Barclays PowerPoint Template Guidelines - For External Use - invest'13

Outline• Introduction: questioning the consensus• Two very visible ongoing risks…1: The euro2: The business cycle… and why markets can live with them• Conclusion: stay invested2

“It ain’t what you don’t know that gets youinto trouble.It’s what you know for sure that just ain’t so.”Mark Twain3

• Risk #1: the euro“One must imagine Sisyphus happy” -Camus4

The euro: neither triumph nor disaster• The “end of the beginning” for EMU? Politicians ‘get it’• Integration will be slow: leaders are weak, voters sceptical• Greece is beyond redemption – inside or out• Spain/Italy different: austerity & reforms satisfy ECB…• … and some tentative pooling of risks is emerging• Conclusion: still “muddling through” – which is not priced-in5

Euro interbank (LHS) & Spanish bond (RHS) spreads2761.510.50Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12543210Euro interbank - OIS spread (%)Germany-Spain 10 year bond spread (%)Source: Bloomberg, Barclays Wealth Strategy6

Flow chart and timetable for a definitive euro fix2012… 2015?2017?? 2022???Safeguardbanks, tackledeficits &insolventsovereignsCo-ordinatedepositinsurance,supervision,rescuefacilitiesGreater fiscalintegration,joint bondissuanceMorecompetitiveperipheraleconomiesLasting solutionSource: Blackrock, Barclays Wealth Strategy7

8• Risk #2: the business cycle

The global economy can muddle through too• Ex-euro, growth feels disappointing – particularly in Asia• Customer No.1 and monetary policy will prevent a stall• There can be life after debt for US households…• … and Asia (and Europe) will benefit• Nominal interest rates will stay low through 2013• Negative real rates reflect fear – but will foster greed9

Selected manufacturing surveys2Standard deviations from trend10-1-2-3-4-5Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12China US UK Germany JapanSource: Bloomberg, Datastream, Barclays Research10

Consumer share of GDP80%$13 trln$ Trillions$15 trln 1660%40%$7 trln57%71%12820%36%40%China Euro zone USHousehold Consumption as % of GDP (LHS)2011 GDP, current prices, USD trlns (RHS)0Source: Datastream, IMF, Barclays Strategy11

US consumer spending: life after debtIndex: Dec 2005=100124122120118116114112110108106104102100000s per w eek7006506005505004504003503009815/12/2005 15/12/2007 15/12/2009 15/12/2011250US household spending (nominal, index)Unemployment claims (000, RHS)Source: Datastream, Barclays Wealth Strategy12

US housing market turning the corner14001300120011001000900800700600500400Sep-07 Sep-08 Sep-09 Sep-10 Sep-11550500450400350300250200150100Building permits Private housing starts Stock of new homes for sale (RHS)Source: Factset, Barclays Wealth Strategy13

Total US liabilities are large…Debt/GDP3.53.02.52.01.51.00.50.0Q11962 Q11972 Q11982 Q11992 Q12002 Q12012Consumer+ Government+ Non-financial business + Financial sector = Total domesticSource: Datastream, Federal Reserve, Barclays Research14

… but household net worth is strongly positiveX GDP5.04.54.03.53.02.52.01.51.00.50.0Q11962 Q11972 Q11982 Q11992 Q12002 Q12012Debt Financial assets Tangible assets Net worthSource: Factset, Barclays Wealth Strategy15

Oil market remains tight…US Dollar/Barrel1251151059585756555453531/12/2008 31/12/2009 31/12/2010 31/12/2011Brent Crude OilSource: FactSet, Datastream, Barclays Strategy16

17• Conclusion: stay invested

Key Economic ForecastsReal GDP (%)Barclays Forecasts2010 2011 (E) 2012(F) 2013(F)US 2.4 1.8 2.3 2.0Global 5.1 3.8 3.1 3.5Emerging markets 8.1 6.5 5.1 5.6Inflation (CPI,%)US 1.6 3.2 2.2 2.3Global 2.7 3.9 3.0 3.2Emerging markets 5.2 6.3 4.8 5.3Official interest rates (end-year, %)US 0.0–0.25 0.0–0.25 0.0–0.25 0.0–0.25ECB 1.0 1.0 0.5 0.5Bank of England 0.5 0.5 0.25 0.25Source: Barclays18

Summary: Asset Allocation and selected Investment IdeasAsset Allocation Specific Investment Ideas Current ThemesDeveloped and Emerging Stocks – 48% of Risk Level 3 SAA portfolio – best strategic outlookDeveloped stocks offer most attractive long-term riskadjustedreturns in our nine-asset class Strategic AssetAllocation: use short-term volatility to add to positions• Blue Chip and Income themes• EuroStoxx dividend futures• US banks (for risk-aware)• European recovery• US and Europe preferred to Japan, UK• Cyclicals, tech and energy most favoured• Regional model portfoliosFixed Income (including cash) – 29% of portfolio – worst strategic outlookGovernment bond offer worst long-term returns: theyare expensive, and ratings matter less than cycle. Cashis preferred ‘safe haven’We prefer corporate bonds – especially HY, whereyields are attractive• Convertibles – for investors wary of full equityrisk• High Yield as an income play• Neutral on linker vs. conventional bonds• Short duration in government bonds and longduration in creditCommodities, ATS & Real Estate – 23% of portfolio – neutral, but important diversifiersNeutral. Commodity futures (5%) are expensive, butoffer a valuable geopolitical hedge• Long-dated Brent futures • Precious and industrial metals preferred,energy neutral, agriculturals least favouredForeign ExchangeEuro is least preferred big currency: a safety valve • Basket of Asian currencies as a CNY play• Nervous euro holders: hedge into USD andCAD• Reduce ‘home bias’: include a significantholding of foreign assets in investmentportfoliosThe value of investments can fall as well as rise and youmay get back less than you invested.19

Global Treasuries: UnderweightNominal Level 10yr (%)98765432112/90 12/93 12/96 12/99 12/02 12/05 12/08 12/11Global Government10-year moving average+/- one standard deviationTo end-September 2012Source: FactSet, Datastream, Barclays20

Developed Stocks, 12mth fwd PE: OverweightPE(x)262422201816141210801/95 01/98 01/01 01/04 01/07 01/10MSCI The World Index 10-year moving average+/- one standard deviationTo end-September 2012Source: FactSet, Datastream, Barclays21

Dislocated valuations: equity and credit yieldsYield (%)876543210Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11Developed Markets Equity Dividend YieldGlobal Investment Grade Corporates YieldSource: FactSet, Datastream, Barclays22

US stock valuations: the CAPE debateP/ E (x)504540353025201510501881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011Graham & Dodd PE forecast with no earnings growth 25 year moving average 50 year moving average 100 year moving averageSource: Robert Shiller, Barclays23

Gold and silver: not always safe havensIndex (12/1977=100)8007006005004003002001000'77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10Silver/ US CPI Gold/US CPITo end-September 2012Source: FactSet, Datastream, Barclays24

"This is my long-run forecast in brief. The materialconditions of life will continue to get better for mostpeople, in most countries, most of the time, indefinitely.Within a century or two, all nations and most ofhumanity will be at or above today's Western livingstandards…… I also speculate, however, that many people willcontinue to think and say that the conditions of life aregetting worse."Julian Simon, “The State of Humanity”25

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