Rebuilding confidenceHan de JongGroup EconomicsMarch 2012

2

Six months ago: pessimism

• Contagion in euro crisis

• Sharp drop in economic activity & business confidence

Fear for another sharp downturn like ‘Lehman’

3

Why did the global economy not ‘collapse’?

• Financial system did not dry up

• European leaders took positive steps

44

Business confidence: PMI and ISM

index

Source: Bloomberg

30

35

40

45

50

55

60

65

05 06 07 08 09 10 11 12

Eurozone PMI US ISM

55

Business confidence: PMI

Source : Bloomberg

Index

35

40

45

50

55

60

65

2006 2007 2008 2009 2010 2011 2012Brazil China India

66

Divergence US and eurozone

Unemployment, %

Source: Bloomberg

4

5

6

7

8

9

10

11

12

06 07 08 09 10 11 12US Eurozone

7

Money growth

-2

0

2

4

6

8

10

12

14

04 05 06 07 08 09 10 11 12Eurozone M3 US M2

% yoy

Source: Bloomberg

88

Divergence Europe: car sales

Portugal -48.8

Greece -45.2

Ireland -8.6

France -20.2

Italy -18.9

Netherlands -10.0

UK -2.5

Germany 0.0

Estonia +29.7

Iceland +148.5

% yoy, February 2012

Source: Bloomberg

99

US: self sustaining growth

Source: Bloomberg Small businesses' confidence Source: Bloomberg Home builders' confidence

Source: Bloomberg Source: Bloomberg Univ.of Michigan

NFIB index NAHB index

Car sales, millions Consumer confidence, index

80

85

90

95

100

07 08 09 10 11 12

0

10

20

30

40

07 08 09 10 11 12

8

10

12

14

16

18

07 08 09 10 11 12

50

60

70

80

90

100

07 08 09 10 11 12

10

China hard landing or soft landing: Car sales

0

5

10

15

20

25

05 06 07 08 09 10 11 12

millions

Source: Bloomberg

1111

Economic situation

• US moving to self-reinforcing recovery

• Europe improving gradually

• Emerging economies taking advantage of industrial recovery – and room to stimulate

1212

Euro crisis

• LTROs have eased pressure

• Greek tragedy no longer problem for financial markets – now purely political

• New Compact

• Likely increase bail-out funds

• Calm has returned to markets

1313

2yr government bond yields

Source: Bloomberg

%

1

2

3

4

5

6

7

8

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Italy Spain

1414

European banks tightening lending criteria until Q4

Net-tightening (%)

Source: Thomson Reuters Datastream

-20

0

20

40

60

80

03 04 05 06 07 08 09 10 11 12

Corporates Consumers Housing

tightening

easing

15

Risks to the ECB’s approach

• ECB balance sheet riskier

• Inflation

• Phenomenal distortion in markets, will lead to misallocation

• Reduced urgency other policymakers

- Public finances

- Structural reform

1616

Structural improvements?

• Deleverging continues

• Eurozone public finances much improved

• Structural reform

17

Spain

Source: Thomson Reuters Datastream EUR bn, 3mma, index Jan08=100 Source: Thomson Reuters Datastream GBP/EUR bn, 12mma, index Jan07=100

Source: Thomson Reuters Datastream EUR bn, 12 mm total Source: OECD, estimates 2011 en 2012 OECD % GDP

General government net borrowing

Exports Exports to emerging Asia

Current account

70

80

90

100

110

120

08 09 10 11 12Germany Spain

-140

-120

-100

-80

-60

-40

-20

0

20

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

100

120

140

160

180

200

07 08 09 10 11 12UK Spain

-12

-10

-8

-6

-4

-2

0

2

4

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

18

Italy

Source: Thomson Reuters Datastream EUR bn, 3mma, index Jan08=100 Source: Thomson Reuters Datastream EUR bn, 3mma, index Jan08=100

Source: OECD, estimates 2011 en 2012 OECD % GDP Source: OECD, estimates 2011 en 2012 OECD % GDP

General government net borrowing

Exports Imports

Primary budget balance

70

80

90

100

110

120

08 09 10 11 12Germany Italy

60

70

80

90

100

110

120

08 09 10 11 12Germany Italy

-1

0

1

2

3

4

5

6

7

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

-10-9-8-7-6-5-4-3-2-10

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

19

Unemployment

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Unemployment, % Unemployment, %

0

5

10

15

20

25

05 06 07 08 09 10 11 12Greece Spain Portugal

0

2

4

6

8

10

12

14

16

05 06 07 08 09 10 11 12Ireland Italy Germany

2020

US: Debt deleveraging households

Source: Thomson Reuters Datastream

% GDP

0

20

40

60

80

100

120

55 60 65 70 75 80 85 90 95 00 05 10Households Business Government

21

Risks

• Escalation euro crisis

- Austerity fatigue

- Loss of patience

• Oil prices

• Rising interest rates

• China hard landing

• Too much austerity

• Too little austerity

22

Price earning ratio S&P 500

Source: Bloomberg

0

5

10

15

20

25

30

35

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

232323

Investment portfolios – adding risk

• Equities: raised to neutral

• Equities: - more cyclical exposure

- overweight Emerging Markets

• Bond: High yields, corporates, Emerging Markets

2424

Equities

2525

Bonds

30

3010

1010

10

Government bonds Corporate bonds High yield (funds)

Inflation-linked bonds Covered bonds EM bonds (funds)

%

26

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