Balancing risk and opportunities Han de Jong Chief Economist May 2014

Statement 1. The global economy is set to Strengthen Weaken Continue at its recent pace 2

Statement 2. In 2014, risky assets will provide Above average returns Below average returns Average returns 3

Statement 3. My biggest worry for 2014 is: China Ukraine/Russia The ‘vulnerable 5’, (emerging economies) Disappointing growth in US/UK/Eurozone Deflation Tapering Overvalued asset markets Re-escalation of euro crisis Scottish independence 4

Headwinds abating Balance-sheet repair progressing Austerity easing Stress financial sector easing Inflation lower Pent up demand unlocked 5

6 DM private sector balance sheets back in health US assets minus liabilities % GDP, 100 = long-term average Source: Thomson Reuters Datastream

Eurozone bank deleveraging 7 Financial institution assets, % yoy Source: Thomson Reuters Datastream

Bank lending survey 8 Source: Thomson Reuters Datastream

World PMI and GDP 9 Source: Thomson Reuters Datastream

Business confidence 10 Index Source: Bloomberg

Signs of moderate recovery of eurozone capex Industrial production of capital goods, % yoy Source: Thomson Reuters Datastream 11

US: non-defense capital goods, ex-aircraft 12 % yoy Source: Bloomberg

US, eurozone and UK car sales 13 % yoy Source: Bloomberg

Statement 4. The euro crisis is over Yes No 14

How Europe is beating the crisis 15 LTRO European Semester MIP OMT SRM Two pack GLF EFSM Fiscal Compact Bail-out Bail-in SMP IDR SSM DGS ESM Six pack BRRD EFSF AQR

16 Portugal: confidence 16

Statement 5. Over the next 24 months, important parts of the global economy will See a significant rise of inflation Fall into deflation 17

Inflation 18 % yoy Source: Bloomberg

Statement 6. A hard landing in China is during the next 12 months is: Likely Unlikely 19

China’s problems Corporate debt levels Shadow-banking system Lack of discipline among investors Pollution Corruption They need jobs 20

China’s solution(s). Xi and Li and their reform agenda Step by step Squeeze shadow banking Allow defaults New urbanisation approach Fight corruption Low level of central-government debt and huge FX reserves My conclusion: slower growth, but not much slower, no systemic shocks 21

Risks from excessive debt in China Source: CICC, PBoC, ABN AMRO Group Economics Total debt to GDP, %

Corporate debt high compared to other large EMs Source: CICC, PBoC, ABN AMRO Group Economics Corporate debt to GDP, %

China: key indicators point to resilience Electricity production, % yoy Source: Thomson Reuters Datastream

EM exports starting to move higher 25 Source: Thomson Reuters Datastream Index

26 Positive EM fundamentals: FX reserves FX reserves to short-term external debt Source: IIF, ABN AMRO Group Economics

Statement 7. Tapering and the reversal of monetary policy will have a big impact on financial markets this year Yes No 27

Who is afraid of tapering? 28 Tapering and US 10yr UST Source: Thomson Reuters Datastream

Who is afraid of tapering? 29 Source: Thomson Reuters Datastream Tapering and S&P500

Who is afraid of tapering? 30 Source: Thomson Reuters Datastream Tapering and VIX

Who is afraid of tapering? 31 Source: Bloomberg Tapering and EM equities

Who is afraid of tapering? 32 Source: Thomson Reuters Datastream Tapering and CRB Index

Who is afraid of tapering? 33 Source: Bloomberg Tapering and EUR/USD

Bonds Monetary policy changing direction Very low inflation Default risk easing Valuation: expensive 34

Valuation equities 35 Source: Thomson Reuters Datastream PE

Equities Improving growth picture will support earnings Valuation not cheap / not expensive Investors still somewhat cautious What are the alternatives? 36

Statement 8. Carlo Ancelotti Juergen Klopp Louis van Gaal Diego Simeone Ryan Giggs 37

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