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www.ramseycrookall.com
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Todays Speakers Stuart Cowan Chartered FCSI
Investment Director Welcome Introduction
Peter Robertson BA (Hons) Chartered FCSI Senior
Investment Manager Global Economic
Outlook
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Disclaimer Where Ramsey Crookall has expressed
views and opinions, these may change. Where
markets and securities are mentioned in this
document they do not necessarily represent a
specific portfolio holding and do not constitute
a recommendation to purchase or sell. This does
not constitute an offer or solicitation by anyone
in any jurisdiction in which such an offer is not
authorised or to any person to whom it is
unlawful to make such an offer or solicitation.
The value of investments and any income will
fluctuate (this may partly be the result of
exchange rate fluctuations) and investors may not
get back the full amount invested. Ramsey
Crookall and Co Limited is licensed by the Isle
of Man Financial Supervision Commission.
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QE to Infinity and beyond Global markets in 2014
DEBT
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• Todays Presentation
• Intro - too much Debt
• Quantitative Easing and unconventional measures
• United States
• Winners and losers
• Abenomics
• Europe
• UK
• GDP forecasts
• The market outlook
• Themes for 2014
• Conclusion

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• Debt
• Budget deficits have fallen over the last 5
  years, due to austerity
• But overall debt levels have continued to rise
• And interest rates are at historically low levels
• Governments would love to inflate away the debt

Sovereign Debt
DEBT
Global Banking System
Corporate and consumers
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US Oct 2013 17.07 trillion
EU total public sector debt 8.75trn
Japan total public sector debt 10trn
UK total public sector debt 1.2trn
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• Quantitative easing and other unconventional
  measures
• Aim stimulate the economy when conventional
  measures exhausted
• Zero rate interest policy (ZIRP)
• QE - open market operations
• Forward guidance

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Unconventional measures - 4.7trn so far and
counting Total assets on central bank balance
sheets Q2 2013 (in USD)
Source Mckinsey 2013
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QE a quick example Fed buys a Treasury bond
from bank
Before Before Before Before
Bank A Bank A Bank A Bank A Fed Fed Fed Fed
Assets Liabilities Assets Liabilities
Reserves 50 Deposits 100 Treasury 0 Bank A Reserve A/C 0
Loans 20 Capital 10
Treasury 40

After After After After
Bank A Bank A Bank A Bank A Fed Fed Fed Fed
Assets Liabilities Assets Liabilities
Reserves 90 Deposits 100 Treasury 40 Bank A Reserve A/C 40
Loans 20 Capital 10
Treasury 0
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• QE - the US experience
• The FOMCs dual mandate the goals of maximum
  employment, stable prices and moderate long-term
  interest rates.
• Under Bernanke, Fed Balance sheet has risen from
  800bn in 2007 to over 4 trn
• QE1 (sept 2008) 1.7trn (mortgage backed secs,
  commercial paper lending facility)
• QE2 (Oct 2010) 600bn (long term Treasury
  bonds)
• Operation twist (Sept 2011) sell short dated
  bonds, buy longs
• QE3 (Sept 2012) 40bn per month MBS
• QE infinity (Dec 2013) increase open ended
  purchases from 40bn to 85bn per mth
• How has this stimulus impacted on the dual
  mandate and these other goals?

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• Inflation/prices
• Fed targets PCE 2
• QE has not caused hyper-inflation
• Inflation remains subdued
• Despite an increase in consumer credit
• Credit cards
• Car loans
• Personal loans
• total outstanding 3trn (2.6trn 2008)

Rather than stimulating growth (and inflation),
is the Fed fire-fighting deflation?
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• Most of the QE money is in the banking system
• Banks sell assets to Fed, credits bank reserve
  accounts at Fed
• Fed pays banks 0.25 interest on excess reserves
• Maintaining reserves has little influence on
  banks ability to lend.
• .thats a function of consumer and business
  demand for credit

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• Unemployment
• The official rate is trending lower
• But remains above the Feds 6.5 target
• A lagging indicator
• Subject to revision

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QE and long term interest rates

• Mortgage rates have benefited from QE
• But have risen by over 25 in the last 12 months.
• Long dated Treasury bond yield has fluctuated
  during periods of QE and has, if anything,
  trended higher during these periods.

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• QE and growth
• Growth in the US was trending lower before the
  credit crisis
• US economy remained in recession for much of QE1
  (Nov 08- Mar 10)
• It was a deep recession but economic growth
  recovered in 2010 and got back to pre Crisis
  levels.
• QE1 brought some stability

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• QE winners and losers
• Government lower borrowing costs, rolling
  credit
• facility from Central bank holdings
• Collective benefit 1.4 trn from lower
• borrowing costs
• 350bn remitted to US Treasury since 09
• Banks Fed provided solvency and restored
  confidence.
• Interest paid on excess reserves held with Fed.
• Borrowers low interest rates, low real
  borrowing costs
• Exporters initially benefitted from weaker
  currency
• Investors falling bond yields initially,
  rising stock markets
• Biggest losers have been savers Savings rates
  decimated

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• Since the introduction of QE in the US
• Short term interest rates have stayed at
  historically low levels
• Bond yields have fluctuated with the timing of
  different phases
• of QE but have not been controlled by the Fed
• The dollar weakened initially helping exports
• Potential USD carry trade significant capital
  inflows in to
• higher yielding emerging markets
• CPI inflation has remained low no
  hyper-inflation
• The Feds aggressive stance and forward guidance
  has improved confidence
• And a renewed appetite for risk. Highest
  inflation in asset prices (stocks, housing)

US Fed Funds
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• Bouyant stock market
• Fed support has given investors confidence
• Better relative value vs bonds
• Share buy backs
• 2011 405bn
• 2012 399bn
• 2013 to Q3 344bn

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US Housing
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• Tapering
• Fed recently announced a 10bn reduction in its
  monthly asset purchases to 75bn still
  extremely accommodating policy
• Further tapering data dependent
• Assume an improving economy
• Lower budget deficit
• Lower unemployment
• Higher Government revenues via taxes
• Consumer/business demand for credit higher bank
  lending
• Options Sell bonds back to banks
• Reduce interest payments on reserves
• Abandon QE via progressive scale-back
• Retain bond interest on residual holdings
• New laws forcing banks and pension schemes
• to hold more Govt debt

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Japan and Abenomics origins in Fukushima
The solution?
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• Abenomics the three arrows
• Aggressive monetary easing
• 2. A credible fiscal plan
• 3. Growth strategy based on structural reform
• Aims Target inflation rate of 2 pa
• Decimate yen boost exports
• Expect currency wars (competing trading
  partners will respond)
• ultimate failure

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• Results so far
• A notable weakness in the yen (as hoped)
• USD/JPY 104
• A strong rise in the Japanese Stock market
• But

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• Fiscal Plan
• Debt to GDP 240
• 24 of revenues to pay debt interest
• Sales tax rise from 5 to 8 April 2014
• Demographics not supportive of GDP growth
• Ageing population reduces productivity
  potential.
• Poor track record in structural reform
• Who will buy Japans debt with a known 2
  inflation target?

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• Eurozone heading for deflation?
• ECB cut discount rate to 0.25 in Nov 2013
  lowest level on record
• Deflationary forces persist in the Eurozone
• Inflation reached a 4 year low of 0.7 in
  October (below Japan).
• Eurozone unemployment 12.1 (all time
  high) Italy youth 41.6 Spain 26.7 (all
  time high)
• France 11.03 (16 year high)
• Will ECB consider some form of QE in 2014?
• Bond markets stable since Draghis June 12
• whatever it takes comments

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• UK tentative recovery
• BOE did 375bn of QE owns 31 of UK gilts
• Potential to do more if we see triple dip
• Expect more austerity in 2014
• BOE now using forward guidance no rate rise
  until unemployment falls to 7 (currently 7.4)
• Economy showing tentative signs of recovery
• Help to buy supportive of housing market
• UK consumer remains heavily indebted but are
  taking on more debt (total net lending rose by
  1.5bn in Nov)

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• The market outlook
• Growth forecasts
• Interest rates/credit
• Bonds
• Equities
• Commodities
• Currency

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Growth Forecasts
2013 GDP 2013 CPI 2014 GDP 2014 CPI 2015 GDP 2015 CPI
USA 1.6 1.4 2.6 1.4 3.4 1.4
Japan 2.0 0.04 1.2 2.8 1.1 1.9
Eurozone -0.4 1.5 1.0 1.5 1.3 1.4
UK 1.4 2.7 1.9 2.3 1.9 2.0
G7 1.5 2.5 2.6 1.5 3.3 1.7

Source IMF World Economic Outlook Sept 2013
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Growth Forecasts BRICS
2013 GDP 2013 CPI 2014 GDP 2014 CPI 2015 GDP 2015 CPI
Brazil 2.5 6.3 2.5 5.7 3.1 5.3
Russia 1.5 6.7 3.0 5.7 3.5 5.3
India 3.8 10.8 5.1 8.9 6.3 7.5
China 7.6 2.7 7.2 3.0 7.0 3.0
Source IMF October 2013
BRIC recent stock market performance
31.12.2012 Chg 31.12.2013 Chg All time high (date)
Bovespa 60,952 7.4 51,507 -15.5 73,516 (20.05.08)
RSTI 1,526 10.5 1,442 -5.5 2,487 (19.05.08)
BSE Sensex 19,444 25.8 21,097 8.7 21,326 (09.12.13)
Shanghai SE 2,233 3.17 2,115 -7.7 6,092 (16.10.07)
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• A quick word on China
• The only country in the world that sets growth
  targets (7.5 pa)
• Q3 GDP rose 7.7 in Q3 2013
• Investment makes up 56 of GDP
• Most of it funded by debt, local govt, corporate
  borrowing now 200 GDP
• Economy trying to shift from export and
  investment led growth to consumer led (34)
• Bank assets have ballooned in last 5 years

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• The economic outlook
• Interest Rates/credit
• US 0.25
• UK 0.50 interest rates remain at
  historically low levels
• Eurozone 0.25 US/UK/ECB Forward guidance
  suggests short term rates will stay low
• Must keep an eye on inflation recovery in
  consumer credit/borrowing
• Market rates (bond yields) will provide guidance
• Will the ECB undertake QE?

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• The market outlook - Bonds
• Bonds remain fundamentally expensive
• Governments still carrying massive debts
• Yields on 5-30 year bonds creeping higher (UK,
  US)
• No sign of hyper-inflation. Negative real returns
  out to 5 yrs
• Low market rates supportive for corporate
  borrowers
• Disparity among European Government bonds to
  continue in 2014 although spreads have narrowed
  since Q3 2012.
• Expect aggressive QE from Japan in 2014
• Spreads on high yield debt have fallen, as
  investors embrace risk and yield (again)

Maturity Yield Nov 2011 Yield Jan 2014
3 month 0.49 0.29
6 month 0.46 0.37
1 Year 0.51 0.33
2 Year 0.52 0.48
5 Year 1.11 1.68
10 Year 2.19 2.83
20 Year 2.98 3.38
30 Year 3.19 3.57
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Anything with yield (source Financial Times)
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• The market outlook - Equities
• Remain attractive relative to bonds but some
  caution required
• Non cyclically adjusted forward PEs do not look
  excessively
• demanding, nor excessively cheap (FTSE 100 FPER
  12.4x)
• Dividend yields are attractive (FTSE All Share
  3)
• Far East Asian and Emerging Markets various
  headwinds
• Markets of developed countries have scope for
  further gains in 2014
• But could experience a c5-10 correction, as
  looking
• overbought short term.
• UK listed Focus on dividends, cash flow, low
  debt,
• international revenues. Need to keep an eye on
  earnings

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FTSE 100 Index (Jan 2014)
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• The market outlook Commodities
• Commodities underperformed developed equity
  markets in 2013
• Potential headwinds Slowdown in China
• Stronger US dollar, taper concerns
• Rising supply expectations
• Difficult year for precious metals
• Recent poor weather should support agriculture
• Future performance growth dependent

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Gold Jan 2014
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• The market outlook currency the race to
  devalue continues
• Aggressive policy by Japan to deliberately weaken
  yen- expect retaliation
• USD- should strengthen as taper now in play
• Eurozone strong due to restrictive nature of EU
  monetary policy
• Significant QE (none so far) will weaken the
  Euro. Watch banking sector
• Swiss Central Bank has pegged SFr to Euro at 1
  SFr 1.20
• Sterling has benefited from Govt austerity
  tackling the deficit

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• Summary of main themes for 2014
• Tapering of QE in United States but data
  dependent
• US Government debt ceiling
• Action by ECB to stimulate growth how will they
  act?
• Tensions between Japan and F.E neighbours over
  Abenomics
• China watch the financial sector
• Geopolitical (Mid East, Japan/China, European
  Elections, social unrest)
• Fukushima Unit 4 reactor
• Expect pace of global growth to remain below
  pre-crisis levels still too much debt
• Choice of asset driven by attitude to risk and
  potential return

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Questions Stuart Cowan Chartered
FCSI Director Peter Robertson BA (Hons)
Chartered FCSI Senior Investment Manager
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Disclaimer Where Ramsey Crookall has expressed
views and opinions, these may change. Where
markets and securities are mentioned in this
document they do not necessarily represent a
specific portfolio holding and do not constitute
a recommendation to purchase or sell. This does
not constitute an offer or solicitation by anyone
in any jurisdiction in which such an offer is not
authorised or to any person to whom it is
unlawful to make such an offer or solicitation.
The value of investments and any income will
fluctuate (this may partly be the result of
exchange rate fluctuations) and investors may not
get back the full amount invested. Ramsey
Crookall and Co Limited is licensed by the Isle
of Man Financial Supervision Commission.
Stockbrokers Investment Managers
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Commission