How do we define “cash on the sidelines?”

Source: Bloomberg, Credit Suisse

M2-M1 basically equates to savings accounts, money market accounts, retail money market mutual funds, and COD’s

Global M2 minus M1 Money Supply ($ Millions)

0

5000

10000

15000

20000

25000

30000

US Money Supply

European Money Supply

Chinese Money Supply

U.S. corporate cash has risen Percent of current assets

Source: Bloomberg, Milken Institute

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Q4 2012: 42%

Q2 2008: 32%

Percent

Too many depositors, not enough lenders

Source: Federal Reserve

U.S. Commercial Bank Deposits and Loans ($ in Trillions)

$3

$4

$5

$6

$7

$8

$9

$10Deposits

Loans

Note: 3-month interest rates; China, Canada, France, Germany, Italy, Japan, United Kingdom, United States; Weighted by 2012 GDP.

Source: DataStream, International Monetary Fund, Milken Institute.

Monetary policy has driven real interest rates below 0%

-2

-1

0

1

2

3

4

5

1996 1998 2000 2002 2004 2006 2008 2010 2012

Global real interest rate (%)

Source: ICI, Credit Suisse

Is there evidence that the “Great Rotation” has begun?

Source: Bloomberg, Credit Suisse

Personal savings rates back to pre-crisis levels

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Personal Savings Rate

Percent (%)

Panel Goals

Define and quantify the amount of “Cash” that is truly on the sidelines

Understand the pressures to invest (or not to) and the implications of both

Consider ways to spur re-investment (eg products, policy, and/or strategy)

1

2

3

Mustafa Sagun slides

Unleashing Cash On The Sidelines

• Equities will likely provide the highest absolute returns, but will be volatile

– Effective volatility management will be key

Source: Ned Davis Research.

Win By Not Losing…

• Lower volatility, quality growth delivers more reliable cumulative returns

Source: Principal Global Investors.

Fundamental Nature of Volatility Volatility is Related to Changing Growth Expectations

Recent success fuels investor enthusiasm Extrapolation leads to excessive optimism for most

Low Volatility High Low Volatility High

Valuations bid up based on high expectations Resulting in low and volatile outcomes for most

Low Volatility High Low Volatility High

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

5thPercentile

25thPercentile

Median 75thPercentile

95thPercentile

Trailing 3 year Sales Growth

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

5thPercentile

25thPercentile

Median 75thPercentile

95thPercentile

Trailing 3yr EPS Growth vs

Forward 1yr EPS Growth

Trailing

Forward

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

5thPercentile

25thPercentile

Median 75thPercentile

95thPercentile

Forward Earnings/ Price

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

5thPercentile

25thPercentile

Median 75thPercentile

95thPercentile

Realized ROE & ROE Variability

ROE

STD

As of December 31, 2012 Source: Principal Global Equities 5 = lowest volatility stocks, 100 highest volatility stocks Universe is MSCI AC World Index Data represents Jan 1990 – Dec 2011

“Active” Volatility Management is Key

• Price of volatility changes over time, impacting returns

Reference Slides

Source: Bloomberg.

Expansion of balance sheets of major central banks

0

5

10

15

20

25

30

35

Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012

BoJ

ECB

BoE

Fed

Central bank total assets (% of GDP)

Public sector significantly “out-borrowing” the private sector

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Total Private and Public Borrowing, $bn

Private Sector

Public Sector

Total

Sources: Federal Reserve, Credit Suisse

Source: The Quantitative Impact Study Group of the Basel Committee on Banking Supervision, June 2012; Credit Suisse

* As calculated by the Basel Committee for the ~200 banks included in their study. CS estimates that this study accounts for 40-60% of global banking system

CET 12.0%

CET 14.5%

Hybrid T1 2.0%

HT1 1.5%

Tier 24.0%

Tier 22.0%

CET 12.5%

CET 12.5%

CET 12.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Basel I & II Basel III

Recalibrating to Basel III Current Shortfalls* Under B3

8%

15.5%

Surcharge for

Global SiFI

Counter-

cyclical Buffer

Capital

Conserv. Buffer

B3

Minimum

$225bn

$2.4tn

CET1

Balance Sheet (RWA)

Funding (“NSFR”)

Challenges facing banks under Basel III

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

400

600

800

1000

1200

1400

1600

1800

2000

What is safe?

Source: Bloomberg, Credit Suisse

Gold JPY-USD (Inverse Convention) AAPL

0.007

0.008

0.009

0.010

0.011

0.012

0.013

0.014

What are the implications of shifting demographics?

Source: Credit Suisse Economic Research

Source: Bloomberg

Note: * 2012 GDP data used

Increase in corporate cash balances Selected major countries

0

5

10

15

20

25

30

35

40

45 2005 Q1 2013*

Cash and near cash items, percent of GDP

Source: Bloomberg

Note: * Q1 2013 data. ** 2004 data for Google, as it did not IPO until then

Increase in cash balances among the top U.S. corporations

0

20

40

60

80

100

120

140

2000 2012US$ billions

+48B

+47B +43B

+29B +29B

+7B+19B +13B

+133B

+8B

Financial sponsors still have “cash on the sidelines” but less

than at the peak of the crisis

Source: Prequin

185 177

258

380

446

493 495

429 391

365

$0

$100

$200

$300

$400

$500

$600

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Private Equity Dry Powder, $ billions

Primary dealer holdings of short-term securities have declined

Source: Bloomberg, Milken Institute, March 2013

30

40

50

60

70

80

90

Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13

Primary dealer positions of coupon treasuries, 3 years or less, US$ billions

The effects of Quantitative Easing or flight to safety?

Decline in the government bond yields in major advanced countries

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013

Germany UK US

Japan

10-year government bond yield (%)

Source: Bloomberg.

Source: Credit Suisse High Yield and LUCI Indices

Yields and Spreads for High Yield and Investment Grade

Corporates at or near all-time lows

High Yield & Investment Grade Yields High Yield vs Investment Grade Spreads

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

1/6/2000 1/6/2003 1/6/2006 1/6/2009 1/6/2012

HY IG

0 bp

200 bp

400 bp

600 bp

800 bp

1000 bp

1200 bp

1400 bp

1600 bp

1800 bp

2000 bp

1/6/2000 1/6/2003 1/6/2006 1/6/2009 1/6/2012

HY IG

Source: Credit Suisse

The growth of “alternative” strategies when cash is

not an option

38.0%

57.5% 60.1% 52.2%

49.8%

34.2% 28.7%

26.7%

7.3%

4.9% 5.9% 9.6% 19.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1984-1994 1995-2000 2001-2007 2008-2011

U.S. public pension funds

Equity Fixed income Cash Alternatives

51.5%

63.5% 59.9%

43.6%

33.3%

27.2% 28.0%

37.1%

6.9%

8.3% 7.2% 10.4% 17.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1984-1994 1995-2000 2001-2007 2008-2011

U.S. corporate pension funds

Equity Fixed income Cash Alternatives

Monthly share buybacks since 2009

S&P 500

Source: Bloomberg, Milken Institute, March 2013.

0

10

20

30

40

50

60

70

80

2009 2010 2011 2012 2013

($ bln)

Source: SIFMA.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US$ trillions

Investment

grade

High yield

U.S. corporate bond issuance

Source: Bloomberg, January 2013.

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Net debt-to-EBITDA

Leverage has fallen (S&P 500 Companies)

S&P 500 volatility at pre-crisis levels

Source: Bloomberg

0

10

20

30

40

50

60

70

80

90

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Pre-crisis average, 2004 to June 2007: 13.6

Chicago Board Options SPX Exchange Volatiilty Index (VIX)

US Liquid Assets