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Themes for the decade

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  • 1. Themes for the DecadeApril 20131
  • 2. www.castlestonemanagement.comFour Main Themes for the Next Decade2 The devaluation of money versus real assets.This has been occurring in the last decade and will continue throughout this decade. Outperformance of equities markets with low levels of Debt-to-GDP versus equities markets withhigh levels of Debt-to-GDP.BRIC, Next 11 Emerging Markets will outperform Developed Equity Markets. High-yielding stocks are appealing.High-yielding, stable, partly-monopolistic, inelastic-demand stocks will remain attractive given interestrates are likely to remain low for many years. Direct and indirect taxes will continue to rise.OverviewSource: Castlestone Management.
  • 3. www.castlestonemanagement.com$0$500$1,000$1,500$2,000$2,500$3,000$3,500$4,0001946 1957 1968 1979 1990 2001 2012US Federal ExpenditureUS Government Revenue Changes in population growth and government spending on Social Security and Medicare have permanentlyincreased Expenditure creating an eternal deficit between the two: Expenditure and Revenue.Government Expenditure vs. Government RevenueSource: Castlestone Management & Bloomberg. Data as at February 2013.BillionsofDollarsThemes for the Decade
  • 4. www.castlestonemanagement.com23%20%19%6%13%18%US Expenditure 2011Medicare & MedicaidSocial SecurityDefense DepartmentNet InterestOther MandatoryDiscretionary4%8%19%3%24%41%US Expenditure 1960sMedicare & MedicaidSocial SecurityDefense DepartmentNet InterestOther MandatoryDiscretionaryExpenditure has permanently changedThis is similar for other developed markets (Europe, Japan, Canada) Social Security & Welfare spending across Europe and North America has permanently changed budgets acrossdeveloped markets.Permanent Expenditure ChangesSources: Castlestone Management & Congressional Budget Office, http://www.bis.org/ Data as at February 2013.Themes for the Decade
  • 5. www.castlestonemanagement.comFour Stages of a Secular Bear MarketThemes for the DecadeSource: Morgan Stanley Research, Castlestone Management & Bloomberg. Chart represents the typical secular bear market on a sample of 19 such bear markets and overlaid by the dates of the recent market trend.Note: Past performance cannot be relied on as a guide to future performance.4060801001201401602007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017MSCI Europe Price Index Since June 2007Typical Secular Bear MarketTYPICAL REBOUNDRALLY: +71% over17 monthsTYPICAL BEARMARKET: -57%over 30 monthsTYPICAL NEXTCORRECTION:-25% over 13monthsTYPICAL TRADING RANGE:52% wide 5.6 years long
  • 6. www.castlestonemanagement.comSource: Castlestone Management & Bloomberg. Data range January 1990 – February 2013.Note: Past performance cannot be relied on as a guide to future performance.Strong Correlation Between Gold and M1PM16%ReturnThe Devaluation of Money vs. Real AssetsMoneysupply/US$bn0%50%100%150%200%250%300%350%400%450%500%6008001000120014001600180020002200240026001990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012M1 Money SupplyGold Spot Price
  • 7. www.castlestonemanagement.comPrecious Metals Will OutperformThe Devaluation of Money vs. Real AssetsSource: Castlestone Management & Bloomberg. Data range February 2000 – November 2012.Note: Past performance cannot be relied on as a guide to future performance.0%100%200%300%400%500%600%700%900110013001500170019002100230025002000 2002 2004 2006 2008 2010 2012M1 Money SupplyGold Spot PriceBarclays Precious Metals Index%GoldandPMReturnsMoneysupply/US$bn
  • 8. www.castlestonemanagement.com400600800100012001400160018002000800100012001400160018002000220024002600Jan-2008 Nov-2008 Sep-2009 Jul-2010 May-2011 Mar-2012 Jan-2013M1 Money Supply (LHS)Gold Spot $/oz. (RHS)Relationship Will Continue as in 2008Source: Castlestone Management & Bloomberg. Data range January 2008 – January 2013.Note: Past performance cannot be relied on as a guide to future performance.Moneysupply/US$bnDivergenceUS$/oz.ConvergenceDivergenceThe Devaluation of Money vs. Real Assets
  • 9. www.castlestonemanagement.com-100%-50%0%50%100%150%200%2000 2002 2004 2006 2008 2010 2012Emerging Markets IndexS&P 500 Index (US)Nikkei 225 Index (Japan)Equities Show Close to Zero Percent ReturnsSource: Castlestone Management & Bloomberg. Data range February 2000 – December 2012.Note: Past performance cannot be relied on as a guide to future performance.Debt-to-GDP%Returns
  • 10. www.castlestonemanagement.comSource: Bloomberg & Castlestone Management. Data as at February 2013.Developed vs. Developing Countries+3.8% +1.1%+15.4%Annual equity returns for Developed and Emergingmarket countries over the past ten years%Debt/GDPDebt-to-GDP0%30%60%90%120%150%180%210%240% JapanUSACanadaGermanyFranceUKEgyptMexicoNigeriaSouthKoreaVietnamTurkeyPakistanPhilippinesIndonesia-4%0%-3.22% -1.2%+12.05+15.77%+14.49%+5.5%+12%+13.4%+20.64%+21.5%
  • 11. www.castlestonemanagement.comHigh Income Class: China and N11Source: Castlestone Management & GS Global ECS Research, Global Economics Paper No: 170, http://www.ryanallis.com/wp-content/uploads/2008/07/expandingmiddle.pdfN1105010020030040050060070080090010002010 2020 2030 2040 2050BrazilChinaIndiaRussiaUSWestern EuropeJapanN 11The number of people with incomesabove $30,000 in 2007 PPPDebt-to-GDP
  • 12. www.castlestonemanagement.comGlobal Growth PotentialSource: Castlestone Management & GS Global ECS Research.N11054.90% 4.80%3.70%2.10%0%1%2%3%4%5%6%N 11 BRIC World G7By 2050 N11 could 1) Be significantly larger than the US2) Become twice the size of Europe 3) Account for a fifth of the global economyDebt-to-GDPN11 – Key Driver for Growth:Average Growth Rate (2011-2050)
  • 13. www.castlestonemanagement.comSource: Castlestone Management & Bloomberg. Data as at February 2013.High-Yielding StocksSome High-Yielding Stocks Remain AttractiveHigh-yielding, stable, partly-monopolistic, inelastic-demand stocksMcDonald’s +3.08% Deutsche Telecom +8.49% Trustworth +5.09%Vodafone +6.56% Telstra Corp +8.68% Sasol +4.51%Coca Cola +2.67 Singapore Telecom +5.59% Vodacom +5.81%
  • 14. www.castlestonemanagement.comSource: The Big Picture, http://www.ritholtz.com/blog/wp-content/uploads/2010/04/top-rate.jpgTaxes Need to Increase as They Have HistoricallyTaxes & Debt
  • 15. www.castlestonemanagement.com0%25%50%75%100%125%1907 1922 1937 1952 1967 1982 1997 2012US Marginal Tax RateUS Gross Public Debt % GDPUS Marginal Tax Rate vs. Gross Public DebtTaxes & DebtSource: Castlestone Management & Bloomberg. Data as at February 2013.
  • 16. www.castlestonemanagement.comThe Only Solution to This ProblemSource: Darren Whittingham, http://www.shutterstock.comTaxes & Debt
  • 17. Important InformationAppendixCMDThis document is intended for and directed at investment professionals and is not intended for retail customer use. Persons who do not haveprofessional experience in matters relating to investments should not rely on it.This document is not offering to sell any product. Any transaction requires our subsequent formal agreement which will be subject to internal approvals and bindingtransaction documents. Castlestone Management (“We”) will not be liable for any use you make of any information in this document. We are not your advisor orfiduciary. We are not recommending or making any representations as to suitability of any product or the tax, legal or accounting treatment of any product. We arenot responsible for information stated to be obtained or derived from third party sources. All opinions are given as of the date hereof and are subject to change. Weare not obliged to inform you of any such changes.Any simulated performance data and/or past performance data contained herein is not a reliable indicator of future performance. Income from investments mayfluctuate and investors may not recoup the amount originally invested. Any forward-looking statements concerning the financial condition, results of operations andbusinesses of Castlestone Management expressed or implied, are based on managements current expectations and assumptions, which may change withoutnotice, and are no guarantee of future results, performance or events.This document is confidential. No part of it may be reproduced, distributed or transmitted without Castlestone Management’s written permission. Neither thisdocument nor any copy of it may be distributed, directly or indirectly, in the United States of America or its territories or possessions (the “United States” or to anyUS Person as defined in Regulations under the United States Securities Act of 1933 (as amended). Any failure to comply with these restrictions may constitute aviolation of United States securities law. This is not exhaustive; other regional-specific wording may apply. If in doubt, please consult with CastlestoneManagement’s Legal and Compliance department.Castlestone Management Inc. is regulated by the British Virgin Islands Financial Services Commission.This scheme has been entered into the List of Restricted Schemes by the Monetary Authority of Singapore under paragraph 2(3) of the Sixth Schedule to theSecurities and Futures (Offers of Investments)(Collective Investment Schemes) Regulations 2009 for distribution to institutional and accredited investors.No invitation to the public in Hong Kong to buy or subscribe for any product is permitted to be made. You should consult your own attorney, business adviser andtax adviser as to legal, business, tax and related matters concerning any of the contents of this document.This document has not been delivered for registration to the Registrar of Companies in Hong Kong, its contents have not been reviewed by any regulatory authorityin Hong Kong, nor has the product been authorised by the Securities and Futures Commission. Accordingly, this document must not be issued, circulated ordistributed in Hong Kong other than (1) in circumstances which do not constitute it as a “prospectus” as defined in the Companies Ordinance (Cap.32) or which donot constitute an offer to the public within the meaning of that ordinance, or (2) to professional investors as defined in the Securities and Futures Ordinance(Cap.571) and the Securities and Futures (Professional Investor) Rules made thereunder. Unless permitted by the securities laws of Hong Kong, no person mayissue in Hong Kong, or have in its possession for issue in Hong Kong, this document or any other advertisement, invitation or document relating to any productsother than to a professional investor as defined in the Securities and Futures Ordinance (Cap.571) and the Securities and Futures (Professional Investor) Rulesmade thereunder.