Investment Portfolio for a Down Market - October 12 2011

7/27/2019 Investment Portfolio for a Down Market - October 12 2011

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Roubini Global EconomicsRoubini Global Economics

By the RGE Economic Research and Market Strategy Teams

Roubini Global Economics Copyright 2011

No reproducing or redistribution without written consent.

October 12, 2011

roubini.com | [email protected] Tel: 212.645.0010 | [email protected] / [email protected] Tel: +44 (0) 207 420 2800


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Roubini Global Economics Copyright 2011

No reproducing or redistribution without written consent.



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3

Recessions Covered in This Presentation


1980-82 U.S. Double Dip 1990 Japan

1990-91 U.S./Global

1990s EM Crises: Asia/Russia/Brazil/Mexico

2001 U.S.

2008-09 Global/U.S.

2011 Global Double Dip


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4

Time Periods Used for Dating Recessions


2011 - Global Double Dip

2008-09 - Global/U.S.

2001 - Argentina/Global/U.S.

1999 - Brazil

1998 - Russia

1997 - Asian Crisis

1990-91 - U.S./Global

1994 - Mexico

1981-82 - U.S. Double Dip1980 - U.S./Global

Source: NBER

U.S. Economic Recession Dates

The NBER does not define a recession in terms of two consecutive quarters of

decline in real GDP. Rather, a recession is a significant decline in economic activity

spread across the economy and lasting more than a few months, normally visible in

real GDP, real income, employment, industrial production, and wholesale-retail

sales.

Non-U.S. Recessions (for Graphing

Purposes)

Mexico 1994-Start Jan 1994 through

Dec 1995Asia/Russia/Brazil: Trigger was the

sameAsia. Start Jan 1997 through

Dec 2000


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Protecting the Portfolio in a Downturn:

Lessons from Past Recessions


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1980-82 Double Dip

Induced by monetary policy. Policy was already restrictive

following the great stagflation of the 1970s. The Oilprice shock in 1979 prompted further monetary

tightening, which caused the first recession.

A pause in tightening cycle led to a brief recovery, but

before manufacturing and construction recovered,

inflation resumed; a second phase of monetary

tightening was ushered in, leading to a double dip.

Unemployment soared but Fed gained inflation

credibility. A three-year tax-cut planEconomic

Recovery Tax Act of 1981 announced by President Reagan.

6

1980-82 Recession


(Shaded Areas Represent Monetary Tightening)

Oil Price Shock of 1979 and First Recession

Second Monetary Tightening in 1980 Led to Soaring

Unemployment

(Shaded Area Represents Recession)

But the Fed Succeeded in Clamping Down on Inflation

Source: Federal Reserve Bank of St. Louis FREDSource: Federal Reserve Bank of St. Louis FRED

Source: Federal Reserve Bank of St. Louis F RED


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1990-91 Recession


Black Monday Crash

Source: Robert J. Shiller, Irrational Exuberance, 2nd. Edition, Princeton University Press, 2005

1990-91 Recession

Lingering effects of 1980s including restrictive

monetary policy, tight credit conditions.

1987 Black Monday equity crash (over 22%

drop in DJIA) was a factor, as was the Gulf War-

related oil shock.

Recession saw financial contagion to G10, U.S.

energy and real estate sector affected; high

unemployment, budget deficits.

1990s Gulf War Oil Shock and Loss of ConfidenceReal Home Prices Fell 12.3% in the 1990s Recession

Source: Federal Reserve Bank of St. Louis FRED

Source: Federal Reserve Bank of St. Louis F RED
http://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htm


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50

60

70

80

90

100

110

120

130

140

t-383 t-333 t-283 t-233 t-183 t-133 t-83 t-33 t+17 t+67 t+117 t+167 t+217 t+267 t+317 t+367 t+417 t+467 t+517 t+567 t+617

GSCI DXY MXEF SPX

1990-91 Recession: Asset Performance

Note: All asset values indexed at 100 at beginning of the recession, time t=0 at beginning of recession. GSCI: S&P/ Goldman Sachs Commodity Index; MXEF: MSCI Emerging Markets Index; DXY:

Dollar Index Spot; SPX: S&P 500 Index

Source: Bloomberg


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Low interest rates fed speculative demand in property, especially

commercial, contributing to property price spike. Reduction in

returns on investment. Japans real estate bubble burst in 1991;rise in public debt absorbed by households.

Response: Eventual cut in interest rates, fiscal stimulus. But

stimulus was withdrawn too soon, especially fiscal, and Japan

re-entered recession.

Hidden nonperforming loans; Japanese authorities did not deal

with vulnerabilities in banking sector zombie banks that could

not fund investment and support growth.

Japan saw three cyclical downturns prior to the great recession;

job losses were not severe, but grinding deflation.

9

1990-91 Japan Crash and Lost Decade


Source: Federal Reserve Bank of St. Louis FRED Source: Federal Reserve Bank of St. Louis FRED



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10

1990s EM Crises


EM Crises: Similar balance sheet

vulnerabilities, twin fiscal and trade

deficits, rising public debt, overvaluedcurrencies and de-facto pegs, which allowed

greater debt accumulation.

Crises tended to be combined currency and

banking crises, triggered by currency and

maturity mismatches in balance sheets

(short or LT FX debt-financed LT domestic

infrastructure projects).

Beyond similar triggers, but the Asian crisis

made investors look more closely at

vulnerabilities in other EMs.

In almost all cases, devaluation improved

export competitiveness, reduced imports.

Affected countries restructured bankingliabilities. Stronger global environment

helped eventual recovery.

Most Countries Had Twin Deficits

-12

-10

-8

-6

-4

-2

0

2

4

Current Account Deficit (% of GDP) Fiscal Deficit (% of GDP)

0

1020

30

40

50

60

0

50

100

150

200

250

300

350

Public Debt (% of revenues) Short-term foreign debt (% of reserves) Public debt (% of GDP)

Excessive Short-Term Debt

Source: RGE, Bloomberg



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1994Mexico

Real exchange rate was rising in early 1990s; rising current account deficit; reserve growth was strong, but inflows went more into short-

term financial instruments rather than FDI.

Current account deficit-fueled worries of overvalued peso; U.S. rate hikes, political uncertainty in 1994 aided reserve flight.

Central bank sterilized intervention unsustainable; forced to de-peg; peso collapsed and recession ensued.

Policy response: U.S.-, IMF-backed financial stabilization package (loan guarantees).

1997Asia Crisis

Causes: Overinvestment financed by unsustainable foreign borrowing, contributing to lower returns on investment. FX/maturity

mismatches on investment, excessive public and private debt, twin deficits (fiscal and current account).

Unsustainable debt/debt service and flight of capital prompted Thai baht devaluation, contributing to a sudden stop of capital to other

Asian economies. Key economies affected: Thailand, Malaysia, South Korea, Indonesiabut all Asian countries faced some effects.

Financial contagion spread to other EMs, and negatively affected global sentiment. Devaluation of exchange rate increased the size of

private debt in local currency terms dramatically, boosting debt service costs.

Policy response: Liquidity support, bank restructuring, currency devaluation restored competitiveness, structural reforms etc.

Countries like China, HK used reserves to maintain currency peg. HKMA expanded balance sheet dramatically, increasing reserves and

buying extensive quantities of local equities to counter short-selling.

Policy prescriptions from IMF/WB to raise interest rates to attract capital likely exacerbated the effect of the recession, while lack of fiscal

space meant that public and private demand collapsed simultaneously.

1998Russia

Triggered by Asian Financial Crisis driven capital flight; reduction in global demand and continued oil supply reduced oil pr ices, reducing

government revenues.

August 1998, default on US$40 billion bond payment; Russia de-pegged.

Russia faced LT competitiveness issues following breakup of USSR, shock therapy led to recession in mid-1990s.

Output loss was actually quite small as underlying consumption was little tied to banking system

11

Historical ReviewEM Crises



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1999Brazil

Asian Financial Crisis led to capital flight, drop in commodity

revenues, sharp rise in public debt service costs, sluggish growth, pressureon fixed exchange rate; capital flight (Brazil lost US$50 billion in reserves) .

Policy response: Sharp currency devaluation (over 40% in total) to restore

competitiveness, IMF support (US$41.5 billion) did not prevent

devaluation. Growth slowed again in 2001 during U.S. recession.

Thereafter, strong global growth, better macro framework, helped

support growth.

2000-01Turkey

Trigger: FX/maturity mismatches, highly dollarized economy, wide twin

deficits. Sudden stop of capital convulsed banking system.

Policy response: restructuring of banking sector. IMF support. Currency

devaluation.

2001Argentina

Argentina currency board (peso fixed to dollar facilitated excessive

borrowing), Brazil devaluation made exports even more

uncompetitive, debt service costs too high.

IMF package initially unsuccessful in avoiding currency collapse.

Policy response: Sharp devaluation, pesification of debts, strong global

growth helped Argentina out of crisis .

12

Historical ReviewEM Crises


Source: Gruben and Welch, Federal Reserve Bank of Dallas

BankingFinancial Leverage in Crisis Countries

Post-Crash Output Declines

Source: Bloomberg
http://dallasfed.org/research/efr/2001/efr0104b.pdfhttp://dallasfed.org/research/efr/2001/efr0104b.pdfhttp://dallasfed.org/research/efr/2001/efr0104b.pdfhttp://dallasfed.org/research/efr/2001/efr0104b.pdfhttp://dallasfed.org/research/efr/2001/efr0104b.pdf


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13

Asset Performance During Asian Crisis


70

80

90

100

110

120

130

140

150

t-145 t-95 t-44 t+6 t+56 t+106 t+156 t+206 t+256 t+306 t+356 t+406

GSCI DXY MXEF HY Spread

Note: All asset values indexed at 100 at beginning of the recession, time t=0 at beginning of re cession.

GSCI: S&P/Goldman Sachs Commodity Index

MXEF: MSCI Emerging Markets Index

DXY: Dollar Index Spot

HY Spread: BarCap US Agg. Corporate Avg. OAS

Source: Bailouts and Bail-ins (Roubini and Setser 2004)


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Preceding years saw U.S technology/internet investment

boom (1995-2000) and an accompanying stock market

bubble. The Fed hiked rates by 150 bps between 1999 and early 2000.

Investment peaked in 2000, tech bubble burst and recession

ensued. Globally, mostly affected Asian tech exporters, Israel

given sectoral links. September 11 shocks slowed recovery.

2001 was a mild recession: Loss of financial wealth, but real

estate values were rising, aided by aggressive (excessive) ratecuts by Fed (550 bps by mid-2004). Housing bubble ensued.

14

2001 Recession


Note: All asset values indexed at 100 at beginning of the recession, time t=0 at

beginning of recession

Source: Bloomberg

Source: Federal Reserve Bank of St. Louis F RED Source: U.S. Bureau of Economic Analysis

R U t 2008 R i L d H i


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15

Run-Up to 2008 Recession: Leverage and Housing

Bubbles Across Several DMs


Source: Glick and Lansing, Federal Reserve Bank of San F rancisco

Low interest rates, securitization and lax lending

standards boosted speculative housing demand

in prior decade. (U.S. household debt level

soared to over 130% of GDP. )

Housing bubbles in U.S. and across advanced

economies. In U.S., the bubble drove over-

investment in unproductive real estate. Wealth

effects encouraged mortgage equity withdrawal

and dis-savingboosting consumption.



P ll l R U EZ i i Li i Di l
http://www.frbsf.org/publications/economics/letter/2010/el2010-01.htmlhttp://www.frbsf.org/publications/economics/letter/2010/el2010-01.htmlhttp://www.frbsf.org/publications/economics/letter/2010/el2010-01.htmlhttp://www.frbsf.org/publications/economics/letter/2010/el2010-01.html


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16

Parallel Run-Up to EZ crisis: Living Divergently

Under the Same Roof


Rigid labor markets; global demand shocks did not slow wage

growth; this, combined with low productivity, raised unit labor costs

in periphery that exacerbated the initial competitiveness loss. First decade of EMU saw booming global liquidity, credit and

growth; divergent macroeconomic performance and imbalances

remained masked.

Early interest rate convergence became damaging as it allowed a

severe lack of fiscal discipline in some countries (such as Greece and

Portugal) and the build-up of asset bubbles in others (such as Spain

and Ireland).

2008 crash even seemed to enhance EZ financial stability. Risks

finally surfaced with a vengeance in Q2 2010; questioning sovereign

debt sustainability of the EZ periphery.

Source: European Commission

Source: Bloomberg



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U.S. subprime mortgage defaults began climbing, lending dried up

and housing bubble burst; financial crisis ensued with global

contagion. Drop in asset prices (both housing and financial) and

unsustainable debt burdens drove a balance-sheet

recession, beginning December 2007. Unemployment soared.

Sharp falloff in aggregate demand; credit freeze transmitted via

global financial linkages and exacerbated trade collapse, driving

severe global recession by late 2008. Fall in industrial production

and trade worst since great depression.

Backstopping of the financial system via emergency liquidity

facilities, coordinated global fiscal and monetary stimulus

averted second great depression in 2008-09.

Recovery from recession predictably anemic, subpar.


Source: Eichengreen and ORourke, VoxEU

Greatest Drop in Global Trade Volumes Since Great

Depression

2008-09 Global RecessionU.S. Job Losses Far Exceeded Postwar Recession

Experience


Source: Haver
http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421http://www.voxeu.org/index.php?q=node/3421


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18

Asset Performance2008-09 Recession


GSCI: S&P/Goldman Sachs Commodity Index; MXEF: MSCI Emerging Markets Index; DXY: Dollar Index Spot; HY Spread: BarCap US

Agg. Corporate Avg. OAS; CRY: CRB Commodity Index; EURCHF: Euro/Swiss Franc

Source: Bloomberg


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19

Balance Sheet Issues Are Still Present


Many of the balance-sheet issues that contributed to the 2008-09 recession are still here, or have

worsened as private debts have been taken on to public balance sheets.

Deleveraging, and fiscal austerity to reduce the unsustainable fiscal trajectory, raises risk of double dip.

Source: IMF

Indebtedness and Leverage in Selected Advanced Economies

(percentage of 2010 GDP, unless otherwise noted)


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Aftermath of Balance-Sheet Crises


Source: Glick and Lansing, Federal Reserve Bank of San Francisco

Deleveraging Portends Low Growth in Advanced

Economies

How Much More U.S. Deleveraging: Is Japan an

Example?

Recoveries form financial crises are historically slow.

Deleveraging will cause anemic subpar growth in DMs for a long

time.

DMs are pulling back on fiscal stimulus too soon, high risk of

repeating mistake of 1937.

U.S. and other DMs seem on course for another recession; EZ

crisis a major risk; policy makers running out of bullets. EMs

have recovered faster given higher potential growth and

healthier balance sheets, but a DM downturn will affect the

global economy.

Slow Labor Market Recovery Follows a Financial Crisis; Japan Job

Losses, Small; Albeit Grinding Wage Deflation

Source: HaverSource: Haver
http://www.frbsf.org/publications/economics/letter/2010/el2010-01.htmlhttp://www.frbsf.org/publications/economics/letter/2010/el2010-01.htmlhttp://www.frbsf.org/publications/economics/letter/2010/el2010-01.htmlhttp://www.frbsf.org/publications/economics/letter/2010/el2010-01.html


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Sovereigns have assumed higher private sector debt and overall levels are unsustainable. Heavy burden of

private and public debt in a number of periphery countriesGreece, Ireland, Portugalis so large that debtrestructuring and reduction will eventually have to occur.

Current muddle through approach is not working. Even if sovereign debt issues are addressed, still need to

restore competitiveness for the periphery to bring back growth.

Greece is still insolvent and uncompetitive, and Portugals public, private and external debt dynamics are not

sustainable without a growth boost. Despite comparatively better fundamentals, Spain and Italy are at risk of

losing market access if no action is taken immediately.

Unless the EMU moves toward a broader fiscal, economic and political union that resolves the fundamental

problems of divergence (economic, fiscal and in terms of competitiveness) within the union, the system will

move first toward disorderly debt workouts and then, eventually, even break-up, with weaker members

departing.

Greek and Portuguese fundamentals put them most at risk of an exit from the EZ within the next five years.

21

EZ Crisis Continues



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In RGEs view, Chinas growth model is not sustainable.

Episodes of overinvestment in manufacturing and

industrial capacity (not just housing booms) end in a hard

landing, with no exception: From the Soviet Union in the

1960s-80s; to Latin America in the 1970s-early 1980s; to

Japan in the 1980s; to the U.S. in the 1990s; to East Asia in

the 1990s.

Investment (now almost 50% of GDP) must slow down and

banks will need more capital. The question is whether thishappens with a soft or hard landing.

Recession in DMs might delay a crisis in China as it

dampens inflationary pressures and encourages further

stimulus, but it might increase the eventual cost of (partly)

bailing out the Chinese financial system.

End of investment-led growth implies weaker commodity

demand pressure on metals and energy in particular.

EMs exposed to China (commodity producers, other Asia

exporters) are vulnerable.

China sharp slowdown would reduce global growth, and

could encourage flight to safety.

22

Risks From a Chinese Hard Landing


Rising Debt Burdens (RMB, trillions)

Source: Nehru and Dhareshwar (1993), IMF, World Bank, National Bureau of

Statistics, RGE

Source: Peoples Bank of China, Ministry of Finance, Asian Development Bank, RGE

estimates

Investing for GDP, Not Profit (RMB, trillions)


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23

None of the China Mid-Term Scenarios Are Rosy



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Global Scenario Analysis Flowchart

Present to End-2011 2012

DMs are at stallspeed, while EMs are

growing near potential.

DMs face a risk of

falling into recession in

2011

DMs fall into

recession, likely in late

2011 or early 2012. Triggers

include a financial crisis

following disorderly

default(s) in the EZ and

policy mistakes (lack of or

insufficient timely support)

The growth environment isvolatile, but DMs avoid

technical recession (thoughnot growth recession) andEMs keep growing around

potential

2013-15

A weak, U-shaped recovery

continues, with volatile

growth in DMs (amid

balance-sheet repair and

possible EZ uncertainty) and

EMs growing near potential.

China's broken investment-

led growth model gives out.

Gradual rebalancing ensues

A deep recession takes hold

of DMs and possibly

globally, requiring an

aggressive, coordinated

policy response

~55%

~45%

Probability

Adequate policy

support (QE and

fiscal stimulus

across DMs and

possibly some

EMs) staves off

the failure of

systemic

institutions

The policy

response is

inadequate (no QE

or too-little, too-

late QE; a lack of

adequate fiscal

stimulus and

possible fiscal

drag)

Probability

60%

40%

Policy Response

We now see a negligible chance of strong global growth



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Asset Performance in Past Recessions

and Recommendations by Asset Class


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A notable feature is a significant increase in correlations across asset classes in past years, which results in

indiscriminate rallies and sell-offs.

There are few uniform effects across currencies, and across recessions as exchange rates are relative

prices. Effects are most clear when recessions align with periods of risk aversion. USD tends to perform

best at times of deep crisis as opposed to mere cyclical downturns, CHF and JPY have performed well in

recent recessions.

During the past down cycle, defensive equities typically trade at a premium to cyclical as a result of better

earnings visibility and relatively low valuation ahead of the downturn.

The stagflation episodes are a reminder that Treasurys may not always be a safe haven, but Japan(liquidity trap) is a model for most DMs, with deflation a risk and low bond yields. The EZ, by

contrast, resembles EM crises, with default and deval risk.

Commodity price movements are more pronounced in recent recessions due to the greater volume of

commodities traded in the past two decades, and particularly in the past few years as investors seek

liquidity.

In all recessions, EM bonds (both external and domestic debt) outperformed equities. Asian FX tended tooutperform EMEA and LatAm, aside from in the Asian crisis.

26

Historical AssessmentMain Takeaways by Asset Class



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27

Performance of Bonds in Past Crises


The stagflation episodes are a reminder that Treasurys may not always be a safe haven.

The losses in investment-grade (IG) bonds in 2008-09 were not unprecedented, though the relative

underperformance compared with Treasurys is unique in post-war developed market history.

All maximum drawdowns are fully recovered within six-12 months, even the 2008-09 losses.

Current drawdowns: IG bonds, 0%; Treasurys 0%; high yield (HY) 4%. There may be a long way to gobefore the bottom, even if spreads show value.

De-coupling? EM Crises dont seem to cause severe damage to DMs; but converse is obviously not true.

Episode Date IG Date HY Date 7-10y Tsy Date Comments

Oil Shock #1 1973-4 -10.2% Sep-74 -2.7% Jun-74 GDP falls 3.2%; 10y yields 5--> 9%

1980 -18.0% Mar-80 -15.2% Feb-80 Stagflation; yields hit alltime high >15%

1981 -15.0% Sep-81 -13.0% Sep-81 GDP falls 2.9%, unemployment >10%

S&L Crisis 1990-1 -1.8% Aug-90 -11.2% Oct-90 -2.1% Aug-90 House starts collapse 60%; unempl from 5.2 --> 7.8%

Mexico 1994-5 -6.0% Jun-94 -5.3% May-94 -8.0% Nov-94 Greenspan hikes rates 300bps to 6%

Asia 1997-8 -1.5% Aug-97 -0.1% Aug-97 -1.6% Aug-97 U.S. growing at 5+%

Russia/LTCM 1998-H2 -1.2% Oct-98 -6.8% Oct-98 -1.4% Nov-98 75bp rate cut; US grows at 7% in Q4

Arge/Dot-Com 2001-3 -2.0% Mar-02 -12.0% Jul-02 -5.0% Mar-02 9/11; WorldCom, Enron; near-double dip; Iraq invasion

Subprime/Lehman 2008-9 -16.1% Oct-08 -33.2% Nov-08 -6.3% Jun-09 14% HY defaults; GDP drops 5%, yields soar after bottom

Asset Class Maximum Drawdowns

Double Dip

Source: Merrill Lynch, RGE, Bloomberg


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What to Expect From Bonds


The preceding table shows four types of recessions. MONETARY INDUCED SLOWDOWNS or sectoral bubbles

(dot-com, 1994-5 soft landing) are typically short lived. STAGFLATION is also not relevant in DMs, though some

EMs (India, Vietnam) may relive that nightmare if their growth models fail. LIQUIDITY TRAPS such as the Japanese experience and S&L crisis are more relevant for DMs with an ability to

monetize, such as the UK and U.S.:

Treasuries and IG should do well, even with yields low, but Financials vulnerable.

Deflation Fixed Income deep-freeze. Any safe yield/spread becomes attractive.

Beware the post-recession rally: Long duration Treasuries will sell off fast, usually a signal to buy HY andEquities which are still in deep drawdown and recover later.

In contrast, Europes crisis is more similar to a typical EM CURRENCY/BANKING CRISIS:

Default is already priced in, contagion is not fully appreciated (both financial damage and economic, i.e.

spillover to trade, investment);

Devaluation and EZ breakup risk is not priced in; corporate losses can be staggering with bankruptcy

widespread due to balance sheet effects;

The core will also suffer a prolonged slowdown; bond yields and spreads will be low.

History shows Healthcare and Utilities weather downturns better than Financials, Telecoms, and Transport

which are more cyclical, capital intensive, and highly leveraged (though history shows manias can occur in other

sectorsthink railroads, South Sea bubble, etc).


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29

Effects of Recessions on Commodity Prices


Recession Dates

Industrial Metals Energy Agriculture Gold

Max Min % change M ax Min % change M ax Min % change Max Min % change

U.S. 1/12/1969 30/11/1970 No data No data 123.0 99.5 24% 37.5 34.9 7%

U.S. 1/11/1973 31/3/1975 No data No data 476.1 205.4 -57% 172.2 94.8 82%

U.S./Global 1/1/1980 31/07/1980 219.1 134.8 -38% No data 302.2 258.2 -15% 835.0 485.7 -42%

U.S. Double Dip 1/7/1981 30/11/1982 138.5 87.9 -37% No data 396.3 192.3 -51% 453.5 308.9 -32%

U.S./Global 1/7/1990 3/31/1991 206.0 143.3 -30% 131.3 69.6 -47% 232.1 180.4 -22% 410.6 355.7 -13%Mexico 01/01/1995 31/12/1995 231.7 198.9 -14% 64.7 54.2 -16% 281.8 238.6 18% 387.5 371.5 4%

Asia Crisis 01/07/1997 31/12/1998 194.0 135.5 -30% 81.7 47.1 -42% 268.1 179.5 -33% 324.5 286.3 -12%

Russia 01/01/1998 31/03/1999 148.3 127.5 -14% 56.6 42.0 -26% 228.6 164.6 -28% 312.7 274.4 -12%

Brazil 01/04/1999 30/09/1999 153.3 127.1 21% 74.4 43.2 72% 182.9 150.7 21% 279.9 255.3 -9%

U.S./Global/Argentina 1/3/2001 30/11/2001 165.8 123.6 -25% 133.5 67.0 -50% 182.7 151.6 -17% 291.5 258.0 13%

U.S./Global 1/12/2007 30/06/2009 510.8 188.8 -63% 501.3 143.6 -71% 480.6 246.8 -49% 1003.0 724.6 -28%

Average All -26% -26% -19% -4%

Average U.S./Global Only -39% -56% -27% -2%

General Observations: Commodity price movements are more pronounced in recent recessions due to the

greater volume of commodities traded in the past two decades, and particularly in the past few years as

investors seek liquidity. One also has to consider where, geographically, the recession materialized. In the caseof Asia, the negative effects were evident across all commodities; however, the problems following in Russia

actually mitigated the negative effects of both industrial metals and energy prices due the nations dominance

on the production side. Mexico was similar to Russia in the case of energy. A key factor is that recessions tend

to occur post sharp commodity appreciations, which are cause for a chicken and egg debatesuch that

commodity prices tend to fall from highly elevated prices to begin with, particularly in the case of energy and

more specifically, crude oil.

Differences Today vs. the Past: While patterns in commodity prices during recessions are evident, there are

fundamental differences between today and recent history by sub-sector.

Sub-sectors represented by GSCI sub-components.

Some futures markets did not form until the mid 1980s, therefore data not available for all time periods.



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30

Industrial Metals


Industrial metals have performed poorly

throughout recessionary times, due to their direct

ties to global growth. Their price drops occurredafter recessions had already begun, due to the time

required for metals to move through the supply

chain and experience the price effects of economic

downturns. In most cases, prices began to improve

well before the end of the recession, likely instigated

by forward purchases by consumers in the effort to

take advantage of depressed prices and flat term

structures.

Differences Today vs. the Past: Ore grades are

deteriorating while production input costs such as

energy and labor rise and water become scarcer. In

times of recession, there is less scrap available for

recycling as fewer vehicles and white goods are

traded in and far less construction takes place.

Industrial metals have become more vulnerable to

EM (Chinese demand).

GSCI Industrial Metals Index

0

100

200

300

400

500

600

Jan-77 Jan-83 Jan-89 Jan-95 Jan-01 Jan-07

Global/U.S. Mexico Asia Crisis Russia Brazil



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31

Agriculture


GSCI Agriculture Index Agriculture: The sector is a mixed picture during recessions

due to the more regional and weather-dependent dynamics

of most food and soft commodities, and their being less priceelastic to the global economy. The Asia crisis and the

Argentina recession had the most dramatic downward effects

on prices, indicative of the profound influence of EMs on the

sector.

Differences Today vs. the Past: Today, there is a need for

more output as the worlds population grows, as the percapita income of EM middle classes rises and diets switch

from grains to protein. There is a greater scarcity of land and

water; while efficiency rates are growing, they are doing so at

a depreciating rate. With the surge in biofuel

initiatives, commodities such as corn and sugar serve as both

food and energy. Recent high inflation in EMs has resulted in

the hoarding of food commodities with the goal of keeping

inflation at bay and appeasing disgruntled

populaces, resulting in a further commodity scarcity.

Finally, weather patterns, as measured by the oscillator index

(El Nio/La Nia) have become more pronounced, resulting

in greater frequency and severity of floods and droughts.

0

100

200

300

400

500

600

Jan-70 Jan-76 Jan-82 Jan-88 Jan-94 Jan-00 Jan-06




32/55

32

Energy


GSCI Energy Index Energy: Energy prices have seen more

pronounced effects in recent recessions, but

typically followed a period of rapidly risingenergy prices, which likely had a significant

influence on why the recession materialized in

the first place.

Differences Today vs. the Past: Breakeven costs

for crude oil are higher now than ever and

national balance sheets are in need ofrepair, particularly in OPEC nations. Energy is an

input into all commodities and therefore

increases the cost of production across the

board. Today, the downside of energy prices is

more limited and the likelihood of OPEC cuts are

more probable with MENA uprisings and

governments (i.e. Saudi Arabia) implementing

more social programs as a "pay-for-peace"

policy.

0

100

200

300

400

500

600

Jan-83 Jan-89 Jan-95 Jan-01 Jan-07




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33

Gold


Spot Gold Gold: Golds performance in the past decade is

unlike any other period we have seen. What this

period has shown is that, in times of free-floatinggold, prices rise both in recessionary and

deflationary times as investors seek

safety, particularly when interest rates and

currencies depreciate. Today, gold performs like a

currency without a country, and in pure form

(bullion) as an asset without credit risk. Yet, in time

of strong rallies, gold tends to sell off rapidly when

capital is needed to cover losses in other asset

classes.

Differences Today vs. the Past: Gold experienced a

notable rally in the 1980s, but high inflation, strong

oil prices, Soviet intervention in Afghanistan and the

impact of the Iranian revolution prompted investors

to buy heavily. Yet, the double-dip recession of

1980-82 actually caused gold to fall. By August

1999, gold reached an all-time low of US$251.70 on

concerned central banks reducing bullion

reserves, while mining companies sold in the

forward markets.

0

500

1000

1500

2000

Jan-70 Jan-76 Jan-82 Jan-88 Jan-94 Jan-00 Jan-06




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34

Commodities: What to Expect Going Forward


In Sum: Environmental issues are increasingly

becoming a concern for the world at large, and

previously an issue reserved for the developedworld; today is global.

Today, the greatest risk to the downside in

commodity prices is technology. Research and

development has brought about such new

technologies as hydraulic

fracking, unconventional oil from shale and oil

sands, innovative alternative energies and seed

technologies, synthetic rubber and

lighter, stronger metal alloys. Such inventions

allow both for substitution and for non-traditional

means of production and sources of commodities.

Recessions generally stifle technology as credit is

tight and corporates sit on cash. Producersreduce output as commodity prices drop. The

result is that supply drops and eventually prices

rise, but cycles take time, resulting in a pattern of

15-year peak-to-trough movements in the sector

(with 2008-09 being an outlier).

Trade Ideas: For the sector as a whole, history

has proved that it benefits to be either short or

neutral in a recession. Prices tend to turn beforethe onset of the recession, with a precursor

being the shape of the forward curve. Sharp

backwardations are indicative of nearby

tightness with expectations for weaker future

prices, whereas contangos occur when the

belief is that price weakness is temporary.

Contango steepening signals optimism in future

prices. Of course, sentiment does not always

become reality. but the futures curve is

indicative of market sentiment and momentum.

A tactical trader can seek profits in relative value

(inter- and intra-commodity, or calendar

spreads) and volatility trading (options andoption spreads). When volatility trades at higher

than-historical levels, it is advisable to

tactically sell out of the money options along

the forward curve (hedged with futures or

options if so desired).


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35

FX in Historical Perspective


There are few uniform effects across currencies, and across recessions. This reflects the fact that exchange

rates are relative prices and respond not just to cyclical developments. Effects are most clear when recessions

align with periods of risk aversion.

USD tends to appreciate, but is also the most volatile across the safe havens. It tends to perform best at times

of deep crisis as opposed to mere cyclical downturns. CHF and JPY generally perform well during downturns except during the U.S. double dip during the early

1980s and the Asian Crisis, when USD surged.

AUD, as a risk-related and high-beta currency, is the clearest sell during downturns and periods of risk

aversion. The evidence is more ambiguous on other commodity-linked currencies, such as CAD.

DXY

AUD CAD CHF JPY

Oil Shock Nov 73 - Mar 75 2mos 17% rise, followed

by a 15mos 15% fall

-10% unchgd +22% +8%

US Double Dip Jan 80 - Nov 82 +45% -15% -6% -29% -13%

S&L Crisis Jul 90 - Mar 91 -7% -1% unchgd unchgd +10%

Tequila Crisis Dec 94 - Dec 95 -5% -3% +4% +15% -4%

Asia Jan 97 - Jul 98 +16% -25% -8% -11% -18%

Russia/LTCM 1998 H2 -8% unchgd -5% +5% +25%

Argy/DotCom Mar 01 - Nov 01 +7% +8% unchgd +5% +4%

Subprime/Lehman Dec 07 - Jun 09 17% rise followed by 10%

fall

-10% -15% +4% +19%

Risk Currencies Safe Haven Currencies

Source: NBER and RGE


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36

FX: Valuations Matter


Many pre-2008 mis-valuations have been overturned over the course of the crisis. The clearest examples lie at

the respective ends of the spectrum, with CHF and JPY having become the most overvalued currencies after

having been the most undervalued ones.

Risk-related currencies have moved way beyond equilibrium as aggressive monetary policy accommodation

has reflated risky assets.

But structural breaks can invalidate even the conclusions suggested by reduced form equilibrium models (e.g.

regulatory changes boosting/limiting credit provision, monetary unions under threat).

25%

20%

15%

10%

-5%

0%

5%

10%

15%

20%25%

30%

JPY CHF SEK CAD AUD NOK GBP EUR NZD

Mis-valuation against USD

Effective Mis-valuation

20%

15%

10%

-5%

0%

5%

10%

15%

20%

25%

30%

GBP SEK NOK CAD EUR AUD CHF JPY NZD

Mis-valuation against USD

Effective Mis-valuation

Deviation From Estimated Equilibrium Value (December 31, 2007) Deviation From Estimated Equilibrium Value (September 27, 2011)

Source: RGE


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37

FX: Trends Can Be Persistent


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.41.6

1.8

2.0

Jan-73 May-77Sep-81 Jan-86 May-90Sep-94 Jan-99 May-03Sep-07

US recession Non-US cri si s AUDUSD

0.00

0.00

0.00

0.01

0.01

0.01

0.01

0.01

0.02

Jan-73 May-77 Sep-81 Jan-86 May-90Sep-94 Jan-99 May-03Sep-07

US recession Non-US cri si s JPYUSD

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.11.2

1.3

1.4


US recession Non-US cri si s CADUSD

Long-run charts demonstrate

the dominance of structural

trends over the fleeting effects of

recessions.

They are also suggestive of

structural trends that mayinvalidate traditional equilibrium

models.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4


US recession Non-US cri si s CHFUSD

50

70

90

110

130

150

170


US recession Non-US cri si s DXY

Source: RGE


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38

FX: Volatility and Correlation


In FX space, the crisis has been marked by two extreme developments:

Volatility has reached a new order of magnitude;

Cross-currency and cross-asset correlations have reached new heights.

Stay short volatility;

Diversification potential limited, stay in liquid bellwether currencies.

RGE FX Volatility Index, % Rolling 60-day Correlation

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Note: Index calculated on the basis of 1m implied volatility across G10

currencies, three largest minus three smallest in each period

Currency Pair Other Asset Correlation Correlation Correlation

Jan 03 - Dec 07 Jan 07 - Dec 10 Past month

AUDJPY SPX 0.24 0.61 0.78

USDNOK oil -0.21 -0.64 -0.83

USDCAD oil -0.19 -0.50 -0.80

EURUSD gold 0.51 0.59 0.82

EURUSD 2yr rates 0.15 0.56 0.81

EURJPY 2yr rates 0.14 0.57 0.85

USDCAD 2yr rates 0.18 0.40 0.76

Source: RGE

Source: RGE


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In all recessions, EM bonds (both external and domestic debt) outperformed equities.

Despite general EM debt outperformance, only domestic debt fully recovered max drawdowns. EM

external debts performance showed mixed results in this respect. The extent of sell-offs was more

pronounced in EM external debtmost likely due to a higher proportion of non-resident holdings.

EM debt and equities are still very far from the lows of the 2008 recession/crisis.

If recession deepens, supportive local monetary policies and a smaller share of non-resident holders are

likely to ensure EM local currency debts outperformance vis--vis EM external debt and equities.

39

Performance of EM Debt and Equities in Past Crises




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Great deal of divergence within EMs, often depending on a specific combination of local (Russia

1998, Indonesia 1998, etc.) and global factors.

Asia FX tended to outperform EMEA and LatAm peerswith the exception of the 1997-2000

recession, when the crisis originated in the region. This is due to the fact that Asia FX appreciation pressures

come from both current and capital accounts, while most local central banks still have the fear of free

float.

Commodity FX (RUB, ZAR, BRL, CLP, COP) and liquid currencies that trade as regional proxies (BRL, PLN) tend

to suffer more during sell-offs.

Currencies with real or perceived macro-balance weaknesses (TRY, INR) are other easy targets when risk-aversion increases.

A notable feature is a significant increase in EM FX correlations in the past years, which results in

indiscriminate rallies and sell-offs.

Despite the September 2011 sell-off, most EM FX are far from the lows of the 2008 crisiswith a notable

exception of TRY. Other weak links to watch are MXN in LatAm, INR in Asia (weak macro-balances), and

RUB, PLN, HUF in EMEA.

Overall, EMEA FX looks much weaker fundamentally and is already closer to the 2008 levels than its peers.The weak fundamentals increase the chances of EMEA FX depreciating beyond the 2008 peak if the crisis

deepens.

40

Performance of EM FX in Past Crises



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41

Performance of Asia ex-Japan (AXJ) FX in Past Crises




42/55

42

Performance of Latin America FX in Past Crises




43/55

43

Performance of EMEA FX in Past Crises




44/55

EM equities remain among the most correlated with other risky assets and most widely held by foreign

investors, and this might once again contribute to their overall underperformance during future recession

episodes. EM local currency debt likely to outperform other asset classes (least correlated with global risk, weak

growth and inflation environment, central banks easing), even though acute risk aversion can result in

periods of negative returns.

Asia FX is likely to outperform its peers due to a combination of higher appreciation pressures and lower

tolerance of free-floating. EMEA FX is the weakest link fundamentally and flow-wise.

44

EM Assets: Expectations for Future Recessions


Appreciation Pressures (EMP) and Central Banks Propensity to Intervene in the FX Market

Source: RGE, Bloomberg, IMF


45/55

45

Equity Fundamentals and Performance Drivers


During the past down cycle, defensive typically trade at a premium to cyclical as a result of better

earnings visibility and relatively low valuation ahead of the downturn.

Current recent valuation levels indeed suggest significant downside risks to cyclical especiallydiscretionary industrials where valuation premium are unjustified. Staples and health are trading at relatively

low levels at this point in the cycle.

EPS momentum suggests current consensus EPS estimates in cyclical sectors remain elevated, therefore

we expect revision to further constrain performance.

Bottom Up

Consensus

Estimates

EPS-

growth

(%)

Sales-

growth

(%)

ROE-

growth

(%)

PE-NTMA

S&P 500 13.88 6.25 3.63 10.61

Energy 15.38 6.92 2.61 8.31

Materials 18.82 8.21 3.80 9.50

Industrials 17.01 7.59 9.65 10.70

Cons. Discr 14.42 7.27 5.08 12.68

Cons. Staples 9.21 6.01 1.71 13.35Health Care 6.24 3.37 (5.23) 10.45

Financials 23.47 4.38 15.08 8.31

Technology 12.53 9.12 (5.03) 11.47

Telecom 12.35 3.93 8.58 14.40

Utilities (0.84) 3.29 (5.67) 13.44

*NTMA

U.S.-based data Source: Factset


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46

Performance Ranking During Past Recessions


Average Recession Energy Materials Industrials

Cons.

Discr Financials Tech

Cons.

Staples Health Care Telecom UtilitiesMax Drawdown 5 7 6 10 9 8 1 2 4 3

Sortino Ratio 7 3 8 4 5 6 2 1 10 9

Information Ratio 10 4 8 9 5 3 2 1 7 6

Total Rank 8 3 9 6 5 4 2 1 10 6

Subprime Energy Materials Industrials

Cons.


Cons.

Staples Health Care Telecom Utilities

Max Drawdown 8 9 6 7 10 3 1 2 4 5

Sortino Ratio 5 4 8 2 7 1 3 6 10 9


Total Rank 6 5 9 4 10 1 2 3 7 7

Dot.Com Energy Materials Industrials

Cons.


Cons.


Max Drawdown 5 7 8 9 6 10 1 3 2 4

Sortino Ratio 8 2 6 5 4 7 3 1 9 10


Total Rank 9 2 5 8 4 7 3 1 6 9

S&L Energy Materials IndustrialsCons.


Cons.


Max Drawdown 2 6 7 9 8 10 4 5 3 1

Sortino Ratio 4 9 10 6 5 8 1 2 7 3


Total Rank 4 8 10 7 5 8 1 3 6 2

Defensive sectors typically outperform, but this may vary depending on the type of recession and valuation before recession.

Sortino Ratio U.S.-based dataInformation Ratio

Preferred Sector Strategy under Recession; 1 = Highest and 10 Lowest in Ranking

Source: Haver


47/55

47

Sector Performance During Recession


Defensive sectors typically outperform, but this may vary depending on the type of recession.


Cons.


Cons.

Staples

Health

Care Telecom Uti li ties S&P 500

Max Drawdown -22.9% -27.1% -26.4% -29.3% -28.7% -28.7% -14.8% -17.5% -18.6% -18.2% -22.0%

Sortino Ratio -0.63 -0.22 -0.70 -0.31 -0.36 -0.44 0.76 1.02 -1.07 -0.73 -0.18

Information Ratio -0.94 0.19 -0.66 -0.78 -0.06 0.24 0.63 0.95 -0.29 -0.19 0.00


Cons.


Cons.

Staples

Health


Max Drawdown -42.5% -44.5% -35.0% -41.1% -47.5% -33.1% -23.3% -27.9% -33.5% -34.4% -33.1%

Sortino Ratio -1.38 -1.33 -1.79 -0.99 -1.77 -0.76 -1.17 -1.42 -1.89 -1.80 -34.4%

Information Ratio -0.40 0.30 -0.82 -0.43 -0.68 0.63 0.71 0.00 -0.02 -0.06 0.00


Cons.


Cons.

Staples

Health


Max Drawdown -16.4% -23.1% -27.2% -28.4% -21.4% -34.0% -8.6% -11.6% -11.5% -12.5% -20.4%

Sortino Ratio -0.80 1.16 0.33 0.38 0.48 -0.13 0.58 1.66 -0.98 -1.95 -12.5%

Information Ratio -2.36 1.04 -0.10 -1.40 0.49 0.55 -0.94 0.99 -0.60 -0.73 0.00

S&L Energy Materials IndustrialsCons.Discr Financials Tech

Cons.Staples

HealthCare Telecom Uti li ties S&P 500

Max Drawdown -9.7% -13.8% -17.1% -18.6% -17.4% -18.9% -12.5% -13.0% -10.6% -7.6% -12.6%

Sortino Ratio 0.27 -0.48 -0.64 -0.31 0.21 -0.44 2.87 2.83 -0.33 1.57 -7.6%

Information Ratio -0.04 -0.77 -1.07 -0.50 0.02 -0.46 2.11 1.85 -0.26 0.22 0.00

U.S.-based data

Sortino Ratio Information RatioSource: Haver


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48

Risk Metrics During Past Recessions


All metrics are annualized


Cons.


Cons.

Staples

Health

Care Telecom Util ities S&P 500

Volatility 24.2% 29.5% 30.7% 32.9% 37.3% 36.6% 17.4% 20.4% 22.1% 18.9% 24.1%

Downside Deviatio 39.6% 46.8% 49.3% 51.8% 59.0% 56.3% 26.0% 30.4% 38.3% 35.4% 18.9%Tracking Error 24.2% 29.5% 30.7% 32.9% 37.3% 36.6% 17.4% 20.4% 22.1% 18.9%


Cons.


Cons.

Staples

Health


Volatility 37.7% 41.1% 38.1% 39.8% 56.7% 33.6% 20.0% 23.8% 30.1% 27.9% 31.0%

Downside Deviatio 70.0% 74.7% 69.8% 68.5% 100.6% 59.1% 37.1% 44.9% 56.1% 54.4% 27.9%

Tracking Error 37.7% 41.1% 38.1% 39.8% 56.7% 33.6% 20.0% 23.8% 30.1% 27.9%


Cons.


Cons.

Staples

Health


Volatility 18.9% 26.0% 29.1% 30.3% 21.3% 45.9% 13.0% 16.4% 19.9% 17.3% 22.4%

Downside Deviatio 32.5% 38.2% 44.8% 48.7% 35.1% 71.2% 20.8% 25.6% 35.5% 38.9% 17.3%

Tracking Error 18.9% 26.0% 29.1% 30.3% 21.3% 45.9% 13.0% 16.4% 19.9% 17.3%

S&L Energy Materials Industrials

Cons.


Cons.

Staples

Health


Volatility 15.9% 21.5% 25.0% 28.5% 33.9% 30.4% 19.4% 21.0% 16.3% 11.5% 18.9%Downside Deviatio 16.5% 27.6% 33.3% 38.3% 41.2% 38.5% 20.2% 20.8% 23.3% 13.0% 11.5%

Tracking Error 15.9% 21.5% 25.0% 28.5% 33.9% 30.4% 19.4% 21.0% 16.3% 11.5%

U.S. based data

Source: Haver


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49

Cumulative Return Metrics During Recession



Cons.


Cons.

Staples

Health


Cum Return -63.3% -8.5% -15.7% -6.7% -21.6% -7.2% 1.8% 2.3% -16.5% -17.4% -18.2%

Cum Excess Return -18.4% 3.5% -9.5% -10.3% -15.5% 5.7% 4.7% 8.6% -6.0% -3.2% 0.0%


Cons.


Cons.

Staples

Health


Cum Return -137.6% -33.6% -44.8% -21.8% -72.1% -13.9% -13.4% -20.3% -36.5% -33.2% -34.4%

Cum Excess Return -15.8% 7.8% -19.1% -11.3% -49.6% 13.0% 17.3% 0.0% -0.8% -1.8% 0.0%


Cons.


Cons.

Staples

Health

Care Telecom Uti li ties S&P 500Cum Return -79.6% 12.0% 4.2% 5.2% 4.8% -2.7% 3.4% 11.5% -10.6% -24.7% -12.5%

Cum Excess Return -38.6% 8.6% -0.8% -14.0% 2.8% 11.4% -16.6% 12.1% -12.7% -11.3% 0.0%

S&L Energy Materials Industrials

Cons.


Cons.

Staples

Health


Cum Return 27.3% -3.9% -6.4% -3.5% 2.5% -5.0% 15.5% 15.7% -2.3% 5.7% -7.6%

Cum Excess Return -0.8% -6.0% -8.5% -5.6% 0.4% -7.1% 13.4% 13.6% -4.4% 3.6% 0.0%

U.S.-based data

Source: Haver


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50

Protections Against Shocks


Balance sheets have significantly changed since the last recession and the winners/losers of the early liquidity dry

up will not necessarily be the same. However, given the nature of certain business activities in specific sectors, its

safe to say that, based on the 2008 experience (where sectors in need of financing took hits from a liquidity

crunchmaterials, industrials and staples), all look well suited to better weather a similar event today. Financials

are the most at risk to this type of shock. Materials and industrials, though, look particularly vulnerable to a

Chinese/global slowdown. Financials, utilities and industrials, telecom look particularly vulnerable to a tightening

in credit conditions.

2007 2010 2007 2010 2007 2010

S&P 500 225.51 133.30 551.89 268.03 358.51 366.39

Energy 34.50 32.85 8.02 6.15 25.27 29.17

Materials 50.56 71.12 8.47 4.36 10.89 22.21

I ndustri al s 110. 99 124. 83 59.78 36. 2 20.25 40.53

Cons. Discr 91.92 78.62 23.96 14.92 34.29 31.88

Cons. Staple s 52.82 63.79 14.35 12.74 9.15 16.17

Health Care 36.05 38.21 8.14 11.7 35.39 59.52

Financials 551.46 266.95 739.75 237.36 412.84 265.11

Technology 23.15 21.20 4.53 5.45 44.73 63.61

Telecom 77.77 99.05 4.47 6.53 3.3 6.1

Util itie s 131.63 1 27.58 17.53 14.07 8.12 10.83

Debt to Equity S.T Debt per Share Cash per Share

Relative Cash per share Relative S.T. Debt per share

Source: Haver

ST Debt and Cash per Share (current relative to pre-crisis level)


51/55

51

Monthly Return Distribution


Return distribution varies by sector. Less volatile and low tail riskhealth care, telecom, staples and utilities.

Source: Haver


52/55

52

What to Expect From Equity in a Recession Scenario


While, in general, defensive sectors outperform cyclical sectors, the result may vary depending on the type of

recession and valuation level ahead of the recession.

In the subprime recession, tech performed exceptionally well for a cyclical sector, while in the post dot.com

recession of 2001, telecom and tech were the hardest hit, mainly due to overvaluation in those sectors.

While the Japanese and the S&L recession share the most similarity to the coming double dip at the macro

level, sector performance could be different as relative valuation and micro fundamentals look quite different.

Thus, an unbiased forward-looking assessment of the key drivers of future performance must be

undertaken, especially if one seeks to position for a longer time horizon.

ISM Cycle and Sectors Performance ISM and Global PMI in Past Recessions

Note: Performance based on average monthly return during the period divided by period monthly volume. Source: RGE, Markit

Source: RGE, Markit


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Macro and Market Outlook August 2011 Update



54/55

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Documents

Investment Portfolio for a Down Market - October 12 2011