Keith Wade is Chief Economist and strategist at Schroders. He is responsible for the economics team and the house view of the world economy. Prior to joining Schroders he was a researcher at London Business School's Centre for Economic Forecasting. In the presentation he discusses the current economic cycle, the likely trajectory and investment options for pension schemes having long term outlooks but short term pressure to manage volatility. The “Investment Strategy 2013: Peering into the Crystal Ball” event was organised by The Pensions Management Institute and London Business School’s Alumni Club. It took place on 8 October 2012.

1. Economic update
World economy: help needed
Keith Wade
Chief Economist
September 2012
For professional investors only. This material is not suitable for retail clients
September 2012 | For professional investors only. This material is not suitable for retail clients

2. Early QE
Rare archive footage of young Ben (or is it Mervyn?)
Macro and Markets | September 2012 1

3. Keeping the printing presses rolling
QE – to infinity and beyond?

4. Economic update
World economy: help needed
I. The BBB recovery: bumpy, brittle and below par
II. Where now for the Euro? – has Super Mario cracked it?
III. In the long run?
Macro and Markets | September 2012 3

5. 1. The BBB recovery
Classic post crisis experience: deep recession, slow recovery
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6. I. The BBB recovery
Global economy hits another soft patch
Manufacturing Purchasing Managers Index
Index
70
65 Output expanding
60
55
50
45
40
35 Output contracting
30
25
07 08 09 10 11 12
US UK EZ Japan BRICs
Source: Schroders, Markit PMI, NBER (National Bureau of Economic Research), August 2012
BRICs: Brazil, China, India & Russia
GDP weights based on nominal GDP in USD from IMF
Macro and Markets | September 2012 5

7. I. The BBB recovery
Heading for a hard landing in China?
100 16
80
14
60
12
40
10
20
8
0
-20 6
2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012
Gross revenue – games of fortune YoY % change China real GDP YoY % change
Monthly
Source : Thomson Reuters Datastream Reuters graphic/Scott Barber 07 September 2012
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8. I. The BBB recovery – a bright spot
Pick up in US housing starts indicates stronger residential investment in 2012
2.5 7
6
2.0
5
1.5
4
1.0
3
0.5 2
60 65 70 75 80 85 90 95 00 05 10
RESID. INV (% GDP) RHS Private Starts Million AR
Source: Thomson Reuters Datastream, Schroders, Updated 16 August 2012
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9. I. The BBB recovery
Performance divergence reflected in credit growth
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10. II. Where now for the Euro? – has Super Mario cracked it?
Peripheral bond yields rally as ECB moves ahead of politicians
• 3-year LTROs helped provide liquidity for
banks
• OMT: Promise of bond buying & dropping
seniority is helping reduce yields
• Now waiting for Spain to ask for help
• Euro tail risks reduced
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11. II. Where now for the Euro?
Capital flight – is Spain following Greece?
Change in banking deposits, y/y
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
2007 2008 2009 2010 2011 2012
Greece Spain
Source: Thomson Datastream; Bank of Spain; Bank of Greece. Updated 10 July 2012
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12. The Eurozone’s hidden balance of payments crisis
TARGET 2.0 central banks’ claims at ECB
Source: Thomson Datastream, Schroders. Updated 7/09/2012
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13. II. Where now for the Euro?
Can you deflate your way out of a debt crisis?
Unemployment Rate %
25
20
15
10
5
2004 2005 2006 2007 2008 2009 2010 2011 2012
Greece Spain Portugal Germany
Source: Thomson Reuters Datastream; Schroders; Updated 16 August 2012
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14. II. Competitiveness is at the heart of the problem
Peripheral Europe has lost competitiveness through higher inflation
2000 = 100, real effective exchange rates based on unit wage costs
170
160 Switzerland
150
140 Italy
130
Spain
120 Greece
110
France
100 Portugal
Germany
90 UK
80
70
60 US
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Italy Spain France Portugal Germany UK US Greece Switzerland
Source: OECD, Thomson Reuters Datastream, Bloomberg, Schroders
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15. III. In the long run
Government debt hits WW2 levels in the advanced economies
Gross Government Debt as % Nominal GDP
Source: Reinhart, Reinhart & Rogoff (2010, 2012)
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16. III. De-leveraging in the US
Government debt rockets as private sector retrenches
US debt as a % of GDP: by sector
% of GDP
100
90
80
70
60
50
40
30
20
1960 1970 1980 1990 2000 2010
Households Non Financial Business Federal Government
Source: Thomson Reuters Datastream, Schroders, Updated 13 June 2012
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17. III. A de-leveraging check list
The US is well ahead of the Eurozone, but has done no fiscal tightening
US UK Eurozone Core Periphery
Financial sector stability yes yes no yes no
Lending picking up? yes no no no no
House prices stable yes yes yes yes no
Private investment rising yes no no no no
Fiscal deficit reduction plan no yes yes yes yes
Competitive economy yes yes no yes no
Source: Schroders
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18. III. De-leveraging Roadmap: lessons from history
Swedish & Finnish credit crisis from the 90s
Phase 1
Deleveraging begins in the private sector and takes about 5 years
Government debt continues to rise
Economy stabilises
Phase 2
Private sector begins to re-leverage
Economy picks up
Deleveraging begins in the public sector and takes about 10 years
US nearing end of phase 1, about to start phase 2 (fiscal cliff?)
UK and Eurozone attempting to implement phases 1 & 2 simultaneously. Result no growth.
Source: International Monetary Fund; Haver Analytics; McKinsey Global Institute
Macro and Markets | September 2012 17

19. III. UK: Has the Chancellor seen the light?
Government pushes out fiscal tightening
PSBR, % of GDP Change in structural deficit, % of GDP
Fiscal tightening
delayed
Source: OBR, HMT, Schroders. Updated 23/03/2012.
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20. III. Help needed
Conclusions
Recovery remains inconsistent – creating market volatility – risk on/ risk off
Central banks have reduced the tail risks and stand ready to do more
Risk premiums have narrowed and may close in further
Fiscal challenge remains, but de-leveraging is a marathon not a sprint
Source: International Monetary Fund; Haver Analytics; McKinsey Global Institute
Macro and Markets | September 2012 19

21. Important information
For professional advisers only. This material is not suitable for retail clients.
Past performance is not a guide to future performance and may not be repeated. The value of investments and
the income from them may go down as well as up and investors may not get back the amount originally invested.
Schroders has expressed its own views and these may change.
The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only
as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no
responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our
assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
The data contained in this document has been sourced by Schroders and should be independently verified before
further publication or use.
Issued in September 2012 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registered
No: 2015527 England. Authorised and regulated by the Financial Services Authority. UK03709
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