Yves Bonzon, Chief Investment Officer of Pictet Wealth Management, presented his view for the year ahead in London on January 24th.

1. Secular Trends year 3 - Strategy 2012
The New Normal is Non-Normal
PWM investment strategy
Yves Bonzon, CIO
January 2012

2. Key 2010’s trends
Every decade is characterized by a different economic and investing environment
60’s 70’s 80’s 90’s 00’s 10’s
Bretton Woods Floating FX Disinflation Fall of Berlin EMU
Oil shock Plaza Wall Great global
Inflation Arbitrage Globalization imbalance
Internet China’s rise
?
E-trading Structured credit
US Nifty Fifty Small Caps Gvt bonds Indexing Hedge funds
stocks Oil stocks Nikkei Nasdaq EM equities
Gold, CHF and Hang Seng SMI Commodities
JPY USD EUR
Pictet Secular Trends Year 3 - Strategy 2012 3

3. 1945 – 2007 leveraging cycle
2007 was an inflexion US debt to GDP
point in terms of debt
accumulation in
Western economies.
We have entered the
managed deleveraging
era.
Pictet Secular Trends Year 3 - Strategy 2012 7

4. In a balance sheet recession
Key Points
• Austerity is doomed to fail
• Three solutions to insolvency:
- Transfers, money printing, restructuring
• Capital flees from weak balance sheets to strong ones.
• Strong countries resist the appreciation of their currencies.
• A coordinated solution is unlikely.
Pictet Secular Trends Year 3 - Strategy 2012 8

5. US employment
No net creation in 12 years
US total payroll employment excluding census hiring: level in millions of workers
Mio
135
130
November 1999
125
120
115
110
105
100
95
90
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 9

6. Household formation was very weak over the past 5 years or so
It should re-accelerate over the coming years. Moreover, “shadow demand” has built up
Number of households: effective and trend estimates
On trend, the natural rate of US
household formation is about 1 million Millions
annually. 116
2.7
The depressed level of housing activity 114
and the missing 2 or 3 million jobs
112 Number of households
related have depressed household
formation to the same extent. 110
Fundamentally US demographics are Trend based on
108
adult population
not deflation prone, unlike Japan.
106
104
102
100
00 02 04 06 08 10 12
Source: AA&MR, Datastream Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 10

7. US house prices
One of the cheapest US house price indexes
investable asset class 7.6
but the overhang is not 37%
cleared yet.
Decline
7.4 15%
Decline
US families will switch R Average E
eal xisting House P (log scale)
rice
from an owner’s 7.2
R C
eal ase-Shiller C posite Index (log scale)
om
R O E /FH H
eal FH O FA ouse P Index (log
rice
mentality to a rental
mentality. This is a 2
generations’ turn.
7.0
30%
6.8 Decline
6.6
6.4 Trend = 1.5%per annum
1 SD = 6.7%
Source: CS
6.2
Jan-68 Jan-71 Jan-74 Jan-77 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
Pictet Secular Trends Year 3 - Strategy 2012 11

8. China’s economy at horizon 2015
China would reach between 12% and 16% of world GDP by 2015 at 6% respectively 9% real growth
China’s nominal GDP share in world GDP
18%
USD* 10'076 bn
16%
14%
Bull Case (9% growth)
Bear Case (6% growth)
12%
10% USD* 9'073 bn
USD* 4'814 bn
8%
6%
USD* 2'224 bn
4% USD* 1'196 bn
2%
*2004 constant USD
0%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 16

9. China: middle income trap?
Few people realize how China may be old before it gets rich
fast China is aging.
Labour force is actually
starting to decline from
next year onwards.
Furthermore, they might
be caught in a middle
income trap where they
become too expensive
relative to place such as
Vietnam and not skilled
enough relative to
advanced countries.
Pictet Secular Trends Year 3 - Strategy 2012 21

10. Gold: target raised to $ 3’000.- (from $2’000.-)
We are slowly getting towards Dow/Gold ratio
of target ratio of 5 ounces of
gold for 1 unit of the DJ
Industrial Index.
Monetary disorder of the
deflation or inflation kind
would justify a lower ratio.
In nominal terms, if deflation Insert here your graphs
ultimately prevails, $ 2’000.- and tables
is the maximum potential.
If inflation gets out of control
gold might be confiscated.
Pictet Secular Trends Year 3 - Strategy 2012 25

11. Corporate bonds
Quality corporate bonds are historically the best asset class in a de-leveraging cycle
US corporate bond yield US corporate bond spreads
% % Bp
13.2 380
6.0 1'050 Bp
12.6 5.8 360
1'000
12.0 5.6 340
950
11.4 5.4
900 320
10.8 5.2
5.0 850 Investment 300
10.2
High yield 4.8 grade
800 280
9.6
4.6 750
9.0 260
4.4
8.4 700 High yield
4.2 240
7.8 650
4.0
Investment grade 220
7.2 600
3.8
550 200
6.6 3.6
Merrill Lynch Master index Merrill Lynch Master index
6.0 3.4 500 180
H2 09 H1 10 H2 10 H1 11 H2 11 H1 12 H2 09 H1 10 H2 10 H1 11 H2 11 H1 12
Source: AA&MR, Datastream Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 30

12. Investment rules in a deflationary environment
Key Points • Favour strong balance sheet linked investments.
• Beware the pitfalls of low valuations.
• Focus on:
– Cash and government bonds of countries that can print
their money
– High grade corporate bonds
– Defensive equities
– Gold
• Minimize leverage.
Pictet Secular Trends Year 3 - Strategy 2012 31

13. SAA: allocating capital by strategies and risk factors
We shall progressively PWM strategic asset allocation 2012
move to an asset
allocation driven by E 2 3 4
Fixed income Conservative Balanced Growth Strategies
strategies and risk
factors.
Credit risk premia
The TAA bucket will be
EM debt FX
implemented through Gold
beta instruments.
For the other buckets, TAA bucket
we shall use a variety of
suitable portfolios and
instruments. Alternatives trading
Equity defensive
Equity growth
Alternatives low vol
REITs
Pictet Secular Trends Year 3 - Strategy 2012 34

14. Pictet’s secular outlook: summary
Key Points • Bimodal distribution of returns on financial assets.
• Diversify by strategies rather than by asset classes and
dedicate capital to a tactical bucket.
• GDP growth is the dominant variable for equities.
• Policy decisions trigger violent rallies.
• Emerging equities are only a super cyclical asset class.
• Financial repression has begun.
Pictet Secular Trends Year 3 - Strategy 2012 35

15. Key 2010’s trends
Every decade is characterized by a different economic and investing environment
60’s 70’s 80’s 90’s 00’s 10’s
Bretton Woods Floating FX Disinflation Fall of Berlin EMU Managed Western
Oil shock Plaza Wall Great global de-leveraging
Inflation Arbitrage Globalization imbalance EM
Internet China’s rise discrimination
E-trading Structured credit Tech led cycle
Asset price
targeting
End of $ paper
standard or EUR
?
US Nifty Fifty Small Caps Gvt bonds Indexing Hedge funds TAA and risk
stocks Nasdaq EM equities factor based SAA
Oil stocks Nikkei
SMI Commodities Gold
Gold, CHF and Hang Seng
JPY USD EUR EM local debt
Oil services
Developed quality
blue chips
Pictet Secular Trends Year 3 - Strategy 2012 37

16. Double global decoupling in DMs versus EMs
Tail event scenario Central scenario Alternative scenario
Fiscal union on BCE’s QE. No growth in EU and growth Intensification of the euro
Fiscal policy boost in DMs. recession in the US. Stabilizing crisis. Double-dip in DMs. QE
Accelerating economic growth in EMs. in DMs source of inflation in
growth in DMs. No debt crisis in EMs. EMs.
Economic policies are not coordinated, not cooperative, not homogenous. They generate
disequilibrium.
Emerging Developed
Rise in
Markets Markets
labour QE
costs New supply
side
Double decoupling economics
Diffusion of
Debt deflation
inflation
Credit
Change in the
overhang
Strong economic model
from exports- Sluggish
revenues
based to revenues
growth
domestic based- growth Keynesianism
Buoyant domestic demand demand Lack of domestic demand
Pictet Secular Trends Year 3 - Strategy 2012 Source: AA&MR 42

17. From 2008, DM economies have entered an over-indebtedness regime
ebt
Consensus 5y avg real growth rate 2012 - 2016
Insolvency Territory blic d
of pu
Debt / GDP ratio 2011
ct ory
Traje
2008
Solvency Territory
Portugal Ireland
0.4 % 2.2 %
101.6 % 108.1 % Greece
Germany* 0.7 %
1.5 % 162.8 %
Australia 81.7 %
3.3 % Italy
22.8 % Japan 0.7 %
New Zealand
1.5 % 120.5 %
2.9 %
35.3 % 220 %
1980
Switzerland Spain Great
1.6 % United Kingdom*
38 % 2.1 %
1.7 %
69.6 % divergence
84 %
Public debt Norway Sweden
2.7 % 2.2 %
to GDP ratios 40.9 % 36.3 % USA*
2.7 % France
start rising in 101 % 1.5 %
DM’s 85.4 %
Traje
ctory
of no
Debt-financed economic growth m inal e
cono
mic g
rowth
Debt is out of control without drastic
* Prevailing market status of sovereign bonds issued by measures to cut debt or to boost
these countries still allow us to consider them as solvable economic growth Source: AA&MR
Pictet Secular Trends Year 3 - Strategy 2012 43

18. In an over-indebtedness regime, DM governments have 3 incompatible targets
Set of economic policy responses Governments’ targets Outcomes
Political target:
Re-election
Innovation shock
Reallocation of the
added value from
capital to labor
Supply side Keynesian pro-growth Cuts in
economics fiscal policy Government spending
? European fiscal union
Increase in
Public deficit public debt to
? Default and
restructuring
GDP ratio
Monetization
? of debt
Satisfying financial
markets’ requirements
Set of possible European crisis
Source: AA&MR,
responses
Pictet Secular Trends Year 3 - Strategy 2012 44

19. The five possible outcomes of the euro crisis
Euro outcomes Economic scenario
Ultimate form:
European government
Fiscal union European fiscal policy
Probabilities Euro-bonds Growth at potential
20% Low
volatility
The euro remains the Monetization of debt
35% euro (risk of Greece exiting the by the ECB Mild growth
Eurozone) Medium
volatility
European systemic risk
20% Blue euro
European Political burst Mild recession
Red euro
debt crisis High
20% volatility
Euro = D-Mark zone Global systemic risk
Sovereignty of States
5% + 11 national currencies Deep recession
Implosion:
Sovereignty of States
17 national currencies
Source: AA&MR
Pictet Secular Trends Year 3 - Strategy 2012 45

20. Identifying 3 market regimes with the VIX
A rule of thumb on market VIX index (new VIX starting January 1990)
volatility
80
150 on
19 October 1987
10 - 15, low volatility regime
70
15 - 25, significant risk
60
Above 25, fear of systemic risk Systemic risk
50
After the Euro Summit of 27
40
and 28 October, the VIX
reverted back to 25 on before Cycle with
30 some risk
sky rocketing again after the
Papandreou proposed
referendum announcement. 20
10
Standard cycle
0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 46

21. Pictet’s FX barometer: market factored in a European systemic risk
Scenarios Relative performance: carry trade versus value strategies (01.01.2008 = 100)
110
100
Growth at potential
90
80
Mild growth
70
European systemic risk
60
Mild recession
Global systemic risk 50
Deep recession
40
08 09 10 11
Buy Sell
Intensity of the macro scenario CAD, AUD, NZD, USD, EUR, JPY
Carry trade NOK, SEK GBP, CHF
USD, EUR, JPY CHF, CAD, AUD,
Value GBP, SEK NZD, NOK
Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 47

22. Pictet’s equity barometer: market factored in a European systemic risk
Scenarios
Stoxx Europe 600
Growth at potential 310
290 Low
volatility
Mild growth
270
250 Medium
volatility
European systemic risk 230
Mild recession
210
High
volatility
190 STOXX EUROPE 600 E - PRICE INDEX
Global systemic risk
170
Deep recession
150
10.08 10.09 10.10 10.11
Intensity of the macro scenario Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 48

23. Bonds: 10-year bond yields fell heavily in Q3 before rebounding
Due to a high core inflation rate, our fundamental model is still pointing to a fair value of 3.7%
US Treasury 10-Year bond yield and model estimates 10-Year US Treasury yield and directional pressure
% 6.00 100.00
9
90.00
5.00
8 10-year bond yield
80.00
70.00
December 2011
7 4.00
60.00
Systemic
6 Model* risk 3.00 50.00
premium Insert here your graphs and tables
5 in a high 40.00
volatility
2.00
regime 30.00
May 2012
4
20.00
1.00
3
10.00
*Based on short-term rate, core inflation,
2 0.00 0.00
economic growth and budgetary deficit
06 07 08 09 10 11 12 13
1 US 10 Year Note Yield
86 88 90 92 94 96 98 00 02 04 06 08 10 12
Directional Pressure Index 0 - 100 (leads 19 months)
Source: AA&MR, Datastream
Pictet Secular Trends Year 3 - Strategy 2012 49

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Pictet Secular Trends Year 3 - Strategy 2012 50

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The information and material contained herein are provided for information purposes only and are not to be used or considered an offer or solicitation to subscribe any securities or other financial
instruments.
Furthermore, the information and estimates expressed herein reflect a judgment as at the original date of publication and are subject to change without notice. The value and income of any of the securities
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and volatility, or the credit quality of any issuer or reference issuer. Furthermore, foreign currency rates may have a positive or adverse effect on the value, price or income of any security or related investment
mentioned in this report.
The trade instructions and investment constraints set forth by the client shall take precedence over, and may diverge from, the bank’s general investment policy and recommendations.
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have to be strictly abided by. Actual allocations to alternative, non-traditional investments (e.g. hedge funds) may exceed those mentioned in the grids herein provided that traditional equities are adjusted
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Pictet Secular Trends Year 3 - Strategy 2012 51