Outlook For Financial Markets And Investment Strategy January 2014 Outlook For Financial Markets And Investment Strategy Chen Zhao Chief Global Strategist Global Investment Strategy 1

ISM* PURCHASING MANAGERS' * INSTITUTE FOR SUPPLY MANAGEMENT. Global Economies Resynchronize % Ann% Ann% Ann% U.S. Chg Chg EURO AREA REAL GDP ISM* PURCHASING MANAGERS' Chg 70 60 MODEL ESTIMATE* COMPOSITE INDEX (LS) TOTAL RETURN: STOCK-TO-BOND 2 RATIO (RS) 40 2 60 20 50 -2 -2 -20 40 -40 -4 -4 © BCA Research 2014 © BCA Research 2014 02 04 06 08 10 12 14 04 06 08 10 12 14 * INSTITUTE FOR SUPPLY MANAGEMENT. * BASED ON REAL EFFECTIVE EXCHANGE RATE, CORPORATE BOND YIELDS AND PMI. 2

Global Economies Resynchronize Ann% Ann% Chg GLOBAL INDUSTRIAL PRODUCTION* Chg MODEL ESTIMATE** 10 10 5 5 -5 -5 -10 -10 © BCA Research 2014 70 75 80 85 90 95 2000 05 10 15 * GDP-WEIGHTED AVERAGE OF 40 COUNTRIES. 3 ** BASED ON THE BCA GLOBAL ECONOMIC LEADING INDICATOR, THE PRICE OF BRENT OIL AND BAA SPREADS.

Price Inflation In Developed World Ann% % Ann% % Chg EURO ARE Chg U.K. HEADLINE INFLATION (LS) HEADLINE 70 INFLATION DIFFUSION INDEX* (RS) 70 4 5 INFLATION (LS) 60 4 60 3 50 3 50 2 40 2 40 1 30 1 30 20 INFLATION DIFFUSION -1 INDEX* (RS) 20 10 -1 © BCA Research 2014 © BCA Research 2014 2000 02 04 06 08 10 12 14 2000 02 04 06 08 10 12 14 * PERCENTAGE OF CPI COMPONENTS WHICH ARE RISING. SHOWN * PERCENTAGE OF CPI COMPONENTS WHICH ARE RISING. SHOWN 4 SMOOTHED EXCEPT FOR THE LATEST DATAPOINT. SMOOTHED EXCEPT FOR THE LATEST DATAPOINT.

U.S. CONSUMER PRICE INFLATION Price Inflation In Developed World Ann% Ann% Chg Chg U.S. CONSUMER PRICE INFLATION HEADLINE 4 4 2 2 -2 -2 Ann% Ann% Chg SERVICES Chg GOODS 6 6 4 4 2 2 -2 -2 -4 -4 © BCA Research 2014 04 06 08 10 12 14 5

Profits, Yield Curve And Equity Multiples Ann% Ann% Bp Chg Chg U.S. U.S. S&P 500 OPERATING EARNINGS PER SHARE S&P 500 FORWARD P/E RATIO* (LS) 15 YIELD CURVE** (RS) YEAR-OVER-YEAR GROWTH 400 80 80 MODEL ESTIMATE* 14 350 40 40 13 300 12 250 -40 -40 11 200 © BCA Research 2014 © BCA Research 2014 2000 02 04 06 08 10 12 14 2010 2012 * BASED ON THE CHANGE IN QUALITY SPREADS, NEW ORDERS AND THE GAP BETWEEN PRODUCTIVITY GROWTH AND PERSONAL INCOME GROWTH-PER-CAPITA. * SOURCE: THOMSON REUTERS / IBES. ** 30-YEAR MINUS 2-YEAR GOVERNMENT BOND YIELD. 6 NOTE: BOTH SERIES SHOWN SMOOTHED.

26-WEEK ROLLING CORRELATION**: Changing Correlations % 1800 U.S. 7 U.S. S&P 500 (LS) S&P 500 (LS) 1800 CONTINUOUS COMMODITY INDEX* (RS) 1600 10-YEAR GOVERNMENT BOND 700 6 1600 YIELD (RS) 1400 5 1400 600 1200 4 1200 500 1000 3 1000 400 800 800 2 % 26-WEEK ROLLING CORRELATION**: 4-YEAR WEEKLY ROLLING CORRELATION: .8 .8 .8 .8 .6 .6 .4 .4 .4 .4 .2 .2 U.S. S&P 500 VS. 10-YEAR GOVERNMENT BOND YIELD U.S. S&P 500 VS. CONTINUOUS -.2 -.2 -.4 -.4 COMMODITY INDEX* -.4 -.4 © BCA Research 2014 © BCA Research 2014 02 04 06 08 10 12 14 08 10 12 * SOURCE: THOMSON REUTERS. ** SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT. 7

12-MONTH FORWARD P/E RATIO** Are We In A Bubble? U.S. 250 S&P 500* 250 OPERATING EPS* 200 200 Phase I 150 Phase II 150 100 100 12-MONTH FORWARD P/E RATIO** 15 15 14 14 13 13 12 12 11 11 10 © BCA Research 2014 © BCA Research 2014 10 08 10 12 * SHOWN REBASED TO 100 AT THEIR BOTTOMS. 8 ** SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT. SOURCE: THOMSON REUTERS / IBES.

Are We In A Bubble? % % BCA U.S. EQUITY VALUATION INDEX* U.S. S&P 500 100 100 DEVIATION FROM FAIR VALUE BASED ON 3 3 80 COMPETING ASSETS* 80 2 2 60 60 EXTREMELY OVERVALUED 40 40 1 1 OVERVALUED 20 20 UNDERVALUED -1 -1 -20 -20 EXTREMELY UNDERVALED -2 -2 -40 -40 © BCA Research 2014 © BCA Research 2014 60 65 70 75 80 85 90 95 2000 05 10 15 80 85 90 95 2000 05 10 15 * SHOWN STANDARDIZED. * BASED ON 10-YEAR GOVERNMENT BONDS, HOUSE PRICES AND BAA 9 CORPORATE BONDS. ESTIMATED SINCE 1955.

Japan: Nominal Or Real Problem? JAPANESE RELATIVE TO GLOBAL EQUITIES IN COMMON-CURRENCY TERMS* Chg JAPANESE 100 100 CONSUMER PRICE INFLATION (LS) 4 TRADE-WEIGHTED YEN* (INVERTED, RS) 60 PHASE I ADJUSTMENT: PHASE II ADJUSTMENT: DEBT MINIMIZATION PROFIT MAXIMIZATION 80 80 2 80 60 60 100 40 40 Severe bear market Benchmark performance 20 -2 20 120 © BCA Research 2014 © BCA Research 2014 90 95 2000 05 10 90 94 98 02 06 10 14 * SHOWN REBASED TO JAN. 1989 = 100. * SOURCE: J.P. MORGAN CHASE & CO. 10

Chinese Stocks: Cyclical Trend Versus Structural Story Ann% Ann% Chg CHINESE REAL GDP: Chg CHINESE SMALL CAP* RELATIVE TO A SHARES** ANNUALIZED GROWTH RATE .52 .52 14 QUARTER- OVER- QUARTER YEAR-OVER- YEAR 14 .48 .48 12 12 .44 .44 10 10 .40 .40 8 8 .36 .36 6 6 © BCA Research 2014 © BCA Research 2014 2012 2013 2000 02 04 06 08 10 12 14 * SOURCE: MSCI INC. 11 ** SHOWN IN LOCAL-CURRENCY TERMS.

Commodity Plays Versus Commodity Prices AUD/ USD 700 1.1 AUD / USD EXCHANGE RATE (LS) CONTINUOUS COMMODITY INDEX* (RS) 1.0 600 .9 500 .8 400 .7 CAD/ USD CAD / USD EXCHANGE RATE (LS) 1.05 CONTINUOUS COMMODITY INDEX* (RS) 650 1.00 550 .95 .90 450 .85 350 .80 © BCA Research 2014 08 10 12 * SOURCE: THOMSON REUTERS. 12

Commodity Plays Versus Commodity Prices EMERGING ASIAN RELATIVE TO U.S. S&P 500 RELATIVE 140 LATIN AMERICAN EQUITIES* (LS) 120 120 TO PRICE OF OIL* GLOBAL MANUFACTURED GOODS RELATIVE TO RAW MATERIALS PRICES** (RS) 130 1.2 100 100 120 110 80 80 100 1.0 90 60 60 80 .8 70 40 40 A mega switch? 60 20 20 50 .6 © BCA Research 2014 © BCA Research 2014 02 04 06 08 10 12 14 98 2000 02 04 06 08 10 12 14 * SHOWN IN U.S. DOLLAR TERMS AND REBASED TO JAN. 2002 = 100. * BRENT CRUDE OIL. 13 SOURCE: MSCI INC. ** SOURCE: NETHERLANDS BUREAU FOR ECONOMIC POLICY ANALYSIS.

REAL* PRICE OF GOLD (IN 2013 US$) * DEFLATED USING HEADLINE CPI. Bear Market In Gold Has Further To Go Breakout 1600 REAL* S&P 500 1600 (IN 2013 US$) 900 900 500 500 300 300 REAL* PRICE OF GOLD (IN 2013 US$) 1600 1600 900 Breakdown 900 500 500 300 300 © BCA Research 2014 70 75 80 85 90 95 2000 05 10 15 * DEFLATED USING HEADLINE CPI. 14