This document provides an overview and agenda for a macroeconomic conference on January 22nd, 2014. It introduces the two main speakers, Gavyn Davies and Neil Williams, and gives brief biographies of each. The agenda includes presentations by Davies on the global economic outlook for 2014 and the end of quantitative easing programs. Williams will also present on the global economic outlook and end of quantitative easing. There will be a panel session at the end with both speakers and a moderator. The document provides context for the conference and introduces the expert presenters.

1. Macro Overview
Redington Teach-in
Wednesday 22nd January 2014

2. Agenda
1. Global Economic and Macro Outlook 2014 – Gavyn Davies
2. Global Economic Outlook – Neil Williams
3. The End of QE – Gavyn Davies
4. The End of QE – Neil Williams
5. Panel Session – Participants:
Gavyn Davies, Neil Williams, David Bennett
Moderator:
Pete Drewienkiewicz
Macro Overview
For Professional Investors Only
22 January 2014
2

3. Speakers
Gavyn Davies – Chairman, Fulcrum Asset Management
Neil Williams – Chief Economist, Hermes Fund Managers Ltd
Gavyn is Chairman of Fulcrum Asset Management and Head
of the Fulcrum Investment Committee. Previously, Gavyn was
Chairman of the BBC from 2001 to 2004. He joined
Goldman Sachs in 1986 and was a Partner from 1988 to
2001. He was also the firm’s Chief Economist over that
period and Chairman of the Research Department. He was
repeatedly ranked as the City’s top UK and European
economist in surveys of institutional investors. From 1992 to
1997, he was a member of H.M. Treasury Independent
Forecasting Panel.
Neil joined Hermes Fund Managers in August 2009 and is
responsible for its global economic research. He has over
twenty five years’ experience of providing economic analysis,
and has a forward-looking approach to generate investment
strategy ideas for the company and its clients.
He began as a City Economist, first with Phillips and Drew
from 1979 to 1981, then Simon and Coates from 1981 to
1986. Gavyn graduated in economics from St. John’s
College, Cambridge in 1972. This was followed by two years
of research at Balliol College, Oxford. He joined the Policy
Unit at 10 Downing Street as an Economist in 1974 and was
an Economic Policy Adviser to the Prime Minister from 1976
to 1979.
Neil adopts top-down methods - macro and market analysis
to identify interest rate and credit value, and sovereign
default risk. Neil began his career in 1987 at the
Confederation of British Industry (CBI), becoming its youngest
ever Head of Economic Policy. He went on to hold a number
of senior positions in investment banks - including Director of
Bond Research at UBS, Head of Research at Sumitomo
International, Global Head of Emerging Markets Research at
PaineWebber International, and, before coming to Hermes,
Head of Sovereign Research and Strategy at Mizuho
International. Neil earned an MA in Economics in 1986 from
Manchester University, having the previous year completed
his BSc (Hons), also in Economics, from University College
Swansea.
Gavyn.Davies@fulcrumasset.com
N.Williams@hermes.co.uk
Twitter: @GavynDavies
Twitter: @Hermes_fm
Macro Overview
For Professional Investors Only
22 January 2014
3

4. Global Economic and Market
Outlook, 2014
Gavyn Davies, Chairman, Fulcrum Asset
Management
Redington Conference, 22 January, 2013
4

5. Global equities have out-performed all other asset classes for
almost 5 years, with the US market leading. Bonds have been
flat for 2 years. Commodities have fallen for 3 years.
5

6. There is complete unanimity among analysts that equities will
continue to out-perform bonds during 2014, and also a strong
consensus in favour of equities in the euro area and Japan. Opinion
on the emerging markets remains mostly bearish for now.
6

7. The recession in the developed economies has been deep and long
lasting and may have had permanent effects on potential GDP...
Aggregate G4 (US, Euro Area, Japan, UK) GDP, Potential and Trend
120
Actual GDP
Average of Potential Output Estimates
Log-linear trend
115
110
105
100
95
90
85
80
2000
2003
2006
2009
2012
2015
Source: Fulcrum Asset Management LLP
7

8. ... but for the first time since 2010, domestic demand in developed
markets is leading the recovery
Fig 2. Manufacturing Business Surveys
Euro Area
United States
UK
Japan
60
55
50
45
40
“Whatever it
takes”
35
30
2007
2008
2009
2010
2011
2012
2013
Source: Fulcrum Asset Management LLP
8

9. G8 activity is rising, especially in the UK…..
9

10. The rise in public sector debt ratios has triggered significant tightening in fiscal policy in
all the major economies and this will continue. But the mix is changing, with less
tightening in the US and the Euro Area, and more tightening in Japan.
Fig 12. Fiscal Thrust: change in the underlying government primary balance (% of GDP)
US
Euro Area
UK
Japan
OECD Total
3
2
1
0
-1
-2
-3
-4
-5
2007
2008
2009
2010
2011
2012
2013
2014
Source: Fulcrum Asset Management LLP
10

11. The Fed has started to taper its asset purchases, but other central
banks might expand their operations, so global liquidity will remain
ample
Liquidity Injections of Global Central Banks, % of GDP, 12 months change
10%
Projection
Other Advanced
BOJ
8%
ECB
Federal Reserve
6%
Total World
Emerging Markets
4%
2%
0%
-2%
-4%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Fulcrum Asset Management LLP
11

12. The market has completely undone its anticipation of a Fed
tightening: actual rate hikes are very unlikely at least until 2015
Expected Federal Funds Rate Path
7
Federal Funds Rate
Futures as of 31st of October 2013
Futures as of 9th of September 2013
6
5
4
3
2
1
0
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Source: Fulcrum Asset Management LLP
12

13. The US recovery is dependent on a decline in the private sector financial
balance as investment and consumption return to more normal levels. This
will be helped by much less fiscal tightening from now on.
Private Sector Financial Balance in the US (% of GDP)
Total Non-Financial Private Sector
Households
Non-Financial Business
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
1987
1990
1993
1996
1999
2002
2005
2008
2011
Source: Fulcrum Asset Management LLP
13

14. Global inflation has been low and falling over the past year, with the
exception of a handful of emerging markets
Global Inflation Rates
10%
8%
Emerging Markets, 5.4%
6%
4%
World, 3.1%
2%
Advanced Economies, 1.2%
0%
-2%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Fulcrum Asset Management LLP
14

15. Risk 1: The drop in the US labour force participation rate has
proceeded much further than expected and is showing no signs of
recovery.
Source: Fulcrum Asset Management LLP
15

16. If the participation rate falls further, it might take the unemployment
rate down to levels which could force the Fed to tighten earlier than
expected
Source: Fulcrum Asset Management LLP
16

17. Risk 2: China - The PBOC has left its official monetary
settings unchanged since mid 2012
17

18. The PBOC has “encouraged” market interest rates to rise since last
May, with a short run money market crisis in June/July which has
now been brought under control.
Chinese Market Interest Rates are Trending Upwards
(20-day moving averages)
6.75
6.25
5.75
5.25
4.75
4.25
SHIBOR Rate: 1-Week
3.75
3.25
2.75
5 Year Government Bond
Yield
2.25
2012
2013
Tightening starts here
2014
Source: Fulcrum Asset Management LLP
18

19. The PBOC has also “encouraged” a decline in the total
expansion of credit in the economy by reducing the access of
the shadow banking sector to funding.
19

20. There is no sign yet that the monetary squeeze is slowing the
rate of house price or land price inflation, especially in the
major cities. There is still a significant risk of a collision between
the tightening in monetary conditions and the bubble in
housing.
20

21. Apart from the risk of a China hard landing, the emerging markets
crisis is concentrated in a handful of countries (the “fragile 5”) with
weak fundamentals...
Current Account Balance as % of GDP
8
Brazil
Indonesia
2008
2009
India
South Africa
Turkey
6
4
2
0
-2
-4
-6
-8
-10
-12
2005
2006
2007
2010
2011
2012
2013
2014
Source: Fulcrum Asset Management LLP
21

22. Risk 3: ECB actions have brought about a broad improvement in
financial conditions by reducing euro-breakup fears, but the stance of
monetary policy is still fragmented
Euro Area Sovereign Bond Yields (10-year)
800
France
Germany
Italy
Spain
700
600
500
400
300
200
100
0
2008
2009
2010
2011
2012
2013
Source: Fulcrum Asset Management LLP
22

23. In the euro area, there has been a slight relaxation of fiscal tightening
but austerity is still acting as a drag on domestic demand
Euro Area Periphery: Headline Deficit Targets and Actual Outcome
% GDP
2009
2010
2011
2012
2013
2014
2015
2016
2017
0
-1
-2
-3
-4
-5
-6
Actual Deficit
2011 Target
-7
2012 Target
2013 Target
-8
Source: Fulcrum Asset Management LLP
23

24. The Euro Area has left recession behind already, but market economists
remain sceptical about a strong recovery. A key issue for the Euro Area is
whether the ECB will act aggressively enough to prevent Japanification.
Euro Area GDP Forecasts
% Growth Q/Q Ann.
% Growth Y/Y
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
2007
2008
2009
2010
2011
2012
2013
2014
Source: Fulcrum Asset Management LLP
24

25. Risk 4: Bubbles in equities – New econometric techniques enable us to
estimate the probability of a bubble in the S&P 500 Index in real time. At
present, the risk remains very low.
Source: Fulcrum Asset Management LLP
25

26. US Equities are expensive relative to their long-term historical
averages, but fairly valued relative to the past 2 decades...
Fig 20: US Equities - Very Long Term "Shiller" P/E Ratio
Long Term P/E Ratio (Shiller)
20 Year Moving Average
Long Term Average
50
45
40
35
30
25
20
15
10
5
0
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
Source: Fulcrum Asset Management LLP
26

27. Although bond yields may rise somewhat as activity forecasts for
2014 are increased, we do not expect this to be permanent,
given the central bank attitude to short rates. And anyway,
equities remain very cheap relative to bonds.
27

28. Disclaimer
This material is for your information only and is not intended to be used by anyone other than you. It is directed at professional clients and eligible counterparties only and is not intended for retail
clients. This is not an offer or solicitation with respect to the purchase or sale of any security. The material is intended only to facilitate your discussions with Fulcrum Asset Management as to the
opportunities available to our clients. The given material is subject to change and, although based upon information which we consider reliable, it is not guaranteed as to accuracy or completeness and it
should not be relied upon as such. The material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express
recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon client’s investment objectives. The price and value of
the investments referred to in this material and the income from them may go down as well as up and investors may not receive back the amount originally invested. Past performance is not a guide to
future performance. Future returns are not guaranteed and a loss of principal may occur.
It is the responsibility of any person or persons in possession of this material to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdiction. Prospective investors
should obtain and review the Fund prospectus carefully and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of
their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments. Fulcrum Asset Management does not provide
tax advice to its clients and all investors are strongly advised to consult with their tax advisors regarding any potential investment. Opinions expressed are our current opinions as of the date appearing on
this material only. Any historical price(s) or value(s) are also only as of the date indicated. We will endeavor to update on a reasonable basis the information discussed in this material.
References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time ("benchmarks") are provided by Fulcrum Asset Management for
your information purposes only. Investors cannot invest directly in indices. Indices are typically unmanaged and the figures for the indices shown herein do not reflect any investment management fees or
transaction expenses. Fulcrum Asset Management does not give any commitment or undertaking that the performance or risk profile of your account(s) will equal, exceed or track any benchmark. The
composition of the benchmark may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations,
concentrations, volatility or tracking error targets, all of which are subject to change over time.
Simulated, modeled, or hypothetical performance results have certain inherent limitations. Simulated results are hypothetical and do not represent actual trading, and thus may not reflect material
economic and market factors, such as liquidity constraints, that may have had an impact on actual decision-making. Simulated results are also achieved through retroactive application of a model designed
with the benefit of hindsight. The results shown reflect the reinvestment of dividends and other earnings and other expenses a client would have paid, which would reduce return. No representation is
being made that any client will or is likely to achieve results similar to those shown.
Funds managed by Fulcrum Asset Management LLP are in general managed using quantitative models though, where this is the case, Fulcrum Asset Management LLP can and do make discretionary
decisions on a frequent basis and reserves the right to do so at any point.
Certain transactions, including those involving futures, options and high yield securities and investments in emerging markets may give rise to substantial risk and may not be suitable for all investors.
Foreign currency denominated investments are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment; such
investments are also subject to the possible imposition of exchange control regulations or other laws or restrictions applicable to such investments. Investments referred to in this material are not
necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. Investors should consider whether an investment is suitable for their particular circumstances and seek
advice from their investment adviser.
For US Investors: Shares in the Fund will not be registered under the Securities Act of 1933, the securities laws of any state or the securities laws of any other jurisdiction, and the Fund will not be registered
under the Investment Company Act of 1940. There is no public market for the shares, and no such market is expected to develop in the future. Shares in the Fund may not be sold or transferred except as
permitted under the Fund's articles of association, and unless they are registered under the Securities Act of 1933 or an exemption from registration thereunder and under any other applicable securities
law registration requirements is available. Accordingly, investors will be required to bear the financial risks of an investment in the Fund for an extended period of time.
This material has been approved for issue in the United Kingdom solely for the purposes of Section 21 of the Financial Services and Markets Act 2000 by Fulcrum Asset Management (“Fulcrum”), 6
Chesterfield Gardens, London W1J 5BQ.
Fulcrum Asset Management LLP is authorised and regulated by the Financial Services Authority (No: 230683).
© 2013 Fulcrum Asset Management LLP. All rights reserved.
28

29. Global Economic Outlook
Redington Teach-in
22 January 2014
Neil Williams
Chief Economist

30. Outline
 Where are we now?
 Policy environment
 Economic outlook for 2014…
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 30

31. Is Japan leading the way? Ten-year JGBs vs lagged…
…10-yr US Treasury…
…& 10-yr Bund
…& 10-yr Gilt
Source (all three charts): Thomson Reuters Datastream
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 31

32. Major economies slow to recoup output lost during the crisis
Real GDP levels, rebased to Q1 2007… …and, there’s a lot of ground to make up
Q1 2007 = 100. Grey denotes US recession
Source: Thomson Reuters Datastream, based on national data
Deviation of a country’s actual from potential GDP, as % of potential
Source: OECD
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 32

33. …So, core inflation should stay tame…
US
Japan
Euro-zone
Source (all charts): Thomson Reuters Datastream, & OECD
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 33

34. US – it’s different this time
Unemployment in US recoveries
Core CPI in US recoveries
Core CPI (%yoy) into & out of recessions. Years shown are recessions
Unemp rate (%) into & out of recessions. Years shown are recessions
14
10.5
12
1980 recession
1981-'82
Into & out of the 2007-'09 recession
1981-'82 recession
9.5
10
8.5
8
7.5
6
6.5
1990-'91
4
1980
1990-'91
5.5
2001
2001
2
4.5
2007-'09
3.5
0
-8
-6
-4
-2
0
+2
+4
+6
+8
No of quarters from recession's trough
Source: Hermes Fund Managers Ltd, based on BLS, & NBER
+10
+12
+14
+16
-8
-6
-4
-2
0
+2
+4
+6
+8
+10
+12
+14
+16
No of quarters from recession's trough
Source: Hermes Fund Managers Ltd, based on BLS, & NBER
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 34

35. US – fitted Phillips Curve…
Source: Thomson Reuters Datastream, based on BEA, & BLS data
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 35

36. US – tapering is loosening!…
US
*2014 taper assumptions:
FOMC
$bn
j
75
f
65
FOMC
m
65
FOMC
a
55
m
45
FOMC
j
45
FOMC
j
35
a
25
FOMC
s
25
FOMC
o
15
n
5
d
5
FOMC
total extra
460
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13e
14p
15p
Fiscal
% GDP
(cyc adj)
-5.1
-4.4
-3.3
-2.5
-2.4
-1.4
-0.6
-0.7
-0.2
-2.0
-4.9
-6.1
-6.0
-5.1
-4.3
-4.8
-7.4
-11.2
-10.5
-9.2
-8.1
-5.4
-4.9
-4.0
Real rate
%
CPI*
%
0.4
0.4
3.9
2.8
2.7
3.5
3.6
3.8
3.0
-0.9
-0.2
-1.2
-0.1
1.1
2.2
1.8
-2.4
-1.6
-3.5
-6.2
-5.5
-6.1
-6.9
-6.7
3.0
3.0
2.6
2.8
2.9
2.3
1.5
2.2
3.4
2.8
1.6
2.3
2.7
3.4
3.2
2.9
3.8
-0.3
1.6
3.2
2.1
1.5
1.7
2.2
3m money**
%
Yr-end
3.44
3.38
6.50
5.63
5.56
5.81
5.07
6.00
6.39
1.88
1.38
1.15
2.56
4.54
5.36
4.70
1.43
-1.94 (-219bp for $1.753trn QE1 which started 18 March 2009)
-1.94
-3.04 (-110bp for $880bn QE2 which started 3 November 2010)
-3.36 (-32bp for $255bn QE3 which started Sept 2012 (3x $85bn))
-4.64 (-128bp for $1.02trn QE3 (12x $85bn))
-5.21 (-57bp for $460bn QE3 (ass -10bn taper signalled at each 2014 FOMC meeting*)
-4.46 (No QE; assumes +75bp ON rates)
In totem:
$4.4trn QE = -546bp
Source: Hermes Fund Managers estimates & assumptions, based on OECD data, & Bloomberg
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 36

37. UK - remember QE1?…
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 37

38. Cash went down the asset route...
 This is how QE is supposed to work…
Source: Hermes Fund Managers Ltd, adapted from BoE
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 38

39. UK – BoE’s ‘likely wish list’ when it started QE
Objective
Our view
Expand the money supply
Was slow. Took till mid 2012 for M4 growth
to reverse downtrend started in Feb '09
Keep gilt yields down
Successful - though 10yr yield did quickly
go back up to pre-QE levels
Improve the functioning
of corporate credit markets
Will have helped sentiment, though
BoE corporate buy-backs were small
Higher corporate bond &
equity prices
Will have helped, though how much
of rallies was down to QE?
Increased capital market
issuance
Will have helped - 2009 supply was
way up on 2008
Higher real economic output
Recession ended in Q3 2009, then GDP
flat-lined till last summer
Higher inflation
Uptrend in targeted CPI started in Sept '09,
but had as much to do with VAT etc
Source: Hermes Fund Managers Ltd, based on BoE
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 39

40. UK – CPI ex indirect taxes…
VAT undoubtedly lifted the CPI…
CPI, core CPI, & CPI ex indirect taxes; all % yoy
…but, ex-VAT, services remain sticky
Ex indirect taxes CPI by sector; all % yoy
Source (both charts): Thomson Reuters Datastream, based on ONS data
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 40

41. …But real wages & profit-margins slow to recover
Source: Thomson Reuters Datastream, based on ONS data
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 41

42. UK’s policy mix adjusted for QE
This is how UK policy is shifting…
Total stimulus* vs output gap
*{(QE adj real rate – its long-run av) + (cyc adj fiscal bal as % GDP – its long-run av)}
Using QE adj 3m rates, CPI & cyclically adjusted fiscal balance as % GDP
4
5
2
4
'06
Real interest rates (%)
'08
0
-6.0
-4.0
-2.0
'15p
0.0
2.0
4.0
6.0
2
-2
1
Total stimulus* (%pt)
-4
'13e
-10.5
'08 -6
'92
'15p
Looser
-10
Fiscal deficit
(as % GDP)
4.5
9.5
-1
'14p
Adjusted for QE
-8
0
-0.5
-5.5
'11
'09
'06
3
-2
Output gap
(% GDP)
Adjusted for QE
-3
'09
'92
Looser
-4
Source (both charts): Hermes Fund Managers Ltd, based on OBR, & OECD data, & Bloomberg
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 42

43. No G7 country has loosened its policy more than the UK…
Shows shifts in real rates (using CPI, 3m Libor) & likely 2013 cyclically-adjusted budget balances
…and since 2000
…during the crisis (since Dec ’06)
NB: Exc all liquidity injections
Germany
Tighter
2
€-zone
Shift in real rates (% pt)
-5.00
-4.00
-3.00
-2.00
-1.00
US
0
0.00
-2
Australia
1.00
Sweden
UK
-4
Canada
-6
NZ
Japan
Looser
-8
Fiscal shift
(% of GDP)
-10
NB: Exc all liquidity injections
3
2
1
Germany
Shift in real rates (% pt)
0
-8.00
-6.50
-5.00
-3.50
-2.00
-0.50
-1
€-zone Sweden
-2
Australia
-3
Japan -4
NZ
-5
Canada
US
-6
-7
-8
UK
-9
-10
-11
-12
Looser
Tighter
1.00
Fiscal shift
(% of GDP)
Source: Hermes Fund Managers Ltd, based on OECD projections, IMF, & Bloomberg
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 43

44. …Which helps explain the pound’s weakness
Shows trade-weighted exchange rates, re-based to Feb 2000 (= 100)
Source: Thomson Reuters Datastream
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 44

45. Still mixed competitiveness since the euro…
Change since 2000 in relative unit labour costs (RULC), vs c/acc shift as % GDP. Grey denotes shift since 2010 austerity
Improving competitiveness
11
Portugal
9
Neths
Germany
7
Greece*
5
Spain
Ireland
Denmark
Austria
3
Sweden
-22
-12
Italy
€-zone av
UK
1
-2
-1
8
18
28
RULC change
-3
-5
France
-7
Belgium
C/acc shift
-9
Finland
Falling competitiveness
Source: Hermes Fund Managers Ltd, based on national sources & OECD. (*NB: Greece’s from 2001 when it joined the euro)
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 45

46. …But Spain & Italy – between ‘a rock & a hard place’
Male youth unemployment
Unemployment rates (%) - males under 25 years old
Source: Thomson Reuters Datastream, based on Eurostat data
Consumption lost
Real household consumption levels, re-based to Q1 2008 (= 100)
Source: Thomson Reuters Datastream, based on national data
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 46

47. Euro-zone – our ‘Misery Indices’ (MIs)…
Method & sample data behind our Misery Indices. The higher the MI, the greater the expected economic hardship
2013p1
Unemployment rates
Misery
% point
2, 4
U rate
CPI
2008
'09
'10
'11
'12
5-yr av
2013
2014
Greece
Cyprus
Spain
Portugal
Ireland
Italy
Netherlands
France
Belgium
Luxembourg
Germany
Austria
Finland
26.8
16.5
-0.1
-2.0
7.7
3.6
9.5
5.3
12.6
6.2
17.7
7.8
24.3
12.1
14.4
7.0
27.0
18.0
15.4
1.8
0.4
0.4
11.4
8.5
6.3
18.0
10.6
11.9
20.1
12.0
13.7
21.7
13.0
14.5
25.1
15.8
14.9
19.3
12.0
12.3
11.9
6.4
1.6
3.0
6.8
3.1
7.8
3.7
8.4
4.5
8.4
4.4
10.7
5.3
8.4
4.2
10.9
8.2
5.4
1.2
1.2
2.1
7.8
7.0
4.9
9.5
7.9
5.2
9.8
8.3
4.6
9.7
7.2
4.8
10.2
7.6
5.0
9.4
7.6
4.9
7.0
4.7
1.6
2.1
7.5
3.8
7.8
4.8
7.1
4.4
6.0
4.1
6.8
4.3
7.0
4.3
8.0
2.2
6.4
8.2
8.4
7.8
7.7
7.7
15
14
8
8
5
4
3
3
2
1
1
1
0
12
11
6
7
3
4
2
2
1
1
1
1
0
Unweighted av
12.8
1.2
5
4
11.6
1.5
3
3
Weighted av
1
3
3
Standardised unemployment (%), & HICPs (%yoy)
Using adjusted GDP weights. Excludes Cyprus
2
4
Ab solute CPI deviation from 2.2% (+) added to u rate deviation from 5-yr av (+/-)
Orange shaded areas show 'ab ove-average misery'
Source: Hermes Fund Managers Ltd based on Eurostat data, & Hermes/Nomura International projections (p)
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 47

48. Euro-zone – converging on the weakest
'Least miserable' euro-zone country
'Most miserable' euro-zone country
14.00
Weighted average
9.00
4.00
-1.00
90
92
94
96
98
00
02
04
06
08
10
12
14p
-6.00
Source: Hermes Fund Managers Ltd, based on Eurostat data, & Nomura International projections (p)
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 48

49. Euro-zone’s policy mix...
This is how €-zone policy is shifting…
Total stimulus* vs output gap
*{(Real rate – its long-run av) + (cyc adj fiscal bal as % GDP – its long-run av)}
Using 3m rates, CPI & cyclically adjusted fiscal balance as % GDP
'15p
-2.0
Real interest rates (%)
0.0
-1.0
0.0
1.0
2.0
'14p
'13e
3.0
4.0
5.0
6.0
7.0
2.5
'00
-1.0
'00
1.5
'06
-2.0
'07
3.5
'92
0.5
*Total stimulus (%pt)
-3.0
-4.0
-3.0
-2.0
-1.0
-0.5
0.0
1.0
2.0
3.0
4.0
-4.0
-1.5
'92
-5.0
-2.5
'09
Output gap
(% GDP)
-3.5
'14p
-6.0
Looser
'15p
'09
Fiscal deficit
(as % GDP)
'13e
-7.0
Looser
-4.5
Source (both charts): Hermes Fund Managers Ltd, based on OECD data, & Bloomberg
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 49

50. Euro-zone – disparate real rates
Using ECB refinancing rate, & spot CPIs, %
Latest HICP (% yoy)
Real policy rate*
U rate*
Greece
Cyprus
Ireland
Portugal
Spain
Malta
France
Belgium
Slovakia
Italy
Luxembourg
Slovenia
Germany
Netherlands
Austria
Finland
Estonia
-1.9
-0.5
-0.1
0.0
0.0
0.5
0.7
0.7
0.7
0.8
1.0
1.1
1.2
1.3
1.5
1.7
2.2
2.2
0.8
0.4
0.3
0.3
-0.3
-0.5
-0.5
-0.5
-0.6
-0.8
-0.9
-1.0
-1.1
-1.3
-1.5
-2.0
27.3
17.0
12.6
15.7
26.7
6.4
10.9
9.0
13.9
12.5
5.9
10.1
5.2
7.0
4.8
8.1
8.8
Median
0.7
-0.5
10.1
*Orange flash denotes higher-than-m edian out-turns
Source: Hermes Fund Managers Ltd, based on Eurostat, & ECB
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 50

51. Japan will need even more aggressive monetary easing
JGBs outstanding, banks’ & BoJ
BoJ has to mop up more JGBs
JGBs outstanding in ¥ m on LH Scale, & % shares on RH Scale
Net new JGB issuance (¥trn)
Rinban as % net new issuance (rhs)
60
*FYs11-14 include Reconstruction Bonds
50
50
40
40
30
30
20
20
10
10
0
0
FY98
Source: Thomson Reuters Datastream, based on BoJ
'00
'02
'04
'06
'08
'10
'12*
'14p*
Source: Hermes Fund Managers Ltd, based on MoF, & BoJ
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 51

52. China - hardening reluctance to revalue the currency?
China’s surplus with the EU vulnerable
China - slowing productivity?
China/EU bilateral surplus, 12m rolling total, $m, versus RMB per €
Ind prodn (%yoy)
Manu empl (%yoy, RHS)
Est product'y growth (RHS)
20
30
18
25
16
20
14
12
15
10
10
8
5
6
0
4
-5
2
0
Q1 2000
-10
Q1 2002
Q1 2004
Q1 2006
Q1 2008
Q1 2010
Q1 2012
Source: National Bureau of Statistics, & Ministry of Human Resources & Social Security
Source: Thomson Reuters Datastream, based on IMF data
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 52

53. But, the legacy is debt build-up…
Gross & net, as a % GDP. *’98 data; **’00 data
1997
2014p
Moody's
local ccy
US
Japan
Euro-zone
UK
Greece
Italy
Iceland
Ireland
Latvia
Gross
Net
Gross
Net
Aaa (-ve)
65
102
81
51
100
130
77*
63*
53**
47
34
54
29
77
104
43*
42*
n/a
106
232
107
110
192
68
127
131
75
84
149
69
77
130
118
53
92
n/a
73
43
112
73
Aa3
n/a
Aa1
Caa3
Baa2 (-ve)
Baa3 (-ve)
Baa3
Baa2 (+ve)
OECD av
Source: OECD, Thomson Reuters Datastream, & Moody’s Investor Services
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 53

54. …Until economies fire again
Summary of our economic forecast, published in our ‘Looking into 2014’ Economic outlook quarterly
'08
'09
'10
'11
'12
'13e
'14p
Real GDP
-1.1
-5.5
4.7
-0.6
2.0
1.9
1.2
2.5
Private consumption
-0.9
-0.7
2.8
0.5
2.4
1.6
0.6
2.6
4.8
Business investment
-2.9
-14.2
0.7
3.3
1.8
-1.1
2.5
3.6
2.5
3.3
Industrial production
-3.4
-21.6
15.6
-2.6
0.2
-2.0
3.0
3.2
2.1
1.5
1.7
Consumer prices
1.4
-1.3
-0.7
-0.3
0.0
0.1
2.1
9.6
8.9
8.1
7.4
7.0
Unemployment rate (%)
4.0
5.1
5.1
4.6
4.4
4.0
3.9
-2.7
-3.0
-3.1
-3.0
-3.1
-3.3
Current account (% GDP)
3.3
2.9
3.7
2.0
1.1
1.0
1.5
-6.6
-11.9
-11.4
-10.2
-8.7
-5.8
-5.3
Gen budget balance (% GDP)
-1.9
-8.8
-8.3
-8.9
-9.9
-10.3
-8.0
0.25
0.25
0.25
0.25
0.25
0.25
0.25
BoJ target rate (yr-end, %)
0.10
0.10
0.10
0.10
0.10
0.10
0.10
'08
'09
'10
'11
'12
'13e
'14p
'08
'09
'10
'11
'12
'13e
'14p
Real GDP
0.3
-4.4
1.9
1.6
-0.6
-0.5
0.3
Real GDP
-0.8
-5.2
1.7
1.2
0.3
1.5
2.1
Private consumption
0.4
-0.9
1.0
0.3
-1.4
-0.9
0.0
Household consumption
-1.6
-3.6
1.0
-0.5
1.2
1.8
2.3
Fixed investment
-1.6
-12.7
-0.6
1.7
-3.8
-3.3
0.5
Fixed investment
-4.6
-16.7
2.8
-2.4
0.9
-2.3
3.0
Industrial production
-1.8
-15.1
7.3
3.2
-2.3
-1.2
0.7
Manufacturing production
-2.5
-10.2
4.2
1.8
-1.7
-0.8
1.5
Consumer prices (HICP)
3.3
0.3
1.6
2.7
2.5
1.3
1.0
Retail prices index
4.0
-0.5
4.6
5.2
3.2
3.1
2.9
Unemployment rate (%)
7.7
9.6
10.1
10.2
11.4
12.2
12.5
Consumer prices
3.6
2.2
3.3
4.5
2.8
2.6
2.0
Current account (% GDP)
-1.6
-0.2
0.0
0.1
1.4
2.1
2.3
Unemp, ILO rate (%)
5.6
7.5
7.9
8.0
8.0
7.7
7.4
Gen budget balance (% GDP)
-2.1
-6.4
-6.2
-4.2
-3.7
-3.0
-2.6
Current account (% GDP)
-0.9
-1.4
-2.7
-1.5
-3.8
-3.4
-3.0
ECB refi' rate (yr-end, %)
2.50
1.00
1.00
1.00
0.75
0.25
0.25
Gen budget balance (% GDP)
-4.8
-11.2
-10.1
-7.9
-5.1
-6.0
-5.0
BoE Bank rate (yr-end, %)
2.00
0.50
0.50
0.50
0.50
0.50
0.50
'08
'09
'10
'11
'12
'13e
'14p
Real GDP
-0.3
-2.8
2.5
1.8
2.8
1.6
2.7
Personal consumption
-0.6
-1.6
2.0
2.5
2.2
2.0
Business investment
-0.8
-15.6
2.5
7.6
7.3
Industrial production
-3.5
-11.3
5.7
3.4
Consumer prices (nsa)
3.8
-0.3
1.6
Unemployment rate (%)
5.8
9.3
Current account (% GDP)
-4.7
Fed budget balance (% GDP)
Funds target (yr-end, %)
% yoy unless stated
US
EURO
% yoy unless stated
Source: National data, Hermes Fund Managers Ltd, OECD, & Consensus Economics
JAPAN
UK
% yoy unless stated
% yoy unless stated
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 54

55. Summary
 Despite a firmer US, it’s too soon to allow aggressively higher bond
yields. Inflation benign - driven more by cost than demand factors.
Tapering is loosening! Guidance to help growth assets, but could backfire
 Consumer balance-sheet re-building needs more time. US is expanding
after five years of ultra-loose policy. Even in 2014, QE-adjusted US policy rate
will be -5¼%; the UK’s about -2¼%. Yet, exit strategies premature
 Most governments deferring repair of their own balance sheets - storing
up problems for later. In euro-zone, default-risk is not dead
 Euro-zone is taking the biggest risk with growth. UK has housing, but eurozone will return to recession. When rates rise, shallow tightening cycles
 But, with deficits high, most governments unready to repair fiscally, &
central banks encouraging inflation, bonds no longer a low-risk asset
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 55

56. Disclaimer
The views and opinions contained herein are those of Neil Williams, director, chief economist & strategist, and may not necessarily represent views expressed or reflected in other Hermes communications,
strategies or products. The information herein is believed to be reliable but Hermes Funds Managers does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or
opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations.
This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is published solely for informational purposes and is not to be
construed as a solicitation or an offer to buy or sell any securities or related financial instruments.
This communication is directed only at recipients who are eligible counterparties or professional clients, as defined in the Glossary to the Financial Conduct Authority’s Handbook of Rules and Guidance. This
communication is issued and approved only for the purposes of section 21 of the Financial Services and Markets Act 2000 by Hermes Investment Management Limited. (“HIML”). Hermes Investment
Management Limited has its registered office at Lloyds Chambers, 1 Portsoken Street, London E1 8HZ. Hermes is a multi-boutique asset manager, independent of any broader financial services organisation.
Each Hermes operating company is either a subsidiary of, or is otherwise affiliated to, Hermes Fund Managers Limited. [CM100322 UK 11/10]
Figures, unless otherwise indicated, are sourced from Hermes.
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 56

57. The End of QE:
Is it nigh, and what might it mean
for markets?
Recent economic data suggest the UK is finally recovering from the
financial crisis, whilst the Bank of England is preparing investors for
the end of monetary stimulus through the introduction of forward
guidance.
Should the IMF be proved correct in upgrading the UK’s growth
outlook, what might the end of monetary stimulus look like and what
are the potential effects on markets and the end investor?
Macro Overview
For Professional Investors Only
22 January 2014
57

58. Some Thoughts on the Exit From Quantitative Easing
1. The experiment worked at the beginning, but the benefits have been less
obvious in recent times, and the costs have been mounting.
2. There is a broad consensus on the Fed that the programme should be brought to
an end this year, but no consensus on when to start raising rates.
3. A concern is that the “signalling” effects of ending QE will lead to an unintended
tightening in monetary conditions.
4. The BoJ is replacing a great deal of the global monetary stimulus which
previously came from the Fed, and the ECB may have to start QE as well.
5. The Fed intends to raise rates before reducing the size of its balance sheet.
6. The technical mechanisms needed to exit QE are available to the Fed (and the
BoE), but the impact on bond yields is unknown.
7. Governments might act to prevent the central banks from exiting in order to
hold bond yields down (financial repression).
8. There is some risk that QE may have long term inflationary consequences if it is
not reversed in a timely manner.
9. Will we ever see central bank balance sheets returning to “normal”?
Source: Fulcrum Asset Management LLP
58

59. QE – as in the 1930s – is no ‘flash in the pan’
8
7
6
5
4
3
2
1
0
1934
1938
1942
1946
1950
1954
30-year Treasury yield
1958
1962
1966
1970
T-Bill, 3m rate
Source: Thomson Reuters Datastream, & Federal Reserve Board
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 59

60. Cash went down the asset route...
 This is how QE is supposed to work…
Source: Hermes Fund Managers Ltd, adapted from BoE
Hermes Fund Managers Ltd I Global Economic Outlook I
Page 60

61. Panel Discussion
Gavyn Davies, Neil Williams, David Bennett
Moderator : Pete Drewienkiewicz

62. Austin Friars House, 2-6 Austin Friars, London EC2N 2HD
Telephone : +44 (0) 20 7250 3331
www.redington.co.uk
Contacts
David Bennett
Pete Drewienkiewicz
Gurjit Dehl
Head of Investment Consulting
Direct Line: 0203 326 7147
David.Bennett@redington.co.uk
Head of Manager Research
Direct Line: 0203 326 7138
Pete.Drewienkiewicz@redington.co.uk
Education & Research
Direct Line: 0203 326 7102
Gurjit.Dehl@redington.co.uk
Disclaimer
For professional investors only. Not suitable for private customers.
The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussion
purposes only. A variety of market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that the
parameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which
appear above are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions
expressed herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this
message is indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms
of executed transactions should be treated as preliminary and subject to further due diligence.
Redington Ltd are investment consultants regulated by the Financial Conduct Authority. We do not advise on all implications of the transactions described herein. This
information is for discussion purposes and prior to undertaking any trade, you should also discuss with your professional tax, accounting and / or other relevant advisers how
such particular trade(s) affect you. All analysis (whether in respect of tax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon as
accurate.
©Redington Limited 2014. All rights reserved. No reproduction, copy, transmission or translation in whole or in part of this presentation may be made without permission.
Application for permission should be made to Redington Limited at the address below.
Redington Limited (6660006) is registered in England and Wales. Registered office: Austin Friars House, 2-6 Austin Friars, London EC2N 2HD
Macro Overview
For Professional Investors Only
22 January 2014
62