1. 2012 Outlook :
A matter of politics
Michel Juvet
Head of Research Department
October 2011

2. 1. Economic update
2. The public debt challenge
3. The European banking credit challenge
4. The case of America
5. EM update
6. Extreme central banks
7. Markets…where is safety?
8. Investment conclusion
2012 Outlook 2

3. 1 Economic update
2012 Outlook 3

4. 1 -1 US economic indicators
2011 5/10/11
2008
66 66 66 66
65 65 65 65
60 60 60 60
55 55 55 55
50 50 50 50
45 45 45 45
40 40 40 40
35 35 35 35
32 32 32 32
DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT D J F M A M J J A S O N D
US ISM MANUF. ISM MANUF. Source: DATASTREAM
2012 Outlook 4

5. 1 -2 EU economic indicators
2011 2008
20 20 20 20
10 10 10 10
0 0 0 0
-10 -10 -10 -10
-20 -20 -20 -20
-30 -30 -30 -30
-35 -35 -35 -35
DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT D J F M A M J J A S O N D
EK INDUSTRIAL CONFIDENCE INDICATOR - EA 17 SADJ EK INDUSTRIAL CONFIDENCE INDICATOR (EA17) SADJ
EK SERVICES CONFIDENCE INDICATOR (EA17) SADJ EK SERVICES CONFIDENCE INDICATOR (EA17) SADJ
2012 Outlook 5

6. 1 -3 Chinese economic indicators
2011 30/9/11 2008 30/9/11
60 60 60 60
58 58
56 56
55 55
54 54
52 52
50 50 50 50
48 48
46 46
45 45
44 44
42 42
40 40 40 40
38 38 38 38
DEC JAN FEB MAR APR MAY JUN JUL AUG SEP D J F M A M J J A S O N D
Source: DATASTREAM
CH HSBC/MARKIT FLASH PMI: CH HSBC/MARKIT FLASH PMI:
MANUFACTURING - NEW ORDERS SADJ MANUFACTURING - NEW ORDERS SADJ
2012 Outlook 6

7. 1 -4 Bank stress indicators
Yield premium:
%
Financial sector %
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
2006 2007 2008 2009 2010 2011
USD Source: DATASTREAM
EURO
2012 Outlook 7

8. 1 -5 Corporate stress indicators
Yield premium:
%
Non-financial companies %
6 6
5 5
4 4
3 3
2 2
1 1
0 0
2006 2007 2008 2009 2010 2011
EURO
USD Source: DATASTREAM
2012 Outlook 8

9. 1 -6 Global stress indicators
USD and emerging currencies 5/10/11
120 120
31.12.2007 = 100
110 110
100 100
90 90
80 80
70 70
60 60
2007 2008 2009 2010 2011
USD KOREA Source: DATASTREAM
INDIA
BRAZIL
2012 Outlook 9

10. 1 -7 A confidence shock!
Economically speaking, we’re in a pre-Lehman period. There is no global
economic crisis!
However, the confidence shock over the summer (end of the USD and
euro) has created paralysis in the banking system and among companies
and households.
An economic policy error could lead to a repeat of the 2008 financial crisis
(2008). (credit crunch)
Management of public debt/banking system
2012 Outlook 10

11. 2 The public debt
challenge
2012 Outlook 11

12. 2 -1 Public debt
Although Greece’s public debt is small, the way it is handled
will set a benchmark for others…
Public debts in USD billion
18'000
16'000
14'000 Total around 40’000 USD bn
12'000
10'000
PIIGS total :
8'000
around USD 5’000 bn
6'000
4'000
2'000
$0
Denmark
Australia
Sweden
Spain
Canada
Switzerland
France
Belgium
Portugal
Irland
UK
Japan
Italy
Germany
USA
Greee
2012 Outlook 12

13. 2 -2 Public debt: Who will pay? Who will be saved?
Stability of
Political stability Confidence funding costs
Fiscal Financial
Creditors Government creditors
distrust
Political Make creditors Rising yields
changes pay
Make the
People pay
2012 Outlook 13

14. 3 The European
banking debt
challenge
2012 Outlook 14

15. 3 -1 Public debt restructurations would be tolerable…
but disorganised payment defaults would be
systemic
European bank lending to European bank lending to the
public sector (USDbn) public and private sectors and
local banks (USDbn)
Italy Italy
Irland Irland
Spain Spain
Portugal Portugal
Greece Greece
0 50 100 150 200 250 0 200 400 600 800 1000
Source : BRI mars 2011
PIG : USD 90 bn USD 710 bn
PIIGS = USD 410 bn USD 2’160 bn
2012 Outlook 15

16. 3 -2 Which countries would be hardest hit?
Total bank exposure (public and private sector and local banks) to PIIGS
by bank home country (USDbn)
Switzerland
Withdrawals from the euro
combined with devaluations
Italy would be disastrous!
Spain
20% of
total
UK 30% of
total
Germany
France
0 100 200 300 400 500 600 700 800
2012 Outlook 16

17. 3 -3 Yes to recapitalisations, but care is required
over the timing of capital requirements!
Change in capital ratios
and money creation (USA) 30/9/11
10 11
10
8
9
6
8
4
7
2 6
5
0
4
-2
3
-4
2
-6 1
2007 2008 2009 2010 2011
Source: DATASTREAM
CHANGE IN CAPITAL RATIOS
CHANGE IN M2 (R.H.SCALE)
2012 Outlook 17

18. 3 -4 Creditors: help!
Bad examples: Citi, ING, Max and Dexia
10/10/11
140 Saving bondholders 140
120
Bonds 120
100 100
80 80
Equities
60 60
40 40
20 20
0 0
2008 2009 2010 2011
ING BANK 1999 5 1/4% 07/06/19 98 - DEFAULT PRICE Source: Thomson Reuters Datastream
ING GROEP
CITICORP 1996 7 1/4% 15/10/11 S - DEFAULT PRICE
CITIGROUP
2012 Outlook 18

19. 3 -5 The European solution: a potent mixture!
1. Growth = everyone is saved!
2. Restructuring = reduces debt/places responsibility
on creditors (Investors / IMF)
3. Austerity = reduces growth/punishes the people
(Governments)
4. Inflation = saves borrowers and reduces long-term
debt/punishes savers (ECB)
EMF/EFSF euro 1,000bn ?
Productivity
Recapitalised banks
2012 Outlook 19

20. 4 The case of America
2012 Outlook 20

21. 4 -1 The case of America: less complicated than
Europe
Interest costs as % of GDP (2010) Public debt as % of GDP (2010)
3.5 100
90
3
80
2.5 70
2 60
50
1.5 1 17
40
1 30
20
0.5
10
0 0
USA Euro zone USA Euro zone
Source : OCDE
2012 Outlook 21

22. Greece
4 -2 United States of America: no Greece,
Portugal, Ireland or Italy!
Irland
Italy
State debt (Federal debt incl.) as % of GDP
110%
36bn
1100bn
100%
1700bn 44bn
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
ND
OK
ID
IN
NJ
NV
DC
GA
KS
MD
MI
AL
PA
SC
LA
VA
WV
NY
TN
MS
UT
CA
AZ
CT
MT
WY
Source : SIFMA 2011
2012 Outlook 22

23. 4 -3 However: 23 November? No agreement:
automatic decline in spending; recession
23 October and 3-4 November:
High expectations for a European G20!
Otherwise, a relapse
2012 Outlook 23

24. 5 EM update
2012 Outlook 24

25. 5 -1 The global pistons are tired!
2010 imports (USDbn)
2500
Chine 70%
2000
1500
1000
500
0
BRIC USA EU JP
?
2012 Outlook 25

26. 5 -2 Global slowdown is hurting China, weakened
by its credit system
Interest rates and
% changes in credit 10/10/11 %
7.50 35
Official credit: USD 7,500bn
7.00 30
GDP: USD 5,000bn
Black credit: USD 500bn
6.50 25
Public authorities:
USD 1,500bn
6.00 20
(« lost » loans = approximately 30%)
5.50 15
5.00 10
2006 2007 2008 2009 2010 2011
CHINA LENDING RATE 6M TO 1Y - MIDDLE RATE
CHANGES IN CREDIT (R.H.SCALE) Source: Thomson Reuters Datastream
2012 Outlook 26

27. 6 Extreme central
banks
2012 Outlook 27

28. 6 -1 The American extreme: the dream…
18% of GDP
US monetary base (USDbn) 23/9/11
2800 2800
2600 2600
QE2
2400 2400
X 3.4
2200 2200
2000 2000
1800 1800
1600 1600
1400 1400
1200
QE1 1200
1000 1000
800 800
2007 2008 2009 2010 2011
US MONETARY BASE Source: DATASTREAM
2012 Outlook 28

29. 6 -2 Switzerland: the Bern Xtreme!
Monetary base (CHFbn) and CHF/EUR
1978 6/10/11
2011 6/10/11
40 1.30 170 1.00
160
38
1.25
150 30% of GDP 0.95
36 15% of GDP
140
1.20
34
130 0.90
32 1.15 120
110 0.85
30
1.10
100
28
90 0.80
1.05
26
80
24 1.00 70 0.75
1977 1978 1979 1980 DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT
SW MONEY SUPPLY: CENTRAL BANK MONEY CURN
SW MONEY SUPPLY: CENTRAL BANK MONEY CURN ECUNITS/SWISSFR(R.H.SCALE)
DMARKER/SWISSFR(R.H.SCALE) Source: DATASTREAM
2012 Outlook 29

30. 6 -3 Consequences: inflation or losses
1978 – 1980 6/10/11
8 Inflation 8
7 7
6 6
Currency purchases:
5 5 2011 : 280 billion in currency
4 4 SNB’s capital: 45 billion
3 3
2 2
1 1
0 0
1977 1978 1979 1980 1981
Source: DATASTREAM
INFLATION
2012 Outlook 30

31. 6 -4 Economic conclusion: three scenarios
Disaster scenario cannot be ruled out = austerity
budgets + payment defaults = global recession
A more positive European scenario is possible:
ECB/reduction in public debt/EFSF II – no credit
crunch
America is taking the medicine and China is merely
weakened
Growth shocks/intense commercial
competition/increasing protectionism
More inflation!
1937- the temptation for governments: rising
taxes, voluntary pay rises, inflation, declining
productivity and highly regulated banks
Rebound followed by rupture
2012 Outlook 31

32. 7 Markets: welcome to
a world with no
roadmap!
« Draw me a safe haven asset…»
« Should we be taking risks? »
2012 Outlook 32

33. 7 -1 Bond havens…
% 4/10/11 %
18
This is no longer a 18
16
haven 16
14 14
12 12
10 10
8 8
6 6
4 4
Inflation
2 2
0 0
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: DATASTREAM
SWITZERLAND
USA
GERMANY
2012 Outlook 33

34. 7 -2 Equity havens… Equities are a haven
when they are cheap
Valuations
Germany P/Book US banks and Germany 10/10/11
4/10/11
4.00 4.00 4.50 P/Book 4.50
4.00 4.00
3.50 3.50
3.50 3.50
3.00 3.00
3.00 3.00
2.50 2.50 2.50 2.50
2.00 2.00
2.00 2.00
1.50 1.50
1.50 1.50
1.00 1.00
1.00 1.00
0.50 0.50
0.50 0.50 0 0
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: Thomson Reuters Datastream
GERMANY-DS Market - PRICE/BOOK RATIO US-DS Banks - PRICE/BOOK RATIO
GERMANY-DS Banks - PRICE/BOOK RATIO
2012 Outlook 34

35. 7 -3 Equity havens…
%
Dividend yields %
excl. Financial sector 6/10/11
6.00 6.00
Germany
5.50 5.50
5.00 5.00
4.50 4.50
4.00 4.00
3.50 3.50 Inflation
3.00 3.00
2.50 2.50
2.00 2.00
1.50 1.50
1.00 1.00
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Source: DATASTREAM
GERMANY-DS NON-FINANCIAL - DIVIDEND YIELD
2012 Outlook 35

36. 7 -4 Currency havens…
The Swiss franc is no longer a safe haven
Gold: a safe haven
that is now
and the SNB’s actions have shifted its expensive
safe haven status onto other currencies…
CHF/EUR observed parity and Gold Ounce in USD 10/10/11
1.70 1.70
theorical parity PPP 2000 2000
1.60 1.60 1800 1800
1600 1600
1.50 1.50
1400 1400
1.40 1.40
1200 1200
1.30 1.30 1000 1000
800 800
1.20 1.20
600 600
1.10 1.10
400 400
1.00 1.00 200 200
2005 2006 2007 2008 2009 2010 2011 81 83 85 87 89 91 93 95 97 99 01 03 05 07 0911
OBSERVED RATE Source: Thomson Reuters Datastream
Source: DATASTREAM
PPP THEORICAL RATE Gold Bullion LBM U$/Troy Ounce
2012 Outlook 36

37. 7 -5 Commodity havens: energy
Primary energy requirement
(BN toe)
P/B oil sector - world
Source : Bloomberg
Source: BP Energy Outlook 2030 – Janvier 2011
2012 Outlook 37

38. 8 Conclusions
2012 Outlook 38

39. 8 -1 Investment conclusions: willing to take risks
Long-term bonds issued by developed countries offer
no appeal
Equities are cheap, and they represent companies!
Gold is speculative, but the currency war is not over
In commodities, energy…
2012 Outlook 39

40. 8 -2 General conclusions:
New moral hazard
(zero interest rates and saving creditors)
Crippled banks
(reduced availability of credit)
EMF – IMF
(deglobalisation)
2012 Outlook 40