William Hobbs' presentation from Propel's recent "Predictions for Digital 2013" event. For more content like this, go to www.propellondon.com/blog or follow us on Twitter - @propellondon

3. Investment outlook 2013
William Hobbs
Head of Equity Strategy
January 2013

4. Outline of presentation
 2013 outlook
 Risk #1: the euro crisis
 Risk #2: US & UK austerity
 The global context
 How to invest
4

5.  2013 Outlook
Source: Google Images, Barclays
5

6. Clouds begin to lift
 Most visible clouds:
1: The euro’s existential crisis
2: Fiscal austerity in the US and UK
 Rays of sunshine?
1: The ECB (and, if needed, the BoE)
2: US New Year deal & UK history
3: The bigger picture: ‘Customer no. 1’ and Asia
6

7. Key barometer: manufacturing surveys stabilising
2 Standard deviations from trend
1
0
-1
-2
-3
-4
-5
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
China US UK Germany Japan
Source: Bloomberg, Datastream, Barclays Research
7

8.  Risk #1: the euro crisis
8

9. How to view it:
“One must imagine Sisyphus happy” –
Camus

10. The ECB’s safety net at work
(%) (%)
2.0 7
6
1.5
5
4
1.0
3
2
0.5
1
0.0 0
2007 2008 2009 2010 2011 2012 2013
Euro interbank - OIS spread (lhs) Germany-Spain 10 year bond spread (rhs)
Source: Bloomberg, Barclays
10

11. Spain, the ECB and OMT…
 Will Spain ask for a bail-out?
If the ECB’s promise is credible, it may not matter
A formal request determines who, not what
 After Greece’s default, why not Spain?
Budget and debt arithmetic is better
Economy is different & reforms more credible
The troika would try harder…
11

12. Plausible timescale for a definitive euro fix
2012… 2013-15? 2017?? 2022???
Co-ordinate
Safeguard
deposit Greater fiscal More
banks, tackle
insurance, integration, competitive Lasting solution
deficits &
supervision, joint bond peripheral
insolvent
rescue issuance economies
sovereigns
facilities
Source: Blackrock, Barclays Wealth Strategy
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13.  Risk #2: US & UK fiscal austerity
13

14. US fiscal cliff has been turned
 New Year compromise was a big deal
‘American Taxpayer Relief Act’ keeps a lid on taxes
Tax hit in 2013: $190bn, or 1.2% GDP (cf: $650bn, 4.1%)
 TBD (March?): spending cuts & debt ceiling
Spending sequestration: $90bn, or 0.6% GDP
Credit ratings matter less than ‘fundamentals’
14

15. Govt. borrowing (rolling 12 mths, % GDP)
12
10
8
6
4
2
0
-2
-4
-6
Q1 1994 Q1 1999 Q1 2004 Q1 2009
US UK
Source: Datastream, Barclays Research
15

16. Structural government deficits (IMF, % GDP)
8
6
4
2
0
-2
-4
-6
-8
-10
-12
2007 2009 2011 2013F Change 2009-
2013
UK Euro area US Japan
Source: IMF WEO; Barclays
16

17. Precedent: a brief UK history lesson
“How 364 economists got it totally wrong”
Daily Telegraph, March 2006 – a 25th anniversary
17

18. Sterling is competitive & real rates are low
3 105
2
100
1
0 95
-1
90
-2
-3 85
-4
80
-5
-6 75
02/11/2002 02/11/2004 02/11/2006 02/11/2008 02/11/2010 02/11/2012
Real interest rates (%, LHS) Real exchange rate (index, RHS)
Source: Datastream, Barclays Research
18

19.  The global context
19

20. US housing market gathering momentum
1300 550
1200 500
1100 450
1000 400
900 350
800 300
700 250
600 200
500 150
400 100
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Building permits Private housing starts Stock of new homes for sale (RHS)
Source: Factset, Barclays Research
20

21. US consumer spending: life after debt
Index: Dec 2005=100 000s per w eek
125 700
650
120
600
550
115
500
450
110
400
350
105
300
100 250
15/12/2005 15/12/2007 15/12/2009 15/12/2011
US household spending (nominal, index) Unemployment claims (000, RHS)
Source: Datastream, Barclays Research
21

22. Total US liabilities are large…
Debt/GDP
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Q2 1962 Q2 1972 Q2 1982 Q2 1992 Q2 2002 Q2 2012
Consumer +Government
+Non-financial business +Financial sector = Total domestic
Source: Datastream, Federal Reserve, Barclays Research
22

23. … but consumer assets are larger
X GDP
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Q2 1962 Q2 1972 Q2 1982 Q2 1992 Q2 2002 Q2 2012
Debt Financial assets Tangible assets Net worth
Source: Factset, Barclays Wealth Strategy
23

24. Asian growth: structural underpinnings
Asia’s weight in the world, %
60
50
40
30
20
10
0
Stocks now Bonds now Real GDP now Population in 2041
Source: US Bureau of Census, MSCI, Barclays
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25. Barclays’ key macroeconomic projections
2011 2012(E) 2013(F) 2014(F)
Real GDP (%)
Global 3.8 3.0 3.2 4.0
Emerging 6.5 5.0 5.4 6.0
US 1.8 2.3 2.1 2.5
Euro area 1.5 -0.4 0.1 1.4
UK 0.9 -0.1 1.3 2.2
Inflation (CPI,%)
Global 3.9 2.9 3.0 3.3
Emerging 6.4 4.8 5.1 5.1
US 3.2 2.1 2.0 2.5
Euro area 2.7 2.5 1.8 1.7
UK 4.5 2.8 2.8 2.4
Official interest rates (end-year, %)
US 0.0–0.25 0.0–0.25 0.0–0.25 n/a
ECB 1.0 0.75 0.5 n/a
Bank of England 0.5 0.5 0.5 n/a
Barclays Forecasts
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26.  How to invest
26

27. Conclusion: risk assets preferred in 2013
1. Corporate securities preferred to government
- Business cycle and collective risk appetite matter more than QE
- Credit spreads are flattered by low GB yields: High Yield preferred
2. Stocks preferred to bonds
- Analysts too optimistic, but market doesn’t believe them: valuations low
- Current: US and EUX preferred to Japan, UK, RoW; neutral EM (Asia
pref.)
- Within EUX: some core and some periphery
- Rotation ahead: ‘Income’ & recovery to switch into ‘Growth’…
3. F/X: USD becomes pro-cyclical; JPY & CHF to reverse; Asian EMs
27
favoured

28. Strategic and Tactical Asset Allocation
Moderate risk portfolio
SAA
Asset Class
Indices SAA +TAA TAA
Cash & Short Maturity Bonds Barcap Global Treasury 1-3y 8.0% 6.0% -2.0%
Developed Government Bonds Barcap Global Treasury 7-10y 9.0% 4.0% -5.0%
Investment Grade Bonds Barcap Global Corporate 4.0% 4.0%
High Yield & Emerging Markets
Bonds Barcap Global High Yield and EM 8.0% 10.0% 2.0%
Developed Markets Equities MSCI World Index 38.0% 43.0% 5.0%
Emerging Markets Equities MSCI EM 10.0% 10.0% -
Commodities DJ UBS Future Commodity Index 5.0% 5.0% -
Real Estate MIT/CRE IBI US Index (70%) and IPD UK
(30%) 4.0% 4.0% -
Alternative Trading Strategies Barclays Wealth ATS Weighted Index 14.0% 14.0% -
TOTAL 100.0% 100.0% 0%
28

29. Developed profitability is not extreme (real ROE, %)
16
14
12
10
8
6
4
2
0
-2
Dec-74 Dec-79 Dec-84 Dec-89 Dec-94 Dec-99 Dec-04 Dec-09
inflation adjusted RoE 10 year moving average
Source: MSCI, Datastream, FactSet, Barclays
Please note that past performance is not necessarily a reliable indicator of future performance

30. Cross-asset dislocation: a message to CFOs
Yield (%)
8
7
6
5
4
3
2
1
0
Jan-01 Jan-03 J
an-05 Jan-07 J
an-09 Jan-11
Developed Markets Equity Dividend Yield Global Investment Grade Corporates Yield
Source: Factset, Barclays
Please note that past performance is not necessarily a reliable indicator of future performance
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