Marko Papic Managing Editor Geopolitical Strategy Geopolitics: Risks & Opportunities In 2013 January 2013

GLOBAL FORECAST: More Sunny Breaks in 2013  General theme: policy is a tailwind  Europe: a ‘Red Herring’  Middle East: overstated  U.S.: don’t expect miracles  East Asia: risks understated

EUROPE: Where is the collapse? © BCA Research CYCLICALLY-ADJUSTED PRIMARY BUDGET BALANCE*: ITALY GREECE SPAIN IRELAND PORTUGAL % Of GDP % Of GDP * SOURCE: IMF FISCAL MONITOR (OCTOBER 2012) NOTE: VERTICAL LINE DENOTES JANUARY 2005, WHEN HARTZ IV LABOR REFORMS TOOK EFFECT; SOURCE: ILO GERMANY: TOTAL HOURS LOST TO LABOR ACTION Th Hrs. Th Hrs. © BCA Research 2013 Implementation phase Hartz IV negotiation phase

EUROPE: Investment Opportunities 4 © BCA Research OVERALL EQUITY MARKET*: EURO AREA RELATIVE TO U.S. * REBASED TO JAN = 100; EXPRESSED IN COMMON-CURRENCY TERMS. © BCA Research JANFEBMARAPRMAYJUNJULAUGSEPOCTNOVDEC ITALIAN 10-YEAR GOVERNMENT BOND YIELD % % JANFEBMARAPRMAYJUNJULAUGSEPOCTNOVDEC SPANISH 10-YEAR GOVERNMENT BOND YIELD % © BCA Research 2013

MIDDLE EAST: Iran-Israel Conflict Is Key (But Overstated) © BCA Research ,000 15,000 10,000 5,000 INDIA NUMBER OF PUBLISHED SCIENTIFIC AND TECHNICAL JOURNAL ARTICLES BRAZIL TURKEY IRAN, ISLAMIC REP.ISRAEL DENMARK FINLAND SOUTH AFRICA PAKISTAN NOTE: SCIENTIFIC AND TECHNICAL JOURNAL ARTICLES REFER TO THE NUMBER OF SCIENTIFIC AND ENGINEERING ARTICLES PUBLISHED IN THE FOLLOWING FIELDS: PHYSICS, BIOLOGY, CHEMISTRY, MATHEMATICS, CLINICAL MEDICINE, BIOMEDICAL RESEARCH, ENGINEERING AND TECHNOLOGY, AND EARTH AND SPACE SCIENCES. SOURCE: WORLD BANK.

U.S.: A HOUSE DIVIDED 6 © BCA Research 2013 SOURCE: POOL, ROSENTHAL, ET AL. (2011). DATA USED FOR POLARIZATION ANALYSIS USES NOMINATE (NOMINAL THREE-STEP ESTIMATION), A MULTIDIMENSIONAL SCALING METHOD DEVELOPED TO ANALYZE PREFERENCE AND CHOICE. THE TWO DIMENSIONS USED IN THIS METHOD ACCOUNT FOR THE GREAT BULK OF ALL ROLL CALL VOTING IN THE U.S. CONGRESS OVER ITS HISTORY. THE PRIMARY DIMENSION (X-AXIS) IS THE LIBERAL-CONSERVATIVE SPECTRUM ON THE BASIC ROLE OF THE GOVERNMENT IN THE ECONOMY. THE SECOND DEPENDS ON THE ERA, PICKING UP REGIONAL DIFFERENCES ON A NUMBER OF SOCIAL ISSUES SUCH AS THE CIVIL RIGHTS MOVEMENT. THE DATA ILLUSTRATES THAT THE SECOND DIMENSION HAS DECLINED IN IMPORTANCE, WITH SOCIAL ISSUES NOW LARGELY CONSIDERED WITHIN THE LIBERAL-CONSERVATIVE SPECTRUM OF THE PRIMARY DIMENSION. THE PRIMARY DIMENSION NOW ACCOUNTS FOR APPROXIMATELY 93% OF ALL ROLL CALL VOTING CHOICES AND THE TWO PARTIES ARE HIGHLY POLARIZED ON THIS SPECTRUM. © BCA Research 2013

CHINA: Domestic Pressures For Reform GDP PER CAPITA (IN USD) 10,000 8,000 6,000 4,000 2,000 SOURCE: CEIC AND IMF WEO. NOTE: BLACK DENOTES COASTAL PROVINCES, BLUE DENOTES INTERIOR PROVINCES, AND RED DENOTES SOVEREIGN COUNTRIES. SHANGHAIBEIJINGBRAZILTIANJINMEXICOJIANGSUZHEJIANGSOUTH AFRICAINNER MONGOLIAGUANGDONGLIAONINGSHANDONGFUJIANTHAILANDJILINCHINAHEBEIHUBEICHONGQINGSHAANXIHEILONGJIANGNINGXIASHANXIXINJIANGHUNANHENANQINGHAIHAINANJIANGXISICHUANANHUIGUANGXIINDONESIATIBETGANSUYUNANGUIZHOU © BCA Research 2012

EAST ASIA: Geopolitical Tensions Understated VIETNAM Bn USD Bn USD THE PHILIPPINES Bn USD Bn USD NOTE: BOTH SERIES SHOWN SMOOTHED. USD Bn USD TOTAL TRADE WITH: CHINA U.S. © BCA Research SOUTH KOREA Bn TOTAL TRADE WITH: CHINA U.S. JAPAN Bn NOTE: BOTH SERIES SHOWN SMOOTHED. © BCA Research 2013 Bn

JAPAN: Opportunities Exist 9 © BCA Research CENTRAL BANK TOTAL ASSETS* FED BoE ECB BoJ * SHOWN REBASED TO JAN = JAPAN RELATIVE TO SOUTH KOREA: EXPORTS TO THE WORLD (LS) EQUITY PERFORMANCE* (RS) * LOCAL CURRENCY TERMS. SOURCE: MSCI INC. (SEE LAST PAGE). © BCA Research 2013