1. Marko Papic Chief Strategist Geopolitical Strategy The BCA Dialogue Webcast February 19, 2013 Ian MacFarlane Chief Strategist Global Asset Allocation

2. GEOPOLITICS AS A POSITIVE SURPRISE 2 © BCA Research 2013 800 700 600 500 400 300 0809101112 240 220 200 180 160 140 120 100 U.S. EQUITY RISK PREMIUM* (LS) POLICY UNCERTAINTY INDEX** (RS) Bp * 12-MONTH FORWARD EARNING YIELD (SOURCE: THOMSON REUTERS / IBES) MINUS 10-YEAR GOVERNMENT BOND YIELD. ** SHOWN SMOOTHED. SOURCE: BAKER, BLOOM, AND DAVIS (2012).

3. 3 70 65 60 55 50 45 10111213 240 200 160 120 U.S.: CEO BUSINESS CONFIDENCE* (LS) POLICY UNCERTAINTY INDEX** (Inverted, RS) SOURCE: THE CONFERENCE BOARD. ** SHOWN SMOOTHED. SOURCE: BAKER, BLOOM, AND DAVIS (2012). NOTE: 218 VOTES ARE REQUIRED TO PASS LEGISLATION IN THE U.S. HOUSE OF REPRESENTATIVES. 100200 SANDY DISASTER RELIEF DEBT CEILING AGREEMENT FISCAL CLIFF AGREEMENT The magic 218 votes DEMOCRATS REPUBLICANS © BCA Research 2013 THE U.S.: CHANGE YOU CAN BELIEVE IN?

4. 4 © BCA Research 2013 80 70 60 50 020406081012 80 70 60 50 PERCENT OF RESPONDENTS IN FAVOR OF THE EURO: GREECE SPAIN FRANCE ITALY % % SOURCE: EU COMMISSION. SOURCE: WORLD BANK, BCA CALCULATIONS. * THE BCA GOVERNANCE INDICATOR INCLUDES THE FOLLOWING WORLD BANK MEASURES: GOVERNANCE EFFECTIVENESS, VOICE AND ACCOUNTABILITY, POLITICAL STABILITY, RULE OF LAW, AND CONTROL OF CORRUPTION. THE ORIGINAL MEASURES ARE DERIVED FROM IN-COUNTRY SURVEYS CONDUCTED BY THE WORLD BANK AND RANGE FROM -2.5 (WEAKEST) TO 2.5 (STRONGEST). 0 % -10 -20 -30 -40 -50 -60 PERCENT CHANGE IN BCA GOVERNANCE INDICATOR* BETWEEN 2007 AND 2011 SPAIN PORTUGAL FRANCE GERMANY ITALY IRELAND GREECE © BCA Research 2013 WEIMAR EUROPE? DON’T BET ON IT

5. 5 28 26 24 22 20 18 16 196019701980199020002010 28 26 24 22 20 18 16 POPULATION AGED 15 TO 29 YEARS AS A PERCENT OF TOTAL POPULATION: FRANCE ITALY SPAIN U.S. U.K. % % SOURCE: U.N. POPULATION DIVISION. © BCA Research 2013 TODAY’S YOUTH ARE NOT BABY BOOMERS

6. 6 30 20 10 200820102012 30 20 10 UNEMPLOYMENT RATE: GERMANY* (1927-1932) SPAIN ITALY FRANCE % SOURCE: MITCHELL, B.R. "INTERNATIONAL HISTORICAL STATISTICS: EUROPE 1750-1988." 4 0 -4 -8 -12 200820102012 4 0 -4 -8 -12 INFLATION RATE: GERMANY* (1927-1932) SPAIN ITALY FRANCE % % © BCA Research 2013 HOW BAD IS IT IN EUROPE?

7. 7 130 120 110 100 2000020406081012 130 120 110 100 REAL DISPOSABLE INCOME: U.S. GERMANY PORTUGAL ITALY SPAIN FRANCE SERIES SHOWN REBASED TO JAN. 2001 = 100. SOURCE: OECD. © BCA Research 2013 HOW BAD IS IT IN EUROPE?

8. 8 1.OMT initiation before German elections 2.Oil Price Risk To The Upside 3.Is There Real Growth? © BCA Research 2013 1.0 0 200820092010201120122013 20 0 -20 CREDIT CYCLE LEADING INDICATOR* (ADVANCED, LS) COMMODITY PRICES** (RS) WORLD EXPORTS*** (RS) 6-Mth % Chg * ADVANCED BY 6 MONTHS. ** COMMODITY SPOT PRICE INDEX (SEASONALLY ADJUSTED). SOURCE: CRB. *** SOURCE: IMF. RISKS TO THE VIEW

9. 9 350 300 250 200 150 100 50 350 300 250 200 150 100 50 U.S. REAL S&P 500 TOTAL RETURN* JAN 1909 - DEC 1929 SEPT 1929 - AUG 1949** NOV 1968 - OCT 1988** AUG 2000 - TODAY * DEFLATED BY CPI. ALL SERIES REBASED TO STARTING POINT = 100. ** ADVANCED IN ORDER TO MATCH UP STARTING POINTS. © BCA Research 2013 APPROACHING A TURN IN THE CYCLE?

10. 10 © BCA Research 2013 18 MEDIAN S&P 500 P/E VS REAL LONG-TERM BOND YIELDS (1872-2011) 16 14 12 10 8 6 4 2 RBY < -3.0 -2.9 < RBY < -1.0-1.1 < RBY < 0.00.1 < RBY < 1.01.1 < RBY < 22.1 < RBY <3.03.1 < RBY < 4.0RBY > 4.1 REAL LONG-TERM BOND YIELDS RANGE (%) MEDIAN S&P 500 P/E P/E IS POSITIVELY CORRELATED WITH REAL BOND YIELDS

11. 11 20 10 0 -10 60801900204060802000 20 10 0 -10 U.S. REAL* 10-YEAR GOVERNMENT BOND YIELDS % % *DEFLATED BY CONSUMER PRICE INFLATION; SOURCE: THOMSON REUTERS, BCA CALCULATIONS. NEGATIVE REAL YIELDS REMINISCENT OF THE 1940S AND 1970s © BCA Research 2013

12. 12 © BCA Research 2013 5 10 15 20 982000020406081012 6000 5000 4000 3000 10 8 6 4 22 18 14 10 6 JUNK BOND YIELD TO WORST (Inverted, LS)* S&P 500 TOTAL RETURN (RS) BPs YIELD TO WORST*: CORPORATE BONDS (LS) JUNK BONDS (RS) % % * SOURCE: BARCLAYS. FOLLOW CORPORATE AND JUNK YIELDS CLOSELY