us compass - september 2014 -...

CompassSeptember 2014

Wealth and Investment Management

Shifting geostrategic plates

Autumnal themes

Tactical asset allocation review: An unusual summer state of mind

Contents

Shifting geostrategic plates .................................................................................................. 2

Embracing and eschewing risk ............................................................................................. 2

The balance of things ............................................................................................................ 3

Autumnal themes ................................................................................................................... 4

Diverging central bank policy ............................................................................................... 4

US: path to higher yields .............................................................................................. 4

EU: yields unlikely to rise materially from current levels.......................................... 5

So what? ......................................................................................................................... 6

A compelling case for European equities ............................................................................ 6

Economic backdrop ....................................................................................................... 6

Politics and geopolitics ................................................................................................. 7

Earnings upside .............................................................................................................. 8

Sticking with US small- and mid-cap companies .............................................................. 8

A confident US consumer ............................................................................................ 8

Higher-quality earnings ................................................................................................ 9

Increased M&A activity ................................................................................................. 9

Sticking with SMID ...................................................................................................... 10

Emerging Markets: A tale of two regions ......................................................................... 10

Will higher US interest rates have a negative impact on EM equities? ............... 11

Economic fundamentals and equity valuations favor EM Asia ............................ 12

Look within emerging markets for regional divergences ...................................... 13

The case for commodities ................................................................................................... 13

Diversification is key .................................................................................................... 13

Growth drives commodities, but near term caution is warranted ...................... 14

Underweight, but not zero ......................................................................................... 15

Tactical asset allocation review: An unusual summer state of mind ........................... 16

Interest rates, bond yields, and commodity and equity prices in context ................... 22

Barclays’ key macroeconomic projections ........................................................................ 24

Global Investment Strategy Team ..................................................................................... 25

Compass September 2014 1

Shifting geostrategic plates Dear clients and colleagues,

Geopolitical events have taken a harsh turn this summer: a return to the Dark Ages in parts of Syria and Northern Iraq by the forces of ISIS; Putin & Co.’s new Cold War; and the hemorrhagic fever outbreak gripping West Africa with deadly alacrity. These all have coalesced to remind us, in case we forgot, that the world is a dangerous place. Despite the troubling actions of the last several months, global equity markets have remained remarkably nonplussed. Since the end of May, the MSCI World Index advanced 2.52%.1 Prices within the fixed income complex also marched higher, with the Barclays Global Aggregate Total Return Index gaining 0.21%. Capital markets in the United States were robust this summer, as the S&P 500 and the Barclays US Aggregate indexes advanced 4.68% and 0.90%, respectively.

Embracing and eschewing risk Growth in the American economy is gathering pace. The weather-related contraction in the first quarter did not spill over into the second quarter as some had feared. The recently revised second quarter GDP report to 4.2% from 4.0%2 suggests investors should enjoy continued growth momentum. Indeed, they were quick to capitalize on the rising tide by pushing up both small and large company share prices, with the Russell 1000 and 2500 indexes gaining 4.78% and 4.55%, respectively.3

Euro zone equities struggled during the period, declining 5.37%4 in dollar terms, as investors’ fears focused on the deflationary pull of internal devaluations and the fragile state of the currency bloc’s nascent recovery. Anticipating the latest edition of monetary medicine from the European Central Bank (ECB), euro zone sovereign yields have shrunk. The benchmark 10-year German Bund declined from 1.93% at the end of 2013 to 0.93% at the end of August. Shrinking interest rates in the euro zone and Russian irredentism are making themselves felt on the other side of the Atlantic.

Normally, robust economic activity causes investors to exit longer duration fixed income securities. Yet, despite rising employment, a central bank openly rethinking the timing of interest rate hikes, and the imminent conclusion of what has been “industrial quantitative easing”, the yield on the 10-year Treasury continues to decline. This drop appears to be driven both by interest rate differentials between Europe and the United States and fears about the geographic fracture of the Ukraine. Consider the relationship between the Russian ruble and the yield on the 10-year Treasury as recent events have unfolded: money fleeing Russia appears to be seeking refuge, if not asylum, in the United States. (Figure 1) Consequently, the signaling ability that the fixed income market provides investors is impaired by a rush of money to the Treasury market.

Risk aversion was on display not only with the drop in Treasury yields but also in the rise in the price of gold over the summer. The “crisis asset” has enjoyed a good year through the end of August: it has advanced 6.8%.5 Similarly, the increase in the trade-weighted dollar since early May reflects both a run to safety and an anticipation of normalized interest rates relative to Europe. (Figure 2)

1 Returns are from May 30th through August 29th 2014 via Bloomberg. Total return for the MSCI World. 2 Source: Bloomberg, as of August 28, 2014 3 Source: Bloomberg. Total returns from May 30th through August 29th 2014. 4 Returns are from May 30th through August 29th 2014 via Bloomberg. Euro zone equities represented by Eurostoxx 50 Index. 5 Source: Bloomberg, as of August 29, 2014 Past performance does not guarantee future results. An investor cannot invest directly in an index.

Hans F. Olsen, CFA Global Head of Investment

Strategy


Figure 1: Capital flight? Figure 2: Rising dollar

Source: Bloomberg, as of 29 Aug 2014 Source: Bloomberg, as of 29 Aug 2014

The balance of things The geopolitical landscape offers little hope for a de-escalation of tensions. Conflict in Eastern Europe and the Middle East will continue to feature prominently “above the fold.” The global economy is at an important inflection point. Normalization of monetary policy in the United States, driven by healthy and sustainable growth, and strong growth in the United Kingdom both will cast into sharp relief a struggling euro zone economy. Recent trends in the currency bloc are troubling, but not irreversible. A well-executed Targeted Long-term Refinancing Operation (TLTRO), a Quantitative Easing (QE)/asset-backed security purchase program, and a credible asset quality review of euro zone banks all will help resuscitate a wheezing European economy. All of this helps make the case for euro zone equities, as their valuations suggest the future holds more of the same.

As the growth scenario becomes more established, the case for equities at the expense of fixed income also will become more apparent. Investors looking beyond developed markets will find new opportunities in emerging markets, which previously have been ignored.

In this edition of Compass, we look at a handful of investment themes that will continue to play out over the coming months: from the case for emerging markets to the cautionary examination of commodities, the global inflection point where we now stand is an opportunity to take stock of the big themes in portfolios.

We hope you enjoy this edition of Compass. As always, we welcome your feedback.

Hans F. Olsen, CFA Global Head of Investment Strategy

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Autumnal themes There are five themes that will drive market activity as we head into

the final stretch of 2014. They are: diverging central bank policy in the US and Europe; a likely rally in European equities; sticking with US small- and mid-cap stocks; a focus on Asia in emerging markets; and using commodities as a hedge against geopolitical risk.

Diverging central bank policy As we have pointed out many times, fixed income yields across the developed world have fallen, despite a brightening outlook for the global economy, and have caught many market participants off guard.6 Government bond prices are rising in both the US and Europe, with US government bonds returning 6.5%, compared to 7.9% in US dollar (USD) terms7 for their European Union (EU) counterparts. In the former, yields have fallen less, causing the spread between the two to widen. (Figure 1) The yield spread between European and US government bonds will continue to expand, mainly driven by higher US yields and lower (or stable) EU yields.

US: path to higher yields

Factors pushing down US Treasury yields include: falling Treasury supply, spiking geopolitical tension, and dovish statements from the Fed. These factors are unlikely to last for long, and downward pressure on yields should abate. There are many signals that suggest the US economy is on stronger footing. Second quarter GDP showed that the economy grew at a solid 4.2% annualized rate. A detailed reading revealed that consumption and business spending, the key drivers of the economy, contributed 1.7% and 1.0%, respectively.8 More recent economic data, particularly on employment, gives reason for optimism. The July employment report showed a gain of 209,000 jobs, marking the sixth consecutive month in which payrolls have grown by more than 200,000.9 Also, the falling unemployment rate indicates that wage growth may be turning the corner.

Strong economic sentiment is prevalent in the Federal Open Market Committee (FOMC) minutes, as Fed officials acknowledged that progress is improving faster than previously expected for their inflation and labor market mandates.10 July’s post-meeting statement showed participants were hesitant to comment on labor market underutilization. Federal Reserve Chair Yellen delivered a neutral speech on labor market dynamics at Jackson Hole, reducing many investors’ dovish inclinations.11 The disconnect between solid economic fundamentals and interest rates is not sustainable. Fixed income markets begin to discount a change in the federal funds target rate well in advance of rate hikes.

6 Fixed Income yields represented by Barclays US and Euro-Aggregate Treasury 7-10 Year indexes 7 Source: Barclays US and Euro-Aggregate Treasury 7-10 Year indexes, Barclays, year-to-date total return as of 26 Aug 2014 8 Source: Bloomberg, as of August 28, 2014 9 Source: Bloomberg, Monthly US Bureau of Labor Statistics Payroll Report, as of August 1, 2014 10 FOMC Meeting occurred on July 30, 2014 11 Janet Yellen spoke at Jackson Hole on August 22, 2014 Past performance does not guarantee future results. An investor cannot invest directly in an index.

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Figure 1: The spread between yields is elevated Figure 2: Inflation rates are moving in opposite directions

Source: Barclays, as of 22 Aug 2014 Source: Bloomberg, as of 31 Aug 2014

EU: yields unlikely to rise materially from current levels

Euro zone and US inflation paths have been diverging since early this year, necessitating different policies from the ECB and the Fed. (Figure 2) In August, euro zone inflation fell to 0.3%, its weakest level in nearly five years.12 This raises concerns for some that the economy lacks the necessary momentum to bounce back from its weak growth.

A policy error resulting in a deflationary spiral will likely further damage prospects both for return on and of capital. ECB President, Draghi showed his concerns about declining inflation during his Jackson Hole speech when he highlighted his preferred measure of inflation expectations, the 5-year, 5-year forward euro zone inflation swap rate, which fell below 2% in August.13 Due to lower inflation expectations, and recent weaker data out of Europe, the perceived probability of the ECB’s full-blown QE has increased. Many investors will be looking for central bank balance sheets to converge. (Figure 3) If this happens, it is highly likely to result in European government bond yields remaining at current levels, or dropping even further.

Figure 3: Balance sheet divergence Figure 4: Money is flowing into bond funds

Source: Bloomberg, JP Morgan, as of 31 Jul 2014 Source: European Central Bank, JP Morgan, as of 30 Jun 2014

12 Source: Bloomberg, as of August 31, 2014 13 Source: Bloomberg, as of August 21, 2014

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The arguments about the legality of a sovereign bond QE program will be both numerous and loud as the ECB never has used this option. It’s important to note that should the ECB target sovereign bonds in its QE operations, it would not breach the treaties were the bonds purchased in the secondary market. A sovereign bond QE program aimed at the periphery is likely to result in strong opposition from the Bundesbank, because it may undermine the Outright Monetary Transactions facility introduced in 2012, which remains unused.

As economic growth has slowed materially, the ECB has tweaked its June package conditions by progressing towards asset-backed securities (ABS) purchases and has started discussing sovereign bond QE.

So what?

Monetary divergence between the ECB and Fed presumably will push yields in different directions. US yields are set to rise on better economic growth prospects, and EU yields are likely to be limited by the ECB’s expansionary monetary policy and positive bond fund flows in the region. (Figure 4) Where possible, we favor shorter-dated bonds or income-oriented stocks over medium- and long-duration debt holdings.

A compelling case for European equities A thawing credit market and significant earnings upside make Europe a risk worth taking. European equities are capable of outperforming the rest of the developed market in the second half of the year.

An anemic European recovery has faltered recently, with Germany, previously the continent’s reliable engine, starting to sputter. Alongside this, the political backdrop in much of the region remains reliably chaotic: there is little cheer to be found in scrutinizing France’s ailing economy, and the situation in eastern Ukraine remains precarious. In this context, investors are right to question the merit of taking investment risk in the region. European equities14 pulled back sharply over the summer, and there may be more to come. As interest rate increases loom larger in the US and UK, a global, albeit likely temporary, reduction in risk appetite could hit European stocks harder than they hit US or UK equities. Despite this, there are several reasons why now could be a good time to add to European equities. We expect the region to outperform wider developed market equities over the next 6 to 12 months.

Economic backdrop

There is cause for unease regarding the European economy, and incoming data continues to provide scant reassurance. Nonetheless, there is no reason to see the Q2 pull back in German GDP as anything other than temporary payback for a very strong first quarter and some understandable corporate and investor angst regarding President Putin’s maneuvering in the Ukraine. France’s problems may be harder to shift, but a new and more pro-business government may herald an inflection point. Meanwhile, the fortunes of the periphery remain mixed, but are considerably brighter than the dark days of 2012, when asphyxiate borrowing costs and rising unemployment forced many to question the euro’s very existence.

Importantly, employment in much of the periphery is now moving in the right direction, and its government bond yields are barely distinguishable from those of the core countries.

The latter indicates that investors no longer question the euro zone’s existence, just its future growth trajectory and inflation profile. We also are starting to see credit markets thaw in the

14 European equities represented by MSCI Europe ex UK Past performance does not guarantee future results. An investor cannot invest directly in an index.

There is cause for unease regarding the European economy…


region, and data shows that banks are more willing to lend, and customers more ready to borrow. The ECB’s targeted liquidity operation, due in September, alongside some catharsis from the end of the audit of European bank balance sheets, should further aid this thaw. Small and medium-sized businesses (SMEs) will likely benefit most from this warmer credit backdrop. Much of this segment of the European economy has been starved of funding since the ability and appetite of banks to lend to the riskier areas of the market shriveled in the wake of the euro crisis and a more demanding regulatory landscape. (Figure 5) With SMEs accounting for roughly two thirds of both jobs and value added within the EU, an easier credit environment will have important ramifications for both the wider economy and the more domestically focused small- and mid-cap sectors. All this, and the gradually solidifying prospects for more muscular measures from the ECB, involving asset backed securities (a move which would allow banks to lend to SMEs without drawing fire from the regulator), should help small companies .

European large-cap equities tend to dance to the tune of global GDP, a function of their diverse geographic revenue footprint. (Figure 6) With incoming data suggesting appreciably brighter prospects for the US economy through the end of the year, there is room for global GDP forecasts to move higher and provide a tailwind for large-cap European equities.

Politics and geopolitics

At the turn of the millennium, the American scholar, Robert Wright, suggested that in 1500 BC, around 600,000 autonomous governments existed; that number fell to 193 by the time he wrote his book, “Nonzero: The Logic of Human Destiny.” The implication is that mankind, with the many forces of globalization at its back, is moving unevenly towards a single political (and even fiscal) authority.

This is a hotly contested view and, in the short term, is highly unlikely to be a one-way bet, although the European Union is one of the more successful recent examples of this trend. There is a long way to go before we see Europe speaking with a more unified voice. Nonetheless, we continue to see the euro remaining intact, driven by the weight of history and the lack of credible alternatives. There is, however, the potential for the openly separatist forces in Spain to gain momentum in the wake of National Day of Catalonia on September 11th, and calling the twists and turns in eastern Ukraine remains hazardous. France’s political

Past performance does not guarantee future results. An investor cannot invest directly in an index.

Figure 5: Interest rate on loans Figure 6: Global GDP and equity returns

Source: ECB, Barclays; as of 30 Jun 2014 Source: Datastream, Barclays; as of 29 Aug 2014

We continue to see the euro remaining intact, driven forward by the weight of history…

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environment could become even less appealing. But the ECB’s proactive stance is likely to buy authorities time to construct a more convincing fiscal and political architecture necessary for the euro project to work.

Earnings upside

A large part of this story relates to the greater relative upside for European corporate earnings relative to their developed market peers. (Figure 7) This is a function of the banks’ plight, and the more geographically constrained mid- and small-cap universe. As both the European and global economies continue to improve, we likely will see European corporate earnings benefit. (Figure 8)

The case for European equities is finely balanced. Incoming economic data remains uninspiring at best, and the prospects for further sanctions against Russia are unlikely to be helpful. However, gradually thawing domestic credit markets, a process helped by the ECB’s various measures, alongside a brisker global economy, are among the reasons that suggest European equities remain attractive.

Sticking with US small- and mid-cap companies After a stellar 2013, US small- and mid-cap (smid) stock15 performance has lagged this year. Stocks of all capitalizations had a rough start due to weaker Q1 US GDP and harsher-than-expected winter weather. However, since early April, large-cap stocks have performed considerably better than small- and medium-sized stocks, and this underperformance is not justified. Despite trading at a slight premium to their longer-term P/E multiples, several indicators point to smid outperformance into year end. The catalysts are: a confident US consumer, higher quality earnings growth, and the potential for increased mergers and acquisitions (M&A) activity.

A confident US consumer

After a weak first quarter, the US consumer has come roaring back. Retail sales have picked up, averaging 3.5% growth year-over-year in 201416. Even more positive, consumer

15 US small- and mid-cap (smid) stocks are represented by S&P 500 and Russell 2500 Indices. 16 Source: Bloomberg, as of 31 Jul 2014 Past performance does not guarantee future results. An investor cannot invest directly in an index.

Figure 7: Earnings per share Figure 8: Forward earnings growth

Source: FactSet, Barclays; as of 29 Aug 2014 Source: Datastream, Barclays; as of 14 Aug 2014

European corporates enjoy greater relative earnings upside

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confidence sits at or near post-recession peaks. (Figure 9) With the stock market at all-time highs, employment easier to find, and average hourly earnings growing at nearly 3% versus a year ago17, the US consumer has reason to be cheerful. Since small- and medium-sized enterprises are domestically oriented, a confident consumer is good for business, leading to higher revenues.

Higher-quality earnings

Sales figures for small- and medium-sized businesses show improving trends in US consumer spending. There is a stark contrast between the operating performance of smid- and large-cap companies. Since the end of the recession, large-cap companies have grown their earnings primarily by managing expenses, resulting in expanding margins. (Figure 10) Smid-cap companies have grown their revenues at a much faster pace. (Figure 11) Earnings driven by revenue are of higher quality than those driven by managing expenses.

Increased M&A activity

Large-cap companies have struggled to generate organic top-line growth, yet they are sitting on historically high levels of cash. This cash is earning nothing. What has kept CEOs from putting this cash to work? Throughout the recovery, CEOs of large-cap companies have had trouble sustaining confidence. There has been no shortage of concerns, whether it was apprehension about the US consumer, a downgrade of the US credit rating, political debates in Washington, recurring sovereign debt crises in Europe, or rising geopolitical tension. However, these concerns have receded recently, and CEO confidence has trended near post-recession peaks. (Figure 12) Higher confidence has facilitated an increase in M&A activity this year. If the current pace is maintained, annual deal volume this year will exceed prior highs.

When large-cap companies acquire smid-cap companies, they often pay a premium above current stock prices. The demand from large-cap companies seeking to ‘buy growth’, rather than generate it internally, should fuel further gains.

17 Source: Bloomberg, as of 31 Jul 2014 Past performance does not guarantee future results. An investor cannot invest directly in an index.

Figure 9: Consumer confidence is at, or near, post-recession highs

Figure 10: Large Cap companies have been cutting costs more than Smid Cap companies

Source: Bloomberg, as of 31 Aug 2014 Source: Bloomberg, as of 30 Jun 2014

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Sticking with SMID

Although smid-cap valuations appear rich, the catalysts to drive stock performance higher are intact18: US economic growth is set to accelerate into year-end, and small- and medium-sized businesses will benefit directly from a pick up in consumer spending, resulting in continued strong revenue growth. If CEO confidence remains at current levels, M&A activity likely will remain elevated into year-end. Despite the underperformance since April, we reiterate our call to stick with smid, and expect these companies to outperform for the remainder of the year.

Emerging Markets: A tale of two regions Emerging Markets (EM) equities19 underperformed their developed counterparts over the last four years as overstated earnings and growth expectations faltered under the weight of a synchronized regional slowdown. However, in February this year, the asset class reached an inflection point. The broad EM equity index has since rallied by almost 19%20, with much of this performance attributed to two regions: Asia and Latin America (LatAm).

Strikingly, the rebound has unfolded in spite of geopolitical headwinds, relatively passive global trade, and the looming prospect of monetary normalization in advanced economies. Although low levels of risk aversion and positive election results have supported capital flows, the recent trend may indicate that the negative sentiment towards emerging economies is dissipating, and investors are, once again, looking to differentiate between the EM regions. Tighter monetary conditions in the US may result in challenging times ahead for these markets, but accounting for this – as well as for regional fundamentals and valuations – equities in EM Asia should outperform those in LatAm over the medium term.

18 Current P/E and P/B on Russell 2500 Index are trading at a 12.8% and 13.8% premium to their long term averages, respectively. Source: Bloomberg, as of 26 Aug 2014 19 Any references to Emerging Markets (EM) equities in this article are represented by MSCI Emerging Markets Index. 20 MSCI Emerging Markets Index between 5 Feb 2014 and 1 Sep 2014. Source: Bloomberg. Past performance does not guarantee future results. An investor cannot invest directly in an index.

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Will higher US interest rates have a negative impact on EM equities?

The stream of positive data from the US suggests that the first rate hike is likely to occur in the first half of 2015 – sooner than markets anticipate. The pricing in of this event could see some downside for EM equities; although any setback is likely to be less prolific than the taper tantrum in 2013, given that much of the hot money has fled. Instead, many commentators overlook that normalization of US monetary policy sends two signals to the emerging markets: (a) the outlook for external demand is improving, and (b) global liquidity conditions are tightening. Although the two factors tend to affect EM equities in conflicting ways, adverse effects of the latter are likely to be limited for the following reasons:

1. Rising US yields at low levels have not previously weighed on EM equities

In the Fed’s previous three tightening cycles, the pace of domestic growth strengthened, warranting a less accommodative monetary backdrop that drove US yields higher. But any difficulties for EM equities were short-lived, and swiftly followed by an extended period of outperformance21. In a low interest rate environment, equities in Asia and LatAm move in line with rising US yields, implying that a stronger US economy is a more potent driver of EM equity performance. (Figure 13) Gradual and limited rate hikes, coupled with the Fed’s forward guidance policy, have given markets ample time to prepare for such moves. This will make the impact of the next Fed tightening cycle historically unique.

2. The risk of contagion in emerging markets is lower

Countries such as Turkey and South Africa – that rely on short-term external financing to fund current account imbalances – are vulnerable to higher global interest rates. However, intra-EM correlations have dropped since the end of last year (Figure 14), suggesting that country-specific factors have become more important relative to systemic drivers. Therefore, widespread contagion stemming from the downturn of a particular EM country (akin to Mexico’s default during the 1994 Fed tightening cycle) likely will be muted. The lack of substantial spillover from recent geopolitical tensions demonstrates how EM countries – with no direct trade links – can remain isolated from idiosyncratic risks.

Figure 13: EM equity returns and changes in US yields Figure 14: EM correlations have fallen to pre-crisis levels

Source: Barclays, Bloomberg as of 15 Aug 2014 Source: Barclays, Bloomberg as of 22 Aug 2014

21 Between 01 Jun 2004 and 28 Jun 2006, the MSCI EM index increased by 64%, while the S&P 500 increased by 36%. Source: Bloomberg. Past performance does not guarantee future results. An investor cannot invest directly in an index.

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US growth is likely to be the dominant driver for EM equities


Although the focus for EM equities has centered on the aggregate impact of the first Fed rate hike, the medium-term prospects should be focused primarily on the situation within the emerging economies. As the recovery in the developed world takes off, the outlook for EM equities will be dictated largely by global growth and trade dynamics, rather than by higher interest rates, with varying impact across the regions.

Economic fundamentals and equity valuations favor EM Asia

A gradual Fed tightening program – modest enough not to thwart the momentum of US growth – would benefit those Asian economies with close manufacturing links to US consumers and businesses. Moreover, cheap valuations, in a global equity market that offers few such opportunities, add to the appeal of Asian stocks. Despite the recent rally, equities in EM Asia, on average, trade at a 30% discount to those in the US.22

For LatAm, the task of revitalizing growth via structural reforms requires an allocation of resources that will take time to filter through to headline output. This is a key problem for the region. Brazil, for example, needs a policy regime change to turn around a faltering growth and current account outlook. Demand for commodities, which boomed during the last Fed tightening cycle in 2004, is unlikely to provide support for the region’s commodity exporters this time around, given China’s attempts to shift its economy from a commodity-intensive, investment-led growth model to one that is more consumption orientated.

Instead, the shift in sentiment towards Chinese growth – from hard landing concerns to signs of stabilization – is likely to have a positive spillover effect on surrounding countries. The manufacturing-intensive Asian economies are poised to recouple with the growing developed world. Forward-looking indicators are starting to evidence this: export orders in Asian countries with a higher share of manufacturing exports have risen relative to those in the commodity-exporting LatAm countries. Greater export growth will provide a welcome boost to employment, incomes, and domestic demand in emerging Asia. Likewise, favorable current accounts have helped sustain growth amid the recent EM slowdown (Figure 15), and lower external financing requirements and greater foreign exchange reserves will ensure that these economies are insulated from material capital flight as global liquidity becomes more expensive.

Figure 15: Resilient growth for those with stronger trade

Figure 16: EM LatAm valuations look relatively stretched

Source: Barclays, Bloomberg, IMF as of 31 Dec 2013 Source: Barclays, Datastream as of 31 Jul 2014

22 12 month forward price-to-earnings ratios for MSCI indices. Source: Datastream as of 29 Aug 2014. Past performance does not guarantee future results. An investor cannot invest directly in an index.

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Manufacturing-intensive Asia should benefit from a pick up in developed world demand…


As the macroeconomic backdrop improves and export growth regains momentum, companies in EM Asia should begin to deliver higher profits. This theme is playing out: first-quarter earnings in Taiwan came in stronger than expected, and earnings in Korea show signs of bottoming out. Positive reform stories in Mexico, India, and the Philippines have resulted in greater returns for domestic equity markets23, with new policies set to benefit both economic growth and corporate earnings over time.

Within the emerging market landscape, equity valuations for Asia remain attractive on both an absolute and relative basis. (Figure 16) LatAm equity prices, and multiples, have surged in a manner that seems irreconcilable with the structural weakness facing many of the region’s economies. Only a rebound in earnings growth can justify these rich valuations, the drivers for which we do not foresee in the near term.

Look within emerging markets for regional divergences

The emerging world no longer can be characterized as one monolithic market. Although EM equities, broadly speaking, performed well in the second quarter, sustained outperformance largely will be dependent on the regional drivers for growth. The economies of emerging Asia are well positioned to withstand the gradual tightening of global financial conditions, as cyclical demand for exports bounces back alongside the recovery in advanced economies. For LatAm equities, a more constructive outlook requires, inter alia, an improved regulatory environment for domestic businesses to prosper. This likely will take time, and in the absence of any material demand from emerging market commodity-importers, economic growth in this region is likely to remain subdued. With the need for differentiation, Asia continues to be our preferred region for EM equities.

The case for commodities

Diversification is key

Over the past decade, the diversified returns achieved across commodities have led investors to supplement their portfolios with the asset class. (Figure 17) Given the diverse drivers for each commodity segment, there may be opportunities to allocate funds tactically based on market conditions. There are a few illustrations of this in 2014.

The year began with inhospitable weather conditions for crop growth. Constrained supplies led to a 22.3% price increase for agricultural commodities through early May.24 Warmer temperatures have since reversed this trend, resulting in a 5% overall year-to-date price decline for these assets.25 Meanwhile, mounting tensions in the Ukraine, Israel, and Iraq in June attracted capital to crisis assets, such as oil and precious metals, driving prices up 3.2% and 8.6%, respectively.26 Finally, industrial metals, which stumbled during the first quarter US contraction, have benefitted from the surge in second quarter activity.27

23 Source: Datastream as of 31 Jul 2014. 24 Source: Bloomberg, Agricultural Commodities Index, year-to-date as of May 6, 2014. Diversification does not assure profit or protect against market loss. Past performance does not guarantee future results. An investor cannot invest directly in an index. 25 Source: Bloomberg, as of August 22, 2014, represented by Bloomberg Agricultural Commodities Index. 26 Source: Bloomberg. Precious metals represented by Bloomberg Precious Metals Index for the period June 2, 2014 through July 2, 2014. Oil represented by WTI Crude Oil Spot for the period June 2, 2014 through July 2, 2014. 27 Source: Bloomberg. Industrial metals represented by Bloomberg Industrial Metals Index, as of August 22, 2014. Diversification does not assure profit or protect against market loss. Past performance does not guarantee future results. An investor cannot invest directly in an index.

…resulting in stronger corporate earnings and equity returns over time


An actively managed collection of commodities is our recommended course of action

Figure 17: Commodity returns

Source: Bloomberg, as of 22 Aug 2014

Collectively, commodities may operate well within a diversified portfolio due to their low correlations with other asset classes, as well as each other. (Figure 18) Maintaining a small commodity exposure could reduce the overall volatility of the portfolio, and act as a hedge against geopolitical hazard.

Growth drives commodities, but near term caution is warranted

Economic growth is forecasted to pick up across both developed and emerging markets this year. This typically bodes well for commodities because of increased demand. The

Figure 18: Commodity correlations with Equities and Fixed Income

10 Year US

Treasury Bond S&P 500

Index

Bloomberg Energy Index

Bloomberg Precious Metals

Index

Bloomberg Industrial

Metals Index

Bloomberg Agricultural

Index

Bloomberg All Commodities

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10 Year US Treasury Bond

1 0.335 0.057 -0.09 0.195 0.049 0.086

S&P 500 Index 0.335 1 0.14 0.093 0.245 0.047 0.194

Bloomberg Energy Index

0.057 0.14 1 0.138 0.155 0.162 0.717

Bloomberg Precious Metals Index

-0.09 0.093 0.138 1 0.433 0.208 0.561

Bloomberg Industrial Metals Index

0.195 0.245 0.155 0.433 1 0.159 0.549

Bloomberg Agricultural Index

0.049 0.047 0.162 0.208 0.159 1 0.639

Bloomberg All Commodities Index

0.086 0.194 0.717 0.561 0.549 0.639 1

Source: Bloomberg, as of 22 Aug 2014. Correlations are based on the two-year period between 22 Aug 2012 – 22 Aug 2014. The darker the color, the weaker the correlation.

Diversification does not assure profit or protect against market loss. Past performance does not guarantee future results. An investor cannot invest directly in an index.

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DifferentiatedReturns

Returns Indexed to 100, 4 Jan 2005


correlation between GDP and commodities is illustrated in Figure 19. However, the risks associated with the transition to normalized interest rates in the US justify an underweight to the asset class.

Figure 19: GDP effects on commodities and inflation

Source: Bloomberg, as of 25 Aug 2014: projection through 2019

The US economy is accelerating, and the Fed is taking notice. Recent FOMC minutes acknowledged better-than-expected progress on inflation and unemployment targets, which implies that an increase in interest rates is on the horizon.28 Rising rates create an opportunity cost to holding commodities in the form of storage fees. This reduces the asset class’s attractiveness relative to stocks and bonds, which compensate their holders with dividend or interest payments.

Underweight, but not zero

We remain underweight commodities, given the prospect of rising interest rates and the conclusion of QE in the US, both of which could be headwinds for the asset class. However, maintaining a small exposure to commodities is still valuable to diversify or hedge against geopolitical conflict.

An actively managed collection of commodities is our recommended course of action. Global tensions throughout many key oil and gas producing regions provide opportunities within energy and precious metals. Any threat to oil and gas transportation routes will boost energy products, while other asset classes likely will struggle. Gold also tends to rally during these tense times, since investors see it as a safe haven to protect their capital. These spikes generally are unpredictable, making it beneficial to hold a small amount of gold in a portfolio as a hedge against geopolitical risk.

28 FOMC Meeting occurred on July 30, 2014

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Opportunities exist within energy and precious metals should geopolitical tensions spike


Tactical asset allocation review: An unusual summer state of mind This year, we enter September in an unusual summer state of mind.

The typically tranquil reflections of the warm, languid days of summer are, instead, disquieting. A pass through the photo book contains some startling images: a passenger plane downed over the Ukraine, Russian troops on the march, violence in Gaza, US airstrikes in Iraq, a bank default in Portugal…The list goes on. Meanwhile, the US economy remained a bright spot against a more uncertain geopolitical climate. The events of this summer brought bouts of heightened volatility, but overall, most markets soldiered on.

US Equities US equities, both large and smid cap, outperformed in August after suffering a brief period of uncertainty earlier in the summer.29 Persistent signs of an improving US economy outweighed downward pressure from geopolitical agita. Second quarter GDP growth estimates came in above expectations at an impressive 4.2%, and unemployment data showed durable improvements in the labor market.30 Second quarter earnings results also surprised to the upside, with large- and smid-cap companies growing their earnings, 9% and 5%, respectively.31

We maintain our Overweight in US Smid Cap Equities, as this domestically-exposed sector should benefit most from the continued US economic rebound through the end of the year. The primary catalysts are: a confident US consumer, higher quality earnings growth, and the potential for increased M&A activity.

We are Neutral on US Large Caps, and, although not guaranteed, continue to expect a mid-to-high single digit return for the year. Large-cap companies have outperformed their smaller counterparts substantially since early April, but we do not expect this performance differential to persist.29

Non-US Developed Markets Equities European equities sold off mid-summer in response to both deteriorating conditions in the Ukraine and sanctions against Russia from the West. Further, negative data surprises, particularly lower-than-expected GDP growth, and still lower consumer price growth, gave investors pause. The asset class reversed its downward trend in early August, and we expect positive momentum to endure through year end.32 Continued support from the ECB, along with strong earnings upside potential and early signs of improvement in credit markets, should help propel European equities higher.

29 US Large Cap Equities represented by Russell 1000 Total Return Index. US Smid Cap Equities represented by Russell 2500 Total Return Index 30 Source: Bloomberg, as of August 28, 2014 (GDP) and August 1, 2014 (Unemployment data) 31 Source: Bloomberg, as of September 2, 2014 32 European equities represented by Eurostoxx 50 Index Past performance does not guarantee future results. An investor cannot invest directly in an index.

Laura Kane, CFA +1 212 526 2589

[email protected]

A strengthening US economy is bolstering equity prices

European equities have upside potential


Japanese equities struggled throughout the summer as faith in the near-term success of Abenomics faltered. The Japanese economy showed signs of weakness after the sales-tax hike in April. In July, industrial production rose less than expected, while household spending slumped, and inflation remained unchanged. Prime Minster Abe will decide by year end whether to raise the sales tax again from 8% to 10% in October 2015. If the data continues to disappoint, the Bank of Japan also will be faced with the decision whether to step up the pace of money printing to achieve its medium-term inflation objective.

We remain Overweight Non-US Developed Markets Equities, as valuations are compelling, and policy actions should be catalysts for outperformance over the long term.

US Bonds US fixed income markets continued to benefit from lower-than-expected interest rates this summer.33 Heightened geopolitical risk has increased demand for safe-haven assets, pushing down US Treasury yields. The Fed’s dovish tone under the helm of Ms. Yellen, as well as a supply/demand imbalance in the Treasury markets (the Fed is still buying a large portion of Treasury issuance) also have kept a lid on rates.

Improving US economic data, particularly in the labor market, is building pressure for the eventual increase in interest rates. Rising rates will hurt fixed income investors, especially those with passive, long-duration exposure. We remain either Underweight or Neutral fixed income assets for this reason.

In late July, we decreased our allocation to US High-Yield Bonds from Overweight to Neutral. Falling absolute yields and credit spreads, as well as deterioration in credit underwriting standards for leveraged loans, suggested the higher coupon did not justify the risk of lower returns.

Emerging Markets Bonds Emerging Markets Bonds have been losing steam since the end of July.34 The asset class experienced considerable strength earlier in the year, as emerging market central bankers proved their ability to navigate a decrease in the pace of US monetary stimulus. In the past month, tensions in the Ukraine have sparked a sell off, particularly in Emerging Europe assets. Recent dollar strength on improving US economic data has also contributed to the re-pricing.

We are Underweight Emerging Markets Bonds due to an unfavorable risk-return profile in light of geopolitical concerns and the potential for continued currency volatility.

Commodities Commodities fared poorly this summer, dropping 7.5% since their peak at the end of June.35 With near-ideal weather for growing grain, corn, and soybeans in the US, many agricultural goods saw supply constraints ease, and prices decline. Coffee prices, however, remained high, as investors speculated on the full impact of the drought in Brazil earlier in the year. Industrial metals fared the best of the commodity complex, benefitting from the pick up in manufacturing activity in the second quarter. Precious metals and oil were volatile throughout the summer, spiking periodically on geopolitical tensions.36

33 Source: Bloomberg, for the period of May 30 to August 29, 2014. 34 Source: JPMorgan, as of August 29, 2014. Emerging Markets Bonds represented by JP Morgan GBI-EM Total Return Diversified 35 Source: Bloomberg, as of August 29, 2014. Commodities represented by Bloomberg Commodity Index 36 Source: Bloomberg, as of August 29, 2014 Past performance does not guarantee future results. An investor cannot invest directly in an index.

Bond buyers beware: the transition to a normalized rate environment is coming

Commodity returns are differentiated across the complex


Although improved global growth conditions may give Commodities a lift in the longer term, the impending transition to a higher interest rate environment in the US is likely to reduce the relative attractiveness of Commodities as a safety asset. For this reason, we remain Underweight the asset class.

REITs REITs continued to perform well throughout the summer, keeping their place as the best performing asset class year-to-date with returns in excess of 20%.37 REITs have benefited from lower-than-expected interest rates, which bolster the appeal of REIT dividends for yield-hungry investors. Apartments REITs have been among the top performing sectors over the past few months, aided by solid second quarter earnings and employment gains.38 However, recent data showing an increase in building permits may curtail continued outperformance, if supply starts to outpace demand.39

We are Neutral on REITs, as the transition to a normalized interest rate environment could put downward pressure on prices.

Emerging Markets Equities Emerging Markets Equities have started to pick up since mid-March of this year, overtaking US and European equities as of late July. The asset class has shown resilience in the face of geopolitical headwinds and anticipated US monetary policy normalization. Low levels of risk aversion and positive election results have, to some extent, supported capital flows to these regions. Chinese equities rebounded over the summer on more upbeat business sentiment readings and preliminary signs of stabilization in the property market.40

We maintain a Neutral weight on Emerging Markets Equities. Wide disparity in valuations bodes well for actively managed vehicles. While tightening in the US may temporarily pressure EM equities, this should be offset by stronger external demand from developed markets.

Alternative Trading Strategies Our Overweight to most Alternative Trading Strategies is a hedge against anticipated variability in asset prices, as markets adjust to the decreased pace of US monetary stimulus. Relative Value has benefited from declining correlations in US equity markets and Event Driven strategies have outperformed due to a pick up in corporate actions, particularly M&A. Meanwhile, Global Macro funds suffered from the drop in interest rates. Managed Futures funds, where we are Underweight, have underperformed this year, as current central bank policy does not bode well for trend followers.41

37 Source: Bloomberg, as of August 29, 2014. REITS represented by FTSE NAREIT US – ALL Equity REITs 38 Source: Barclays CIB, as of August 29, 2014 39 Source: Bloomberg, as of August 19, 2014 40 Source: Bloomberg, as of August 29, 2014 41 Source: Bloomberg. Returns as of 31 Jul 2014 for: Event Driven Strategies, Relative Value Strategies, and Managed Futures. Returns as of June 30, 2014 for Global Macro Strategies. Global Macro Strategies by Barclay Hedge Fund Global Macro Index; Relative Value Strategies by HFRI Relative Value Index; Event Driven Strategies by Dow Jones CS Event Driven Index; Managed Futures by Dow Jones CS Managed Futures Index Past performance does not guarantee future results. An investor cannot invest directly in an index.

Emerging Markets Equities are beating their developed peers


Figure 1 details our portfolio positioning across all risk profiles. Figure 2 displays the year-to-date returns for all sub asset classes by weighting, and Figure 3 shows our tactical tilts for the Moderate portfolio on a sub asset class level.

Figure 1: Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) by risk profile: asset class42

Low Medium Low Moderate Medium High High

Asset class SAA TAA SAA TAA SAA TAA SAA TAA SAA TAA

Cash and Short-maturity Bonds 46.0% 51.00% 17.0% 22.0% 7.0% 13.0% 3.0% 10.0% 2.0% 8.0%

Developed Government Bonds 8.0% 8.0% 7.0% 7.0% 4.0% 4.0% 2.0% 2.0% 1.0% 1.0%

Investment Grade Bonds 6.0% 4.0% 9.0% 7.0% 7.0% 5.0% 4.0% 2.0% 2.0% 0.0%

High Yield and Emerging Markets Bonds 6.0% 2.0% 10.0% 5.0% 11.0% 5.0% 10.0% 5.0% 8.0% 4.0%

Developed Markets Equities 16.0% 18.0% 28.0% 32.0% 38.0% 43.0% 45.0% 49.0% 50.0% 53.0%

Emerging Markets Equities 3.0% 3.0% 6.0% 6.0% 10.0% 10.0% 14.0% 14.0% 18.0% 18.0%

Commodities 2.0% 1.0% 4.0% 2.0% 5.0% 2.0% 6.0% 2.0% 5.0% 2.0%

Real Estate 2.0% 2.0% 3.0% 3.0% 4.0% 4.0% 6.0% 6.0% 7.0% 7.0%

Alternative Trading Strategies 11.0% 11.0% 16.0% 16.0% 14.0% 14.0% 10.0% 10.0% 7.0% 7.0%

Source: Barclays Wealth and Investment Management, as first published on 22 Jul 2014. Gray: TAA is slightly underweight our SAA. Light blue: TAA is slightly overweight our SAA. No highlight: TAA is neutral weight the SAA. See Figure 3 for benchmark indices used.

42 The recommendations made for your actual portfolio will differ from any asset allocation or strategies outlined in this document. The model portfolios are not available to investors since they represent investment ideas, which are general in nature and do not include fees. Your asset allocation will be customized to your preferences and risk tolerance and you will be charged fees. You should ensure that your portfolio is updated or redefined when your investment objectives or personal circumstances change. Our Strategic Asset Allocation (SAA) models offer a baseline mix of assets that, if held on average over a five-year period, will in our view provide the most desirable combination of risk and return for an investor’s degree of Risk Tolerance. They are updated annually. Our Tactical Asset Allocation (TAA) tilts our SAA views, incorporating small tactical shifts from one asset class to another, to account for the prevailing environment and our shorter-term outlook. For more information, please see our Asset Allocation at Barclays white paper.


https://wealth.barclays.com/content/dam/bwpublic/americas/documents/wealth_management/Asset%20Allocation%20at%20Barclays.pdf

Figure 2: Year-to-date returns and TAA weightings for key asset and regional sub asset classes (by weighting)

Diversification does not assure profit or protect against losses. Past performance does not guarantee future results.

*Returns as of 31 Jul 2014 for: Event Driven Strategies, Relative Value Strategies, and Managed Futures. Returns as of June 30, 2014 for Global Macro Strategies. Source: Bloomberg as of August 29, 2014. We consider private equity to be part of the overall Developed Markets Equities allocation; however, as a reliable performance index is not available, it has been excluded from year-to-date returns/TAA weightings bar chart above. See Figure 3 for benchmark indices used. The benchmark indices are used for comparison purposes only. It is not possible to invest in these indices, and the indices are not subject to any fees or expenses. It should not be assumed that investment will be made in any specific securities that comprise these indices.

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Cash

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US Large Cap Equities

US High Yield Bonds

US Government Bonds

Global Macro Strategies*

US Investment Grade Bonds

Emerging Markets Bonds

Commodities

Short Maturity Bonds

Managed Futures*

Year-to-date Asset Class Benchmark Total Return

Und

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Figure 3: SAA, TAA and tilts with key regional sub asset classes (Moderate Risk Profile)

Asset Class (including key regional sub asset classes)

Recommended allocation Tilt

SAA TAA SAA vs. TAA

Cash & Short-maturity Bonds 7% 13% +6%

Cash 0% 10% +10%

Short-maturity Bonds 7% 3% -4%

Developed Government Bonds 4% 4% 0%

US Government Bonds 4% 4% 0%

Investment Grade Bonds 7% 5% -2%

US Investment Grade Bonds 7% 5% -2%

High Yield & Emerging Markets Bonds 11% 5% -6%

US High Yield Bonds 5% 5% 0%

Emerging Markets Bonds 6% 0% -6%

Developed Markets Equities 38% 43% +5%

US Large Cap Equities 12% 12% 0%

US Smid Cap Equities 5% 7% +2%

Non-US Developed Markets Equities 16% 19% +3%

Developed Private Equity 5% 5% 0%

Emerging Markets Equities 10% 10% 0%

Emerging Markets Equities 10% 10% 0%

Commodities 5% 2% -3%

Real Estate 4% 4% 0%

US Developed Public Real Estate 4% 4% 0%

Alternative Trading Strategies 14% 14% 0%

Global Macro Strategies 3.5% 3.5% 0%

Relative Value Strategies 3.5% 4.2% +.70%

Event Driven Strategies 3.5% 4.9% +1.40%

Managed Futures 3.5% 1.4% -2.1%

Gray = TAA is slightly underweight the SAA. Light blue = TAA is slightly overweight the SAA. Source: Barclays Wealth and Investment Management, Americas Investment Committee, as first published on 22 Jul 2014. Cash and Short-maturity Bonds: Cash by Barclays 3-6 month T-bills; Short-maturity Bonds by Barclays 1-3 Year US Treasury; Developed Government Bonds: US Government Bonds by Barclays US Treasury; Investment Grade Bonds: US Investment Grade Bonds by Barclays US Aggregate Corporate; High-Yield and Emerging Markets Bonds: US High Yield Bonds by Barclays US Corporate High Yield; Emerging Markets Bonds by JP Morgan GBI-EM Total Return Diversified; Developed Markets Equities: US Large Cap Equities by Russell 1000; US Smid Cap Equities by Russell 2500; Non-US Developed Markets Equities by MSCI EAFE Net Return; Emerging Markets Equities by MSCI EM; Commodities by Bloomberg Commodity Index; Real Estate: US Developed Public Real Estate by FTSE NAREIT US – ALL Equity REITs; Alternative Trading Strategies: Global Macro Strategies by Barclays Hedge Fund Global Macro Index; Relative Value Strategies by HFRI Relative Value Index; Event Driven Strategies by Dow Jones CS Event Driven Index; Managed Futures by Dow Jones CS Managed Futures Index. The benchmark indices are used for comparison purposes only. It is not possible to invest in these Indices; they are not subject to any fees or expenses. It should not be assumed that investment will be made in any specific securities that comprise the indices.


Interest rates, bond yields, and commodity and equity prices in context* Figure 1: Short-term interest rates (global) Figure 2: Government bond yields (global)

Source: FactSet, Barclays Source: FactSet, Barclays

Figure 3: Inflation-linked real bond yields (global) Figure 4: Inflation-adjusted spot commodity prices

Source: Bank of America Merrill Lynch, Datastream, FactSet, Barclays Source: Datastream, Barclays

Figure 5: Government bond yields: selected markets Figure 6: Global credit and emerging market yields

*Monthly data with final data point as of COB 1 September 2014. Past performance does not guarantee future results. An investment cannot be made directly in a market index. Source for Figures 5-6: FactSet, Barclays

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Figure 7: Developed stock market, forward PE ratio Figure 8: Emerging stock market, forward PE ratio

Figure 9: Developed world dividend and credit yields Figure 10: Regional quoted-sector profitability

Figure 11: Global stock markets: forward PE ratios Figure 12: Global stock markets: price/book value ratios

All sources on this page: MSCI, IBES, FactSet, Datastream, Barclays Past performance does not guarantee future results. An investment cannot be made directly in a market index.

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Figure 1: Real GDP and consumer prices (% y-o-y)

Real GDP Consumer prices

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2015F

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Source: Barclays Research, Global Economics Weekly, 29 August 2014 Note: Arrows appear next to numbers if current forecasts differ from previous week by 0.2pp or more. Weights used for real GDP are based on IMF PPP-based GDP (5yr centred moving averages). Weights used for consumer prices are based on IMF nominal GDP (5yr centred moving averages). There can be no guarantees that these projections will be achieved.

Figure 2: Central bank policy rates (%)

Official rate % per annum (unless stated)

Forecasts as at end of

Current Q3 14 Q4 14 Q1 15 Q2 15

Fed funds rate 0-0.25 0-0.25 0-0.25 0-0.25 0.50

ECB main refinancing rate 0.15 0.15 0.15 0.15 0.15

BoJ overnight rate 0.10 0-0.10 0-0.10 0-0.10 0-0.10

BOE bank rate 0.50 0.50 0.75 1.00 1.25

China: 1y bench. lending rate 6.00 5.75 5.50 5.50 5.50

Brazil: SELIC rate 11.00 11.00 11.00 11.00 11.00

India: Repo rate 8.00 8.00 7.50 7.50 7.50

Russia: One-week repo rate 8.00 8.50 9.00 9.00 9.00

Source: Barclays Research, Global Economics Weekly, 29 August 2014 Note: Rates as of COB 28 August 2014.There can be no guarantees that these projections will be achieved.


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Global Investment Strategy Team

AMERICAS

Hans Olsen, CFA Global Head of Investment Strategy [email protected] +1 212 526 4695

Laura Kane, CFA Investment Strategy [email protected] +1 212 526 2589

David Motsonelidze Investment Strategy [email protected] +1 212 412 3805

Kristen Scarpa Investment Strategy [email protected] +1 212 526 4317

ASIA

Benjamin Yeo, CFA Chief Investment Officer, Asia and Middle East [email protected] +65 6308 3599

Eddy Loh, CFA Equity Strategy [email protected] +65 6308 3178

EUROPE

Peter Brooks, PhD Behavioural Finance [email protected] +44 (0)20 3555 1261

Greg B Davies, PhD Head of Behavioural and Quantitative Finance [email protected] +44 (0)20 3555 8395

Emily Haisley, PhD Behavioural Finance [email protected] +44 (0)20 3555 8057

William Hobbs Equity Strategy [email protected] +44 (0)20 3555 8415

Antonia Lim Global Head of Quantitative Research [email protected] +44 (0)20 3555 3296

Antonia Silcock, CFA Investment Strategy [email protected] +44 (0)20 3555 2930

Christian Theis, CFA Macro [email protected] +44 (0)20 3555 8409


All end points of data for figures in this document are the same day as source dates unless otherwise indicated. Chartered Financial Analyst Institute owns the CFA designation, which it awards to individuals who successfully complete rigorous certification requirements. Asset class risks Alternative Trading Strategy – There are specific concerns related to alternative investment strategies with respect to private wealth clients. These include: investor taxability; suitability of funds that require long lock-up periods for investors with liquidity needs or multiple investment horizons; communicating complex strategies to a non-professional client; greater likelihood of decision risk (changing strategies at the point of maximum loss) and clients whose wealth stems from concentrated positions in closely held companies may not be suited to other illiquid investments. Bonds – Bonds are subject to market, interest rate and credit risk; and are subject to availability and market conditions. Generally, the higher the interest rate the greater the risk. Bond values will decline as interest rates rise. Government bonds are subject to federal taxes. Municipal bond interest may be subject to the alternative minimum tax; other state and local taxes may apply. High yield bonds, also known as “junk bonds” are subject to additional risks such as the increased risk of default. Debt securities may be subject to call features or other redemption features, such as sinking funds, and may be redeemed in whole or in part before maturity. These occurrences may affect yield. Like all bonds, corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest rates rise. The longer the maturity of the bond, the greater the degree of price volatility. If you hold a bond until maturity, you may be less concerned about these price fluctuations (which are known as interest rate risk or market risk), because you will receive the par or face value of your bond at maturity. Distressed Debt – Although distressed debt opportunities are cyclical, in that they multiply during economic slowdowns, the time taken to profit from them depends on how long a firm takes to restructure, which varies from one case to another. The process can be lengthy - for instance, if the negotiations between a firm's management team and its creditors start to drag. Event risk relates to unexpected company-specific or situation-specific events that affect valuation. Market liquidity risk arises because distressed securities are less liquid, and demand runs in cycles. J-factor risk relates to the judge presiding over bankruptcy proceedings. The track record in adjudication and restructuring can play a significant role in both the overall outcome and determining the optimum securities in which to invest. Cash Equivalents – Portfolios that invest in very short-term securities provide taxable or tax-advantaged current income, pose little risk to principal and offer the ability to convert the investment into cash quickly. These investments may result in a lower yield than would be available from investments with a lower quality or longer term. Commodities – Commodities are assets that have tangible properties, such as oil, metals, and agricultural products. An investment in commodities may not be suitable for all investors. Commodities may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes, or political and regulatory developments. Commodities are volatile investments and should only form a small part of a diversified portfolio. Diversification does not ensure against loss. Consult your investment representative to help you determine whether a commodity investment is right for you. Market distortion and disruptions have an impact on commodity performance and may impact the performance and values of products linked to commodities or related commodity indices. The levels, values or prices of commodities can fluctuate widely due to supply and demand disruptions in major producing or consuming regions. Equities – Large Growth and Value Stocks – Portfolios that emphasize large and established US companies may involve price fluctuations as stock market conditions change. Stocks of small- and mid-capitalization companies tend to involve more risk than stocks of larger companies. Investments in small- and mid-sized corporations are more vulnerable to financial risks and other risks than larger corporations and may involve a higher degree of price volatility than investments in the general equity markets. International/Global lnvesting/Emerging Markets – International investing may not be suitable for every investor and is subject to additional risks, including currency fluctuations, political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be magnified in emerging markets. Real Estate Investment Trusts (REITs) – The properties held by REITs could fall in value for a variety of reasons, such as declines in rental income, poor property management, environmental liabilities, uninsured damage, increased competition, or changes in real estate tax laws. There is a risk that REIT stock prices overall will decline over short or even long periods because of rising interest rates. Other risks include: Sensitive to Demand for Other High-Yield Assets. Generally, rising interest rates could make Treasury securities more attractive, drawing funds away from REITs and lowering their share prices. Property Taxes. REITs must pay property taxes, which can make up as much as 25% of total operating expenses. State and municipal authorities could increase property taxes to make up for budget shortfalls, reducing cash flows to shareholders. Tax Rates. One of the downsides to the high yield of REITs is that taxes are due on dividends, and the tax rates are typically higher than the 15% most dividends are currently taxed at. This is because a large chunk of a REIT's dividends (typically about three quarters, though it varies widely by REIT) is considered ordinary income, which is usually taxed at a higher rate. Index definitions Barclays EM Local Currency Governments is a broad-based index that measures the total return of 20 different local currency government debt markets spanning Latin America, Europe, the Middle East, Africa and Asia. Barclays Global Aggregate – Corporates – The corporates portion of the Barclays Global Aggregate index grouping. Barclays Global Governments 1-3 years – The 1-3 Yr component of the Barclays Global Treasury Index. The Barclays Global Treasury Index tracks fixed-rate local currency government debt of investment grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 38 countries denominated in 23 currencies. The three major components of this index are the U.S. Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. The index was created in 1992, with history backfilled to January 1, 1987. Barclays Global Governments 7-10 years – the 7-10 Yr component of the Barclays Global Treasury Index. The Barclays Global Treasury Index tracks fixed-rate local currency government debt of investment grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 38 countries denominated in 23 currencies. The three major components of this index are the US Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. The index was created in 1992, with history backfilled to January 1, 1987. The Barclays Global Emerging Markets Index represents the union of the USD-denominated U.S. Emerging Markets Index and the predominately EUR-denominated Pan Euro Emerging Markets Index, covering emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability.

Barclays Global High Yield represents the US High Yield Index, Pan-European High Yield Index, High Yield CMBS Index, and non-investment grade portion of the Barclays Global Emerging Markets Index. Barclays Global Treasury Index tracks fixed-rate local currency government debt of investment grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 37 countries denominated in 23 currencies. The three major components of this index are the U.S. Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. Barclay Hedge Global Macro – Represents a measure of the average return of the macro geared/strategized hedge funds within the Barclay database whose positions concertedly reflect the direction of the overall market as attributed to major economic trends and events. The portfolios of these funds are comprised of an offering of stocks, bonds, currencies and commodities in the form of cash or derivative instruments. A majority of these index linked funds invest globally in both developed and emerging markets. Barclays Municipal Bond Index – The Index currently contains approximately 46,200 bonds. To be included in the index, bonds must be rated investment-grade (“Baa3/BBB-” or higher) by at least two of the following ratings agencies: Moody’s, Standard & Poor’s and Fitch, if all three rate the bond. If only two of the three agencies rate the bond, the lower rating is used to determine index eligibility. If only one of the three agencies rates a bond, the rating must be investment-grade. To be included in the index, bonds must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Barclays Short Treasury Index – this index is composed of all treasuries that have a remaining maturity between one and twelve months. Barclays Treasury Bill Index includes US Treasury bills with a remaining maturity from 1 month up to (but not including) 12 months. It excludes zero coupon strips. Barclays U.S. 1-3 Yr. Treasury – Barclays Capital 1-3 Year U.S. Government/Credit Index is composed of all bonds of investment grade with a maturity between one and three years. Barclays US 3-6 Mo. Treasury – Comprised of all treasuries with 3-6 month maturities purchased at the beginning of each month and held for a full month. At the end of the month, issues with less than three months to maturity are sold and rolled into newly selected issues. Barclays US Agg Bond Index – The index is market capitalization weighted that includes Treasury securities, Government agency bonds, Mortgage-backed bonds and Corporate bonds. It excludes Municipal bonds and Treasury Inflation-Protected securities because of tax treatment. Barclays US. Aggregate Corporate – An unmanaged index considered representative of the U.S. investment-grade, fixed-rate bond market. Barclays US Corporate High Yield measures the US corporate market of non-investment grade, fixed-rate corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Barclays US Data Surprise Index – This index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage (or percentage point) difference between analyst forecasts and the published value of economic data releases. Barclays U.S. Treasury – The index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. Barclays US Aggregate Treasury 7-10 year Index – A subset of the U.S. Treasury Index, which includes public obligations of the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded. STRIPS are excluded from the index because their inclusion would result in double-counting. Securities in the index roll up to the U.S. Aggregate, U.S. Universal, and Global Aggregate Indices. The U.S. Treasury Index was launched on January 1, 1973 Barclays Euro Aggregate Treasury 7-10 year Index – this index includes issues with 7-10 year maturities that are issued in the euro or the legacy currencies of the 16 sovereign countries participating in the European Monetary Union (EMU). All issues must be investment grade rated, fixed-rate securities with at least one year remaining to maturity. The Euro-Aggregate Index excludes convertible securities, floating rate notes, perpetual notes, warrants, linked bonds, and structured products. German Schuldscheine (quasi-loan securities) are also excluded because of their trading restrictions and unlisted status, which results in illiquidity. The country of issue is not an index criterion, and securities of issuers from outside the Eurozone are included if they meet the index criteria. Bloomberg Commodity index measures price movements of the commodities included in the appropriate sub index. It does not account for effects of rolling futures contracts or costs associated with holding the physical commodity. Bloomberg Energy Index – the index is a commodity group subindex of the Bloomberg CI. It is composed of futures contracts on crude oil, heating oil, unleaded gasoline and natural gas. Bloomberg Industrial Metals Index – the index is composed of futures contracts on aluminum, copper, nickel and zinc. Bloomberg All Commodities Index – Measures price movements of the commodities included in the appropriate sub index. It does not account for effects of rolling futures contracts or costs associated with holding the physical commodity. Commodities sectors include: Energy, Grains, Industrial Metals, Petroleum, Precious Metals, Softs. Bloomberg Precious Metals Index – Represents the performance of U.S.-trading stocks of companies engaged in the exploration and production of gold, silver and platinum-group metals. Bloomberg Agricultural Index – Intends to measure the stock performance of large companies engaged in the production of agriculture-related commodities. Bloomberg Commodities Total Return Index – Measures price movements of the commodities included in the appropriate sub index. It does not account for effects of rolling futures contracts or costs associated with holding the physical commodity. Commodities sectors include: Energy, Grains, Industrial Metals, Petroleum, Precious Metals, Softs. Conference Board Consumer Confidence Index – is a confidence measure based on a monthly survey based upon random sampling of 5,000 households and is designed to measure consumer confidence in the wider economy, via consumer attitudes towards saving and spending CEO Confidence Index – A survey of 100 CEOs in the United States on their perceptions of the state of their business and the economy in general. Topics covered in the survey include long-term and short-term outlooks, prospects for hiring or laying off workers, and concerns unique to particular industries. The CEO Confidence Survey attempts to quantify these feelings on a scale of 0 to 100, with a higher score indicating bullish feelings. The survey is taken monthly and published by The Conference Board. Dow Jones CS Event Driven – Represents an aggregate of Event Driven funds. Event driven funds typically invest in various asset classes and seek to profit from potential mispricing of securities related to a specific corporate or market event. Such events can include: mergers, bankruptcies, financial or operational stress, restructurings, asset sales, recapitalizations, spin-offs, litigation, regulatory and legislative changes as well as other types of corporate events. Event driven funds can invest in equities, fixed income instruments (investment grade, high yield, bank debt, convertible debt and distressed),

options and various other derivatives. Many event driven fund managers use a combination of strategies and adjust exposures based on the opportunity sets in each subsector. Dow Jones CS Managed Futures Index – Focuses on investing in listed bond, equity, commodity futures and currency markets, globally. Managers tend to employ systematic trading programs that largely rely upon historical price data and market trends. A significant amount of leverage is employed since the strategy involves the use of futures contracts. CTAs do not have a particular bias towards being net long or net short any particular market. The EURO STOXX 50 Index, Europe's leading Blue-chip index for the Euro zone, provides a Blue-chip representation of supersector leaders in the Euro zone. The index covers 50 stocks from 12 Euro zone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The EURO STOXX 50 Index is licensed to financial institutions to serve as underlying for a wide range of investment products such as Exchange Traded Funds (ETF), Futures and Options, and structured products worldwide. FTSE All Country Local Currency Index – The FTSE All World Index covers 48 different countries and approximately 2700 stocks. The indices aim to capture up to 90%-95% of the investable market capitalization of a country, incorporating both large and medium cap stocks. FTSE EPRA/NAREIT Global Developed Index is designed to track the performance of listed real estate companies and Real Estate Investment Trusts (REITs) worldwide. It incorporates REITs and Real Estate Holding & Development companies. Index constituents are free float-adjusted and screened for liquidity, size and revenue screened. FTSE NAREIT - All Equity REITs – An index that consists of all Real Estate Investment Trusts that currently trade on the New York Stock Exchange, the NASDAQ National Market System and the American Stock Exchange. Equity REITs include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. HFRI Relative Value TR is comprised of investment managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. Relative Value is further subdivided into eight sub-strategies: Asset Backed, Convertible Arbitrage, Corporate, Sovereign, Volatility, Yield Alternatives-Energy Infrastructure, Yield Alternatives-Real Estate, and Multi-Strategy. HFRX Global Hedge Fund Index is comprised of all eligible hedge fund strategies including, but not limited to: convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry. JP Morgan GBI-EM Total Return Diversified – The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments. The Diversified version was launched in January 2006. The Markit PMI™ (Purchasing Managers’ Index™) series are monthly economic surveys of carefully selected companies compiled by Markit. They provide advance insight into the private sector economy by tracking variables such as output, new orders, employment and prices across key sectors. Economic analysts, business decisionmakers, forecasters and policy makers leverage the PMI surveys to better understand business conditions in any given economy. Central banks in many countries use the data to help make interest rate decisions, and analysts in the financial markets use PMI data to forecast official economic data. A PMI of more than 50 represents expansion of the sector, compared to the previous month. A reading under 50 represents a contraction, while a reading at 50 indicates no change. MSCI All Country World Index represents a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI consisted of 45 country indices comprising 23 developed and 22 emerging market country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indices included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. MSCI Asia ex Japan Index – A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. As of January 2009 the index consisted of the following 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. MSCI EAFE – The MSCI EAFE Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed equity. As of January 2012 the MSCI EAFE Index consisted of the following 22 developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. MSCI EM Index represents a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of February 2013, the MSCI Emerging Markets Index includes 23 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. MSCI EM LatAm Index – captures large and mid cap representation across 5 Emerging Markets (EM) countries* in Latin America. With 140 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI EM Asia – captures large and mid cap representation across 8 Emerging Markets countries*. With 535 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI EM FX Index – tracks performance twenty-five emerging-market currencies relative to the US Dollar. MSCI EMU Index measures the performance of stocks based in the European Economic and Monetary Union. It consists of stocks in the following 11 developed-market countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain. The index contains almost 300 stocks and represents about 85% of the market capitalization in these countries. The MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe*. With 330 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK. The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 617 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US. MSCI World Index represents a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of February 2013, it includes 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

MSCI World ex EMU Index captures large and mid cap representation across 13 of 23 Developed Markets countries* (excluding those in the EMU): Australia, Canada, Denmark, Hong Kong, Israel, Japan, New Zealand, Norway, Singapore, Sweden, Switzerland, the UK and the US. With 1,373 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. NAREIT Global RE Hedged – The FTSE EPRA/NAREIT Developed Real Estate Index Series is broken down into eight index families and 141 indices in Asia Pacific, Europe and North America. It is the FTSE EPRA/NAREIT Developed Total Return Index in USD. NCREIF TBI Index – A quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciary environment. Russell 1000 – measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. As of December 31, 2011, the weighted average market capitalization was approximately $86.1 billion; the median market capitalization was approximately $5.1 billion. Russell 2000 Index – A Frank Russell index which consists of the 2,000 smallest securities in the Russell 3000 Index, representing approximately 8% of the Russell 3000 market capitalization. This index is widely regarded in the industry as the premier measure of small capitalization stocks. Dividends are reinvested. Indices are unmanaged, do not reflect the deduction of fees and expenses and cannot accommodate direct investments. Russell 2500 Index – Measures the performance of the 2,500 smallest companies in the Russell 3000 Index. The index is market cap-weighted and includes only common stocks incorporated in the United States and its territories. Russell 3000 – A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire U.S. stock market. This index encompasses the 3,000 largest U.S.-traded stocks, in which the underlying companies are all incorporated in the U.S. The Standard & Poor's (S&P) 100 Index is a capitalization-weighted index based on 100 highly capitalized stocks selected from the S&P 500 index for which options are listed. The Standard & Poor's (S&P) 500 Index represents a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market companies; the NYSE Euronext and the NASDAQ OMX. A selection committee selects the companies in the S&P 500 so they are representative of the industries in the United States economy. S&P 500 Dividend Aristocrat Index – measures the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. The Standard & Poor’s (S&P) MidCap 400 Index measures the performance of mid-sized capitalization companies and is distinct from the S&P 500 Index. It seeks to reflect the risk and return characteristics of this market segment. The Standard & Poor’s (S&P) SmallCap 600 Index measures the small capitalization segment of the US equity market. Introduced in 1994, and S&P Index Committee maintains the index with the goal of ensuring it remains an accurate measure of small companies, reflecting the risk and return characteristics of the broader small cap universe on an ongoing basis. University of Michigan Consumer Confidence Index - is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. At least 500 telephone interviews are conducted each month of a continental United States sample (Alaska and Hawaii are excluded). Five core questions are asked. Other definitions Asset-backed securities (ABS) – Securities whose income payments and hence value is derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets which are unable to be sold individually. Bund – A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury bonds. Duration – A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Outright Monetary Transaction Facility – The European Central Bank's outright monetary transactions (OMT) or bond-buying programme was announced by Mario Draghi, president of the European Central Bank, in September 2012. Under the outright monetary transactions programme the ECB would offer to purchase eurozone countries’ short-term bonds in the secondary market, to bring down the market interest rates faced by countries subject to speculation that they might leave the euro. Price-to-Book Value (P/B) – A valuation metric that compares a stock's market value to its book value. Book value refers to a company’s total assets minus its total liabilities. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Another way is to divide the current share price by the book value per share. Price-to-earnings (P/E) multiple – The ratio of a stock’s price to the company’s earnings per share (EPS). It is calculated by dividing the stock’s price by its EPS. It is a measure of how much an investor is paying for earnings. Quantitative Easing (QE) – A monetary policy pursued by a central bank, in this case the Federal Reserve, that increases the bank’s balance sheet through the regular purchase of government and other securities. It increases the money supply by providing financial institutions with capital in an effort to promote increased liquidity. QE is used when central bank interest rates are near zero and cannot be lowered by much. For more information, see http://www.federalreserve.gov website. “Taper Tantrum” – The moment last summer when capital markets started to worry more visibly about the approach of US monetary normalization. Targeted longer-term refinancing operations (TLTROs) – On 5 June 2014 the European Central Bank announced Targeted Long-Term Repo Operations (TLTROs]. Their main purpose is to stimulate bank lending to non-financial corporations. The operations would offer conditional cheap funding to banks in large size and for maturities of up to four years. Private loan conditions should ease in response, particularly in the euro area periphery, but the impact on area-wide credit is uncertain. Also, TLTROs might effectively be used for government bond carry trades. An investment cannot be made directly in a market index.

http://www.federalreserve.gov/

Disclaimer Past performance does not guarantee future returns.

The value of the investments which may be stated in this document, and the income from them, may fall as well as rise. Past performance of investments is no guide to future performance. You may not get back the amount of capital you invest. Any income projections and yields are estimated and are included for indication only.

Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses.

Benchmarks are shown for illustrative purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different. It is not possible to invest in these indices and the indices are not subject to any fees or expenses. Information is as of the date hereof unless otherwise indicated. Certain information is based on data provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

This document has been prepared by Barclays for information purposes only.

Diversification does not protect a profit or guarantee against losses. Investing in securities involves a certain amount of risk. You are urged to review any prospectuses and other offering information prior to investing.

This material is provided by Barclays for information purposes only, and does not constitute tax advice. Please consult with your accountant, tax advisor, and/or attorney for advice concerning your particular circumstances.

IRS Circular 230 Disclosure: BCI and its affiliates do not provide tax advice. Please note that (i) any discussion of US tax matters contained in this communication (including any attachments) cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

“Barclays” refers to any company in the Barclays PLC group of companies.

Barclays offers wealth management products and services to its clients through Barclays Bank PLC (“BBPLC”) and functions in the United States through Barclays Capital Inc. (“BCI”), an affiliate of BBPLC. BCI is a registered broker dealer and investment adviser, regulated by the U.S. Securities and Exchange Commission, with offices at 200 Park Avenue, New York, New York 10166. Member FINRA and SIPC. Barclays Bank PLC is registered in England and authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered No. 1026167. Registered Office: 1 Churchill Place, London E14 5HP. ©Copyright 2014.

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