1. 0800 367 227 www.forsythbarr.co.nz Unwinding the great monetary experiment Macro view for the bond markets Kevin Stirrat, Head of Investment Strategy

2. 0800 367 227 www.forsythbarr.co.nz Slide 2 Disclosure Statement The Financial Advisers Act 2008 and the Financial Advisers (Disclosure) Regulations 2010 require written disclosure of specific information by people providing financial advice In accordance with this legislation we have distributed a copy of our Disclosure Statements If anyone does not have a copy of these Disclosure Statements can you please advise us now before we commence the presentation The comments in this presentation are general in nature and should not be regarded as personalised financial advice. If you wish to receive specific financial advice, please contact your Investment Advisor This slide must always be the FIRST slide after the heading slide. No text should be altered, except for the last two bullet points which may be removed if no KiwiSaver or investment Funds information is being used in the presentation.

3. 0800 367 227 www.forsythbarr.co.nz Slide 3 Disclaimer Analyst Disclosure Statement: In preparing this report the analyst may or may not have a threshold interest in the securities mentioned in this report. A threshold interest is defined as being a holder of more than $50,000 or 1% of the securities on issue, whichever is the lesser. A disclosure statement is available on request and is free of charge. Disclaimer: This publication has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. However, that information has not been independently verified or investigated by Forsyth Barr Limited. Accordingly, Forsyth Barr Limited: a)does not make any representation or warranty (express or implied) that the information is accurate, complete or current; and b)excludes and disclaims (to the maximum extent permitted by law) any liability which may be incurred by any person as a result of that information being inaccurate or incomplete in any way or for any reason. The information, analyses and recommendations contained in this publication are confidential to the intended recipients and are statements of opinion only. They have been prepared for general information purposes and whilst every care has been taken in their preparation, no warranty or representation is given (express or implied) as to their accuracy or completeness. Nothing in this publication should be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from doing so or engaging in any other transaction. This publication should not be used as a substitute for specific advice. Prior to acting on any information, analysis or recommendation contained in this publication, you should seek advice from your usual Investment Advisor. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) will not be liable for any loss whatsoever suffered by any person relying upon any such information, analysis or recommendation. This publication is not intended to be distributed or made available to any person in any jurisdiction where doing so would constitute a breach of any applicable laws or regulations. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) may own or have an interest in securities or other products referred to in this publication, and may be directors or officers of, or provide investment banking services to, the issuer of those securities or products, and may receive fees for acting in any such capacity in relation to that issuer. Further, they may buy or sell securities as principal or agent, and as such may undertake transactions that are not consistent with any recommendations contained in this publication. This presentation is not for reproduction, public circulation or the use of any third party (whether in whole or in part) without the prior written consent of Forsyth Barr Limited.

4. 0800 367 227 www.forsythbarr.co.nz Slide 4 Content Global industrial cycle upswing underway United States employment outlook improving United States Federal Reserve to commence stimulus reduction United States tightening still a long way off Macro suggestions why inflation could remain contained Bond market rout unlikely

5. 0800 367 227 www.forsythbarr.co.nz Slide 5 United States manufacturing – surging

6. 0800 367 227 www.forsythbarr.co.nz Slide 6 UK manufacturing – material up-turn

7. 0800 367 227 www.forsythbarr.co.nz Slide 7 Euro manufacturing recovering

8. 0800 367 227 www.forsythbarr.co.nz Slide 8 China looking more sturdy China HSBC manufacturing PMI: Momentum is improving following the mid- year slow-down Source: Markit, Haver Analytics, Deutsche Bank Research

9. 0800 367 227 www.forsythbarr.co.nz Slide 9 United States unemployment rate - key policy indicator

10. 0800 367 227 www.forsythbarr.co.nz Slide 10 Core United States inflation

11. 0800 367 227 www.forsythbarr.co.nz Slide 11 Corporate Inc. saving versus investing Source: Forsyth Barr Research, BCA Research

12. 0800 367 227 www.forsythbarr.co.nz Slide 12 Excess global liquidity has not led to a general increase in prices

13. 0800 367 227 www.forsythbarr.co.nz Slide 13 Advanced economies CPI

14. 0800 367 227 www.forsythbarr.co.nz Slide 14 United States Federal Reserve balance sheet – the solution and the problem

15. 0800 367 227 www.forsythbarr.co.nz Slide 15 Employment Structural changes in employment Globalisation – first outsourcing and now “showrooming” Technology – robotics/3D Printing Under- employed (part-timers)

16. 0800 367 227 www.forsythbarr.co.nz Slide 16 United States employment growth mainly part-timers

17. 0800 367 227 www.forsythbarr.co.nz Slide 17 United States labour force participation rates in secular decline – mostly age related

18. 0800 367 227 www.forsythbarr.co.nz Slide 18 Demographics Aging populations in the developed world Leading to lower aggregate demand Declining workforce Saving over investment Income over growth

19. 0800 367 227 www.forsythbarr.co.nz Slide 19 Global fertility comparisons

20. 0800 367 227 www.forsythbarr.co.nz Slide 20 Europe working age population projections

21. 0800 367 227 www.forsythbarr.co.nz Slide 21 Developed markets’ share of population and demographic Source: Haver, UBS

22. 0800 367 227 www.forsythbarr.co.nz Slide 22 Implications for Bonds Normalisation of yields underway Tapering doesn’t mean explicit tightening Quantitative Easing to slow – not unwind (for many years) United States long bonds to trade between 2-4% United States 10 year bonds to trade around nominal GDP Steeper curves to remain the norm

23. 0800 367 227 www.forsythbarr.co.nz Slide 23 United States long bond yields and demographics Source: Shiller, Haver, UBS

24. 0800 367 227 www.forsythbarr.co.nz Slide 24 United States 10-year bond and nominal GDP

25. 0800 367 227 www.forsythbarr.co.nz Slide 25 Demographics and nominal GDP - United States Source: Haver, UBS

26. 0800 367 227 www.forsythbarr.co.nz Slide 26 Policy response Inflation headwinds Technology and innovation impacting on employment Globalisation – “showrooming” Demographics Debt/deleveraging Lower nominal GDP Policy Response will be to keep rates low for longer than currently expected In the absence of inflation, central bank balance sheets will remain reflationary

27. 0800 367 227 www.forsythbarr.co.nz Slide 27 Thank you