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2012 Global Forum

The International Alliance for Women. October 19, 2012. 2012 Global Forum. Connecting Women – Empowering Change Regional and Global Megatrends Impacting Economic Growth Presented by Cynthia Steer. Agenda. Unemployment Wages Commodity Prices Real Estate

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2012 Global Forum

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  1. The International Alliance for Women October 19, 2012 2012 Global Forum Connecting Women – Empowering Change Regional and Global Megatrends Impacting Economic Growth Presented by Cynthia Steer

  2. Agenda Unemployment Wages Commodity Prices Real Estate Emerging Markets and Grand Convergence 2

  3. Section I. Unemployment

  4. Unemployment Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon • U.S. unemployment rate in August fell to 8.1% from 8.3%, but the fall occurred due to 368,000 discouraged workers dropping out of the labor force, leaving ~12.5 million unemployed and still looking for work • 8.1% is still high compared to the historical average of ~5.8% since 1948 • Looking over the last 20 years, unemployment ranged from 3.8% in April 2000, to 10% in October 2009 • At 8.1% in U.S., unemployment rate significantly higher than Japan (4.4%) and South Korea (3.2%), but still below Spain (24.7%), Italy (10.6%), and overall Eurozone (11.2%) • May not get down to 5/6% until late teens (per Fed’s own projections)

  5. U.S. Unemployment and Labor Force Participation Rate: 1990 Q1 to 2012 Q2 Quarterly data as of June 30, 2012. Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

  6. Eurozone1 Unemployment and Labor Force Participation Rate: 1992 Q3 to 2012 Q2 1 Eurozone labor force participation rate: excludes Malta and Cyprus. Quarterly data as of June 30, 2012. Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

  7. Japan Unemployment and Labor Force Participation Rate: 1990 Q1 to 2012 Q2 Quarterly data as of June 30, 2012. Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

  8. South Korea Unemployment and Labor Force Participation Rate: 1990 Q1 to 2012 Q2 Quarterly data as of June 30, 2012. Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

  9. Section II. Wages

  10. Wages Source: Bloomberg; Census Bureau; FactSet; BEA; NBER; IMF; BNY Mellon • Real median U.S. household income at $50,054; lower than the level in 1999 (slide 11) • Growth stagnant over last two - three decades on a median basis • Compensation of employees at 54.9% of GDP; lowest in almost 40 years and on a downtrend since 1971 (slide 12) • Trickle down not evident for middle class workers • Corporate profitability skyrocketed to 9.6% of GDP in 2011 • Distribution of reward skewed in favor of capital, partly because of high unemployment since the great recession and more broadly because the world became “labor surplus” with the integration of India and China in the global economy • Political debate about the appropriate U.S. tax code • Debate not confined to U.S.; emulated in parts of Europe; French socialists decided to increase taxes on upper income brackets

  11. U.S. Household Median Income:1967 to 2011 (Annual) Annual data as of December 31, 2011. Source: Bloomberg; Census Bureau; BNY Mellon

  12. U.S. Compensation of Employees (% of Nominal GDP):1947 to Q2 2012 (Quarterly) U.S. compensation of employees and nominal GDP: seasonally adjusted annual rates. Quarterly data as of June 30, 2012. Source: FactSet; BEA; BNY Mellon

  13. Section III. Commodity Prices

  14. Commodity Prices Source: Bloomberg; BNY Mellon • Up-year for commodities but uneven/bifurcated • Agriculture: some commodities up big spurred by the drought while others are languishing – corn (32.35%), soybeans (53.39%), wheat (29.33%), and coffee (-24.84%) • Metals: precious metals (gold: 12.29%, $1799), silver (23.54%, $34), platinum (18.86%) up on central bank balance sheet expansions but cyclically sensitive aluminum (-1.04%) and copper (6.42%) languishing on lackluster China demand • Energy: gasoline (28.63%) ahead of crude oil (-3.43%) and natural gas (-19.23%)

  15. Commodity Total Returns1: September 13, 2012 1 S&P GSCI Total Return Indices Source: Bloomberg; BNY Mellon

  16. Commodity Prices • Outlook • Asset allocation diversification – investors want to be in commodities even though correlations up • Expectations of higher global economic growth in 2013; alternatively, to the extent slowdown extended commodities will be suppressed • Monetary stimulus leading to premise hard assets more likely to retain value as supply of fiat currencies increases significantly

  17. Section IV. Real Estate

  18. Real Estate Source: Bloomberg; FactSet; Census Bureau; BNY Mellon • Case-Shiller index points to signs of incipient recovery in housing valuations • U.S. residential real estate bottoming out in mid 2012, homebuilder stocks broke out in late 2011 • Long period of excesses being purged, positive reaction to low rates, and availability of mortgages for high quality borrowers leading to improvement in initially hard hit sand states (Nevada, Florida, Arizona); as always, uplift not homogenous • Appreciation rates likely subdued next few years because of shadow inventory overhang from underwater mortgages; correction began in 2006; approximately seven years old depending on one’s timeline; coming to close, but not looking for 10% year-over-year price increases • Housing refinancing rate gone up quickly in response to falling rates and outstanding debt composition shifting to newly originated creditworthy mortgages • Residential construction bottomed and picking up from a very depressed level

  19. U.S. Home Prices: March 31, 1987 – June 31, 2012(Quarterly): In Search of the Bottom Home Price Index: S&P/Case-Shiller U.S. National Home Price Index seasonally adjusted; Base value: January 2000 = 100 Data as of June 30, 2012. Source: Bloomberg; BNY Mellon

  20. Section V. Emerging Markets and Grand Convergence

  21. Emerging Markets and Grand Convergence Source: OECD; IMF; BNY Mellon • One of the great grand themes of late 20th and early 21st century: grand convergence of emerging markets to advanced economy status – BRICs and secondary emerging market entities like MIST. Also, frontier markets now moving into arguably full-fledged emerging market status – Nigeria, Egypt, etc. • World Bank report shows emerging market versus advanced economy growth to 2025 (4.7% vs. 2.3%) • Tremendous investment in infrastructure, education, healthcare, etc. required to support population growth. Supply in fixed income securities (USD and local currency) in emerging markets likely to increase rapidly (compared to U.S. and Eurozone). Expect emerging market entities to sponsor more equity over time • Bottom line: flourishing security origination to finance growth; security origination and capital market development follows emerging market growth

  22. Emerging Markets and Grand Convergence Source: OECD; IMF; BNY Mellon • USD emerging market index trading at 322 bps (option-adjusted spread since August 2000: low 139 bps on June 1, 2007, high 1087 bps, average: 418 bps); yield lowest ever 4.70% (high 18.19% in March 1995, average 8.89%) • Historically low yields reflect significant decline in inflation, global search for yield, low indebtedness, growth arena, etc. • Last year, emerging market equities performed poorly, and this year, China: Shanghai Composite PE: 11.60 (average since Q4 1997 31.65, low 11.44 in Q4 2011, high 62.08 in Q4 2000); Russia Micex Index PE: 5.84 (average since July 2003 9.29, low 3.02 in November 2008, high 21.10 in November 2009)

  23. Numbers (millions) and Share (%) of the Global Middle Class*: 2009 to 2030 *Global middle class defined as households with daily expenditures between US $10 and US $100 per person in purchasing power parity terms. Source: OECD; BNY Mellon

  24. Spending by Global Middle Class*: 2009 to 2030(Billions of 2005 PPP USD) *Global middle class defined as households with daily expenditures between US $10 and US $100 per person in purchasing power parity terms. Source: OECD; BNY Mellon

  25. Shares of Global Middle Class* Consumption:2000 to 2050 *Global middle class defined as households with daily expenditures between US $10 and US $100 per person in purchasing power parity terms. Chart taken from OECD Working Paper titled “The Emerging Middle Class in Developing Countries” and was published in January 2010 (http://www.oecd.org/social/povertyreductionandsocialdevelopment/44457738.pdf). Source: OECD; BNY Mellon

  26. Advanced Economy* vs. Emerging Markets** Nominal GDP (USD) per Capita: 1992 to 2017 Log scaled with base 100. *Advanced Economies: Germany, Japan, U.K., U.S., France. **Emerging Markets: Brazil, Russia, India, China, South Korea. Data was collected from the IMF October 2012 World Economic Outlook (WEO). Source: IMF; BNY Mellon

  27. Emerging Markets vs. Advanced Economy Nominal GDP (USD) per Capita: 1992 to 2017 Emerging Markets Advanced Economies Data was collected from the IMF October 2012 World Economic Outlook (WEO). Data was collected from the IMF October 2012 World Economic Outlook (WEO). Source: IMF WEO October 2012; BNY Mellon

  28. How to Adapt to Low Yield Environment • Central question over the last decade, no singular solution • Methods adopted – increasing allocation to assets with higher expected return • Increased allocation to spread sectors: investment grade corporates, high yield corporates, emerging market debt, and increased allocation to alternatives • High dividend/quality stocks • For certain plans, problem of low yield implies benefits and entitlements will have to be downward adjusted, or contribution rate increased • Think differently about investment horizons and constraints • Government of Singapore Investment Corporation adopted 20-year horizon TR target 500 bps real return; long horizon great solution because of greater ability to assume liquidity risk via private equity, etc. • Currency as an alpha source • Sell volatility where strong view on ranges • Leverage • Use leverage to enhance return in positive carry situations • Pitfall: Orange County fall in 1944

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