cazenove presentation 03 11 09

Economics & Strategy

Richard Jeffrey – Chief Investment Officer, Cazenove Capital Management

3 November 2009

Cazenove Capital Management Limited 12 Moorgate London EC2R 6DA Telephone +44 (0) 20 7155 5600 www.cazenovecapital.com

Registered Office 12 Moorgate London EC2R 6DA Registered in England No 3017060 Authorised and regulated by the Financial Services AuthorityCazenove Capital Management Limited provides independent advice

Risks & Uncertainties

What sort of recovery are we facing?

How resilient will the financial system be to future stocks?

How inflationary will current orientation of monetary policy prove? (Is there still a risk of deflation?)How inflationary will current orientation of monetary policy prove? (Is there still a risk of deflation?)

How will financial markets react as and when central banks cease quantitative easing?

How resilient will economies prove to rising interest rates and/or a reversal of QE?

Will the dollar and sterling be able to stand firm?

When will unemployment peak?

Will final demand now begin to reinforce the inventory-led bounce?

Will banks be able to support an upturn with increased bank lending?

To what extent will the impact of efforts to control huge public sector deficits impact the recovery?To what extent will the impact of efforts to control huge public sector deficits impact the recovery?

Has the US hegemony of the developed world been lost for all time?

1

Short Term Interest Rates

UK Short Term Interest Rates Eurozone Short Term Interest Rates

3

4

5

6

4

5

6

7

0

1

2

3

Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 090

1

2

3

4


%

US Short Term Interest Rates

Repo RateExpected Overnight rate over follow ing 3 months3 Month LIBOR

y p y p y p

Bank RateExpected Average Overnight Rate over Follow ing 3 Months3 Month LIBOR

6

2

3

4

5

0

1


Fed Funds Target RateExpected Overnight rate over follow ing 3 months3 Month LIBOR

2

Sources: Thomson Datastream & Thomson Reuters

3 Month LIBOR

UK Monetary Environment: Lending

UK Bank Lending to Households UK M4 Lending to Private Non-Financial Corporations

14

16

17.5

20.0

10

12

14

10.0

12.5

15.0

6

8

YoY

% C

hang

e

2.5

5.0

7.5

YoY

% C

hang

e2

4

-5.0

-2.5

0.0

01993 1998 2003 2008

-7.51992 1994 1996 1998 2000 2002 2004 2006 2008

3

Source: Thomson Datastream

Quantitative Easing

Size and composition of Bank of England Assets Size and composition of ECB assets

1250

1500

1750

2000

2250

o bl

ns200

250

300

350

ns

Size and composition of Bank of England Assets Size and composition of ECB assets

0

250

500

750

1000

Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09

Euro

0

50

100

150

Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09

£ bl

QE QE

2000

2500

Lending to Other Fin Ins t Euro Securities Other AssetsGold Local Res id Foreign Claim s (FC)Govt Debt Foreign Claim s (Euro) Other Lending

Longer-term Reverse Repos Ways and Means advances to GovernmentOther Assets Bonds and Other Securities PurchasesShort term Market Operations

Size and composition of Fed Assets

500

1000

1500

2000

$ bl

ns

QE

0Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09Securities Held Outright Other AssetsTerm Auction Credit Net Port Holdings of Com m.Pap. Fund. LLCOther Loans Net Port Holdings Maiden Lane LLCNet Port Holdings Maiden Lane II LLC Net Port Holdings Maiden Lane III LLCNet Port. Holdings LLCs through MMIF Repurchase Agreem entsSpecial Drawing Rights Gold Certificate AccBank Prem ises CoinItem s in Proc Of Coll Cent Bank Liqu Swaps

4

Item s in Proc. Of Coll Cent Bank Liqu. Swaps

Source: Bank of England, Federal Reserve, ECB, Absolute Strategy Research Lt & Thomson Datastream

Public Sector Balances as a % GDP3

0

ears

)

-3

GD

P (c

alen

dar y

e

-9

-6

nt B

udge

t as

a %

-12Gov

ernm

e

-15Germany Australia Canada China France Eurozone US Italy Japan India UK

2007 2008 2009(f) 2010(f)

5

Source: EIU, Thomson Datastream

Cumulative Gilt Issuance & Bank of England Purchases

140

160

100

120

60

80

£ bl

n

20

40

0Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

CGNCR Net Issuance of Gilts Bank of England Bond Purchases

6

Source: Bank of England, DMO, Thomson Datastream

Public sector finances

95.0

UK Public Sector Net Debt as a % GDP US Public Sector Debt by Public as a % GDP

90.0

75.0

85.0

70.0

80.0

55.0

65.0

% G

DP

50.0

60.0

% G

DP25 0

35.0

45.0

20 0

30.0

40.0

25.01974/75 1980/81 1986/87 1992/93 1998/99 2004/05 2010/11

Fiscal YearActual HM Treasury Budget 2009 ForecastsGross Debt on a Maastericht basis

20.01962 1972 1982 1992 2002 2012

Fiscal YearActual CBO Baseline Forecasts CBO Forecasts of Budget Proposals

7

Source: Congressional Budget Office, HM Treasury & Thomson Datastream

Consensus Economics 2010 GDP forecasts

2010 GDP forecasts China 2010 GDP forecast

9 0

9.2

9.4

9.6

2.0

2.5

3.0

2010 GDP forecasts China 2010 GDP forecast

8 2

8.4

8.6

8.8

9.0

%

0.0

0.5

1.0

1.5%

8.2Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

3 2

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

US UK Japan Eurozone

World 2010 GDP forecast

2 4

2.6

2.8

3.0

3.2

%

1.8

2.0

2.2

2.4

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

8

p

Source: Consensus Economics

Demand vs Output

90

95

100

105

7 =

100)

95

100

105

110

7 =

100)

UK Demand vs Output US Demand vs Output

70

75

80

85

90

Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009

Inde

x (Q

1 20

0

70

75

80

85

90

Inde

x (F

eb 2

007

*September f igure estimated f rom GDP prelim release

Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009

GDP Inventories + Capital Inves tm entFinal Dem and Household ExpnditureManufacturing Output

Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009GDP Inventories + Capital Inves tm entFinal Dem and Household ExpenditureManufacturing Output*

106 105

Germany Demand vs Output France Demand vs Output

86

91

96

101

(Feb

200

7 =

100)

90

95

100

(Feb

200

7 =

100)

76

81

Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009

Inde

x

GDP Inventories + Capital Inves tmentFinal Demand Consum er Expenditure

80

85

Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009

Inde

x

GDP Inventories + Capital Inves tm entFinal Dem and Consum er Expenditure

9

pManufacturing Output Manufacturing Output

Sources: Eurostat, Thomson Datastream

UK Quarterly Trends

UK Trends in Household ConsumptionUK Trends in GDP

101

102

103*From Q3 1979 & Q1 1990

100

101

102*From Q3 1979 & Q1 1990

97

98

99

100

Inde

x

95

96

97

98

99

Inde

x

140

UK Trends in Capital Formation

961 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Average '80s & '90s From Q1 2008

UK Interest Rates in Recessions

94

95

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16


105*F Q3 1979 & Q1 1990

40

60

80

100

120

ed (1

st m

onth

= 1

00)

85

90

95

100

Inde

x

*From Q3 1979 & Q1 1990

0

20

40

Q0 Q1 Q2 Q3 Q4 Q5Quarter

Reb

ase

From Q4 1979 (14%) From Q2 1990 (15%) From Q2 2008 (5%)70

75

80

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16


10

Sources: ONS, Bank of England & Thomson Datastream

US Quarterly Trends

104

106

108

*From Q4 1979 & Q1 1990

106

108

110

*From Q4 1979 & Q1 1990

US Trends in Household ConsumptionUS Trends in GDP

98

100

102

100

102

104

106

961 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter

Average 80s & 90s* From Q1 200898

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter

Average 80s & 90s* From Q1 2008

110

US Trends in Fixed Capital Formation US Interest Rates in Recessions160

90

95

100

105*From Q4 1979 & Q1 1990

60

80

100

120

140

70

75

80

85

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Average 80s & 90s* From Q1 2008 0

20

40

60

Q0 Q1 Q2 Q3 Q4 Q5Quarter

From Q1 1980 (13 5%) From Q2 1990 (8 25%) From Q2 2008 (2 25%)

11

Quarter

Sources: Bureau of Economic Analysis, Thomson Datastream

From Q1 1980 (13.5%) From Q2 1990 (8.25%) From Q2 2008 (2.25%)

Germany Quarterly Trends

104

105

106

107

100

102

104

Germany Trends in Household ConsumptionGermany Trends in GDP

99

100

101

102

103

94

96

98

105

981 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter

From Q1 1991 From Q4 200792

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Quarter

From Q1 1991 From Q4 2007

Germany Trends in Fixed Capital Formation

90

95

100

80

85

90

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

From Q1 1991 From Q4 2007

12

Quarter

Sources: Eurostat, Thomson Datastream

France Quarterly Trends

103

104

105

*From Q4 1979 & Q4 1991

101

102

103

104*From Q4 1979 & Q4 1991

France Trends in Household ConsumptionFrance Trends in GDP

99

100

101

102

Average 80s & 90s From Q4 200797

98

99

100

101


100

991 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter

961 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter


France Trends in Fixed Capital Formation

88

9092

94

96

98 *From Q4 1979 & Q4 1991

82

84

86

88

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter


13

Sources: Thomson Datastream

Current Account Balances as a % GDP

12

8

10

12

4

6

nce

as %

GD

P

2

0

2

ent A

ccou

nt B

alan

-6

-4

-2

Cur

re

-8China Germany Japan Canada Eurozone India France Italy UK US Australia

2007 2008 2009(f) 2010(f)

14

Source: EIU, Thomson Datastream

UK GfK Consumer Confidence

10

1530

Consumer Confidence Q2: How do you perceive the financial position of your household over the next 12 months?

0

5

10

10

20

-10

-5

Inde

x

-10

0

Inde

x

-20

-15

30

-20

-30

-25

1982 1987 1992 1997 2002 2007-40

-30

1974 1979 1984 1989 1994 1999 2004 2009

15

Source: GfK NOP

Real Household Disposable Income

US R l H h ld Di bl I

6

8

10

ge

6

8

10

ge

UK Real Household Disposable Income US Real Household Disposable Income

-2

0

2

4

YoY

% C

hang

0

2

4

YoY

% C

hang

65

-41985 1990 1995 2000 2005

-21985 1990 1995 2000 2005

Germany Real Household Disposable Income France Real Household Disposable Income

1

2

3

4

5

% C

hang

e

-1

0

1

2

3

4

% C

hang

e

-4

-3

-2

-1

0

1985 1990 1995 2000 2005

YoY

-6

-5

-4

-3

-2

1992 1995 1998 2001 2004 2007

YoY

16

1985 1990 1995 2000 20051992 1995 1998 2001 2004 2007


Savings Ratios

8

10

12

14

15.0

15.5

16.0

UK Savings Ratio Eurozone Savings Ratio

0

2

4

6

8

%

13.5

14.0

14.5%

9

10

-2

0

1985 1990 1995 2000 2005

13.01999 2001 2003 2005 2007 2009

US Savings Ratio

4

5

6

7

8

9

%

0

1

2

3

4

1985 1990 1995 2000 2005

17


Unemployment & Labour force

9

10

11

12

9 5

10.0

10.5

11.0

Eurozone Unemployment RateUK LFS Unemployment Rate

5

6

7

8

9

%

7.5

8.0

8.5

9.0

9.5

%

41985 1990 1995 2000 2005

7.01993 1996 1999 2002 2005 2008

10

US Unemployment Rate

6

7

8

9

10

%

3

4

5

6

1985 1990 1995 2000 2005

18

Source: ONS, Eurostat, Bureau of Labor Statistics & Thomson Datastream

Housing Market Activity

100

120

140

160

30

40

50

UK Mortgage ApprovalsUK Average Halifax & Nationwide House Prices

20

40

60

80

100

000s

20

-10

0

10

20

% C

hang

e

01990 1995 2000 2005

20

-201985 1990 1995 2000 2005

3m m, annualised Year-on-Year

US S&P Case Shiller 20 City Composite House Prices US Build Permits

1000

1500

2000

2500

000s-5

0

5

10

15

% C

hang

e

0

500

1000

1970 1975 1980 1985 1990 1995 2000 2005

-25

-20

-15

-10

2001 2002 2003 2004 2005 2006 2007 2008 2009

%

3m m annualised Year-on-Year

19

3m m annualised Year on Year

Source: Bank of England, Nationwide, Halifax, S&P Case-Shiller, Bureau of the Census & Thomson Datastream

Inflation

3

4

5

6

nges

UK Inflation Eurozone Inflation

3

4

5

ge

-1

0

1

2

3

YoY

% C

han

-1

0

1

2

YoY

% C

han

1997 2000 2003 2006 2009

Headline Core

7

US Inflation

2000 2002 2004 2006 2008

Headline Core

1

2

3

4

5

6

7

oY %

Cha

nge

-3

-2

-1

0

1985 1990 1995 2000 2005

Yo

Headline Core

20


Conclusions

What we know

Industrial economies have experienced the deepest and most correlated recession of the past sixty years.

What we anticipate

The trend in household spending will have more influence in determining the next phase of the economic cycle.

The downturn was led by falling inventories and reduced capital spending.

Manufacturing industry seems to be through the worst.

Fi l d d h i d l ti l b t

Most economies will begin to emerge from recession in the second half of 2009.

Economies with higher fiscal deficits will face tougher post-recession conditions, and could experience double-dips.

Final demand has remained relatively robust.

Interest rates have been cut earlier, faster and further than during previous downturns.

Government deficits are rising; in the UK it is soaring

Despite low interest rates, the availability of credit will remain restricted.

Quantitative easing will eventually prove inflationary – but probably t b f 2011Government deficits are rising; in the UK, it is soaring.

Unemployment is rising sharply.

Inflationary pressure has diminished, but not as much as many predicted

not before 2011.

Economic instability is likely to be an on-going feature of world growth until fractured banking systems and government fiscal problems have been resolved.

predicted

QE is masking the deep underlying problems in the real and financial economies.

Company profits will begin rising as a percentage of total national income.

The ending of QE will lead to reduced availability of capital to the private sector

21

private sector.

cazenove presentation 03 11 09

Economy & Finance