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2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
2013.10.10 accuvest bpv-q4
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2013.10.10 accuvest bpv-q4

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  • 1. 4th Quarter BPV Accuvest Global Advisors  Investment Committee  Big Picture View  October 1, 2013
  • 2. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 2 Emerging Markets have not experienced the same kind of economic uptick seen in Developed Markets Equity market underperformance in EM has been accumulating since 2010 and is not solely due to tapering talk Stocks up, bonds crushed is the easy headline. But within equity-land, there have been highly disparate returns ECONOMIC OUTLOOK One of the ongoing themes in 2013 is the overall somewhat disappointing economic data for Emerging Markets (“EM”). While Developed Markets (“DM”) data have been largely uninspiring, they have been unrevised and steady for most of this year. Projections for EM countries, on the other hand, continue to get ratcheted lower, reflecting the negative effect on business confidence arising from local market developments and weaker domestic and foreign demand. Indeed, one of the more interesting and impactful developments of the post-crisis period is the underperformance of not only economic data, but market performance as well. Underperformance by EM equities began in late 2010 and has run mostly unabated to the present. The taper talk that began in May of this year brought focus to EM deterioration, but most of the cumulative EM underperformance was logged prior to the May shock, not as a result of it. These 2-1/2 years of steady, ongoing underperformance is unusual for its duration and has occurred while Developed Markets saw fairly robust recoveries. Pulling back the lens a bit further also brings into focus that, within EM markets and economies, there has been highly varied performance. BRIC countries, for instance, have been a significantly underperforming subset of the overall EM universe. Each of those four markets has their own issues and outlooks. It is becoming more and more apparent that country- by-country analysis is necessary for a clear view on economic and market forecasts. 1 Month 3 Months 6 Months 1 Year S&P 500 3.7% 5.3% 8.8% 19.5% MSCI EAFE 8.1% 11.2% 11.0% 23.0% MSCI Emerging Markets 9.5% 9.7% ‐0.4% 1.5% All Country World Index 6.2% 8.2% 8.3% 17.9% High Yield Bonds 1.2% 2.5% 0.4% 6.0% Investment Grade Bonds 1.0% 0.5% ‐3.2% ‐3.3% Lont Term Treasuries 0.4% ‐3.3% ‐8.9% ‐12.4% Emerging Market Bonds 3.2% ‐0.4% ‐5.3% ‐6.5% US Dollar Index ‐2.9% ‐4.9% ‐4.6% ‐1.4% Euro vs. USD 2.7% 4.6% 5.8% 4.7% Yen vs. USD 0.7% 3.2% ‐4.3% ‐20.1% EM Currencies vs. USD 3.3% 0.9% ‐3.3% ‐2.4% Gold ‐5.6% 5.9% ‐16.6% ‐26.2% Silver ‐7.2% 12.3% ‐20.4% ‐37.4% Crude Oil ‐2.9% 7.1% 8.6% 11.1% Commodities ‐3.0% 1.9% ‐4.9% ‐9.5% Tuesday, October 1, 2013
  • 3. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 3 Economic Growth in developed economies is forecasted to improve in 2014 Consensus Forecasts - Real GDP (%Y/Y) 2012 (a) 2013 (f) 2014 (f) Change in 2013 forecasts from June 30, 2013 Global 2.2 2.0 2.9 -1.0 G10 1.5 1.1 2.0 -0.1 US 2.8 1.6 2.7 -0.2 Euro Area -0.6 -0.4 1.0 -1.1 Germany 0.7 0.5 1.8 1.0 France 0.0 0.1 0.9 0.2 Italy -2.4 -1.7 0.5 0.0 Spain -1.6 -1.4 0.6 0.3 UK 0.2 1.3 2.0 0.4 Japan 2.0 1.9 1.6 -0.2 Emerging (brics) 5.6 5.7 5.7 0.7 Asia 6.2 6.4 6.3 1.0 China 7.7 7.6 7.4 0.2 India 5.1 4.8 5.2 -0.6 South Korea 2.0 2.6 3.5 -0.3 Latin America 2.7 2.6 3.2 0.0 Brazil 0.9 2.4 2.5 0.1 Mexico 3.9 1.9 3.8 -0.6 EMEA 2.6 2.1 3.0 -0.4 Russia 3.4 2.0 2.9 -1.0 Turkey 2.2 3.6 4.0 -0.1 Poland 1.9 1.1 2.5 0.1 South Africa 2.6 2.2 2.9 -0.1 Source: Bloomberg The “Equities” section of this BPV will delve greater into the details of performance, outlook, and issues attendant to the highly contrasting country profiles. In the broadest view of the global economy, however, it seems as though a generally better outlook for activity in the US and Europe has emerged as a consequence of favorable financial conditions which have resulted in stronger business confidence data. This is in spite of the rise in bond yields since May. Some of the data is shown in charts below. For instance, the US unemployment rate, which has fallen significantly, in line with the historical average pace of decrease.
  • 4. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 4 Higher interest rates have the ability to derail economic improvement which is why the Fed delayed tapering Investment and Consumption growing, Government spending declining US Industrial Production has improved Risks are well-known currently. Higher interest rates are a threat for the whole economy and the Fed must walk a fine line as the likelihood for policy error is potentially large. Tapering will eventually become a reality and the market has seen a preview of the effects of just talking about it. Debt ceiling and government shut- down debates in the US have the potential to negatively impact confidence and economic activity as was seen in the Fall of 2011. Overall, however, the economy seems to have entered a period where momentum can build and benefits can broaden US GDP Components Source: Accuvest Global Advisors US Industrial Production YoY Source: Accuvest Global Advisors
  • 5. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 5 US Manufacturing is surging US Earnings Growth should follow the expansion in US Manufacturing US ISM Purchasing Managers Index Source: Accuvest Global Advisors S&P 500 Earnings Growth relative to ISM Manufacturing Source: Accuvest Global Advisors
  • 6. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 6 US Personal Consumption appears to be bottoming Velocity of Money remains in a long term downtrend, reducing inflationary pressure US Lending continues to tighten US Personal Consumption Expenditures YoY Source: Accuvest Global Advisors Velocity of Money – M2 Source: Accuvest Global Advisors US Loans as a % of US Deposits Source: Accuvest Global Advisors
  • 7. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 7 Capacity Utilization is moderate, reducing inflationary pressure Home prices are higher, improving consumer confidence and increasing household wealth Mortgage Rates have spiked with fears of “QE Tapering” US Capacity Utilization as a % of Total US Capacity Source: Accuvest Global Advisors Case Schiller 20 City Home Prices Source: Accuvest Global Advisors 30 Year Mortgage Rate Source: Accuvest Global Advisors
  • 8. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 8 Employment data in the US has improved and is helping consumer confidence Personal Income Growth appears to be bottoming Not huge retail sales growth, but enough to keep things moving and improving Change in Non-Farm Payrolls Source: Accuvest Global Advisors US Personal Income Growth YoY Source: Accuvest Global Advisors US Retail Sales YoY Change Source: Accuvest Global Advisors
  • 9. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 9 Tapering talk and the government shut- down in Washington have impacted FX markets Those short-term gyrations will ultimately give way to USD strength broadly The negative tone in the EM FX market has been reduced, but headwinds remain in certain countries After sharp weakness, the Yen has trended sideways over the last four months The Fed’s decision to postpone tapering has certainly impacted the currency market and continued volatility is likely in the short-term. In the medium-term, the eventual move towards tapering should be viewed as USD bullish. Uncertainty regarding the timeframe for tapering to begin is well-founded given the surprise by the Fed in September. It will eventually happen and December is a reasonable timeframe for it to begin. Diverging growth trends and the relative monetary outlook point to eventual USD strength against EUR and JPY, but also against other majors as well as many EM currencies. The drag from spending cuts/sequestration will lessen into 2014. At the same time, the wealth effects generated from higher financial assets and housing prices should continue to bolster consumer spending in a meaningful way. On the investment side, cleaner balance sheets and improved profitability in the corporate sector will spur credit growth and investment. Euro Area conditions, in contrast, are unlikely to buoy growth in a similar manner. JPY will continue to weaken as consumption taxes are initiated making relative growth rates tip noticeably in USD’s direction. Relative monetary policy also favors USD; at least in the longer-term which could see JPY much lower. EM currencies should start to move laterally on average. With tapering on hold, there is as much as $250B more coming into the market from Fed asset purchases. These inflows still may not offset the exodus of funds from EM. Policy makers will have some breathing room, however, and can try to offset some of the headwinds affecting decision making such as funding pressures, dwindling global and domestic growth, inflationary pressures, declining reserves, and political instability. With muted risk aversion and relatively attractive valuations, currencies that are benefiting from Developed Market improvement and China stabilization can do best. Japanese Yen Source: Accuvest Global Advisors
  • 10. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 10 EUR has improved, but will ultimately give way to weaker levels vs USD The weaker Peso is surprising given strong fundamentals in Mexico, but indicative of how EM currencies have been hit generally CHF continues strong Euro - EURUSD Source: Accuvest Global Advisors Mexican Peso - USDMXN Source: Accuvest Global Advisors Swiss Franc - USDCHF Source: Accuvest Global Advisors
  • 11. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 11 Emerging Market and Commodity Currencies have depreciated against the US Dollar in 2013 EM equity market underperformance is due to exceptional strength in the US and shocking underperformance by BRIC markets This differential has been building since 2010 and is not just an unfortunate point- to-point measurement issue The methodology for creating the FX Forecast table below takes into account fair value evaluations that do not fully account for momentum and other supply and demand technicals that cause overshoots. The broad call for near-term FX moves is for JPY to continue its weakening trend and for USD to gain ground against other majors, notably EUR. FX Returns vs. USD - YTD Source: Accuvest Global Advisors EQUITIES As mentioned in the opening, a deeper dive into Emerging Market equity underperformance is necessary in order to have a clear view on likely paths going forward. EM underperformance can be decomposed into 1) the exceptionally strong performance of US equities, and 2) a particularly pronounced underperformance by the BRIC countries. Remember that Brazil, Russia, India, and China comprise around half of the EM equity market capitalization. EM markets other than the BRICs have performed comparably to Developed Markets x-US. A closer look at developments in the BRICs suggests that the underperformance was driven by disappointing fundamentals, rather than positioning, sentiment, or other non- fundamental drivers of asset prices. Those fundamentals are unlikely to return to the levels that created the rapid growth in earnings, almost across the board in the EM universe. EM equities may be a ‘buy’ at current levels, but analysis needs to have a different investment thesis than expectations of strong growth which underpinned the case for EM equities for an extended period.
  • 12. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 12 EM has underperformed DM equities since 2010 Economic Data has been weaker than expected in Emerging Markets Between late 2010 and the current period, the total return on EM equities was about two-thirds of the return on advanced markets, which amounts to over 10 percentage points of underperformance per year. Emerging Markets Relative Strength Source: Accuvest Global Advisors Why EM has underperformed is not clear-cut. For instance, although EM GDP growth has decelerated in the past years, advanced economies have underperformed as well. Additionally, mutual fund and ETF fund flows were supportive of EM equities over the underperformance period. Growth and flows would be two reasons to expect EM returns to continue to outperform DM, but they haven’t in the past few years. Economic Surprise Index Source: Accuvest, Citi
  • 13. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 13 EM GDP has decelerated but so has growth in DM There has been wide dispersion in Emerging Market Retail Sales Emerging vs Developed Economic Growth Source: Accuvest Global Advisors Emerging Market Retail Sales Source: Accuvest Global Advisors
  • 14. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 14 Fund flows were actually supportive of EM over the underperformance period Declining EM equity P/E ratios has been pronounced. This derating is the main cause of underperformance since 2010 Overly aggressive initial valuations does not seem to have been the case The outperformance of the US equity market is out of proportion and unlikely to be repeated Emerging Market Equities & Bonds Source: Accuvest Global Advisors Valuations would also be a reasonable place to look for anomalies in recent performance. Had EM equities been very aggressively priced relative to DM or other asset classes in 2010, their subsequent underperformance would have had an easy explanation. This does not seem to be the case. On a PE basis, EM were more conservatively valued than DM in 2010. The massive underperformance since then has been associated with a growing gap between EM and DM equities valuations. The derating over those 2-1/2 years needs to be explained. Emerging and Developed Market Valuation One reason for the EM underperformance has been the outperformance by the US market. That performance is out of proportion to its own historical norm and to the magnitude of its economic recovery. Such outperformance is highly unlikely to be seen in the years to come. The US market has been driven predominantly by a double-digit surge in earnings that far exceeded earnings growth in other advanced markets and in EM as a group.
  • 15. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 15 In addition to a strong US market, BRIC markets have done very poorly and remember that BRIC markets are half of EM market cap EM x-BRIC has done as well as DM x-US. So, in general terms, US up big, BRIC down big, all other countries clustered in the middle EM underperformance is concentrated in the BRICs Equity Returns Source: Accuvest Global Advisors The second driver of EM underperformance is the return on BRIC equities which accounts for about half of the EM total market capitalization. Those countries have been as weak as the US returns were strong. BRICs have seen an annual return of negative 12.5%. Interestingly, EM equities excluding the four BRIC markets earned roughly 4.5% during that time. Emerging Market (ex-BRIC economies) Relative Performance Source: Accuvest Global Advisors
  • 16. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 16 BRIC underperformance is due to weak earnings growth and a big de- rating of BRIC equities Getting the country right has been a significant issue, almost to the point where it may not even make sense to view EM as an asset class at all Performance varies widely across EM markets, but BRICs are the weakest performers Investment opportunities may have arisen from this tremendous dispersion, but unique developments have created unique markets requiring a country-by-country view Total Returns Source: Accuvest Global Advisors A key distinction between BRIC and other EM markets is that earnings fell sharply in the BRICs but rose strongly in other EM markets. In the charts above, it can be noted that there is not a point-to-point comparison that creates the underperformance. Rather, it is an ongoing issue than has been consistently concentrated in the BRICs. The message from this data is that equity market investing requires a close look at a wide disparity of drivers across national markets. Even in the BRICs, the returns are highly generalized. There are important differences in the fundamental drivers of those four countries with important implications for the investment outlook. This highlights the importance of getting the national market contexts right and raises the question whether it even makes sense to view EM as an asset class at all. Dispersion of Country Returns Source: Accuvest Global Advisors With the underperformance as large as the recent period, it raises the question whether an investment opportunity has been created. BRIC underperformance specifically seems worthy of close analysis. Market developments and macro views are different in each case and create unique implications for each market.
  • 17. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 17 The Chinese market has de-rated significantly. Earnings growth has stalled. Economy seems to be reconfigured for a more balanced trajectory going forward Earnings in Brazil have collapsed. Economic policies have created environment where the rate of investment is too low Earnings in India have grown, but PEs have dropped as the market participants have run away from policy reforms that are not working EM equity markets lack common drivers, perhaps making the asset class an unwise investment as a whole China prospects, for instance, are not bad given unchallenging earnings expectations Growth, on the other hand, is what will eventually drive India China, for instance, has seen the least disappointing returns amongst the BRICs although the numbers are striking compared to DM. As the largest EM economy and equity market, Chinese results are the most consequential. The economic backdrop in China has been dominated by a) a deceleration to a slower rate of growth as authorities engineer a transition to a more balanced development trajectory, and b) anxiety that a sharp cyclical event may result from risks and tensions created by that transition. The two points have created a substantial de-rating of Chinese markets. The biggest issue going forward is a third point; earnings have barely budged in USD or CNY terms, even with near double-digit rates of growth in GDP. The combination of policy, development, and demographics has created a rapid increase in labor costs that could continue. Corporate costs structures will be affected and earnings may not grow as much as in the past. Brazil, unfortunately, has been impacted negatively on a number of fronts. Weak growth and a faltering economic strategy have undermined a seemingly promising market outlook. Since 2010, Brazil’s equity market is down 16% p.a. and that is with the PE relatively static. The market decline has been entirely attributable to a collapse in earnings of listed shares which a weak BRL has compounded. Policies have failed to create an environment conducive to high rates of investment and economic growth. Policies have promoted domestic consumption and income distribution with some positive social results, but the rate of investment is below 20% of GDP which is too low to generate strong growth. This problem is more longstanding than it will be in China. A weak economic outlook for growth and doubts about policy framework creates a set of complications that are difficult to evaluate. India’s equity market performance has been closer to Brazil than China, but the underlying story is different from both. The weak market performance is due predominantly to a de-rating of Indian equities, rather than very weak growth in corporate earnings. Looking through the recent currency shock, earnings are seen to be growing in local currency terms. The public sector has been unable to make the investments and enact the policy reforms required to sustain rapid growth and investors have lost confidence as evidenced by the declining PE ratios. EM equities do not seem to currently possess powerful enough common drivers to create an asset class worthy of specific analysis and portfolio management; at least not as it was in the past. Growth has been the common factor amongst EM markets, but that is a less powerful driver currently. Each market must be viewed and analyzed independently. Using the same BRIC countries, not only have they seen different paths over since 2010, their outlooks are unique as well. In China, earnings may stay somewhat stagnant even as GDP reaccelerates. Value is a more plausible investment thesis than growth, and, for now, Chinese equities seem interesting in that light. Unchallenging valuations and the cash the investments distribute will be the theme, and not unabated growth. India is the market where the traditional EM driver, growth, looks most relevant. The key question is whether policy status quo is compatible with robust future growth and whether that growth can filter through to corporate earnings. Tactical issues regarding currency and bond levels are also more important here.
  • 18. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 18 But, Brazil is a value trap. An EM-only, or BRIC-only analysis would not pick this up Countries most reliant on capital flows, measured by the current account deficit, are where the most intense currency and interest rate adjustments have taken place China, South Korea, and Russia appear to be least exposed to the risk of increasing US interest rates The Brazilian market has proven to be a value trap. Equity investments have appeared fairly valued since the 2002 election-related crisis. Fundamentals have deteriorated and brought the market down with them; declining PEs and declining earnings. Brazil should be viewed as a turnaround or restructuring candidate which is a different proposition than other EM markets. Current Account Impact on Currencies Current Account Impact on Interest Rates Source: Accuvest Global Advisors, Lyxor
  • 19. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 19 Country Ranking Data – As of 9/30/2013 Source: Accuvest Global Advisors, MSCI
  • 20. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 20 Range of Returns among Countries – 3rd Quarter QTD Spain 25.7% Italy 19.6% Austria 18.9% France 15.4% Sweden 15.2% Korea 14.9% Netherlands 14.8% Belgium 13.6% Russia 13.6% Germany 12.7% China 12.2% United Kingdom 12.0% Australia 11.9% Switzerland 9.5% Norway 9.1% Hong Kong 8.9% Canada 8.8% South Africa 8.8% Brazil 8.4% Japan 6.7% Usa 5.6% Singapore 4.6% Taiwan 3.1% Israel 2.2% Mexico -1.7% Malaysia -3.0% Thailand -5.2% India -5.3% Chile -5.6% Turkey -6.7% Max 25.65% Min (6.73%) Range 8.29% Average 8.19% Stdev 8.19% Source: Accuvest Global Advisors
  • 21. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 21 The earnings yield gap still points to relative value in stocks On January 1 of this year, the average S&P forecast for year-end was 1,531 and the highest forecast was 1,615 Of course, strategists have moved up their targets now as the market rallied, but the move in stocks this year was very much unexpected Recommended asset allocations are varied Earnings yield vs. Junk Bond yield Source: Accuvest Global Advisors S&P 500 Year End Forecast Table 2013 Close 2013 EPS Bank of America 1750 $109.00 Bank of Montreal 1800 $110.00 Barclays 1800 $108.00 Citigroup 1650 $109.50 Credit Suisse 1730 $107.70 Deutsche Bank 1750 $111.00 Goldman Sachs 1750 $108.00 HSBC 1680 JP Morgan 1775 $110.00 Morgan Stanley $105.50 Oppenheimer 1730 $109.00 Wells Fargo 1440 $105.00 Mean 1715 $108.76 Median 1750 $108.50 High 1800 $111.00 Low 1440 $105.00 Source: Accuvest Global Advisors Asset Allocation Table Firm Stocks Bonds Cash Alts Bank of America 68% 30% 2% 0% HSBC 24% 59% 7% 5% JPMorgan 60% 25% 15% 0% UBS 47.6% 39% 3.2% 5% Source: Accuvest Global Advisors
  • 22. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 2 A highly accommodative central bank and a modestly growing economy that shows no signs of inflation are the reasons why rates probably only trend slowly higher in a stair-step fashion Reducing rate risk and taking more credit risk is a way bond portfolios can still add value in the rising-rate environment Interest Rate forecasts are being ratcheted higher with the 10-yr expected to end the year with a yield of 2.85% This is 65 basis points higher than the median forecast at the beginning of the year. The magnitude of the increase we have seen in 2013 was unexpected. down massively. Neither the overly-strong economy or inflationary scare are base cases currently, but they must be watched vigilantly. As noted in the table below, the forecasts for year-end are still under 3% on the 10-year Treasury note and twelve months later it is projected to be less than 50 basis points higher than that. This kind of scenario, while not great for bonds, is certainly not terrible. That outlook is the most reasonable and will drive strategy for the near term. Exposure to credit should be rewarded. Extending out the curve somewhat (say, in the 3-5 year range) should also be a winning strategy. With the yield curve steep and a dramatic rise in rates unlikely in the medium-term, move out the curve to that maturity range will create better returns than owning maturities that are very short, continually reinvesting and hoping for higher rates to kick in. Other strategies can minimize much of the interest rate risk of holding bonds. High yield bond portfolios can be built with durations near 3 and yields high enough, that rates would have to rise dramatically to not have positive returns when measured in 12-month holding periods. Of course, this brings into play risks associated with credit, but with the improving economy continuing to improve corporate balance sheets, metrics should improve. Floating rate senior loans are another way to mitigate interest rate risk. Floaters in general do not provide much return with a small margin over Libor, but once again, by accepting credit risk much higher returns are possible. 10-Yr Treasury Yield Forecasts (77 forecasts) Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Median Forecast 2.85 3.00 3.10 3.22 3.36 Average Forecast 2.84 2.96 3.10 3.24 3.36 High Forecast 3.76 3.93 4.21 4.36 4.52 Low Forecast 2.10 2.20 2.30 2.74 2.71 Source: Accuvest Global Advisors Change in Forecasts since January 2013 Q4 13 Q1 14 Median Forecast +0.65 +0.60 Average Forecast +0.67 +0.62 High Forecast +0.76 +0.68 Low Forecast +0.60 +0.54 Source: Accuvest Global Advisors
  • 23. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 2 Interest Rates are increasing… But have reached their long term trend The US Yield Curve is steepening, short term interest rates remain low 10 Year Treasury Yield Source: Accuvest Global Advisors 10 Year Treasury Yield - Long Term Trend Source: Accuvest Global Advisors, Lyxor 2 Year - 10 Year Treasury Yield Spread (Steepness) Source: Accuvest Global Advisors
  • 24. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 2 US Yield Curve has steepened further over the last three months Investment Grade credit spreads have widened Yield Curve Shifts    3‐Mo  2‐Yr  5‐Yr  10‐Yr  30‐Yr  12/31/2008 0.08 0.77 1.55  2.21  2.68 12/31/2010 0.13 0.60 2.01  3.30  4.34 12/31/2012 0.04 0.25 0.72  1.76  2.95 6/30/2013 0.03 0.36 1.40  2.49  3.50 9/30/2013 0.01 0.32 1.38  2.61  3.69 Source: Accuvest Global Advisors BBB Corporate Bond Spreads Source: Accuvest Global Advisors
  • 25. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 2 High yield spreads can perhaps stay tight if the economy stays on track, allowing credit metrics to continue improving Emerging Market Sovereign Bond spreads have widened, and are approaching resistance Rotation from Bonds to Equities still in the early stages High Yield Bonds - Spread to Worst Source: Accuvest Global Advisors Emerging Market Bond Spreads Source: Accuvest Global Advisors U.S. Fund Flows Source: Accuvest Global Advisors, Lyxor
  • 26. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 2 Strategy  The breakdown in US Treasury bonds has been dramatic. While tactical opportunities for trading could be present given the historic rise in rates, a more moderate strategy is warranted.  Investment grade exposure in the 2-5 year range will be built to take advantage, at least modestly, of the steep yield curve at a time when rates may move sideways for an extended period. Still, negative impacts will be avoided if rates were to rise significantly again.  Greater exposures to lower quality credit are being built to fill some of the gray area between stocks and bonds. Risk associated with an improving economy and favorable credit metrics of corporate bond issuers is preferable to taking straight-up interest rate risk. High yield and floating rate loans will do fine if rates tick up gradually. Allocations Bonds (35%)  Core  Overweight  Neutral  Underweight  Mid‐term Credit  Short‐term Credit  Mid‐term Treasuries                                              Satellite     Overweight        High Yield Bonds  Floating Rate Senior Bank Loans  Global Bonds 
  • 27. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 2 Exposure to Duration and Credit has increased moderately over the last 3 months Alternative strategies can be helpful given the economic panorama 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Credit Risk Duration Risk Accuvest Bond Model  AGA Bond ‐ October AGA Bond ‐ July Benchmark Source: Accuvest Global Advisors ALTERNATIVES The post-crisis backdrop of moderate global growth, mild inflation, and high liquidity will likely continue to prevail over the next few quarters. This investing backdrop and the ongoing process of monetary normalization are powerful drivers of performance, and should present opportunities for alternative strategies to generate alpha. Cumulative Returns ‐20% ‐10% 0% 10% 20% 30% 40% 50% 60% Alternative Strategies Global Equities Aggregate Bonds Long Term Treasuries 1 Year 3 year 5 year Source: Accuvest Global Advisors
  • 28. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 28 Higher oil prices are a possibility, but other commodities are likely to be under some pressure Commodities remain in a well-established 5 year downtrend Global manufacturing may be showing signs of improvement and Chinese business confidence is getting stronger, but the global growth outlook is not yet good enough to prompt a sustained pick-up in commodity prices. Growth-sensitive commodities such as base metals may get a short-term price lift, but fundamentals are just not firm enough to sustain a rally. Upside risks in oil are high, despite an easing in the Syrian situation and prospect of a thaw in US relations with Iran. Commodities trailing equities Source: Accuvest Global Advisors Broad Commodities Source: Accuvest Global Advisors
  • 29. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 29 Best/Worst Commodities YTD Source: Accuvest Global Advisors Oil Prices (WTI) Source: Accuvest Global Advisors
  • 30. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 30 Gold decline continues with hardly even a modest correction seen Directional, Equity- focused Alternative Strategies have outperformed in 2013 Gold Prices Source: Accuvest Global Advisors Alternative Strategies Year to date, the Lyxor Hedge Fund Index, a portfolio of alternative strategies, has returned approximately 3.0% with low volatility (5%) and modest correlations to stocks (0.80) and bonds (-0.12). Directional strategies with a focus on equities remain a strategic core exposure given our positive view on the asset class. With rates entering a bottoming process, investments in fixed income strategies present a less attractive risk-return profile. Alternative Strategy Returns - Year-to-Date 10.4% 7.4% 5.5% 4.7% 3.6% 3.4% 0.4% ‐0.9% ‐4.1% ‐6.0% ‐8% ‐6% ‐4% ‐2% 0% 2% 4% 6% 8% 10% 12% Source: Accuvest Global Advisors, Hedgefundresearch.com, Lyxor
  • 31. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 31 SECULAR THEMES Correlations amongst risk assets will drift lower Gradual weakening trend in USD Energy Revolution creates investment opportunities Global economic growth will run below trend Chinese turn to consumerism and urbanization Correlations amongst risk assets will drift lower Maintain commitment to broad diversification of portfolios through multiple asset classes Prefer top-down country-by-country approach in building equity exposures Alternative assets have place in portfolio if lower cost, transparent, and liquid Gradual weakening trend in USD Non-USD exposure via international equities Tactical exposures to emerging market currencies Satellite exposures to resource equities Energy Revolution creates investment opportunities Gas-on-gas arbitrage expands margins and market share Gas-on-oil arbitrage see U.S. truck fleets and shipping switching Tactical exposures to emerging market currencies Global economic growth will run below trend Rates will stay lower Inflation will stay in the background Trending risk markets will be elusive Chinese turn to consumerism and urbanization Consumption and services create sustained income and weal effects Better social services generate marginal demand for healthcare, financials, IT, transportation, etc. Currently less applicable Current focus warranted Cyclical Status ‐ Sept 2013 Secular Themes
  • 32. October 1, 2013 Accuvest Global Advisors 4th Quarter Big Picture View 2013 32 General Disclosures The material provided in this report is for informational use only and should not be seen as an offer to sell or as a solicitation of an offer to purchase any security or to subscribe to any investment or advisory service. This information was obtained from the disclosed sources and is believed to be reliable. The information is subject to change without notice. Accuvest Global Advisors does not guarantee the accuracy or completeness of the information nor make any warranties with regard to the results that may be obtained from its use. Debt and equity investments associated with certain foreign countries may involve increased volatility and risk due to, among others, political risk, sovereign risk, economic quality, liquidity risk. Differences in the extent of these risks vary from country to country, among investment instruments, and over time. Investing in non-U.S. securities, including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor subject to the reporting requirements of the U.S. Securities and Exchange Commission (SEC). There may be limited information available on foreign securities. Foreign companies are generally not subject to uniform audit and reporting standards, practices and requirements comparable to those of U.S. Securities. Some foreign companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. In addition, exchange rate movements may have an adverse effect on the value of an investment in a foreign stock and its corresponding dividend payment for U.S. investors. Past performance is not indicative of future results. You should not assume that any future performance of any security or country referred to in this Report will be profitable or equal to any corresponding performance levels that might be provided. Investment risks are borne solely by the investor and not by AGA. Where included in this report, MSCI sourced information is the exclusive property of AGA. Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Certain names, words, titles, phrases, logos, icons, graphics or designs or other content in this Report are trade names, trademarks, or protected by copyright laws. Any unauthorized re- transmission, copying or modification of trademarks and/or the contents of this Report may be a violation of federal or other law that may apply to trademarks and/or copyrights and could subject the copier to legal action. Unless otherwise authorized, no one has permission to copy, redistribute, reproduce, republish, store in any medium, retransmit, modify or make public or commercial use of, in any form, the information contained in this Report. Accuvest Global Advisors is registered with the SEC. All disclosures and marketing brochures are available upon request.

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