2016 Investment Outlook: Crosscurrents January 13, 2016

Celia Dallas Chief Investment Strategist

Wade O’Brien Managing Director, Global Investment Research

Christopher Hunter Managing Director, Head of Cambridge Associates Beijing Office

MODERATED BY:

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Economic Crosscurrents

Slowing Economic Growth

Struggling Emerging Markets

Commodity Price Weakness

Widening Credit Spreads

Concerns

Shrinking Global Trade

The Bright Side Growth Stabilizing

Wealth Transfer Supports Consumer/Services Sectors

Developed Markets Still 2/3 of Global GDP

Defaults Remain Low and Focused in Commodities

More Importantly, Services Growth Remains Strong

What do credit spreads price in? Barclays High-Yield Option-Adjusted Spread December 31, 2004 – December 31, 2015 • Basis Points

US High-Yield Five-Year Cumulative Breakeven Default Rates As of December 16, 2015 • Percent (%)

583 660

1,296

0

500

1,000

1,500

2,000 Barclays High Yield ex EnergyBarclays High YieldBarclays High Yield Energy

40 44

61

0

10

20

30

40

50

60

70

High Yield ex Energy High Yield High Yield Energy

Sources: Barclays, Bloomberg L.P., J.P. Morgan Securities, Inc., and Lombard Street Research. Note: Breakeven default rates assume a 30% recovery rate.

Pace of Fed rate hikes will be gradual Federal Reserve Median Fed Funds Rate Projections As of December 16, 2015 • Policy Rate (%)

0.4

1.4

2.4

3.3 3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2015 2016 2017 2018

Median Annual Projections

Median Longer-runProjection

Source: Federal Reserve. Note: Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy.

Stocks and bonds often rise after rate hikes Cumulative US Market Performance Around Fed Rate Hikes

Sources: Standard & Poor's and Thomson Reuters Datastream. Notes: Data are daily. One month represents 20 weekdays. Average return is arithmetic mean.

60

70

80

90

100

110

120

130

140

150

Time in Months From First Hike

S&P 500

Jun 2004

Jun 1999

Feb 1994

Mar 1988

Average 12-Month Return: 7.1%

60

70

80

90

100

110

120

130

140

150

Time in Months From First Hike

Ten-Year US Treasury

Average 12-Month Return: 8.5%

EM Asia’s outperformance is less dependent on commodities Rolling 12-Month Correlation of Emerging Markets Regions Equities Excess Return vs Developed Markets to Commodities December 31, 2004 – December 31, 2015 �• US Dollar

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EM Asia

EMEA

EM LatAm

Sources: Bloomberg L.P. and MSCI Inc. MSCI data provided "as is" without any express or implied warranties. Notes: Data are daily. Rolling 12-month returns reflect the performance during the previous 261 weekdays. Commodities are represented by the Bloomberg Commodity Total Return Index; EM Asia by the MSCI EM Asia Index; EMEA by the MSCI EMEA Index; and EM LatAM by the MSCI EM Latin America Index.

Emerging Markets Debt to GDP Percent (%)

EM debt levels: more manageable than assumed

Non-Financial Corporate Debt to GDP As of Second Quarter 2015 • Percent (%)

61

91

38 43

21

33

0

10

20

30

40

50

60

70

80

90100

Non-Financial CorporatesGovernmentHouseholds

163

58 57 50 49 46 42 35 23 23

020406080

100120140160180

China Turkey Russia India Brazil Poland Saudi Arabia South Africa Mexico IndonesiaSource: Institute of International Finance.

Q2 2007 Q2 2015

Effects of Yen and Euro Depreciation on EPS Growth

Can earnings continue to grow if currencies stabilize?

60

80

100

120

140

160

180

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15

Europe June 30, 2012 – December 31, 2015

June 30, 2012 = 100

Earnings Growth

EUR/USD Spot

Sources: Eurostat, Government of Japan Cabinet Office, MSCI Inc., and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Notes: Europe earnings and GDP represent the 19 members of the Eurozone. GDP data are quarterly and through September 2015. Spot rate and earnings growth data are monthly.

60

80

100

120

140

160

180

Nov-10 Nov-11 Nov-12 Nov-13 Nov-14

Japan November 30, 2010 – December 31, 2015

November 30, 2010 = 100

Earnings Growth

JPY/USD Spot

Small-Cap Equity Trailing P/E Ratios As of December 31, 2015 • Local Currency

Japanese small caps stand out Small-Cap Equity P/B Ratios As of December 31, 2015 • Local Currency 31.5

21.5

17.9

26.8

0

5

10

15

20

25

30

35

United States United Kingdom Japan Europe ex UK

Current Median

2.1

2.4

1.2

1.9

0.0

0.5

1.0

1.5

2.0

2.5

United States United Kingdom Japan Europe ex UK

Current Median

Sources: MSCI Inc. and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Notes: Total returns are net of dividend taxes. Median data calculated from January 31, 2003, to present.

Performance of Japanese Yen and Global Equity Markets in Up/Down Markets First Quarter 1996 – Fourth Quarter 2015 • Percent (%)

Japanese Yen tends to appreciate in down markets

-0.9

6.6

-8

-6

-4

-2

0

2

4

6

8

Yen/USD

MSCI World

1.8

-7.4 -8

-6

-4

-2

0

2

4

6

8Up Equity Markets Down Equity Markets

Sources: MSCI Inc. and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Notes: Up and down markets are defined by the quarterly total return of the MSCI World Index in local currency. Performance of yen is in US$ terms. Average return is based on arithmetic mean.

Ave

rage

Qua

rter

ly R

etur

ns

MLP fundamentals are holding up Historical Distribution Growth of Wells Fargo MLP Index As of December 11, 2015 • Percent (%)

1.0

5.0

4.0

5.0 6.0

9.0 10.0

11.0 10.0

3.0 3.0

5.0 5.0 5.0 6.0 6.0

5.0 5.0

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Median Distribution Growth (2000–2014)

Quarterly Trailing 12-Month Revenue of Alerian MLP Index Fourth Quarter 2000 – Fourth Quarter 2016 • US$ millions

50,000

125,000

200,000

275,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: Alerian, Bloomberg L.P., FactSet Research Systems, Tudor, Pickering, Holt & Co., and Wells Fargo Securities Inc. Notes: Orange bars are estimates. Distribution growth is based on year-over-year change in median distribution.

Year-Over-Year Change as of December 31, 2015 • Percent (%) • US Dollar

Energy stocks suffer from weak earnings

Annual S&P 500 Energy Earnings and Average Crude WTI Price 1995–2016

0

20

40

60

80

100

120

140

160

1995 1998 2001 2004 2007 2010 2013 2016 Est.

S&P 500 Energy Earnings ($bn)Avg Crude WTI ($/bbl)

Sources: Bloomberg L.P., FactSet Research Systems, MSCI Inc., Standard & Poor's, and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Note: Percent change in forward P/E is calculated using FactSet Research Systems estimates. Percent change in forward P/E for US energy is based on November 2014 to November 2015. Estimates for 2016 earnings are calculated by Factset and are as of December 31, 2015.

-35 -25 -24

91

-27 -60-40-20

020406080

100

Brent MSCI World Energy Index MSCI US Energy Index US Energy Forward P/E MSCI US EnergyNormalized P/E

Price LevelsValuations

Brent Crude Prices Energy Equity Prices Energy Company Valuations

Wide Dispersion of Emerging Markets Economic Sector Valuations December 31, 1995 – December 31, 2015 �• US Dollar

Emerging markets sector valuations are widely dispersed

0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sta

ndar

d D

evia

tion

of V

alua

tion

Per

cent

iles

Sources: MSCI Inc. and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Note: Data are monthly.

Summary Portfolio Recommendations Overweights Underweights

Diversified Growth

High-Quality US Equities US Small-Cap Growth Equities

Eurozone Equities* Japanese Equities*

Asia ex Japan Equities

US Equities

Diversifiers Macro Protection

Deflation Hedge

Cash Sovereign Bonds

Inflation Resistant

Natural Resources Equities

Energy MLPs

Cash

Commodities

Inflation-Linked Bonds and Commodities

Currency Hedge World ex US (currency hedged)

World ex US (US$)

* Currency hedged

2016 Investment Outlook: Crosscurrents January | 2016 Thank you for joining us.

Q&A

Celia Dallas Chief Investment Strategist

Wade O’Brien Managing Director, Global Investment Research

Christopher Hunter Managing Director, Head of Cambridge Associates Beijing Office

MODERATED BY: