For professional investors

2012: a frugal and crucial year

An investment outlook for 2012

2012: a frugal and crucial year | November 2011 I 2

On the eve of another new year, the challenges look more daunting than ever. The western world is slowing quite significantly, despite very easy monetary policies. Nevertheless, fiscal policy will be tightened in many countries. Emerging markets, while still outpacing the west, are slowing too. On the policy front, western central banks will have to assess whether more nonconventional initiatives are required, while their colleagues in the emerging markets will get ready to use the room for manoeuvre they have. Governments will have to bite the bullet under pressure from the markets, although upcoming elections in key countries could trigger surprises in terms of what is decided or not decided. This environment is more challenging than ever for investors as well. Equity valuations have come down but do not yet incorporate a recession scenario, whereas the traditional safe havens are very expensive. Moreover, when the mood is very low, marginally positive developments can trigger huge reactions. 2012 looks like being a frugal year on the economic front, a crucial year for policymakers and, for investors, a year in which market timing will be of particular importance.

William De Vijlder CIO, BNP Paribas Investment Partners

2012: a frugal and crucial year | November 2011 I 3

Contents
MACROECONOMIC AND MARKET ANALYSIS
Macroeconomic outlook Market outlook 4 9

ASSET CLASSES FOR 2012

High Income Equities Emerging Market Equities Emerging Market Debt Global High Yield Convertible Bonds 14 16 18 19 20

CONTRIBUTORS Macroeconomic and market outlook: Joost van Leenders Individual asset classes: Tom Bagguley, Mathew Powers, Jennifer Clarke, Martin Fridson, Sheila Ter Laag Editor: Maryelle Ouvrard Art director: Sandrine Rivire Graphic Designers: Studio BNPP IP, Ateliers Hiver Project coordination: Hannah Wright

2012: a frugal and crucial year | November 2011 I 4

Macroeconomic outlook
SUMMARY
Growth in developed economies to stay low Emerging markets expected to hold up better Limited inflation risks More monetary stimulus possible Dollar to strengthen, yen to weaken

The outlook for 2012 raises some difficult questions. Will developed economies slip back into recession? Will political leaders in the eurozone be able to resolve the sovereign crisis? How will the debates over US government finances evolve? Will central banks see the need for additional monetary stimulus? Politics mattered in 2011 and will certainly matter again in 2012, as elections are to be held in the US, Russia, France and Spain, and Chinas leadership should change. While all these much publicised issues remain unresolved, several cyclical components of GDP, such as housing and business investment, as well as durable goods consumption, remain at relatively low levels and thus have less potential to drag down growth the way they tend to do during recessions. Nevertheless, our outlook for 2012 is not very optimistic, although we think a very negative outcome may be prevented.

Low growth with elevated recession risks in developed economies

Our 2012 outlook for developed economies can be best described as low growth with elevated recession risks. Many leading indicators in the developed economies point to low growth at best, and for good reasons. In countries that were hit by housing busts, such as the US, Spain and Ireland, deleveraging among households has further to run. In most developed economies, government deficits are high and debts are rising, so austerity is the major focus for many governments. However, surveys among consumers and producers indicate that there is little confidence that governments can successfully reduce deficits and debt loads within the foreseeable future.

2012: a frugal and crucial year | November 2011 I 5

Consumer confidence (indices)

150 125 10 0 -10 -20

Eurozone (rhs)
100 75

developed countries face. Furthermore, households and governments are not alone in still deleveraging. Banks, facing the potential of higher loan losses and tougher capital requirements, are also reducing their balance sheets. Financial sector deleveraging and slow credit growth also have the potential to push some developed economies back into recession.

US (lhs)
50 25 00 01 02 03 04 05 06 07 08 09 10 11 -30 -40

A more favourable outlook for emerging economies

Source: Datastream, BNPP IP

The corporate sector is generally quite profitable and cashrich, but companies are reluctant to invest in new production capacity or to hire new workers. Employment growth is therefore too low to meaningfully reduce unemployment. Overall household income is thus growing only modestly and, in many countries, too slowly to compensate for inflation. So there is an impasse. Households are waiting for companies to start hiring and companies are waiting for households to start consuming. In normal times such a stalemate can be broken by monetary or fiscal policy, but the options for further stimulus are limited these days. According to the IMF there are some countries that have the room for fiscal stimulus, such as Germany and several smaller European countries, which have relatively sound government finances, or the US, where the government can still borrow at very favourable interest rates. However, the political will for further stimulus is low. The Germans dont think it is appropriate to stimulate the economy at this point, while many European countries are anxiously watching their credit ratings and low risk spreads on their government bonds versus Germany. In the US, the two parties are at odds between increasing public expenditure and cutting taxes. The Super Committee installed after the increase in the debt ceiling in August 2011 will have to provide some clarity on how the fiscal problems in the US should be solved, but any large-scale stimulus looks very unlikely: President Obama launched a stimulus plan in September 2011 but it did not get through Congress. Political bickering will probably intensify in 2012 as the presidential election campaigning will run through most of the year. Many European countries, including France, Italy and Spain do not even have the option of fiscal stimulus. The UK and Japanese economies are feeling the brunt through exports. The UK faces slowing growth in the eurozone, its major trading partner, while Japan must cope with a strong yen and weak domestic demand. Low growth automatically increases the risk of recessions, as shocks with a negative impact have greater potential to push economies into negative territory. Such a shock could be rising oil prices due to geopolitical tensions or failure to address the huge fiscal challenges that many

The situation looks better in emerging markets. In general these countries do not face a period of private sector deleveraging and government finances are healthy in most countries. Growth remains structurally higher than in developed economies as emerging economies will continue to catch up in terms of innovation and productivity, while younger populations provide demographic tailwinds. Strong dynamics, both within these countries - such as the gradual shift towards consumer societies - and between them such as the increasing mutual trade patterns -, insulate emerging markets to some extent from difficulties in developed economies. Nevertheless, we dont think that emerging markets can fully decouple from the slow growth environment we foresee in the developed economies. Indeed, leading indicators for the emerging economies have fallen and are pointing to more moderate growth, which we think is positive from the viewpoint of inflation and monetary policy. Official interest rates and reserve requirements in the BRIC countries (Brazil, Russia, India and China) troughed in October 2009. Since then, interest rates and reserve requirements have been raised significantly in response to accelerating growth and inflation. We think this phase has come to an end. In fact, since July 2011, Brazil has already cut interest rates twice. Furthermore, moderating inflation should provide room for emerging market central banks to loosen monetary policy in 2012. BRIC monetary policy indicator* (6-month change, %-points)
2

-1

-2 01 02 03 04 05 06 07 08 09 10 11

* Weighted average of short-term interest rates and reserve requirements in Brazil, Russia, India & China. Source: Bloomberg, BNPP IP

Inflation or deflation in developed countries?

In September 2011, inflation had risen to 3.9% YoY in the US, to 4.0% in the eurozone and even reached 5.2% in the UK.

2012: a frugal and crucial year | November 2011 I 6

CPI (% YoY)
6 4 2

US

to demand higher wages. Unlike in the 1970s, wages are no longer indexed to inflation (with some exceptions), labour unions have lost power and many workers in developed economies are, to some extent, competing with low-wage workers in emerging economies. US unemployment & earnings
10

Eurozone
0 -2

8 -4 00 01 02 03 04 05 06 07 08 09 10 11 6 4 2 0 90 92 94 96 98 00 02 04 06 08 10

Unemployment (%)

Source: Datastream, BNPP IP

No wonder increasing numbers of investors have become worried about inflation. We do not share these fears. Granted, central banks have created huge amounts of money, which could in theory cause runaway inflation. However, this liquidity has hardly reached the real economy. Despite several rounds of quantitative easing in the US and the UK, and unlimited liquidity provisioning by the European Central Bank (ECB), credit is barely growing. Banks have remained reluctant to lend. Indeed, in the autumn of 2011, banks in the eurozone tightened credit standards again as the economy weakened and stress on the interbank market increased. Of course, demand for credit has stayed subdued in a deleveraging environment. In other words, while the amount of base money in the developed economies has increased, the velocity of money has slowed sharply. For inflation to take off, credit would need to start growing more strongly. More importantly, inflation expectations and wages would need to start rising. There are no signs that any of this is happening. Inflation expectations, as derived from the difference between yields on nominal government bonds and on inflation-linked bonds, have actually fallen in the US and in France over the course of 2011. In an environment of high unemployment in the US and the eurozone, wages are growing at a modest pace. In the US, average hourly earnings increased by only 1.9% YoY in September 2011. This is not enough to compensate for inflation. In real terms, earnings fell by 1.9%. Household disposable income, which is also affected by employment growth and changes in hours worked, has held up better, but at 3.2% YoY in nominal terms and 0.3% in real terms, growth was very modest in August 2011. US households are being heavily supported by the government; government transfer payments increased from an average of 14% between 2000 and 2007 to an average of 18% in the first nine months of 2011. Taxes paid are close to historical lows; a result of past tax cuts and low levels of employment. In the eurozone, compensation per employee grew by 2.5% YoY in the second quarter of 2011. This was higher than in the previous nine quarters, but again not enough to compensate for rising prices. Therefore, the development of wage-price spirals or stagflation (low growth and sticky inflation) looks unlikely to us. Employees simply do not have the bargaining power

Hourly earnings (% yoy)

Source: Datastream, BNPP IP

In fact, we think the greater risk is that some developed economies will face a period of deflation, although this is not our base case scenario. Rising inflation, on the back of commodities or finished goods without wages rising accordingly, is ultimately deflationary, as the increase in inflation would only hurt households purchasing power. Several peripheral eurozone countries may have to go through a period of deflation to restore competitiveness within the monetary union. For the core eurozone countries, deflation looks less likely, given relatively low unemployment rates. We think the Feds determination to prevent deflation in the US reduces the likeliness that falling prices will take hold there.

Further monetary stimulus?

Central banks in the developed economies have opened all the spigots in the past few years. The Fed cut rates to zero and embarked on two rounds of quantitative easing, the ECB is providing unlimited liquidity to the banking system at low interest rates, while the Bank of England (BoE) has been the most aggressive with its quantitative easing. As in previous years, the Bank of Japan (BoJ) kept interest rates at zero, accompanied by some quantitative easing. In the summer of 2011, the Fed announced that it will keep rates exceptionally low at least through to mid-2013 and started Operation Twist an initiative whereby it will sell short-dated Treasury securities, bought under previous quantitative easing programmes, and buy longer-dated bonds. This should flatten the yield curve. The ECB will provide emergency loans with six to twelvemonth maturities. It stopped hiking interest rates after the two in April and July 2011. Indeed, it surprised the markets in early November 2011 with a 25bp rate cut after the first policy meeting under the new bank president, Draghi. The BoE expanded its quantitative easing programme by GBP 75 billion to GBP 275 billion.

2012: a frugal and crucial year | November 2011 I 7

Central bank assets (index, 1 January 2007 = 100)

400

BoE
300

Fed

200

ECB
100

debt crisis, some problems remain, including structurally low growth and possibly unsustainable fiscal positions in some countries. This still has the potential to weigh on the euro. However, provided that the Feds monetary policy remains highly accommodative, it is unlikely that the US dollar will strengthen dramatically in the near term. We expect the EUR/ USD exchange rate to gradually return below 1.30 in 2012. Currencies
1.6 105

0 07 08 09 10 11 1.5 1.4 1.3 1.2 1.1 01-09

Euro stronger

USD per EUR (lhs)

99 93 87 81

Source: Bloomberg, BNPP IP

The question now is whether central banks in developed countries think they have done enough or believe they should go further. We think there is a high chance that more steps will be taken both in the US and in Europe. If growth stays low and unemployment remains high, and if inflation moderates, as we foresee, the Fed may embark on another round of quantitative easing, or QE3. The most likely target of the purchases would be mortgage-backed securities, just as in QE1. This would lower mortgage rates, thus enabling consumers to refinance their mortgages more cheaply. We doubt that QE3 would have a major impact on the real economy, as refinancing is not an option for many households, given the banks tight reins on credit. But there should also be support from the HARP (Home Affordable Refinance Program) scheme to help households with negative equity in their homes. As we see the eurozone economy as particularly vulnerable to recession, we think the ECB will cut rates further in late 2011 or early in 2012. We think they will only cut rates below 1% if there are clear risks of deflation. The BoEs hands are tied to some extent, as persistently high inflation is undermining the banks credibility. So far the BoE has been more focused on growth than inflation in its policy deliberations, but the economy needs to weaken much further before the bank becomes even more aggressive.

JPY per USD (rhs)

06-09 01-10 06-10

Yen stronger
01-11 06-11

75

Source: Datastream, BNPP IP

The Japanese yen has been strengthening against the US dollar during most of 2011. This may look strange, as Japans growth prospects are modest at best and the BoJ has continued its ultra loose monetary policy. However, the yen has benefited from risk-averse repatriation flows. The BoJ has even intervened in currency markets more than once to prevent the yen from strengthening further, but without success. The structural decline of the yen has been forecast by many before, so it may look like a risky bet for 2012. Nevertheless, we dont think that in 2012 the yen will continue to be able to resist the gravity of weak growth, deflation and loose monetary policy in Japan. In fact, the weakness in the economy and on the Japanese equity market is partly being caused by the strong yen. We foresee a weaker yen in 2012.

In summary: our view on the macro side

Stronger dollar, weaker yen

Despite the ongoing sovereign bond crisis and the high risk of a double dip recession in the eurozone, the euro has held up remarkably well in 2011. In the first part of the year, the ECBs rate hikes supported the currency, while during the summer, the barely averted default of the US government and the increased likelihood of a double-dip recession there kept the US dollar relatively weak. The euro weakened when the eurozone sovereign crisis flared up again in the autumn of 2011, but it recovered when a deal was struck at the end of October. We dont see the euro retaining its current strength through 2012, for several reasons. First, we think growth in the eurozone will weaken and that a recession is more likely there than in the US. Secondly, the ECB may further cut interest rates in 2012. Finally, and despite some important steps in late October 2011 to address the eurozone sovereign

We think developed economies will continue to see low growth in 2012 as governments and households continue to deleverage. The risk of recession will remain high and inflation should moderate. Monetary policy will stay loose; central banks are generally expected to cut rates or announce other stimulus measures. We expect growth in emerging economies to hold up better. Some growth moderation should be seen as positive, as it will ease inflationary pressures and enable central banks to loosen monetary policy.

Risks to our outlook

There are several risks to our outlook. First of all, we could be too pessimistic. The growth slowdown in the summer of 2011 was partly due to temporary factors such as the steep rise in oil prices from May 2010 to May 2011 and supply disruptions to global manufacturing following the

2012: a frugal and crucial year | November 2011 I 8

devastating earthquake and tsunami in Japan in March 2011. The corporate sector is highly profitable and has ample cash. Should positive sentiment return and investment and employment start growing more robustly, a more durable economic recovery could follow. Alternatively, we could be too confident: political risks will abound in 2012, both in developed and emerging countries. In November 2011, eurozone government leaders outlined a solution for recapitalising the banking sector, writing down Greek sovereign debt and further increasing the firepower of the EFSF. Yet durable solutions to the fiscal situation in some peripheral countries, to growth differentials within the eurozone, to the lack of competitiveness of some member states and to current account imbalances still have to be found. Eurozone spreads (10-year yield difference with Germany, bps)
2500

Greece
2000 1500 1000 500 0 01-08

Italy Ireland Portugal

06-08

01-09

06-09

01-10

06-10

01-11

06-11

Source: Bloomberg, BNPP IP

We think that in the end they will arrive at a solution which could contain three parts. Firstly, provide a credible buyer of last resort for the debt of countries facing liquidity problems. This could be a leveraged EFSF or the ECB itself. Secondly, offer peripheral countries support to enable them to grow out of their problems. And thirdly, some form of collective debt issuance by eurozone governments. Such solutions will not be quick in coming, and in the meantime, there are risks of negative consequences for confidence, financial markets and the global economy. On the political front, the US elections could result in a stalemate regarding fiscal policy. We expect the temporary tax cuts that expire at the end of 2011 to be extended, as not doing so would create a strong fiscal squeeze on a fragile economy. We also think uncertainty will remain over the longer-term fiscal outlook for the US, which may continue to weigh on consumer and producer confidence. There is a strong probability that the leadership transition in China will see a period of economic stability as we think the Communist Party will do its utmost to keep the economy stable before and during the transition. Finally, there are downside risks to our moderately bearish outlook on the economic side. If economies slip back into recession, we expect it to be mild, as many adjustments in employment, investment and durable goods consumption were made during the previous recession even if this did

not lead to a full recovery. However, the usual tools to battle a recession stimulative fiscal and monetary policy may prove less effective than usual, if indeed they are available at all. And if developed economies relapse into another recession, this could be accompanied, and thus aggravated, by another financial crisis, meaning any new recession could again be deep or even more drawn-out. Regarding China, it is now becoming clear that the huge government stimulus that prevented the economy from entering into a recession in 2008/09 is having its drawbacks. Housing and other infrastructure spending, as well as bank credit, may have been excessive. We think growth in China will merely moderate in 2012, which is positive from an inflation standpoint. Even if a hard landing cannot be ruled out, we believe that the political leadership transition makes it unlikely in 2012, and expect that Chinas huge foreign exchange reserves will form an important buffer against a strong growth slowdown. For example, China could recapitalise its banks if necessary and there is room for fiscal stimulus through infrastructure spending or tax cuts. Finally, tensions around currencies could intensify in 2012. Currency interventions in Japan and Switzerland in 2011 caused sharp moves in currency markets, yet no political backlash. As many emerging market currencies sold off during the summer of 2011, the pressure is off for the authorities in these countries to weaken their currencies. However, the growth differential between developed and emerging markets has remained, so at some point emerging currencies may appreciate again. We dont think this will be strong enough to lead to large interventions and political tensions, but we do see it as a risk.

2012: a frugal and crucial year | November 2011 I 9

Market outlook
SUMMARY
Valuations not expected to be the main driver for equities Emerging equities to benefit from robust growth and lower inflation US and German government bonds not attractive Emerging market debt supported by growth and monetary policy Preference for high yield versus investment grade corporate bonds Time for commodities has yet to come

At the time of writing (early November), the performance of equity markets during 2011 to some extent resembled that of 2010: early strength followed by a summer sell-off. In 2010, equities rallied to new post-financial crisis highs in the final months of the year. Will equities in 2012 be able to finally leave the legacy of the crisis behind? Bond yields have been forecast to rise from historical lows on many occasions in the past years. Will they stay low in 2012? It should be no surprise that, given our somewhat bearish outlook, we are cautious towards risky assets going into 2012. This does not mean we are outright totally bearish about the whole year. Things may improve over the course of 2012, so timing will be very important.

Equities: low valuation but many risks

On both an absolute and a relative basis, equity valuations are low. Price-earnings (P/E) ratios in both developed and emerging markets have fallen well below their long-term averages. The earnings yield on US and European equities is close to a record high when compared to the yield on government bonds. In Japan, the price of equities relative to the underlying book values of the companies stands out as extremely low. However, we do not see these positive valuation metrics as a compelling reason to buy equities at this point. Firstly, the US cycle-adjusted P/E ratio, which measures prices against a long-term average of earnings to smooth out cyclical patterns, is still above its own longterm average. And the comparison with bond yields may anyway be less relevant in a low growth environment where bonds yields are depressed by extremely loose monetary policy. So US equities are not cheap by all measures. Secondly, valuations could move lower if the US or the eurozone were to enter a new recession in anticipation of earnings downgrades. At the time of writing, the P/E ratio for US equities is around 13, while this fell to 11.5 during the 2008/09 recession. European and emerging markets

2012: a frugal and crucial year | November 2011 I 10

are currently trading just above 10 times earnings, while P/E ratios fell below 8 during the financial crisis. Finally, we have doubts about the sustainability of earnings growth. Analysts have cut their earnings estimates in the past few months, but for US companies, earnings are still expected to grow close to 14% next year. In the second quarter of 2011, US corporate profits amounted to 12.9% of GDP, the highest level since the early 1950s. Part of this may be structural as companies are making more profit abroad, but margin expansion looks difficult to achieve as margins are already at or close to record levels. Expectations for earnings growth in France and Germany have come down to 8%, but with a recession looming this may still be too optimistic. True, wage costs are subdued in most developed economies, but productivity growth has slowed significantly. As a result, unit labour costs have risen. Lower commodity prices may be beneficial to some extent, but this effect is relatively small. In fact, we dont think valuations will be the key market driver in 2012. We think macroeconomic and political developments will be more important. As we described in the previous section, we are not optimistic on those points. In other words, valuation may be low today, but without positive catalysts, we do not see this changing much. In short, we do not foresee a lasting rally in equity markets for the time being. If the right policy measures are taken and confidence improves, we could see a more lasting upturn later in 2012. But this is shrouded in uncertainty. There will be rallies, but also downturns. This argues in favour of a more tactical approach to equity markets instead of a buy-and-hold strategy.

25% lower than that of developed equities. The discount for emerging markets is currently only 16%. EM/DE 12-months forward PE
120

100

80

60

40 96 98 00 02 04 06 08 10

Source: Datastream, BNPP IP

Thus, emerging equity valuations are somewhat above their long-term average relative to developed equities, but we think this is justified given emerging markets improvements in macroeconomic stability, transparency and corporate governance during the past decade. And emerging equities are, relative to developed equities, more attractively valued than in 2007/08, or in 2010 when they traded at a 5% premium. While emerging equities cannot escape the gravity of falling developed markets and so remain vulnerable to shocks, we are positive on this asset class, especially relative to developed equities.

Bond yields to stay low

Developed or emerging equities?

Regionally we do not have a strong preference for any developed market. Structurally, growth tends to be higher in the US than in Europe (partly due to more favourable demographics), and the Fed tends to be more aggressive in its attempts to avert recessions. Furthermore, US equities tend to be more defensive in a downturn. On the other hand, valuations are lower in Europe and earnings expectations are more modest. We have a small preference for US over European equities. Valuations are certainly low for Japan. This may be a compelling argument in favour of Japanese equities, but investors should bear in mind that many Japanese companies are geared towards the global economy and that they may continue to struggle with a strong yen. There are, on the other hand, many arguments to be made in favour of emerging equities. The positive growth differential versus developed economies, which averaged 4.6 percentage points in the past decade, has been maintained in the current downturn and we do not expect it to narrow much: emerging markets have favourable demographics and do not face deleveraging processes. We also find emerging equities attractively valued versus developed equities. Since 1996, the P/E ratio of emerging equities has been on average about

In our outlook for 2011, we warned that government bonds were not entirely risk free. We pointed to the specific risks of peripheral eurozone government bonds, risks that indeed surfaced during 2011. Although we do not think the eurozone will fall apart or that Italy or Spain will default, we would not want to advise investors to increase their exposure to these bonds. Greek government debt may be restructured to a larger extent than currently planned and we would not fully rule out debt restructuring in Portugal or Ireland either. Risk spreads on Italian and Spanish bonds have been kept from spiralling out of control by heavy buying from the ECB, but the ECB has made clear on several occasions that it does not see this as a core activity. Last year, we also highlighted the risk that rising yields would have on the value of US or German government bonds. Yields were so low that even a modest rise would destroy the total return of this asset class. This has not changed. In fact, yields are currently lower than when we wrote our outlook for 2011.

2012: a frugal and crucial year | November 2011 I 11

10-year government bond yield

5

US

US) and the risk spread. We do not foresee large swings in bond yields in developed economies. In our view, the risk spread on foreign currency emerging market bonds has widened enough in 2011 to take a modest growth scenario into account. We think the pick-up in yields is attractive and a narrower risk spread over the course of 2012 could offer further support.
Germany

Credit: we favour high yield

1 01-08 06-08 01-09 06-09 01-10 06-10 01-11 06-11

Source: Datastream, BNPP IP

We think that bond yields in the US, Germany, Japan and the UK will stay low from a historical perspective. First of all, we think growth will stay low, and as written earlier, some developed economies may even relapse into recession. We dont see upside inflation risks now, nor do we expect them to appear in 2012 either. Thus, central banks in the US, Europe, Japan and the UK will be on hold throughout 2012 and we would not even rule out additional stimulus measures. This should put a strong cap on government bond yields. However, we would not entirely rule out an increase in bond yields in 2012. Three developments could make this happen: if the US avoids recession, if any recession were mild and short or if progress was made on the eurozone sovereign crisis, reducing the need for safe havens. Nevertheless, with yields as low as they are, even small increases could lead to negative returns on government bonds. We therefore favour other fixed income instruments, such as emerging market debt or high yield credit.

We are currently neutral or negative on most risky asset classes, but if we were looking to increase exposure in any asset class, it would be credit, especially high yield. Credit tends to outperform equities and government bonds in a low-growth environment. In such an environment, companies are forced to focus on their core activities and are less likely to embark on adventurous investment projects or mergers and acquisitions, which could be positive for equities, but tend to be negative for bondholders. Moreover, corporate fundamentals such as profitability and balance sheets are generally strong. Corporates do not face the need to deleverage. Credit spreads widened during the 2011 summer sell-off. Corporate defaults may rise from the current low levels, but only to a limited extent, in our view. We therefore believe the valuation of credit has improved. Risk spreads on investment grade credit have widened further than those on high yield. Investment grade spreads have moved close to the levels seen in the financial crisis of 2008/09. The increase in the risk spread on high yield bonds has been much more muted, at least in Europe. Eurozone option-adjusted corporate spread (basis points)
500 2500

We think the prospects for emerging fixed income are more positive. During the summer of 2011, these bonds sold off sharply when investors feared a double-dip recession. Spreads on USD-denominated bonds over US Treasuries widened to over 440bp, from an average of 270bp in the first seven months of the year. Some emerging currencies depreciated by 20%. This has improved the valuation of emerging bonds, in both US dollars and local currencies. Given emerging markets generally fundamentally sound fiscal positions, we think this sell-off will prove to have been overdone. Much was recouped in October 2011, when risk appetite returned, but we think there is room for further upside. We expect inflation to moderate and monetary policy tightening to be reversed. This should lead to lower yields in local currencies. Currency developments are of course very important for this asset class. In 2012, emerging currencies will no longer be supported by monetary tightening as they were in 2011, but we think this is already widely priced in. In fact, emerging market growth resilience may even lead to currency appreciation, despite monetary easing. The return on emerging bonds in foreign currency is related to developed economies bond yields (mostly the

Better perspectives for emerging fixed income

Investment-grade (lhs)
400 300 200 100 2000 1500 1000 500

High-yield (rhs)
0 05 06 07 08 09 10 11 0

Source: Barclays Capital, Bloomberg, BNPP IP

The reason for the difference is that banks, which form a large part of the investment grade universe, have suffered from the eurozone sovereign crisis. We are thus more reluctant to increase exposure in investment grade bonds than we are in high yield bonds, even though investment grade bonds may be more attractively valued on a relative basis. It is worth noting however, that we dont see the need to rush into this asset class. Recession fears may cause further spread widening in the near term and liquidity in these markets has worsened lately.

2012: a frugal and crucial year | November 2011 I 12

Commodities not yet

Commodities did well in the first few months of 2011. The global economy was doing well and political unrest in the Middle East and North Africa raised fears of disruptions to the supply of oil. However, as the global economy slowed during the summer and the loss of Libyan oil production was offset by Saudi Arabias, oil prices started to move sideways. Gold prices continued to increase as investors sought the ultimate safe haven as a shield against the risk of recession and the (in our view, low) risk that too much monetary stimulus could lead to runaway inflation. When these fears also receded, gold prices dropped sharply. Base metals peaked relatively early in 2011, but also sold off sharply in August and September 2011. These developments show that commodities are correlated to the global economic cycle. We are therefore not ready to give a positive recommendation for commodities at this point. We like commodities from a fundamental perspective though: commodity-intensive growth in emerging markets should remain supportive, especially against a background of limited growth in production capacity. So we think a rotation into commodities will become attractive sometime in 2012, once there is more visibility on how the macroeconomic cycle will develop. When that improves, we would also recommend a shift from defensive commodities like gold towards more cyclical commodities like base metals.

Infrastructure investments refer to the private sector being involved in closing the funding gap for new or existing assets necessary for economic activity. One of the characteristics of such an investment is that it usually aims at financing, maintaining and operating public or private sector assets in return for long-term contract payments based on the operational longevity of the underlying. The current sovereign debt concerns, especially in the eurozone, should tip the balance in favour of privately funded deals therefore increasing the deal flow. We believe that, considering a high degree of selectivity, 2012 and 2013 should be appropriate years for investing in private markets. The main reasons for this are attractive pricing, fundamentals for deal flow and distressed opportunities, but also that this area has generally shown itself to be an effective diversifier for portfolio construction on a mid to long-term horizon.

Our ideas for 2012

Alternatives

During and after the financial crisis of 2008/09, alternatives across the board played their role of diversification both in terms of returns and of risks, even though some (such as hedge funds) were not negatively correlated. Investments in non-public assets such as non-listed companies, infrastructure and other real assets, are long term in nature. They have an average investment horizon of eight to 10 years and they provide limited liquidity, so they can make the most of a difficult situation by capitalising on the weak assets available due to a fragmented environment, suffering less from short-term market moves due to the valuation methods of transactions. Private equity did suffer during the crisis but with a lag as 2009 and 2010 were the years when immunity was affected. Nevertheless, their three year performance remained positive. For example, the US private equity market outperformed the S&P index by more than 5% as of December 2010. Thanks to its counter-cyclicality, the best vintages of private equity have proven to be the ones investing within the worst economic environments due to a combination of low valuations, more selectivity and a stricter leverage attribution. In any case, the flow of debt capital seen in the bull years will have to be refinanced either through debt or capital, and crisis environments remain favourable for entrepreneurship and innovation. Other real asset strategies such as infrastructure also enable investors to diversify away from the short-term volatility of listed financial markets.

In the next part of this outlook we highlight several investment ideas for 2012, which we have selected from a risk-return perspective. The asset classes we like for upside potential, yield or a favourable combination of upside potential and defensive characteristics are high income equity, emerging market equities, emerging market debt, high-yield corporate bonds and convertibles. High income equity should give investors a good yield, while offering upside potential when the global economic cycle improves. We think Asia will be the best region for this asset class. Emerging market equities should benefit from a positive growth differential between their economies and developed ones, while lower inflation and greater accommodative policy should also offer support. We also expect relatively strong growth to be beneficial for emerging market debt. Furthermore, fundamentals are sound and the asset class should benefit from institutional inflows. Low interest rates on government bonds of safe countries are encouraging investors with a large, unsatisfied appetite for yield to shift assets into the high yield asset class. Convertible bonds combine defensive characteristics with upside potential.

2012: a frugal and crucial year | November 2011 I 13

2012: a frugal and crucial year | November 2011 I 14

High Income Equities

Brief review of key developments in 2011
To borrow the phrase from the world of advertising, high income equities have done exactly what it says on the tin over 2011. By their very nature, such stocks offer stronger downside protection than general equities in a declining market. In the difficult market conditions of 2011, high dividend stocks have outperformed general equities on both a global and a regional basis. Even if these stocks have also experienced a sell-off as investors, both private and institutional, have shunned equities, their dividends have provided a cushion. flight to safety we have seen by investors has driven down yields on government bonds to historical lows. Government bonds have a yield of approximately 2%-3% currently and in some core countries even less, while the dividend yield on global stocks in general now stands at approximately 3% (MSCI World). High income stocks, by contrast, currently yielding approximately 5% (S&P High Income Equity World), are offering an even more attractive spread. While the comparison of bond and dividend yields is often used in making the case for a high dividend equity strategy, it is not entirely fair as the yield on a government bond is all an investor receives, while the dividend yield is only half the story for equities. With a pay-out ratio of approximately 50%, half of a companys earnings are retained and can be re-invested. The current earnings yield of equities is thus effectively 3-4 times that of bond yields, a staggering comparison! Taking an historical perspective, this has not been the case for over 30 years in the US, as shown in the chart below. This implies a significant mispricing in the market currently, not on the side of earnings yield but, in our opinion, on bonds. US earnings yield & bond yield (%)
16

Asset class drivers

With markets being driven mainly by macroeconomic factors, negative sentiment and memories of 2008, investors seem to have forgotten about the fundamentals of companies. Unlike heavily indebted countries, corporates appear to be generally healthy, with cash reserves, strong balance sheets and greater geographic diversification. Looking ahead, with expectations of subdued global growth, low inflation and stimulative monetary policy, interest rates are set to remain low. In such a low-yielding environment, choices are scarce for investors searching for yield. Given the low yields available on bonds, we believe that investors who have traditionally invested in them for their perceived safety and steady yield, may turn to high dividend equities. Over the short term, we think the important catalysts for the performance of high dividend stocks will be greater macroeconomic clarity and less risk adversity among investors. Many investors have a significant proportion of cash in their portfolios, as the significant inflows into money market funds in 2011 show. With these reserves earning little, if investors were to gain confidence, there could be a significant increase in demand for equities paying higher dividends. Taking a longer-term perspective, the ageing population creates a natural demand for retirement planning. In Asia, for example, Japans ageing population is often talked about, yet in South Korea, more than 35% of the population will be 65 or older in 2050, while in China the figure is expected to be 20%. We believe these demographics will support the demand for high dividend stocks in the Asia Pacific region over the longer term.

S&P500 earnings yield

12

10-year Treasury yield

0 60 65 70 75 80 85 90 95 00 05 10

Source: Datastream, BNPP IP

Valuation

Turning to valuation, high dividend stocks look attractive both on an historical basis and compared to bonds. By historical standards, global high dividend stocks are currently trading at an attractive P/E of around 10, the lower end of their longer-term range. We see a number of growth stocks that were too expensive yet are now, due to market movements, attractively priced dividend stocks. In relation to bonds, the

It is important to remember that companies paying high dividends also have the potential to grow. To put it another way, rapidly growing companies can also pay relatively high dividends and nowhere is this clearer than in the Asia Pacific region. The region is regarded as being characterised by growth and therefore, when investing in equities, the strategy should be to focus on high growth stocks. However, a high dividend equity strategy can significantly outperform the general equity market and has not only done this in bear but also bull markets.

Considerations when pursuing this strategy

It is not just the absolute level of dividend yield that investors should consider; it is paramount they ensure that the dividend level is sustainable and, preferably, growing. One has to be careful not to fall into a value trap, which

2012: a frugal and crucial year | November 2011 I 15

can occur when a stock looks cheap, as reflected in a high dividend yield, but it actually is not. The companys stock price may decline further or the firm may cut or stop paying dividends. In the worst case scenario, both may happen. To try and avoid this potential pitfall it is important to select stocks bottom-up, and ensure thorough analysis and research has been conducted: this is the focus of our high income equity investment process.

Conclusion

We believe that in the current economic environment, high dividend equities are attractively valued and offer a higher yield than bonds with the potential for growth. From a global perspective, in terms of regions, Asia, particularly emerging Asia, is the most interesting after the set-back this summer. With low growth and elevated recession risks in developed economies, Asia while not risk-free looks relatively attractive now that inflation seems to have peaked and a soft landing in China is likely.

2012: a frugal and crucial year | November 2011 I 16

Emerging Market Equities

Brief review of key developments in 2011
Uncertainty and volatility ruled the markets over large portions of 2011. Early in the year, investors feared that rising commodity prices, particularly for food, would drive inflation in emerging markets to dangerous levels. During the markets late-summer downturn, eurozone sovereign debt issues and the US rating downgrade caused investor concern over the prospects of slowing growth in China. Overall however, it was external macro-issues that caused a large portion of the outflows from emerging markets (EM) throughout much of the first nine months of 2011. Even in October, when broader markets rebounded, inflows to EM equity were minimal. As 2011 drew to its end, a more supportive environment for emerging markets began to materialise: the ECB lowered interest rates, the Fed signaled it was likely to keep rates low until 2013 and the Brazilian central bank cut its base rate twice. The common and global commitment to spur economic growth helps underpin our positive outlook on emerging markets. In 2012, we expect governments to be less concerned over inflation and to focus more on creating growth. Accordingly, we anticipate greater accommodative policies from many emerging markets, including China. While the US and eurozone are struggling to regain any firm growth impetus, countries such as China have actually engineered their slowdowns, allowing for an easier return to growth policies. Of course, the downside of cyclicality in developed markets can still weigh on emerging markets as the two remain cyclically correlated. However, as emerging markets have higher real interest rates relative to most developed markets, they have greater monetary flexibility, which will provide them with an edge should investor sentiment turn down again. Regionally, we expect the best performing markets to be those with a strong presence in the most attractive industries. For example, shifts in consumer preferences towards mobile data devices and the near-certainty that car ownership will increase in China, makes South Korea an attractive market. Similarly, the rapid growth of middleclass consumers makes domestic retailers in Brazil an attractive opportunity.

Asset class drivers

A key strength of emerging markets is that most companies operating within them are in very good shape. Additionally, EM governments are maintaining high quality balance sheets. EM debt experienced limited outflows when the markets turned down in July 2011. Compared to 2008, when investors had similar concerns over the strength of financial markets, the outflows were small. We see this as evidence of the increasing confidence investors have in EM governments and sets a foundation for prosperous EM businesses. While there have been concerns that their growth is slowing, emerging markets remain the premier region for exposure to growth. Even with falling GDP growth, most emerging markets are still growing faster than Europe and the US, and this should not change any time soon. GDP (% YoY)
10

Valuation

Emerging economies
5

World

Developed Economies
-5 00 01 02 03 04 05 06 07 08 09 10 11

Source: IMF, BNPP IP

In October 2011, investors moved sharply back into risk, with a clear rotation out of defensive assets and into higher beta equities, yet numerous global equity markets remained oversold, including Russia, Brazil, China, South Korea and Taiwan. While most experienced some inflows in October, these did not come close to matching the outflows witnessed during the summer downturn. We find equity valuations within emerging markets attractive. EM equities were negatively impacted largely on external factors, i.e., faltering developed market growth. In 2007, Chinese equities were trading at around 35x earnings. Currently they are trading at around 8x to 9x earnings. Chinese banks currently trade at around 5x earnings compared with a norm of around 10x earnings. As emerging markets are not suffering from the high debt levels that plague developed countries, we would argue that they have been oversold and are currently undervalued. EM currencies have also suffered, perhaps more so than equities. As emerging markets have a structural reason to maintain higher growth relative to developed markets, namely lower debt, and as they are likely to continue providing investors with higher interest rates, there is considerable potential for EM currencies to strengthen. And as much of the upside in EM equities comes from strengthening EM currencies, they too, should have considerable upside potential.

2012: a frugal and crucial year | November 2011 I 17

Considerations when pursuing this strategy

While the prospects for growth in emerging markets are strong and equity valuations are attractive, there are of course risks to be considered. The main one is a hard landing in China. There is a risk that the Chinese government will over-tighten, squeezing developers and restricting credit. However, we believe the more likely course of action in 2012 will be more accommodative policy, not just in China but in the majority of emerging markets. There will also be a transition within the Chinese government in 2012 and while this process is expected to be fairly smooth, should it experience any turbulence the effect on EM equities could be substantial.

Conclusion

The prospects for strong returns from EM equities look excellent. The asset class appears oversold, is fundamentally strong, and should remain a major component of most asset allocations. Over the next decade, emerging markets could arguably be the fastest growing component of many portfolios. We believe the recent market downturn has provided an excellent opportunity to enter into global EM equities.

2012: a frugal and crucial year | November 2011 I 18

Emerging Market Debt

Brief review of key developments in 2011
During the first half of 2011, solid growth performance allowed emerging market currencies to outperform. An initial inflation scare quickly disappeared as emerging market central banks normalised policy rates. Curves then benefited from slowing growth in the second half. In the summer, the European sovereign debt crisis loomed back to the fore, casting its shadow over global markets. Risk aversion was at its highest since October 2008 and global markets were hit by extreme volatility. While remaining highly resilient through the summer, September saw emerging markets eventually hit by collateral damage from global events, dragging on performance in Q3. Fundamentally, however, the emerging market story remains intact and emerging bond markets have already retraced their September losses. transitory and emerging market debt to be among the first assets to rebound.

Conclusion

Asset class drivers

We expect the key drivers for emerging markets in 2012 to continue to be growth and strong potential inflows, with some regional divergence; we see growth remaining solid and at potential output level in Asia, Latin America and Africa. Russia/CIS was growing slightly below potential but seems to be firming now. Central and Eastern Europe will see the weakest growth due to the regions strong trade and financing links with Western Europe. Since EM debt is not immune to events in developed markets, the eurozone sovereign debt crisis and European bank deleveraging are also likely to have an impact. EM debt is thus likely to experience volatility contagion from developed markets, and there is the risk that Central & Eastern Europe growth may be hit should the eurozone slip into recession. There is also a tail risk from eurozone deleveraging but we do not see this derailing the positive story for EM debt.

We continue to see value in EM debt and are positive on the asset class for 2012. We are not building our constructive view of emerging market assets on a decoupling or safe haven theory but on fundamentals. Despite the recent volatility seen in the markets, the emerging market story remains unscathed, the valuations are more attractive and near-term risks are fading. Growth potential is one of the most important drivers of performance in this asset class and we expect growth outperformance in emerging markets to prevail. Market worries are that EM growth will falter with DM growth, yet although these fears seem credible and realistic, hard economic data do not validate them. We see growth momentum continuing and believe that the market is myopic, focusing solely on the tail risks from the sovereign crisis. Fundamentals are continuing to strengthen and, on balance, we think economic momentum is not as weak as priced by the market. We also expect structural allocation flows from institutional clients to continue: as investors reconsider the value of sovereign external debt, the EM corporate asset class story should gather speed and start to attract long-term institutional investors. Emerging bond spreads (yields difference with US Treasuries, bps)
550 500 450 400 350 300 250 01-11 04-11 07-11 10-11

Corporates

Valuation

Valuations are currently cheap compared to historical levels. External and corporate debt are both sitting at around 400bp of premium for BBB-rated assets. EM currencies are currently cheap following the underperformance seen in 2011 but since these are cyclical assets we will watch for the bottom in global growth.

Government

Source: Bloomberg, JPMorgan, BNPP IP

Considerations when pursuing this strategy

There is upside risk potential from the existing weak growth in the eurozone as well as the sovereign debt crisis risk abating, either of which could lead to the outperformance of emerging market debt. Possible downside risk comes from a synchronised global slowdown should the sovereign debt crisis worsen. However, we would expect the damage to emerging markets to be

2012: a frugal and crucial year | November 2011 I 19

Global High Yield

Brief review of key developments in 2011
The risk premium on high yield corporate bonds tightened during the first four months of 2011 as investors grew less fearful of sovereign debt crisis contagion and double-dip recession. Global high yield returned 5.57% during the period, far outpacing government bonds in both Europe and the US. Over the next six months, conditions reversed. Returns turned negative for high yield bonds and strongly positive for governments. The high yield bond asset class became the victim of a general flight to quality as new fears arose of a disorderly Greek default and a possible spreading of the sovereign default problem to other peripheral European countries. Economists also began to scale back their US growth expectations. The price deterioration contrasted with the firmness of credit fundamentals. There was no significant escalation in the actual or projected default rate.

Considerations when pursuing this strategy

High yield bonds face the same hazards as other risky asset classes such as equities. They would suffer in the event of a disorderly sovereign debt default, an economic 5 slowdown, a hard landing in China, or unforeseen geopolitical upheaval. On the upside, unexpectedly strong 4 GDP growth could push spreads below their historical average, conceivably vaulting returns into low double 3 digits.

Conclusion

If eurozone leaders succeed in restoring confidence, credit quality and underlying government bond yields will resume their role as the primary determinants of high yield performance. Any signs of improvement in the global economy will generate new pressure for ECB interest rate hikes to ward off inflation, however this is unlikely in 2012. The default rate should not rise sharply from its current 2% range as long as GDP growth remains modestly positive. A lapse into recession would push the default rate higher, but probably not to the double-digit levels of 2009. Corporate balance sheets are stronger than they were prior to the Lehman Brothers crisis and many companies took advantage of highly favourable financing conditions to extend debt maturities beyond 2012. Furthermore, there has been little creation of extremely leveraged buyouts in this cycle.

Asset class drivers

1 We believe high yield bonds have the potential for strong performance in 2012, provided sovereign debt problems 0 cease to dominate'97-'10 Median financial market developments. Low 31-oct-11 interest rates on the government bonds of safe countries are encouraging investors with a large, unsatisfied appetite for yield to shift assets into the high yield asset class. Barring a double-dip recession, credit quality should remain strong, providing further support to high yield bond prices.

High yield risk spread (yield difference with US Treasuries, basis ponts)
800 700 600 500 400 300 200 100 0 Median '97-'10 Source: BofA Merril Lynch, BNPP IP. 31-oct-11

Valuation

High yield default rate (%)

5 4 3 2 1 0 Median '97-'10 Source: Moodys, BNPP IP. 31-oct-11

The high yield spread versus Treasuries is well above its historical median, even though the speculative grade default rate is well below its historical median. This unusual relationship points to excellent value in high yield bonds. The disparity between risk and reward reflects illiquid conditions in the secondary market, as dealers have cut back sharply on their commitment of capital to market-making. As dealers step up their secondary activity, high yield spreads should contract, creating the potential for high single-digit returns in 2012.

2012: a frugal and crucial year | November 2011 I 20

Convertible Bonds
Brief review of key developments in 2011
In 2011, convertible bonds fulfilled their side of the bargain by outperforming straight equities with less volatility in a down market. Nevertheless, the cushioning effect may have disappointed some as the difference was not huge: the total return of the UBS Convertible Global CB index in USD was 9.38% at the end of September vs. 11.82% for the MSCI World USD index. This was in large part due to the influence of overall credit spread widening, which also impacted straight bonds, particularly at the height of the crisis in August and September. As seen in straight bonds, despite a widening overall, it was more extreme in high yield than investment grade credit. And having lost some of their equity sensitivity, convertible bonds, as an asset class, were more sensitive to bond news.

Conclusion

In most market configurations, convertible bonds have a more favourable risk/return profile than equities do. We therefore believe that in a low growth environment, convertible bondholders should continue to experience the benefits from the dispersion. Underlying equities that perform poorly do not impact the convertible bonds performance as long as the final redemption occurs and the coupon is paid. However, underlying equities that reach the strike provide a substantial positive return for the convertible bondholder. Japanese returns (total return indices, 1 January 2005 = 100)*
250 200 150 100 50 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Asset class drivers

Convertibles Gov. bonds Cash Equities

The key driver for convertibles remains their core characteristic of offering investors a way of reducing their risks in the case of a negative scenario while keeping a potential upside should a more optimistic scenario unfold. The nature of a convertible bond portfolio is such that with 50% of stocks rising and 50% falling over a period, for example, the corresponding convertible bonds universe will see a positive return due to the upside capture of rising stocks, which is higher than the downside capture of declining ones. On the credit side, we do not foresee a dramatic rise in rates, and as spreads are at wide levels, we might expect them to narrow. Convertible bonds are therefore particularly suited to a lacklustre environment, as the comparison between different Japanese asset classes over a 15-year period shows in the adjacent graph.

* JPM data not available after November 2010. Source: Bloomberg, JPMorgan, BNPP IP.

The value of your investments may fluctuate. Past performance is no guarantee for future returns. It is possible that your investment will increase in value. It is also possible, however, that your investment will generate little or no income and that, if the asset price performs poorly, you will lose some or all of your initial outlay.

Valuation

Spreads are wide and some bonds are near their bond floors although we cannot say the market is as oversold as it was after the Lehman Brothers crisis. The universe is structurally small versus other asset classes and valuations could also be sustained by the rarity value, merger and acquisition activity, emerging market issuance and potential new issues of exchangeable bonds by sovereigns.

Considerations when pursuing this strategy

Convertible bonds face the same hazards as other risky asset classes such as equities, albeit with lower volatility. They would suffer in the event of a disorderly sovereign debt default, an economic slowdown, a hard landing in China, or any unforeseen geopolitical upheaval. On the upside, they will be favourably affected by any credit spread narrowing and subsequent equity market rally. Furthermore, given their short duration, they would not be highly sensitive to a hike in interest rates should one occur.

2012: a frugal and crucial year | November 2011 I 21

Contact Us
Joost van Leenders
Investment Specialist Allocation and Strategy joost.vanleenders@bnpparibas-ip.com

Tom Bagguley

Investment Specialist High Income Equities tom.bagguley@bnpparibas-ip.com

Mathew Powers

Investment Specialist Emerging Market Equities mathew.powers@bnpparibas-ip.com

Jennifer Clarke

Investment Specialist Emerging Fixed Income jennifer.clarke@bnpparibas-ip.com

Martin Fridson

Global Credit Strategist martin.fridson@bnpparibas.com

Sheila Ter Laag

Investment Specialist Convertible Bonds sheila.terlaag@bnpparibas.com

2012: a frugal and crucial year | November 2011 I 22

Datastream and Bloomberg are the sources for all data in this document as at end October 2011, unless otherwise specified. This material is issued and has been prepared by BNP Paribas Asset Management S.A.S. (BNPP AM)* a member of BNP Paribas Investment Partners (BNPP IP)**. This material is produced for information purposes only and does not constitute: 1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. any investment advice. Opinions included in this material constitute the judgment of BNPP AM at the time specified and may be subject to change without notice. BNPP AM is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective clients investment portfolio. Given the economic and market risks, there can be no assurance that any investment strategy or strategies mentioned herein will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the Financial Instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the Financial Instruments may have a significant effect on the results portrayed in this material. The value of an investment account may decline as well as rise. Investors may not get back the amount they originally invested. The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes. *BNPP AM is an investment manager registered with the Autorit des marchs financiers in France under number 96-02, a simplified joint stock company with a capital of 64,931,168 euros with its registered office at 1, boulevard Haussmann 75009 Paris, France, RCS Paris 319 378 832. www.bnpparibas-am.com. ** BNP Paribas Investment Partners is the global brand name of the BNP Paribas groups asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your locally licensed Investment Partner.

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