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MARKET UPDATE

MARKET UPDATE. Paul Ord – Investment Manager 26 February 2013. 2012 - THE YEAR THAT WAS. Wide GDP divergence between emerging and developed economies US relative winner, UK stagnant, Europe recession (No austerity, mild austerity, extreme austerity) Positive returns from bonds

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MARKET UPDATE

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  1. MARKET UPDATE Paul Ord – Investment Manager 26 February 2013

  2. 2012 - THE YEAR THAT WAS • Wide GDP divergence between emerging and developed economies • US relative winner, UK stagnant, Europe recession • (No austerity, mild austerity, extreme austerity) • Positive returns from bonds • Higher yield/financial corporate bonds beat ‘safe-haven’ sovereigns • Equities outperformed bonds • Europe beat US, UK lagged • Mid/small beat large • Disappointing year for Commercial Property and Hedge Funds

  3. AUSTERITY GAMES - BETTER THAN EXPECTED OUTCOME Source: DataStream, 31/12/11 - 31/12/12

  4. BONDS OVERPRICED VERSUS EQUITIES Gilt, Corporate Bond and Equity Yields Source: Bloomberg, 12 Dec 2012

  5. CORPORATE BONDS – BOND YIELDS vs. EQUITIES UK dividend yields versus corporate bond yields - example companies Source: Bloomberg, 29 October 2012

  6. ECONOMIC GROWTH - MODEST RECOVERY Source: Citi Research Global Economic Outlook & Strategy, 18 January 2012 and 23 January 2013

  7. ECONOMIC GROWTH - DEVELOPED WORLD Percent % Source: Citi Global Economic Outlook and Strategy 23 January 2013

  8. US FISCAL CLIFF • What did happen • Bush-era tax cuts extended for families with income under $450k • Extended unemployment benefits to continue • Spending cuts mandated by Budget Control Act put off two months • Overall package equates to 1% drag on GDP • What didn’t happen • No meaningful structural reform • Debt ceiling • Public debt remains on an unsustainable trajectory • What this means for markets • Deep GDP recession was avoided = risk asset relief rally • More volatility to come

  9. US - ECONOMIC GROWTH IMPROVING • ‘Going for growth’ • ‘Fiscal cliff’ avoided • Low interest rates • Strong profit upturn • Employment now turning the corner • Low inflation • Dollar strength making imports cheaper

  10. EQUITIES - UK MARKET OUTLOOK • Market is pricing continued recession and earnings contraction • Global policy support and cheap money • Strong balance sheets, access to funding and EM exposure key drivers • Equity valuation attractive on all but doomsday scenario Source: Thomson Reuters Datastream 25/10/2011 Source: Thomson Reuters Datastream, 11/11/2011 Source: Citi European Portfolio Strategist, 7 February 2013

  11. EQUITIES - UK QUOTED MARKET IS GLOBAL NOT LOCAL Source: Morgan Stanley Global Exposure Guide 2011, Estimated 2012 Revenues, 21 May 2012

  12. EQUITIES - EMERGING MARKET OUTLOOK • Highest global GDP growth, highest EPS • EM est. share nominal global GDP 45% • Low household/corporate credit as % GDP • BRIC consumption exceeds US Source: Morgan Stanley Global Emerging Markets Strategy, Factset Consensus Estimates, 29 November 2012

  13. INDIA - GROWTH POISED TO OUTPACE CHINA • GDP to accelerate to 10% pa over next 5 years outpacing China • GDP per capita to match China over next 10 years • Structural rise in domestic savings - India has youngest and increasingly well educated workforce • Demographics - age dependency trough in China but not until 2030 in India • Productivity - reforms on state subsidies, taxes and accelerating infrastructure spending

  14. EQUITIES – INVESTMENT THEMES 2013 • Global diversification • Stock markets often different to economies • Many global businesses with Emerging Markets exposure • Quality companies • Earnings momentum, stable growth, strong franchise, strong balance sheet • Developed vs. Emerging Markets • Emerging Markets = industrialisation/urbanisation long-term growth trend • Developed Markets = unsustainable promises e.g. healthcare, pensions • Sustainable/reliable income • Well covered and growing dividends attractive vs. rising bond yields

  15. STRATEGY - FEBRUARY 2013 • Equities - overweight • Growth expectations to improve H2 • Central banks to continue reflation policies • Still the best return vs. risk option • Valuations fair for long-term investors • Global • Income from dividends higher than bonds • Gilts - underweight • Yields ‘fundamentally too low’, but • ‘Financial repression’ could keep rates lower, for longer • Global, corporate or EM bonds may make sense but involve different risks • Hedge funds - neutral • Commercial property - neutral • Income attractions • Cash – underweight • Negative real return may still make sense for some risk averse investors

  16. DISCLAIMER This presentation has been prepared for regulated intermediaries as at the date shown on the front page. It is not intended for any other persons and should not be relied upon by other persons. This presentation has been prepared for information purposes only and is not a solicitation or an offer to buy or sell any security. It does not purport to be a complete description of our investment policy, markets or any securities referred to in the material. The information on which the presentation is based is deemed to be reliable, but we have not independently verified such information and we do not guarantee its accuracy or completeness. All expressions of opinion are subject to change without notice. Any reference to the Quilter model portfolio, which is used for internal purposes, is purely illustrative and should not be relied upon. The figures quoted do not include charges. Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return. You may not recover what you invest. Changes in exchange rates may have an adverse effect on the value, price or income of foreign currency denominated securities. Levels and bases of taxation can change. Investments or investment services referred to may not be suitable for all recipients. Quilter is the trading name of Quilter & Co. Limited, registered in England with number 01923571, registered office at St Helen’s, 1 Undershaft, London EC3A 8BB. Quilter is a member of the London Stock Exchange and authorised and regulated by the UK Financial Services Authority.

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