2012 Global Forum

Connecting Women – Empowering Change

Regional and Global Megatrends Impacting Economic Growth

Presented by Cynthia Steer

The International Alliance for Women October 19, 2012

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Agenda

I. Unemployment

II. Wages

III. Commodity Prices

IV. Real Estate

V. Emerging Markets and Grand Convergence

Section I.

Unemployment

Unemployment

U.S. unemployment rate in August fell to 8.1% from 8.3%, but the fall occurred due to 368,000 discouraged workers dropping out of the labor force, leaving ~12.5 million unemployed and still looking for work

8.1% is still high compared to the historical average of ~5.8% since 1948

Looking over the last 20 years, unemployment ranged from 3.8% in April 2000, to 10% in October 2009

At 8.1% in U.S., unemployment rate significantly higher than Japan (4.4%) and South Korea (3.2%), but still below Spain (24.7%), Italy (10.6%), and overall Eurozone (11.2%)

May not get down to 5/6% until late teens (per Fed’s own projections)

4

Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

U.S. Unemployment and Labor Force Participation Rate: 1990 Q1 to 2012 Q2

5

Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

Quarterly data as of June 30, 2012.

63

64

65

66

67

68

3

4

5

6

7

8

9

10

11

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Unemployment Rate (Left Side) Labor Force Participation Rate (Right Side)%

Avg. Labor Force Participation: 66.23%Avg. Unemployment:06.04%

%

Eurozone1 Unemployment and Labor Force Participation Rate: 1992 Q3 to 2012 Q2

6

1 Eurozone labor force participation rate: excludes Malta and Cyprus. Quarterly data as of June 30, 2012.

Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

66

67

68

69

70

71

72

73

74

6

7

8

9

10

11

12

Sep-92 Mar-94 Sep-95 Mar-97 Sep-98 Mar-00 Sep-01 Mar-03 Sep-04 Mar-06 Sep-07 Mar-09 Sep-10 Mar-12

Unemployment Rate (Left Side) Labor Force Participation Rate (Right Side)% %

Avg. Labor Force Participation: 70.03%Avg. Unemployment:09.47%

Japan Unemployment and Labor Force Participation Rate: 1990 Q1 to 2012 Q2

7

Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

Quarterly data as of June 30, 2012.

72

73

74

75

76

77

78

79

80

81

82

1

2

3

4

5

6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Unemployment Rate (Left Side) Labor Force Participation Rate (Right Side)%

Avg. Labor Force Participation: 78.16%Avg. Unemployment:03.88%

%

South Korea Unemployment and Labor Force Participation Rate: 1990 Q1 to 2012 Q2

8

Source: Global Financial Data; FactSet; Bloomberg; BNY Mellon

Quarterly data as of June 30, 2012.

61

62

63

64

65

66

67

68

69

70

71

1

2

3

4

5

6

7

8

9

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Unemployment Rate (Left Side) Labor Force Participation Rate (Right Side)%%

Avg. Labor Force Participation: 66.64%Avg. Unemployment:03.42%

Section II.

Wages

Wages

Real median U.S. household income at $50,054; lower than the level in 1999 (slide 11)

- Growth stagnant over last two - three decades on a median basis

Compensation of employees at 54.9% of GDP; lowest in almost 40 years and on a downtrend since 1971 (slide 12)

Trickle down not evident for middle class workers

- Corporate profitability skyrocketed to 9.6% of GDP in 2011

Distribution of reward skewed in favor of capital, partly because of high unemployment since the great recession and more broadly because the world became “labor surplus” with the integration of India and China in the global economy

Political debate about the appropriate U.S. tax code

Debate not confined to U.S.; emulated in parts of Europe; French socialists decided to increase taxes on upper income brackets

10

Source: Bloomberg; Census Bureau; FactSet; BEA; NBER; IMF; BNY Mellon

U.S. Household Median Income:1967 to 2011 (Annual)

11

Source: Bloomberg; Census Bureau; BNY Mellon

196740,261

197847,659

198344,823

198950,624

199347,884

199954,932

200452,788

200754,489

201150,054

Average 48,641

38,000

40,000

42,000

44,000

46,000

48,000

50,000

52,000

54,000

56,000

38,000

40,000

42,000

44,000

46,000

48,000

50,000

52,000

54,000

56,000 U.S. $ U.S. $

Annual data as of December 31, 2011.

U.S. Compensation of Employees (% of Nominal GDP):1947 to Q2 2012 (Quarterly)

12

Mar. 194753.6

Sep. 197459.8

Dec. 199655.8

Mar. 200159.0

Dec. 200857.1

Jun. 201254.9

51.0

52.0

53.0

54.0

55.0

56.0

57.0

58.0

59.0

60.0

61.0

51.0

52.0

53.0

54.0

55.0

56.0

57.0

58.0

59.0

60.0

61.0

1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

% %

Source: FactSet; BEA; BNY Mellon

U.S. compensation of employees and nominal GDP: seasonally adjusted annual rates.Quarterly data as of June 30, 2012.

Section III.

Commodity Prices

Commodity Prices

Up-year for commodities but uneven/bifurcated

- Agriculture: some commodities up big spurred by the drought while others are languishing – corn (32.35%), soybeans (53.39%), wheat (29.33%), and coffee (-24.84%)

- Metals: precious metals (gold: 12.29%, $1799), silver (23.54%, $34), platinum (18.86%) up on central bank balance sheet expansions but cyclically sensitive aluminum (-1.04%) and copper (6.42%) languishing on lackluster China demand

- Energy: gasoline (28.63%) ahead of crude oil (-3.43%) and natural gas (-19.23%)

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Source: Bloomberg; BNY Mellon

Commodity Total Returns1: September 13, 2012

YTD 3-Month 1-Year 3-Year 5-Year

Energy 4.72 20.57 7.72 22.59 -28.28

Crude Oil -3.43 15.88 6.87 4.53 -42.48

Unleaded Gasoline 28.63 29.57 28.44 98.55 50.82

Natural Gas -19.23 36.96 -47.50 -70.96 -92.85

Precious Metals 13.79 10.80 -5.52 76.94 139.93

Gold 12.29 9.12 -3.80 73.35 136.71

Silver 23.54 19.57 -16.43 103.24 160.94

Platinum 18.86 14.12 -8.61 22.68 23.97

Industrial Metals 2.56 7.15 -12.26 9.91 -21.78

Aluminum -1.04 5.35 -16.59 -3.26 -37.34

Copper 6.42 9.21 -7.91 27.13 8.51

Agriculture 21.69 31.76 4.74 59.19 15.10

Corn 32.35 48.99 16.56 118.52 56.07

Soybeans 53.39 32.43 30.78 98.76 111.00

Wheat 29.33 39.83 15.68 15.45 -51.60

Coffee -24.84 14.05 -37.82 17.11 1.34

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Source: Bloomberg; BNY Mellon1 S&P GSCI Total Return Indices

Commodity Prices

Outlook

- Asset allocation diversification – investors want to be in commodities even though correlations up

- Expectations of higher global economic growth in 2013; alternatively, to the extent slowdown extended commodities will be suppressed

- Monetary stimulus leading to premise hard assets more likely to retain value as supply of fiat currencies increases significantly

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Section IV.

Real Estate

Real Estate

Case-Shiller index points to signs of incipient recovery in housing valuations

U.S. residential real estate bottoming out in mid 2012, homebuilder stocks broke out in late 2011

Long period of excesses being purged, positive reaction to low rates, and availability of mortgages for high quality borrowers leading to improvement in initially hard hit sand states (Nevada, Florida, Arizona); as always, uplift not homogenous

Appreciation rates likely subdued next few years because of shadow inventory overhang from underwater mortgages; correction began in 2006; approximately seven years old depending on one’s timeline; coming to close, but not looking for 10% year-over-year price increases

Housing refinancing rate gone up quickly in response to falling rates and outstanding debt composition shifting to newly originated creditworthy mortgages

Residential construction bottomed and picking up from a very depressed level

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Source: Bloomberg; FactSet; Census Bureau; BNY Mellon

U.S. Home Prices: March 31, 1987 – June 31, 2012(Quarterly): In Search of the Bottom

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Mar. 198762.5

Max.Mar. 2006

191.0

Jun. 2012131.1

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

190.0

200.0

210.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

190.0

200.0

210.0

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Source: Bloomberg; BNY Mellon

Home Price Index: S&P/Case-Shiller U.S. National Home Price Index seasonally adjusted; Base value: January 2000 = 100Data as of June 30, 2012.

Section V.

Emerging Markets and Grand Convergence

Emerging Markets and Grand Convergence

One of the great grand themes of late 20th and early 21st century: grand convergence of emerging markets to advanced economy status – BRICs and secondary emerging market entities like MIST. Also, frontier markets now moving into arguably full-fledged emerging market status – Nigeria, Egypt, etc.

World Bank report shows emerging market versus advanced economy growth to 2025 (4.7% vs. 2.3%)

Tremendous investment in infrastructure, education, healthcare, etc. required to support population growth. Supply in fixed income securities (USD and local currency) in emerging markets likely to increase rapidly (compared to U.S. and Eurozone). Expect emerging market entities to sponsor more equity over time

Bottom line: flourishing security origination to finance growth; security origination and capital market development follows emerging market growth

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Source: OECD; IMF; BNY Mellon

Emerging Markets and Grand Convergence

USD emerging market index trading at 322 bps (option-adjusted spread since August 2000: low 139 bps on June 1, 2007, high 1087 bps, average: 418 bps); yield lowest ever 4.70% (high 18.19% in March 1995, average 8.89%)

Historically low yields reflect significant decline in inflation, global search for yield, low indebtedness, growth arena, etc.

Last year, emerging market equities performed poorly, and this year, China: Shanghai Composite PE: 11.60 (average since Q4 1997 31.65, low 11.44 in Q4 2011, high 62.08 in Q4 2000); Russia Micex Index PE: 5.84 (average since July 2003 9.29, low 3.02 in November 2008, high 21.10 in November 2009)

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Source: OECD; IMF; BNY Mellon

Numbers (millions) and Share (%) of the Global Middle Class*: 2009 to 2030

2009 2020 2030

North America 338 18% 333 10% 322 7%

Europe 664 36% 703 22% 680 14%

Central and South America 181 10% 251 8% 313 6%

Asia Pacific 525 28% 1740 54% 3228 66%

Sub-Saharan Africa 32 2% 57 2% 107 2%

Middle East and North Africa 105 6% 165 5% 234 5%

World 1845 100% 3249 100% 4884 100%

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Source: OECD; BNY Mellon

*Global middle class defined as households with daily expenditures between US $10 and US $100 per person in purchasing power parity terms.

Spending by Global Middle Class*: 2009 to 2030(Billions of 2005 PPP USD)

2009 2020 2030

North America 5602 26% 5863 17% 5837 10%

Europe 8138 38% 10301 29% 11337 20%

Central and South America 1534 7% 2315 7% 3117 6%

Asia Pacific 4952 23% 14798 42% 32596 59%

Sub-Saharan Africa 256 1% 448 1% 827 1%

Middle East and North Africa 796 4% 1321 4% 1966 4%

World 21278 100% 35045 100% 55680 100%

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Source: OECD; BNY Mellon

*Global middle class defined as households with daily expenditures between US $10 and US $100 per person in purchasing power parity terms.

Shares of Global Middle Class* Consumption:2000 to 2050

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Source: OECD; BNY Mellon

*Global middle class defined as households with daily expenditures between US $10 and US $100 per person in purchasing power parity terms.Chart taken from OECD Working Paper titled “The Emerging Middle Class in Developing Countries” and was published in January 2010 (http://www.oecd.org/social/povertyreductionandsocialdevelopment/44457738.pdf).

Advanced Economy* vs. Emerging Markets** Nominal GDP (USD) per Capita: 1992 to 2017

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Source: IMF; BNY Mellon

Log scaled with base 100.*Advanced Economies: Germany, Japan, U.K., U.S., France.**Emerging Markets: Brazil, Russia, India, China, South Korea.Data was collected from the IMF October 2012 World Economic Outlook (WEO).

199225,584

201145,967

201754,127

1992666

20114,958

20177,852

100

10,000

1,000,000

100

10,000

1,000,000Advanced Economies* Emerging Markets**

U.S. $ U.S. $

Projected

Emerging Markets vs. Advanced Economy Nominal GDP (USD) per Capita: 1992 to 2017

27

Source: IMF WEO October 2012; BNY Mellon

Emerging Markets Advanced Economies

Data was collected from the IMF October 2012 World Economic Outlook (WEO).

Data was collected from the IMF October 2012 World Economic Outlook (WEO).

15,919

9,528

2,428

21,351

31,825

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000Brazil China

India Russia

South Korea

U.S. $ U.S. $

1992Brazil: 2,577China: 417India: 330Russia: 576South Korea: 7,730

Projected

2011Brazil: 12,789China: 5,417India: 1,514Russia: 12,993South Korea: 22,424

2017

0

10,000

20,000

30,000

40,000

50,000

60,000

0

10,000

20,000

30,000

40,000

50,000

60,000Japan Germany

United States United Kingdom

France

U.S. $ U.S. $

1992Japan: 30,973U.S.: 24,700France: 24,091Germany: 25,671U.K.: 19,247

Projected

2011Japan: 45,870U.S.: 48,328France: 44,007Germany: 44,111U.K.: 38,811

2017Japan: 52,504U.S.: 59,916France: 44,629Germany: 46,015U.K.: 47,518

How to Adapt to Low Yield Environment

Central question over the last decade, no singular solution

Methods adopted – increasing allocation to assets with higher expected return

- Increased allocation to spread sectors: investment grade corporates, high yield corporates, emerging market debt, and increased allocation to alternatives

- High dividend/quality stocks

For certain plans, problem of low yield implies benefits and entitlements will have to be downward adjusted, or contribution rate increased

Think differently about investment horizons and constraints

- Government of Singapore Investment Corporation adopted 20-year horizon TR target 500 bps real return; long horizon great solution because of greater ability to assume liquidity risk via private equity, etc.

Currency as an alpha source

Sell volatility where strong view on ranges

Leverage

Use leverage to enhance return in positive carry situations

Pitfall: Orange County fall in 1944

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