1. Investment Evening, Prague, 14 th December 2015 Nick Beecroft Founder and CEO, HP Economics www.hpeconomics.com

2. A Winning Portfolio for 2016? www.hpeconomics.com

3. 2016-a Goldilocks Year? Global growth accelerates a little in 2016 to 3.6%, after 3.2% in 2015 Inflation in developed markets (DM) recovers back to 2% targets more quickly than expected. So the US and UK have to raise rates more quickly than expected Europe stabilizes, but ECB possibly eases some more. Japan implements structural reform and BOJ eases. China growth eases further to 6.3%-lowest since 1987 So PBOC eases further Emerging markets (EM) regain their footing, with – Modest growth – Low Inflation – A relatively ‘slow’ and patient Fed www.hpeconomics.com

4. Rate Divergence is Coming www.hpeconomics.com

5. Black Swans Greater than usual risk of outlying scenarios-’Black Swans’ EITHER, bad- – low growth, low inflation, China disappoints, geo- political risks, so – the Fed has to stop raising rates, or even cut them again OR, BAD- – inflation much higher than expected, China does fine, peace reigns, so – The FED has to raise rates much faster and higher than expected www.hpeconomics.com

6. Portfolio Implications of Central Scenario Government bonds to suffer more than expected But corporate bonds have a ‘yield cushion’ already Equity returns quite low Commodities continue to under-perform Foreign Exchange Makes for a challenging year! www.hpeconomics.com

7. Government Bonds Conventional yields rise more than expected US 10-yr 3.25%, from current 2.25% Inflation protected bonds in US and UK outperform conventional Buy 10-yr Treasury Inflation Protected Securities/sell 10-yr notes www.hpeconomics.com

8. www.hpeconomics.com

9. Corporate Bonds Now have a nice ‘yield cushion’ Especially if you’re playing the spread to government bonds Fundamentals are OK – Global growth – Inflation – Monetary policy But avoid the oil sector Accumulate some mining sector www.hpeconomics.com

10. Equities US looks expensive, energy under threat Asia ex-Japan uninspiring – Growth is challenged – China is slowing – FED hiking, so currency risk Europe looks good – Crisis abated – Monetary policy Japan looks best – Cheap valuations – Room for earnings growth – Favourable macro www.hpeconomics.com

11. Equities www.hpeconomics.com

12. The Equity Cycle in Japan Despair-2008-extreme earnings collapse Hope-March 2009 onwards-good earnings growth Growth-Jan 11 onwards-continued earnings growth Optimism-characterised by P/E growth, but in Japan – 12month forward P/E= 15.6 – Median over last 30 years=19 www.hpeconomics.com

13. Commodities Not appealing Supply/demand imbalances almost everywhere-energy and metals Especially in oil – Opec was a disaster – So need non-Opec supply contraction – Low China/EM growth is a problem US/EU storage capacity could be exceeded – 20% chance that the Northern Hemisphere winter is mild enough www.hpeconomics.com

14. Foreign Exchange- Currency Wars? US$ to strengthen. Too obvious? FED not too concerned-economy has coped Small chance of an FOMC statement message In contrast, currency depreciation is an ambition for EU/Japan So, monetary divergence China-if US$ appreciates too much, ‘peg’ will be under threat – If USD/CNY is 6.40 – And USD/JPY = 120, CNY/JPY = 18.75 – But if USD/JPY = 140, CNY/JPY = 21.875 www.hpeconomics.com

15. EM Foreign Exchange The waters should be calm with – Modest growth – Low Inflation – A relatively ‘slow’ and patient Fed So carry trades can work BUT, there are risks, as ever – Oil price crash – FED risk – China devaluation www.hpeconomics.com

16. Portfolio Composition What about Black Swans? I feel the second is much more likely – inflation much higher than expected, China does fine, peace reigns, so – The FED has to raise rates much faster and higher than expected www.hpeconomics.com

17. Portfolio Composition Percentage Cash 10 Conventional government bonds 0 US Treasury Inflation Protected Securities 10 Corporate bonds 10 Equities – Japan 30 – EU 20 – India 10 Commodities -gold 10 Foreign exchange – Short EUR/USD – Long USD/JPY – Long INR/ZAR www.hpeconomics.com