Financial Markets :

Towards a New Hierarchy of Risks?

× Paris Europlace

× Jean-François Bay, Managing Director, Morningstar France

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© 2012 Morningstar, Inc. All rights reserved.

× Jean-François Bay, Managing Director, Morningstar France

× Tuesday July 3, 2012

Long-term Shift : From Developed Countries to Emerging Countries

Important, Fast & Furious Change Since 2000

60

70

80

90

POPULATION & GDP%

2

0

10

20

30

40

50

60

1960 1970 1980 1990 2000 2012

POP. Dev. Countries GDP. Dev. Countries POP. Emg. Countries GDP. Emg. Countries

Source : FMI / Morningstar

Long-term Shift : From Developed Countries to Emerging Countries

Leveraging and Doping in order to Stay in the Race

LEVEL OF DEBT / GDP IN 2012

3

Source : FMI / Banque de France / Fed / Eurostat / Morningstar

% Debt / GDP

Medium-term Shift : Deleveraging of the World is Underway

Low Demographic Growth, Low Economic Growth, Low Returns

STOCKMARKETS

Dow Jones Ind. Index since 1900 Source : Morningstar

Medium-term Shift : More Black Swans More often

Paradox : Lower Returns, Higher Risks

STANDARD DEVIATION

Standard Deviation of Dow Jones Ind. Index since 1950 / Source : Morningstar

1950 1960 1970 1980 1990 2000 2010

Medium-term Shift : An Inter-penetrated World

Increasing Correlation = Decreasing Diversification

LEVEL OF CORRELATION

0.4

0.5

0.6

0.7

Correlation of Indexes since 1990 (rolling period of 1 year) Source : Morningstar

0

0.1

0.2

0.3

0.4

Etats-Unis - France

Etats-Unis - Royaume-Uni

US / France

US / UK

1990 2000 2010

Short-term Shift : After Convergence, Divergence

Eurobonds Already Existed (Between 1998 and 2008)

10

12

14

16

Taux d'intérêts longs en %

Espagne

Italie

France

En %10 YEAR INTEREST RATES IN EUROZONE

Spain

Italy

France

7

0

2

4

6

8

France

Allemagne

Source : Morningstar

France

Germany

1993 1996 1999 2002 2005 2008 2012

Short-term Shift : The Flight to Liquidity, Security, Quality…

Bund as the Riskless Asset

12

14

16

18

20

OBLIG ZONE EURO INFLATION

10 YEAR GERMAN INTEREST RATES & INFLATION

German Bond Inflation

0

2

4

6

8

10

12

1982 1985 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

German Interest Rate and German Inflation Rate since 1982 - Source : Morningstar

Short-term Shift : The Japanese Scenario

Deflation, Recession, Ageing of the Population …

6

7

8

9

10

Japon

Allemagne

En % 10 YEAR INTEREST RATES IN GERMANY & JAPAN

Germany

Japan

9

0

1

2

3

4

5

6

oct.-

82

déc.

-83

févr

.-85

avr.-8

6

juin

-87

août

-88

oct.-

89

déc.

-90

févr

.-92

avr.-9

3

juin

-94

août

-95

oct.-

96

déc.

-97

févr

.-99

avr.-0

0

juin

-01

août

-02

oct.-

03

déc.

-04

févr

.-06

avr.-0

7

juin

-08

août

-09

oct.-

10

déc.

-11

Source : Morningstar

Consequence : 2012 = 2008/2009

Cash is King !

FUND FLOWS IN EUROPE

Monthly Fund Flows in Europe – OE Funds - Source : Morningstar

×Structurally : Solvency II, Basel III…

×Conjuncturally :

× Cash

× EBE : Everything But the Euro!

CATEGORIE APRIL 2012 YTD 2012

High Yield Debt USD 1 010 5 038

Corporate Debt GBP 713 2 611

Consequence : From Asset Management to Yield Management

Nothing but the Yield ! Everything but the Euro !

Corporate Debt GBP 713 2 611

Globales Bond 620 143

Emerging Debt Glob. 616 4 168

Emerging Debt Local Currency 491 2 702

High Yield Bond Hedge 483 4 375

Corporate Debt USD 476 1 934

Flexible Bond GBP 441 773

Flexible Bond USD 417 2 325

Bond CHF 395 1 475

Top 10 5 662 25 544

Others 62 Bond Categories 291 16 795

Catégories avec la collecte nette la plus importante en avril 2012 (millions d'euros) / Source : collecte nette Morningstar Direct.

40%

30%

20%

• Grece / 47.82%

Consequence : A New Hierachy of Risks

Corporate Bonds, Banks and Sovereign Debt

Exemple de taux actuariels – 5ans échéance 2017 en mars 2012 / Source : Morningstar

20%

10%

8%

6%

4%

2%

1%

0%

• France / 1.70%

• Ireland / 5.17%

• Italie / 4.33%

• Portugal / 13.78%

• Espagne / 4.80%

• Allemagne / 0.70%

• BNP Paribas / 4.11%

• Bank Tier 2 / 7.09%

• Bank Tier 1 / 12.23%

• Air Liquide (A) / 1.77%• Auchan / 1.96%• Bouygues / 2.20%• ENI / 2.74%

• Telefonica / 4.40%

Etats Banques Entreprises

• Renault (BB) / 4.57%

• Alcatel (B) / 7.51%

• Brésil / 2.01%

• USA / 1.01%

Consequence : Mainly a Crisis of Confidence

The Cash Run (in France) and the Bank Run (Spain, Greece…)

Livret A

Other Savings

Accounts CEL Cash Deposits Total (bn€) Diff

2007 140 258 38 246 682

2008 164 351 36 243 794 16%

2009 183 280 36 262 761 -4%

2010 186 281 36 269 772 1%

2011 197 294 36 275 802 4%

2012 214 309 36 285 844 5%

march-12 222 317 36 279 854 1%

900

CASH DEPOSITS IN FRANCE

Evolution des dépôts à vue et livrets réglementés chez les ménages français / Source : Banque de France

0

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 2011 2012 march-12

Consequence : High Returns for Safe Haven Assets

Gold, Swiss Franc, Govies…

TOP & BOTTOM CATEGORIES : SHORT, MEDIUM & LONG-TERM

Category / Risk Return (ann,) YTD (%) 3M (%) 1Y(%) 3Y%) 5Y(%) SD 3ANS

1 Gold 1,96 -5,48 5,37 16,17 15,69 23,42

2 Global Bond CHF 3,26 -2,53 1,57 18,02 13,27 10,72

3 Global Bond Hedge 4,84 -0,84 10,08 17,67 11,60 10,28

4 Bond AUD 1,77 -1,05 15,44 18,57 10,90 7,61

5 Global Bond Aggregate CHF 3,54 0,59 6,81 13,40 10,14 9,84

6 Bond CHF 5,28 1,45 5,57 14,10 9,75 10,43

7 Money Market AUD 0,36 -2,29 10,23 14,59 8,95 7,95

8 Global Bond 5,58 3,99 15,82 10,78 7,87 8,52

9 Aggregate Bond USD 7,28 7,30 23,24 12,40 7,71 12,36

10 Money Market CHF 1,20 0,46 1,57 8,38 7,51 9,86

11 Corporate Bond USD 8,49 6,52 21,96 13,78 7,28 11,35

223 Equity Small & Mid Caps France -5,10 -20,80 -37,57 4,81 -8,63 17,38

224 Equity Small Caps Europe 3,68 -10,19 -16,64 9,67 -8,87 17,14

225 Equity Large Cap "Value" Europe -2,55 -10,97 -13,77 3,63 -9,35 15,86

226 Equity Large Cap Euro -3,12 -13,50 -20,22 0,77 -10,05 18,07

227 Equity Large Cap France -2,10 -12,09 -21,39 -0,50 -11,09 18,02

228 Equity Spain -14,12 -17,08 -27,40 -4,22 -11,61 21,07

229 Equity Belgium 2,46 -7,58 -16,04 6,13 -11,84 14,42

230 Equity Polish -1,71 -16,04 -32,49 3,29 -13,42 26,15

231 Equity All Caps Euro -0,14 -11,56 -21,87 -1,44 -13,96 18,29

232 Equity Italy -4,56 -16,19 -28,78 -7,08 -16,86 19,82

233 Equity Greece -24,13 -29,58 -53,20 -31,35 -32,86 29,25

Performances sur 1 an, 3 ans et 5 ans des catégories Morningstar de fonds. Source : Morningstar / June 2012

Consequence : New Regulation at the Worst Possible Time !

Solvency II, Basel III, UCITS IV …

THE DECREASING OF THE EXPOSURE TO STOCKS : NOT ONLY A MARKET EFFECT !

15,00%

20,00%

25,00%

30,00%

Source : AF2i / Morningstar

0,00%

5,00%

10,00%

15,00%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

___ : % of Equity in the Asset Allocation by French Institutional Investors (base 100 in 1999)___ : CAC40 Index (base 100 in 1999)

Conclusion : A New Hierarchy of Opportunities ?

Opportunities for Experts in their Respective Fields

× Specialists in EmergingMarkets

× Specialists in Credit

× Specialists in Sovereign Debt

× Specialists in Risk Management, Volatility

× Specialists in Correlation/Decorrelation

…

× Specialists in Correlation/Decorrelation

×…

Conclusion : A New Hierarchy of Opportunities ?

Opportunities in Stock Markets ?

YIELD OF MAIN ASSET CLASSES

4%

5%

6%2012

Average 10Y

Source : Morningstar / End of June 2012

0%

1%

2%

3%

European Equities Bund 10Y Govies US 10Y Corporate Bonds (A) Euribor 3M

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