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Beyond building BRICS A world of opportunity

Beyond building BRICS A world of opportunity. September 2011. Metamorphosis of risk. Chris Hart Chief Strategist. Ave E CW DSAI. Contrasting paths of BRICS/EM and the Developed World. . . Spending the problem. Consumption vs Production. Source: INet.

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Beyond building BRICS A world of opportunity

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  1. Beyond building BRICSA world of opportunity September 2011 Metamorphosis of risk Chris Hart Chief Strategist Ave E CW DSAI

  2. Contrasting paths of BRICS/EM andthe Developed World . .

  3. Spending the problem. Consumption vs Production Source: INet

  4. Fundamental problem: governments have grown too big Source: INet

  5. The systemic Ponzi – dynamicsAt the 11th hour, as government compensates Systemic collapse Credit worthy capacity Systemic instability Debt Debt needed to sustain the system BCA: the debt super cycle Time

  6. From 2010: The debt trap: more debt no solution Source: INet

  7. From 2010: Projected debt burdens: US and UK servicing requirements in a worse position than Greece in 2040. The Argentine disease

  8. The EM contrast: yield, growth, solvency Interest Rates Government Spending 2007 EM Crisis Bubble Resolution Sovereign Debt Difference in economic performance very stark

  9. Crisis and risk Market response and the changes .

  10. Financial Markets and safe-havens: …swinging between risk and reward Source: INet

  11. Debt Distressed Italian Financial Markets – no swing but general exodus. Repeated in … Greece, Ireland, Portugal & Spain!!

  12. Risk and the USD. Source: INet

  13. Euro: convergence and divergence trade. Source: INet

  14. French Spreads over German Bunds. …..France as well!!!!??? Source: INet

  15. EUR vs USD – Range Trading Source: INet

  16. A chart for the generation: USD vs Swiss franc. Source: INet

  17. EUR vs CHF – huge move over the past year. Source: INet

  18. S&P: Bearish? Source: INet

  19. S&P: Long Term Outlook Turning Bearish as well Source: INet

  20. JSE: Bearish! Source: INet

  21. JSE: better long term outlook, but bearish s/t. Contrast with S&P very stark! Source: INet

  22. The rand. Very Volatile. Really???? Source: INet

  23. SA Bonds: yield and solvency!! Source: INet

  24. The EM opportunity: changing nature of risk Growth Yield Investment Opportunities Differentiation Solvency BRICS and EM becoming safe-havens Relative risk diminishing

  25. A Soft Patch…. ….or Double Dip? Slowdown aggravates debt distress .

  26. Quantitative Easing. …1, 2 and maybe 3?? Otherwise better described as printing money Record budget deficits also added to the mix

  27. …and deficit spending As far as the eye can see. Anyone for tea?? Record budget deficits also destabilizes Source: INet

  28. OECD Lead indicator: no recovery; pointing to stagnant 2nd half at best. Source: INet

  29. Risk metamorphosis Historic experience problematic .

  30. Governments - becoming the investor’s enemy…but are friends when emerging from the restructure RisingTax Burden Labour Instability Hostile Regulation Protectionism Concentration US; UK; Japan; PIIGS Blame game Bankruptcy Brazil; Zambia; Turkey, Thailand Low Labour Costs Investment Incentives Pragmatic regulation

  31. Challenge to asset management doctrine and foundationDoes ‘risk free’ rate become redundant? Return “Defensive” “aggressive/growth” Equity Property Bonds Cash Risk

  32. Inflation adjusted and the model falls apartDoes ‘risk free’ rate become redundant? Return Equity “Expensive” “Cheap” Property Bonds Risk Cash Submarine assets

  33. Risk hierarchy. Source: INet

  34. Gold – a safe haven Source: INet

  35. Conclusion EM investors get growth, yield and solvency Market response to risk is changing fundamentally Conventional Investment Wisdom needs a rethink to deal with systemic risk Twitter: chrishartza

  36. Thank You Chris Hart Chief Strategist Twitter: chrishartza Ave E CW DSAI

  37. FAIS disclaimer • Investment Solutions Limited is a licensed financial services provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act, 37 of 2002, as amended. • Any information in this presentation relating to any product: • Is a factual and objective description of the product • Does not constitute an express or implied recommendation, guidance or proposal that any particular transaction in respect the product is appropriate to your particular investment objectives, financial situation or particular needs • Is not advice as contemplated in the Financial Advisory and Intermediary Services Act • Investment Solutions Limited shall not be liable for any damage or loss suffered resulting from any action taken by any person based on this presentation or any discussions relating to it.

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