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2010 - a bumpy road ahead?

2010 - a bumpy road ahead?. Investment Presentation Jersey – February 2010. Speakers Tristan Hanson Jonathan Schiessl Craig Farley. Climate change. Tristan Hanson. Crisis, Recovery…What Next? Investing in an Uncertain World May 2010. A stronger than anticipated recovery.

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2010 - a bumpy road ahead?

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  1. 2010 - a bumpy road ahead? Investment Presentation Jersey – February 2010 Speakers Tristan Hanson Jonathan Schiessl Craig Farley

  2. Climate change Tristan Hanson Crisis, Recovery…What Next? Investing in an Uncertain World May 2010

  3. A stronger than anticipated recovery IMF growth forecasts: 2010 12 10 Apr '09 forecast 8 Apr '10 forecast 6 % 4 2 0 -2 EU Japan USA Asian Brazil India China NICs Source: IMF

  4. Agenda • Three Issues: • Sovereign debt in developed countries • Is China’s growth sustainable? • US unemployment & consumer spending • Implications for asset allocation

  5. Why Greece? • Loss of credibility • Persistent budget deficits • Unsustainable debt dynamics • debt outstanding • size of budget deficit • demography

  6. Gross Public Debt (% of GDP) 140 125 2007 117 120 2010 103 100 95 85 84 78 75 80 76 70 66 65 64 64 60 48 44 36 40 25 20 0 US UK Italy Spain Greece France Ireland Germany Portugal Greek finances: worst of a bad bunch Source: EC, CBO, IMF, Barclays Capital

  7. Euro periphery compared Source: Bloomberg

  8. Greek contagion: how serious is it? Source: Bloomberg

  9. No contagion to core of Euro-area German & French 10yr bond yields 4.5 Germany France 4.0 3.5 3.0 2.5 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: Bloomberg

  10. Scepticism merited when price drives opinion Oct. 16 (Bloomberg) – “The dollar will extend its drop versus the euro over the next two to five years, falling as much as 20% to an all-time low under a widening budget deficit, Harvard University’s Professor Niall Ferguson said.” US dollar strength 1.25 1.30 1.35 €/$ 1.40 1.45 1.50 1.55 May-09 Aug-09 Nov-09 Feb-10 May-10 Source: Bloomberg

  11. Conclusion: “nothing to fear but fear itself?” • Europe’s Achilles heel: one currency, 16 finance ministers • EU/IMF deal should ringfence Greece into 2012 • Spain & Italy: too big to save = too big to fail? • Austerity packages are deflationary • Printing money can eliminate default risk in low inflation world (US, UK) • Behavioural Perspective: the legacy of the 2008 financial crisis is still with us…are we now preconditioned to fear the worst in any shock/contagion event?

  12. China: stimulus-led recovery Source: World Bank

  13. Chinese property: bubble territory? Source: World Bank

  14. China’s growth potential remains huge GDP per capita relative to the USA PPP terms 100 90 80 Japan 70 60 % 50 Taiwan Korea 40 30 China 20 10 0 1977 1982 1987 1992 1997 2002 2007 1952 1957 1962 1967 1972 Source: PWT, WB

  15. China: industrial profitability has improved Source: Macquarie

  16. US household balance sheet 800 700 Assets 600 Net Worth 500 % of disposable income 400 300 200 Debt 100 0 1952 1957 1962 1967 1972 1977 1982 1987 1997 1992 2002 2007 Source: Federal Reserve, Bloomberg

  17. Debt remains high; service cost declining 14 Debt Service Ratio 13 12 % of disposable income 11 10 9 Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Source: Federal Reserve

  18. 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% Employment GDP -6.0% -7.0% Avg: 1950-2000 2001/02 2008/09 US: job losses vs GDP declines Declines in US GDP & Employment compared Source: Bloomberg, Barclays Capital

  19. Replica Asset Management Asset Allocation (28/04/10) 15 Equities* 33 Govt/quasi-govt 5 Inflation-protected DM - IG corporate DM - High Yield corporate 11 EM - IG corporate EM - govt/quasi-govt 2 FRNs 3 Effective Cash 5 16 *net of put options 10 DM=developed markets EM=emerging markets Replica Asset Management: asset allocation Source: Ashburton

  20. Replica Asset Management: performance Percentage Growth Total Return, Tax Default, In LC 15 10 5 0 Ashburton Replica Sterling Asset Management -5 -10 -15 PercentageGrowth -20 -25 MSCI World TR LC -30 -35 -40 -45 -50 04/2007 07/2007 10/2007 01/2008 04/2008 07/2008 10/2008 01/2009 04/2009 07/2009 10/2009 01/2010 Source: Lipper 3 Years From 30/03/2007 To 31/03/2010

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