This document provides an overview and analysis of global economic and market conditions from the perspective of January 2014. It discusses signs of improving global economic growth and manufacturing activity. While the US economy is showing growth around 3%, consumption remains subdued. Profit margins are at historic highs globally. The Eurozone is showing signs of recovery but deflationary risks remain. Emerging markets face the challenge of transitioning to domestic demand-led growth models from their past export and investment models. Overall, the document presents an assessment of improving yet uneven global economic growth and the investment outlook.

1. Global Investment
Outlook Equities 2014
Madrid, 16th January 2014
Dominic Rossi
Global CIO, Equities

2. Incipient signs of a global synchronised upswing
Synchronised Global Expansion
60
55
50
45
40
Global Manufacturing
PMI (JP Morgan) at
53.3% in December
35
Source: ISI Group. January 2014
2
2013
2013
2012
2012
2011
2011
2011
2010
2010
2009
2009
2009
2008
2008
2007
2007
2006
2006
2006
2005
2005
2004
2004
2004
2003
2003
2002
2002
2001
2001
2001
2000
2000
30

3. Proxy of US GDP growth suggests c3% growth
9%
7%
5%
3%
1%
-1%
-3%
-5%
-7%
-9%
2003
2004
2005
2006
2007
2008
2009
US lead indicator: Implied GDP growth (6wk lead)
Source: Thomson Reuters, Credit Suisse Research. January 2014
3
2010
2011
2012
US GDP qoq %, saar
2013

4. 4
Source: ISI Group. January 2014
jul 13
may 13
mar 13
ene 13
nov 12
sep 12
jul 12
may 12
mar 12
ene 12
nov 11
sep 11
jul 11
may 11
mar 11
ene 11
nov 10
sep 10
jul 10
may 10
mar 10
ene 10
nov 09
sep 09
jul 09
may 09
mar 09
ene 09
nov 08
sep 08
jul 08
may 08
mar 08
ene 08
Fiscal drag on the US economy continues
U.S. Real Federal Govt. Spending
120
Fast (1975 & 1982)
115
110
Slow (1991 & 2001 )
105
100
95
Current
90

5. Trade position – path of structural improvement
U.S. Real Exports
140
135
130
125
Current
120
115
Slow (1991 & 2001 )
110
105
Fast (1975 & 1982)
100
95
Source: ISI Group. January 2014
5
jul 13
abr 13
ene 13
oct 12
jul 12
abr 12
ene 12
oct 11
jul 11
abr 11
ene 11
oct 10
jul 10
abr 10
ene 10
oct 09
jul 09
abr 09
ene 09
oct 08
jul 08
abr 08
ene 08
90

6. 6
Source: ISI Group. January 2014
jul 13
may 13
mar 13
ene 13
nov 12
sep 12
jul 12
may 12
mar 12
ene 12
nov 11
sep 11
jul 11
90
may 11
140
mar 11
ene 11
nov 10
sep 10
jul 10
may 10
mar 10
ene 10
nov 09
sep 09
jul 09
may 09
mar 09
ene 09
nov 08
sep 08
jul 08
may 08
mar 08
ene 08
Housing market can provide further stimulus
U.S. Real Residential Fixed Investment
180
170
160
Fast (1975 & 1982)
150
Slow (1991 & 2001 )
130
120
110
100
Current
80

7. 7
Source: ISI Group. January 2014
jul 13
may 13
mar 13
ene 13
nov 12
sep 12
jul 12
may 12
mar 12
ene 12
nov 11
sep 11
jul 11
may 11
100
mar 11
125
ene 11
nov 10
sep 10
jul 10
may 10
mar 10
ene 10
nov 09
sep 09
jul 09
may 09
mar 09
ene 09
nov 08
sep 08
jul 08
may 08
mar 08
ene 08
Capex key to 2014 growth prospects
U.S. Real Non-Residential Fixed Investment
140
135
130
Fast (1975 & 1982)
120
115
Current
110
105
Slow (1991 & 2001 )
95
90

8. 8
Source: ISI Group. January 2014
jul 13
may 13
mar 13
ene 13
nov 12
sep 12
jul 12
may 12
mar 12
ene 12
nov 11
120
sep 11
jul 11
may 11
mar 11
ene 11
nov 10
sep 10
jul 10
may 10
mar 10
ene 10
nov 09
sep 09
jul 09
may 09
mar 09
ene 09
nov 08
sep 08
jul 08
may 08
mar 08
ene 08
Consumption likely to continue to be sub par, <2%
125
U.S. Real Consumer Spending
Fast (1975 & 1982)
115
Slow (1991 & 2001)
110
105
Current
100
95

9. Consumer confidence
10.0
50
40
8.0
30
20
6.0
10
0
4.0
-10
2.0
-20
-30
0.0
-40
-50
-2.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
Consumer Confidence Differential (LHS)
Source: Haver Analytics, Fidelity Worldwide Investments. January 2014
9
2008
2009
2010
2011
Unemployment Rate (RHS)
2012
2013

10. US average hourly earnings growth
US average hourly earnings growth for private production/non-supervisory workers
Y/Y%
10
9
8
7
2.2% in
November
6
5
4
3
2
1
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: Bureau of Labour Statistics, CLSA. January 2014
10

11. Share of total income accruing to each group
Income inequality may be an obstacle to growth
30
25
20
15
10
5
1913
1916
1919
1922
1925
1928
1931
1934
1937
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
0
Top 1% income share-including capital gains
Top 5-1% income share-including capital gains
Source: Emanuel Saez, ISI Group. 2012
11
Top 10-5% income share-including capital gains

12. QE has not generated an inflation problem
Trimmed Mean
1.35% in November
3.50
3.00
2.50
2.00
1.50
1.00
0.50
Core 1.12% in
November
Trimmed Mean PCE Deflator Y/Y %
Source: ISI Group. January 2014
12
Core PCE Deflator Y/Y %
oct 13
jul 13
abr 13
ene 13
oct 12
jul 12
abr 12
ene 12
oct 11
jul 11
abr 11
ene 11
oct 10
jul 10
abr 10
ene 10
oct 09
jul 09
abr 09
ene 09
oct 08
jul 08
abr 08
ene 08
oct 07
jul 07
abr 07
ene 07
oct 06
jul 06
abr 06
ene 06
0.00

13. Inflation unlikely to present an issue for at least 2 years
Civilian unemployment rate
Source: US Federal Reserve, ISI Group.
13
Output gap

14. Negative short rates until 2017
Federal funds rate
Source: US Federal Reserve, ISI Group.
14
Core PCE inflation (4Q)

15. Profit margins at historic highs
After-Tax Corporate Profits as a % of National Income(1)
12%
LT Average = 7.2%
10%
8%
6%
4%
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
S&P 500 Net Margin (4Qtr Average)(2)
10%
8%
6%
4%
2%
0%
1963
(1)
(2)
15
1968
1973
1978
1983
Source: Haver Analytics, Strategas Research Partners. January 2014
Source: Strategas Research Partners. January 2014
1988
1993
1998
2003
2008
2013

16. S&P 500 trailing price/earnings with historical median
35
30
Very Overvalued
25
Overvalued
20
Median = 16.2
15
Undervalued
10
Bargains
5
0
1965
1969
1973
1977
1981
Source: Strategas, Standard & Poor's. January 2014
16
1985
1989
1993
1997
2001
2005
2009
2013

17. 12m forward ROE
16%
18%
16%
15%
14%
12%
14%
10%
8%
13%
6%
12%
Jan 2012
May 2012
Sept 2012
Global
Source: Thomson Reuters, Credit Suisse Research. January 2014
17
Europe
Jan 2013
GEM
May 2013
US (RHS)
Sept 2013
Japan (RHS)
4%
Jan 2014

18. Europe coming back
European PMIs have turned up recently…and improvements have
been broad-based
Eurozone: PMI Composite
PMI Composite Index
Index
Index
62
57.5
58
55.0
54
52.5
50
46
50.0
42
47.5
38
34
45.0
2011
2012
2013
10
11
Spain
Sources: Markit, Haver Analytics, DB Global Markets Research. January 2014
18
12
Italy
13
France
Germany

19. European competitiveness improved relative to
Germany
ECB - harmonised competitiveness indicators - ULC based, 2000=100
150
140
130
120
110
100
90
80
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Germany, 87.6
Ireland, 111.8
Greece, 91.3
Portugal, 100.7
Italy, 110.6
France, 106.9
Source: Thomson Reuters, Credit Suisse Research. January 2014
19
Q1
2010
Q1
2011
Q1
2012
Spain, 101.0
Q1
2013

20. Peripheral European current account balance
4%
2%
0%
-2%
1.8%
in October
-4%
-6%
-8%
-10%
jul-05 ene-06 jul-06 ene-07 jul-07 ene-08 jul-08 ene-09 jul-09 ene-10 jul-10 ene-11 jul-11 ene-12 jul-12 ene-13 jul-13
sep-05mar-06sep-06mar-07sep-07mar-08sep-08mar-09sep-09mar-10sep-10mar-11sep-11mar-12sep-12mar-13sep-13
nov-05may-06nov-06may-07nov-07may-08nov-08may-09nov-09may-10nov-10may-11nov-11may-12nov-12may-13
Peripheral European 5: 3-month annualized current account balance, % of GDP
Source: Thomson Reuters, Credit Suisse Research. January 2014
20

21. Output gap
0%
-1%
-2%
-3%
-4%
-5%
-6%
Eurozone
Source: ISI Group. January 2014
21
Germany
France
Spain
Italy

22. De-leveraging continues
Eurozone MFI Loans
Non-Financial Corporations
Adjusted for Loan Sales and Securitizations Y/Y%
1.50
1.00
0.50
0.00
-0.50
-3.10%
in November
-1.00
-1.50
-2.00
-2.50
-3.00
-3.50
ene 12
Source: ISI Group. January 2014
22
jul 12
ene 13
jul 13

23. Monetary policy remains on a deflationary path
Eurozone M3 Y/Y%
4.50
4.00
1.5%
in November
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
ene-12
Source: ISI Group. January 2014
23
jul-12
ene-13
jul-13

24. Strong Euro exasperates deflationary trends
Eurozone Exports % Contribution to GDP Growth Q/Q
2
1
0
-1
0.1%
in September
-2
-3
-4
2010
Source: ISI Group. January 2014
24
2011
2012
2013

25. Inflation weakness in Eurozone
Eurozone CPI
Y/Y%
6
5
4
3
2
1
0
-1
-2
1998
0.8%
in December
1999
2000
Source: ISI Group. January 2014
25
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

26. GEMs: in search for a new growth model
 1990 – 1997: Washington Consensus
 1997 – 2010: Export model & financial autarky
 2010 onwards: Domestic demand & structural reforms
26

27. 27
Source: ISI Group. January 2014
2013
2013
2013
50
2013
2012
2012
2012
2012
2011
2011
2011
2011
2010
2010
2010
2010
2009
2009
2009
2009
2008
2008
2008
2008
China svc PMI
62
60
58
56
54
52
54.6%
in December
48

28. SHIBOR 1 month
10
9
8
7
6
5
4
6.1% in January
3
2
1
0
ene 13
feb 13
mar 13
abr 13
may 13
Source: Bloomberg, Fidelity Worldwide Investments. January 2014
28
jun 13
jul 13
ago 13
sep 13
oct 13
nov 13
dic 13
ene 14

29. China: Debt to GDP
220
200
180
160
203.8
in September
140
120
100
2002
2003
Source: Gavekal. January2014
29
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

30. Nominal GDP – Emerging Markets
30
25
20
%
15
10
5
0
-5
China
Brazil
India
Source: Haver Analytics, Fidelity Worldwide Investments. Nominal GDP in local currency, January 2014
30
Mexico
Q3-2013
Q2-2012
Q1-2011
Q4-2009
Q3-2008
Q2-2007
Q1-2006
Q4-2004
Q3-2003
Q2-2002
Q1-2001
Q4-1999
Q3-1998
Q2-1997
-10

31. Conclusion
 Equity friendly environment
 US led bull market set to continue
 European deflation threat
 GEMs in search for a new growth model
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