Outlook For Financial Markets And Investment Strategy

Chen ZhaoChief Global StrategistGlobal Investment Strategy

January 2014

2

Global Economies Resynchronize

© BCA Research 2014

70

60

50

40

02 04 06 08 10 12 14

60

40

20

0

-20

-40

U.S. ISM* PURCHASING MANAGERS'COMPOSITE INDEX (LS)TOTAL RETURN:

STOCK-TO-BONDRATIO (RS)

% Ann%Chg

* INSTITUTE FOR SUPPLY MANAGEMENT.

2

0

-2

-4

04 06 08 10 12 14

2

0

-2

-4

EURO AREA REAL GDPMODEL ESTIMATE*

Ann%Chg

Ann%Chg

* BASED ON REAL EFFECTIVE EXCHANGE RATE, CORPORATE BOND YIELDS AND PMI.

© BCA Research 2014

3

Global Economies Resynchronize

© BCA Research 2014

10

5

0

-5

-10

70 75 80 85 90 95 2000 05 10 15

10

5

0

-5

-10

GLOBAL INDUSTRIAL PRODUCTION* MODEL ESTIMATE**

Ann%Chg

Ann%Chg

* GDP-WEIGHTED AVERAGE OF 40 COUNTRIES.

** BASED ON THE BCA GLOBAL ECONOMIC LEADING INDICATOR, THE PRICE OF BRENT OIL AND BAA SPREADS.

4

Price Inflation In Developed World

© BCA Research 2014© BCA Research 2014

4

3

2

1

0

-1

2000 02 04 06 08 10 12 14

70

60

50

40

30

20

10

EURO AREHEADLINE INFLATION (LS)INFLATION DIFFUSION INDEX* (RS)

Ann%Chg

%

* PERCENTAGE OF CPI COMPONENTS WHICH ARE RISING. SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT.

5

4

3

2

1

0

-1

2000 02 04 06 08 10 12 14

70

60

50

40

30

20

U.K.HEADLINEINFLATION (LS)

INFLATION DIFFUSIONINDEX* (RS)

Ann%Chg

%

* PERCENTAGE OF CPI COMPONENTS WHICH ARE RISING. SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT.

5

Price Inflation In Developed World

6 4

2

0

-2

-4

04 06 08 10 12 14

6 4

2

0

-2

-4

4

2

0

-2

4

2

0

-2

SERVICES GOODS

Ann%Chg

Ann%Chg

U.S. CONSUMER PRICE INFLATIONHEADLINE

Ann%Chg

Ann%Chg

© BCA Research 2014

6

Profits, Yield Curve And Equity Multiples

© BCA Research 2014© BCA Research 2014

80

40

0

-40

2000 02 04 06 08 10 12 14

80

40

0

-40

U.S. S&P 500 OPERATING EARNINGS PER SHAREYEAR-OVER-YEAR GROWTHMODEL ESTIMATE*

Ann%Chg

Ann%Chg

* BASED ON THE CHANGE IN QUALITY SPREADS, NEW ORDERS AND THE GAP BETWEEN PRODUCTIVITY GROWTH AND PERSONAL INCOME GROWTH-PER-CAPITA.

11

12

13

14

15

2010 2012

400

350

300

250

200

U.S. S&P 500 FORWARD P/E RATIO* (LS) YIELD CURVE** (RS)

Bp

* SOURCE: THOMSON REUTERS / IBES.** 30-YEAR MINUS 2-YEAR GOVERNMENT BOND YIELD.NOTE: BOTH SERIES SHOWN SMOOTHED.

7

Changing Correlations

© BCA Research 2014© BCA Research 2014

.8

.4

0

-.4

02 04 06 08 10 12 14

.8

.4

0

-.4

1800

1600

1400

1200

1000

800

7

6

5

4

3

2

4-YEAR WEEKLY ROLLING CORRELATION:

U.S. S&P 500 VS. 10-YEAR GOVERNMENT BOND YIELD

%

U.S.S&P 500 (LS)10-YEAR GOVERNMENT BONDYIELD (RS)

%

.8 .6 .4

.2 0

-.2

-.4

08 10 12

.8 .6

.4

.2 0

-.2

-.4

1800

1600

1400

1200

1000

800

700

600

500

400

26-WEEK ROLLING CORRELATION**:

U.S. S&P 500 VS. CONTINUOUSCOMMODITY INDEX*

U.S. S&P 500 (LS)CONTINUOUS COMMODITY INDEX* (RS)

* SOURCE: THOMSON REUTERS.** SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT.

8

Are We In A Bubble?

© BCA Research 2014 © BCA Research 2014

15

14

13

12

11

10

08 10 12

15

14

13

12

11

10

250

200

150

100

250

200

150

100

12-MONTH FORWARD P/E RATIO**

U.S.S&P 500*OPERATING EPS*

* SHOWN REBASED TO 100 AT THEIR BOTTOMS.** SHOWN SMOOTHED EXCEPT FOR THE LATEST DATAPOINT. SOURCE: THOMSON REUTERS / IBES.

Phase IPhase II

9

Are We In A Bubble?

© BCA Research 2014 © BCA Research 2014

3

2

1

0

-1

-2

60 65 70 75 80 85 90 952000 05 10 15

3

2

1

0

-1

-2

EXTREMELY OVERVALUED

OVERVALUED

EXTREMELY UNDERVALED

UNDERVALUED

BCA U.S. EQUITY VALUATION INDEX*

* SHOWN STANDARDIZED.

100

80

60

40

20

0

-20

-40

80 85 90 95 2000 05 10 15

100

80

60

40

20

0

-20

-40

U.S. S&P 500DEVIATION FROM FAIRVALUE BASED ONCOMPETING ASSETS*

% %

* BASED ON 10-YEAR GOVERNMENT BONDS, HOUSE PRICES AND BAA CORPORATE BONDS. ESTIMATED SINCE 1955.

10

Japan: Nominal Or Real Problem?

© BCA Research 2014© BCA Research 2014

100

80

60

40

20

90 95 2000 05 10

100

80

60

40

20

JAPANESE RELATIVE TO GLOBAL EQUITIES IN COMMON-CURRENCY TERMS*

PHASE I ADJUSTMENT:

DEBT MINIMIZATION

* SHOWN REBASED TO JAN. 1989 = 100.

4

2

0

-2

90 94 98 02 06 10 14

60

80

100

120

JAPANESECONSUMER PRICE INFLATION (LS)TRADE-WEIGHTED YEN* (INVERTED, RS)

Ann%Chg

* SOURCE: J.P. MORGAN CHASE & CO.

Benchmark

performance

Severe bear

market

PHASE II ADJUSTMENT:

PROFIT MAXIMIZATION

11

Chinese Stocks: Cyclical Trend Versus Structural Story

© BCA Research 2014© BCA Research 2014

.52

.48

.44

.40

.36

2012 2013

.52

.48

.44

.40

.36

CHINESE SMALL CAP* RELATIVE TO A SHARES**

* SOURCE: MSCI INC. ** SHOWN IN LOCAL-CURRENCY TERMS.

14

12

10

8

6

2000 02 04 06 08 10 12 14

14

12

10

8

6

CHINESE REAL GDP:ANNUALIZED GROWTH RATE

QUARTER-OVER-QUARTER

YEAR-OVER-YEAR

Ann%Chg

Ann%Chg

12

Commodity Plays Versus Commodity Prices

© BCA Research 2014

1.05

1.00

.95

.90

.85

.80

08 10 12

650

550

450

350

1.1

1.0

.9

.8

.7

700

600

500

400

CAD / USD EXCHANGE RATE (LS)CONTINUOUS COMMODITY INDEX* (RS)

CAD/USD

AUD / USD EXCHANGE RATE (LS)CONTINUOUS COMMODITY INDEX* (RS)

AUD/USD

* SOURCE: THOMSON REUTERS.

13

Commodity Plays Versus Commodity Prices

© BCA Research 2014 © BCA Research 2014

140

130

120

110

100

90

80

70

60

50

02 04 06 08 10 12 14

1.2

1.0

.8

.6

EMERGING ASIAN RELATIVE TOLATIN AMERICAN EQUITIES* (LS)

GLOBAL MANUFACTURED GOODS RELATIVE TO RAW MATERIALS PRICES** (RS)

* SHOWN IN U.S. DOLLAR TERMS AND REBASED TO JAN. 2002 = 100.SOURCE: MSCI INC.

** SOURCE: NETHERLANDS BUREAU FOR ECONOMIC POLICY ANALYSIS.

120

100

80

60

40

20

98 2000 02 04 06 08 10 12 14

120

100

80

60

40

20

U.S. S&P 500 RELATIVETO PRICE OF OIL*

* BRENT CRUDE OIL.

A mega switch?

14

Bear Market In Gold Has Further To Go

© BCA Research 2014

1600

900

500

300

70 75 80 85 90 95 2000 05 10 15

1600

900

500

300

1600

900

500

300

1600

900

500

300

REAL* PRICE OF GOLD (IN 2013 US$)

REAL* S&P 500(IN 2013 US$)

* DEFLATED USING HEADLINE CPI.

Breakout

Breakdown