 2013 12 8 4 0 -4 1990200020102020203020402050 12 8 4 0 -4 100 80 60 40 20 100 80 60 40 20 GDP GROWTH SOUTH KOREA CHINA Ann% Chg Ann% Chg GDP PER EMPLOYED WORKER IN CHINA RELATIVE TO SOUTH KOREA % % SOURCE: THE CONFERENCE BOARD TOTAL ECONOMY DATABASE, BCA ESTIMATES AND PROJECTIONS. Average growth of 8% in China between 2013 and 2030

19. 19 INVESTMENT STRATEGY Risk assets are vulnerable to a near-term correction. Investors should remain tactically cautious, but use any correction in prices to increase risk exposure. U.S. equities will outperform bonds over a two-to-five year horizon. Long-term Treasurys are significantly overvalued. A 1994-style bond riot cannot be ruled out. Corporate credit is less attractive than equities, but pockets of value remain. Despite recent strength, the dollar has not yet bottomed. Globally, emerging markets are poised to do very well over the next few years. Japan is also likely to outperform. Commodity prices will find some support later this year, but a major bust is coming later this decade.

20. 20 EQUITIES ARE CHEAP COMPARED TO BONDS… © BCA Research 2013 8 6 4 2 0 198519901995200020052010 8 6 4 2 0 U.S. S&P 500 TRAILING EARNINGS YIELD MINUS REAL* 10-YEAR TREASURY YIELD % * DEFLATED BY 10-YEAR INFLATION EXPECTATIONS.

21. 21 …BUT NOT ESPECIALLY CHEAP IN ABSOLUTE TERMS © BCA Research 2013 6 4 2 19601965197019751980198519901995200020052010 6 4 2 2.0 1.5 1.0.5 2.0 1.5 1.0.5 40 30 20 10 40 30 20 10 PRICE-TO-BOOK RATIO PRICE-TO-SALES RATIO S&P 500: SHILLER P/E RATIO* * SOURCE: ROBERT SHILLER. ** EXCLUDING FINANCIALS, UTILITIES AND TRANSPORTS. 16% above median 40% above median 30% above median Median S&P 500**:

22. 22 U.S. HOUSEHOLDS ARE NOT PARTICULARLY UNDERWEIGHT STOCKS 50 40 30 20 1950196019701980199020002010 50 40 30 20 40 30 20 10 40 30 20 10 AS A PERCENT OF FINANCIAL ASSETS % AS A PERCENT OF TOTAL ASSETS U.S. HOUSEHOLD ASSETS: DIRECTLY AND INDIRECTLY HELD EQUITIES % SOURCE: FEDERAL RESERVE FLOW OF FUNDS. LATEST QUARTERLY DATAPOINT REPRESENTS BCA ESTIMATE. Average

23. 23 TREASURYS REMAIN OVERVALUED 2 1 0 19901995200020052010 2 1 0 8 6 4 2 8 6 4 2 TERM PREMIUM** % % U.S. 10-YEAR TREASURY YIELD, 5 YEARS FORWARD* 10-YEAR TREASURY YIELD* % % * SHOWN SMO0THED EXCEPT FOR LATEST DATAPOINT. ** SOURCE: KIM AND WRIGHT, FEDERAL RESERVE FINANCE AND ECONOMICS DISCUSSION SERIES, 2005-33.

24. 24 HIGHER INFLATION AHEAD © BCA Research 2013 3.0 2.0 1.0 201120122013201420152016201720182019 3.0 2.0 1.0 2.8 2.4 2.0 1.6 2.8 2.4 2.0 1.6 9 8 7 6 9 8 7 6 FED FUNDS RATE % % PCE INFLATION* % % THREE POLICY PATHS BASELINE (MARKET EXPECTATIONS) JANET YELLEN'S 'OPTIMAL POLICY' RULE MODIFIED TAYLOR RULE U.S. UNEMPLOYMENT RATE % % * 4-QUARTER PERCENT CHANGE. SOURCE: THREE POLICY PATHS: AN ILLUSTRATIVE EXERCISE (PERSPECTIVES ON MONETARY POLICY), JANET L. YELLEN, JUNE 6, 2012. BASELINE FROM THE FEDERAL RESERVE BANK OF NEW YORK, SURVEY OF PRIMARY DEALERS. LATEST UPDATE: NOVEMBER 2012.

25. 25 STILL SCOPE FOR SPREAD COMPRESSION © BCA Research 2013 12 8 4 2006200820102012 12 8 4 1200 800 400 0 1200 800 400 0 12-MONTH TRAILING DEFAULT RATE** BCA FORECAST DEFAULT LOSS*** BCA FORECAST % % U.S. HIGH-YIELD INDEX: DEFAULT-ADJUSTED SPREAD* PESSIMISTIC RECESSION SCENARIO BPs ** SOURCE: MOODY'S INVESTORS SERVICE. *** CALCULATED AS: DEFAULT RATE × (1 - RECOVERY RATE). * OPTION-ADJUSTED SPREAD LESS EXPECTED DEFAULT LOSSES, SOURCE: BARCLAYS.

26. 26 DOLLAR SENTIMENT IS STRETCHED © BCA Research 2013 80 60 40 20 200820102012 80 60 40 20 60 40 20 0 -20 80 40 0 -40 BULLISH SENTIMENT ON THE DOLLAR** % U.S. DOLLAR SPECULATIVE POSITIONS* NET LONG (LS) NET LONG (PERCENT OF OPEN INTEREST) (RS) % * SOURCE: CFTC. ** SOURCE: MARKETVANET.NET. Bn

27. 27 CYCLICAL FACTORS HAVE FLATTERED THE U.S. CURRENT ACCOUNT © BCA Research 2013 1.2.8.4 19901995200020052010 1.2.8.4 1.0.5 0 -.5 1.0.5 0 -.5 EXTERNAL INVESTMENT INCOME BALANCE % Of GDP % Of GDP BCA MODEL ESTIMATE* OF THE CYCLICAL IMPACT ON THE U.S. NON-OIL TRADE BALANCE % Of GDP % Of GDP * BASED ON A REGRESSION OF THE NON-PETROLEUM GOODS TRADE BALANCE ON THE FEDERAL RESERVE'S BROAD REAL EFFECTIVE EXCHANGE RATE, THE U.S. OUTPUT GAP, THE EXPORT-WEIGHTED GLOBAL (EX. U.S.) OUTPUT GAP AND A LINEAR TIME TREND. NOTE: SHADED AREAS DENOTE NBER-DESIGNATED RECESSIONS. 1% of GDP swing

28. 28 EMERGING MARKETS ARE NOW SOMEWHAT CHEAPER THAN DEVELOPED MARKETS © BCA Research 2013 1 0 -2 -3 -4 199619982000200220042006200820102012 1 0 -2 -3 -4 VALUATION GAP BETWEEN EMERGING MARKETS AND DEVELOPED MARKETS* * STANDARDIZED AVERAGE OF PRICE-TO-SALES, PRICE-TO-CASH FLOW, PRICE-TO-BOOK, PRICE-TO-TRAILING EARNINGS, PRICE-TO-FORWARD EARNINGS AND DIVIDEND YIELD. SOURCE: IBES, BLOOMBERG AND MSCI INC. (SEE LAST PAGE). EM more expensive EM cheaper

29. 29 JAPAN’S STOCK MARKET BUST: MAINLY A STORY ABOUT MULTIPLE CONTRACTION © BCA Research 2013 1.0.8.6.4 19901995200020052010 1.0.8.6.4.6.5.4.3.2.1.6.5.4.3.2.1 RELATIVE EARNINGS-PER-SHARE** RELATIVE STOCK PRICE* U.S. RELATIVE TO JAPAN: * IN U.S. DOLLAR TERMS. SOURCE: MSCI INC. (SEE LAST PAGE). ** IN U.S. DOLLAR TERMS, BASED ON 12-MONTHS FORWARD EARNINGS. SOURCE IBES AND MSCI INC. (SEE LAST PAGE). Up 419% No change

30. 30 COMMODITIES: THE LONG-TERM TREND IS DOWN © BCA Research 2013 2.2 1.8 1.4 1.0.6 187519001925195019752000 2.2 1.8 1.4 1.0.6 2.5 2.0 1.5 1.0.5 2.5 2.0 1.5 1.0.5 RAW MATERIALS PRICES (DEVIATION FROM 25-YEAR TREND) REAL* INDUSTRIALS PRICES * DEFLATED BY U.S. CONSUMER PRICE INDEX. U.S. Civil War World War I Korean War Yom Kippur War/ OPEC embargo This time is different?

31. 31 CHINA IS ALREADY THE WORLD’S DOMINANT CONSUMER OF BASE METALS Th Tonnes 20000 15000 10000 5000 CHINA G-3 U.S. EUROPE JAPAN ALUMINUM CONSUMPTION Th Tonnes CHINAG-3 8000 6000 4000 2000 COPPER CONSUMPTION U.S. EUROPE JAPAN © BCA Research 2013

32. 32 THE SHARE OF OIL IN GLOBAL ENERGY USAGE SHOULD CONTINUE TO TREND LOWER © BCA Research 2013 40 30 20 10 0 1970198019902000201020202030 40 30 20 10 0 % OF TOTAL ENERGY CONSUMPTION OIL COAL NATURAL GAS HYDROELECTRICITY NUCLEAR ENERGY RENEWABLES % NOTE: MILLION TONS OF OIL EQUIVALENT. SOURCE BP ENERGY OUTLOOK 2030.

33. 33 PLENTY OF DOWNSIDE RISKS FOR PRECIOUS METALS © BCA Research 2013 150 100 50 0 -50 187519001925195019752000 150 100 50 0 -50 80 60 40 20 0 80 60 40 20 0 AS A PERCENTAGE DEVIATION FROM CPI "TRENDLINE": PRICE OF GOLD PRICE OF SILVER % GOLD PRICE SILVER PRICE CPI NOTE: TOP PANEL REBASED TO 1900 = 1.