AEGON Asset Management Olaf van den Heuvel Head of Tactical Asset Allocation CFA Forecasting dinner

2 Enough already Financial innovation Emerging Markets Stability

3 Enough already II  Historic analysis tells us growth is negatively impacted if debt/GDP exceeds 230% Growth and debt for 18 OECD countries Source: BIS

4 Enough already III  It is contagious! Source: BIS

5 Austerity

6 10 Years + of the Euro: benefits and imbalances What happened and did not happen EMU created one of the largest economic areas  Reduced transaction costs  Increased intra-EMU trade  Resulted in low inflation  Reduced interest rates / interest rate differentials  Resulted in further integration of financial markets  Resulted in economic convergence  Disciplined national budgetary policies  Resulting in:  Increased economic growth throughout the eurozone...  McKinsey calculates EMU effects on GDP at ~0.3%pt p.a. for the eurozone (over period 1999 – 2010)  Germany strongly profited from an increase in competitiveness  Peripherals strongly profited from lower interest rates ... but also a build-up of economic imbalances  Productivity differentials  Government finances where not sufficiently redressed  Low interest rates contributed to increase in household deficits and housing market bubbles

7 The issue

8 Fiscal, economic and political union Fiscal union Eurobonds Budget rules and “Marshall plan” for peripherals “United States of Europe” Sustainability and required integration  Agreement has been reached on tighter budget rules ► “The proof of the pudding is in the eating”  More will probably be needed ► Ad hoc conditional crisis loans have been provided, but not a systemic solution (ie eurobonds, EU IMF) ► Marshall plan for peripherals ► Fiscal union  Insufficient integration (too little, to late) increases likelihood of core eurozone scenario Degree of integration Sustainability / Market credibility High Core Eurozone Enforceable budget rules Present Eurozone

9 Cyclical outlook Source: Bloomberg, Datastream

10 Economic outlook

11 Low growth for longer Not necessarily bad for markets

12 Valuation good predictor of long term equity returns

13  Dividend yield and positive effect of rerating of equities cause a higher expected return in Europe compared to the US Components of equity returns

14 Expected returns Annualized returns until 2015 Basecase EU AAA Sovereign-1% Italian Sovereign5% US Sovereign-1% Inflation Linked Bonds (EU)0% EU Investment Grade3% EU High Yield7% US Investment grade1% US High Yield3% EMD4% Lev loans5% ABS8% Equity - WORLD7% Equity - US5% Equity - EU9% Equity - EMERGING MARKETS8% Real estate - WORLD9% Commodities3%

15 Discuss!

16 High level indication of main (potential) costs and benefits ScenarioCostsBenefits Fiscal Union flight forward (60%)  Funding rescue mechanism (larger than present ESFS)  Debt restructurings to restore sustainability  Fiscal transfers  Negative impact on economic growth from tough austerity packages  Loss of sovereignty  Exchange rate stability continues  Potential as political and economic powerhouse survives  Institutional changes plus forced restructuring of pressured countries improves stability and long term growth outlook  Avoids costs of break-up of Eurozone Core Eurozone economic convergence is leading (30%)  Loss of exchange rate stability and return to competitive devaluations, with negative growth impact and deflationary risks for Core Eurozone and inflationary risks and higher interest rates for exiting/devaluating countries  Increase in euro-denominated debt burden for exiting countries, triggering defaults including systemically important banks  Membership of Core Eurozone driven by high degree of economic convergence and therefore less need for rescue mechanisms and fiscal transfers  Pressured countries restore competitiveness through devaluations Break-up Eurozone, survival EU large step back (9%)  Further loss of exchange rate stability  Larger growth, inflation and interest rate risks  Wealth effects from redenomination of all debts and assets, triggering defaults including systemically important banks  Monetary policies can be better aligned to domestic circumstances Break-up EU chaos (1%)  As above, plus negative growth impact from break down of cooperation, harmonisation and integration and increase in isolation and protectionism  Complete loss of Europe as (potential) political and economic powerhouse  Maximum sovereignty High Small