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1. www.ramseycrookall.com Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

2. Today’s Speakers Stuart Cowan Chartered FCSI Investment Director “Welcome & Introduction” Peter Robertson BA (Hons) Chartered FCSI Senior Investment Manager “Global Economic Outlook” Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

3. 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 Licensed by the Isle of Man Financial Supervision Commission

4. QE to Infinity and beyond Global markets in 2014 DEBT Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

5. Today’s 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 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

6. Debt • Budget deficits have fallen over the last 5 years, due to austerity • But overall debt levels have continued torise • And interest rates are at historically low levels • Governments would love to inflate away the debt Sovereign Debt DEBT Corporate and consumers Global Banking System Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

7. 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 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

8. 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: Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

9. ‘Unconventional measures’ - $4.7trn so far and counting Total assets on central bank balance sheets Q2 2013 (in USD) Source: Mckinsey 2013 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

10. QE – a quick example; Fed buys a Treasury bond from bank Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

11. QE - the US experience • The FOMC’s ‘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? Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

12. 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? Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

13. 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 bank’s ability to lend…. • ….that’s a function of consumer and business demand for credit Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

14. Unemployment • The ‘official’ rate is trending lower • But remains above the Fed’s 6.5% target • A lagging indicator • Subject to revision Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

15. 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. Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

16. 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 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

17. QE: winners and losers • Government: lower borrowing costs, ‘rolling credit • facility’ from Central bank holdings • Collective benefit $1.4 trnfrom 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 • Negative real returns Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

18. 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 Fed’s aggressive stance and forward guidance has improved ‘confidence’ • And a renewed appetite for risk. Highest inflation in asset prices (stocks, housing) US Fed Funds Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

19. 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 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

20. US Housing Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

21. 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 Don’t expect any of these to happen in the immediate future Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

22. Japan and ‘Abenomics’ – origins in Fukushima The solution? Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

23. ‘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 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

24. Results so far • A notable weakness in the yen (as hoped) • USD/JPY 104 • A strong rise in the Japanese Stock market • But… Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

25. 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 Japan’s debt with a known 2% inflation target? Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

26. 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 Draghi’s June ’12 • ‘whatever it takes’ comments Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

27. 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) Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

28. The market outlook • Growth forecasts • Interest rates/credit • Bonds • Equities • Commodities • Currency Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

29. Growth Forecasts Source: IMF World Economic Outlook Sept 2013 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

30. Growth Forecasts: ‘BRICS’ Source: IMF October 2013 BRIC: recent stock market performance Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

31. 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 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

32. 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? Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

33. 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) Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

34. Anything with ‘yield’ (source: Financial Times) Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

35. The market outlook - Equities • Remain attractive relative to bonds but some caution required • Non cyclically adjusted forward PE’s 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 • Have some international exposure too Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

36. FTSE 100 Index (Jan 2014) Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

37. Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

38. 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 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

39. Gold – Jan 2014 Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

40. 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’ Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

41. 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 • Investment portfolios need to remain well balanced by asset class/geography Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

42. Questions Stuart Cowan Chartered FCSI Director Peter Robertson BA (Hons) Chartered FCSI Senior Investment Manager Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

43. 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 Licensed by the Isle of Man Financial Supervision Commission