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Information Security Identification: Confidential

Global Markets & Investor FlowsRisks and Opportunities

April 2010Global Markets

Samarjit Shankar

Managing Director

BNY Mellon

[email protected] BNY Mellon iFlowsm Research

2 Information Security Identification: Confidential

Global growth turns the cornerGlobal recession was synchronousChina and India also slowedRaising of activity estimates by IMF; gradual recoveryExtraordinary stimulus, both monetary and fiscalDeflationary pressures had been the focus during crisis; inflationary expectations normalizing nowPro-active central banks gradually phase out non-conventional measures

Core Inflation

Real GDP Growth

Money Supply Growth


Bond Markets: oversupply concerns amid fiscal stimuli Credit markets have improved, but not fluid yet. Bank lending remains tight

Fiscal stimulus plans have raised concerns about oversupply

Developed equity markets have recovered gradually and been mostly flat year-to-date thus far

Emerging equity markets have bounced stronger as investors continue to make forays into select markets

Equity Markets: rebound from global contagion, wealth destruction

% move since 1/1/08: -- DAX, -- SPX, -- NKY % MSCI move since 1/1/09: -- LatAm, – Asia -- EEurope

Bond 2yr-10yr yield spreads – curve steepeningsTED spread: 3m LIBOR less 3m T-Bill yields


About BNY Mellon’s iFlow – total assets serviced worth $22 trillion+Global Custody Holdings: largest in the world; drawn from heritage Mellon & BNY Platforms

Market Penetration: Flows represent 15-21% of tradable securities in most markets worldwide

Heritage MELLON Custody Holdings – amongst the largest in the world• Mellon has $7.0 trillion under management, administration, or custody• includes CIBC MELLON in Canada and former ABN AMRO MELLON in Europe

Heritage BANK OF NEW YORK – portfolio capital flows• derived from the $6.0 trillion global custody business• derived from the $9.0 trillion domestic custody business

Performance & Risk Analytics – recognized expertiseCombination of Mellon Analytical Solutions (formerly Russell/Mellon) & BNY Global Risk Services

• Client relationships represent $8.2 trillion in assets under measurement• Investor positions versus benchmark (e.g. MSCI EAFE, Lehman Global Agg etc)• What are my competitors/peers doing?

BNY MELLON Equity Flows vs Japan MOF Flowsindexed data, settlement basis for MOF data

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MOF DATA


iFlow: What are our investor flow data telling us? Equities


iFlow: What are our investor flow data telling us? Bonds• Bond yields have diverged within the Eurozone – relative weakness in Italy, Spain & Greece


Currency Markets: US Dollar at a crossroadsThe US dollar saw a secular decline on a trade-weighted basis between 2003 and mid-20082008H2 witnessed strong risk-aversion – high-yielding currencies sold off, low-yielders benefitedA strong dollar trend emerged since then, faded, but is it emerging again?

G-10 FX Returns 2008H2 (%)

-26.43

-23.67

-23.56

-16.13

-11.54

-11.34

-4.58

-27.09

-26.85

17.09

-30.00 -25.00 -20.00 -15.00 -10.00 -5.00 0.00 5.00 10.00 15.00 20.00

NOK

GBP

AUD

SEK

NZD

CAD

EUR

DKK

CHF

JPY

S o urc e : B lo o mb e rg

US Trade-Weighted Major Currency Index

G-10 FX Returns Jan 1 - Dec 31, 2009 (%)

1.97-2.45

27.2624.34

19.8815.84

10.168.63

2.562.08

-5.00 0.00 5.00 10.00 15.00 20.00 25.00 30.00

JPY

EUR

DKK

CHF

SEK

GBP

CA D

NOK

NZD

A UD

S o u rc e : B l o o m b e rg


US fundamentals: slowly improvingHome Sales: Existing and New Deficits: Current Account and Fiscal

ISM Mfg & Non-Mfg; Consumer Confidence Non-farm payrolls & Unemployment Rate


iFlow Insights: Global Capital Flows and Investor Activity• US Treasuries still sought; US equities buying tapered off after 2009H2, but picking up again

• Cross-border investors prefer shorter duration

• USD lost steam amid risk aversion pullback, but is benefiting again from policy outlook & Euro woes

• Also, a realization vis-à-vis the USD: There is no alternative, yet!

10 Information Security Identification: Confidential10

EUR: No longer the new DEM

• EUR had provided only credible alternative (sovereign debt markets that were deep enough) to USD for reserve managers looking for an alternative home for their fresh funds. Unfortunately, investors forgot that not all

European economies were as prudent as Germany. As a result intra European govt. bond spreads driven down to negligible levels by mid 2007.

EUR had become seen as “new DEM”?• Greek crisis is a sharp reminder that it’s the

component of all its parts (e.g. its also the “new GRD”, the “new ITL”, the “new ESP”). Likely to be reinforced by introduction of

EMF? Germany (and France) can no longer isolate themselves from events elsewhere in Eurozone. Likely to be reflected in performance/demand for their debt

• If the EUR is no longer the “new DEM” then it also seems likely that it will lose some of the premium it has enjoyed.


Chinese currency policy

• Lot of debate about probable shift in policy at some point in the near future

Premier Wen tells delegates to the National People's Congress: “International pressure is not good for China's exchange rate reform. China won't bow to any pressure.“

Commerce Minister Chen : “The movement and degree of stability in the CNY in times of crisis ought to be different from when there is no crisis … [but] the direction of CNY reform will be gradual and controlled.”

PBOC Governor Zhou Xiaochuan: “(The USD/CNY peg) is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies.”

• Investors still cautious about outlook of Chinese economy as PBOC tightens.

• Did Singapore show the way?

USD/CNY and Yuan NDFs for 1m and 1y


Japan: equity inflows, bond outflows, yen interestingly poised• Is growth taking hold? Equity inflows in evidence in recent weeks

• JPY is also underrepresented in FX reserves

• The DPJ had emphasised its anti-interventionist stance in the currency markets; will deflation affect policy mindset?

• Public debt burdens in focus globally

GDP and Tankan


PARALLELISM?: Other Sovereign Debt Concerns (5yr CDS)

Since: 1/1/2010: CDS percentage changeSince: 1/1/2009: CDS percentage change

Concerns about Dubai and Greece have been paramount in recent months

Lingering risks in other countries?

Meaningful alternatives to holding sovereign debt as public debt burdens grow?


Policy direction is important• Focus on fiscal stimulus and resulting deficits• Starting points of public debt burden important• Central banks mindful of supporting growth• Looking to phase out quantitative easing measures• Policy rates have converged at historic lows; rate differentials have

narrowed• Expectations of price pressures beginning to rise• Growth differentials and policy maneuverability in focus• Significant capital that has remained on sidelines now being deployed• Looking for yield

Policy Benchmark Rates

JPY Crosses vs key G-10 currencies


High Yielding Emerging Markets Currencies vs USDHigh Yielding Emerging Markets Currencies: Policy Rates

The thirst for yield: currency markets


The thirst for yield: Asia is well-placed

Asia FX Reserves: strong growth; stop and re-start

Asia Currencies vs USD

Asia: price pressures

• Incipient price pressures• Domestic demand and regional trade key drivers• Growth prospects favorable; Steady equity inflows


Emerging market bonds: select markets sought after• Local-currency denominated

debt instruments• Large and liquid asset class• Relatively high yields• Central banks to raise rates

very gradually• Currency appreciation

potential• Improved credit worthiness• Favorable growth differentials


“Green shoots” of recovery – growing roots?

• Commodity/Energy prices looking to recover

• Gold’s safe-haven status largely intact

• Inflationary expectations normalizing from exceptionally low levels

• Talk of “exit strategies” from ongoing extraordinary liquidity injections

• China and India venturing overseas to garner future energy and basic materials supplies to fuel growth

• Evidence of renewed investor buying in commodity-linked markets

Oil, Gold: % move since Jan 2009

Journal of Commerce Industrial Commodity Metals PriceSpread between 10-year US TIPS and nominal Treasuries


iFlow Insights: Commodity-linked markets in favor• Strong buying of ZAR, BRL & RUB as commodity prices have risen from March ’09 lows; some profit-taking of late

• AUD, NZD & CAD have also seen strong inflows amid investor optimism


iFlow Insights: Bond Allocations by Currency 2007-10• JPY-denomination shot up in Jul 2007, stayed at elevated levels, spiked in Jan 2008, and again Sep 2008 onward• Periods of risk aversion: Higher Allocation to USD-denominated bonds as riskier positions were liquidated during

equity market sell-offs in Aug ’07, Nov ’07, Jan ’08 and Sep ’08 onward• Investors favored the shorter end of the curve amid search for safety and liquidity• Up-tick in EUR-denominated holdings in Jan/Feb ’08 => EUR/USD broke above 1.50 and 1.55• Reverse direction for EUR/USD in Aug ’07; more recently in Aug ’08 (1.56 to 1.46) and Oct/Nov ’08 (1.40 to 1.25)• Spike in EUR/USD in Dec ’08/Jan ’09 (1.25 to 1.45); JPY began losing its safe-haven allure during 2009Q1• Allocation to EUR-denominated bonds tapering off; UK gilt buying outpaces CAD bonds as yields sought of late• USD-denominated bonds: steady and growing appetite

Bond Allocation by Currency in US Global Fixed Income Portfolios (Jan 07=100)

65.00

75.00

85.00

95.00

105.00

115.00

125.00

135.00

145.00

155.00

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Sou rce: BNY Mellon iFlow

CAD EUR GBP JPY USD


Interesting Juncture for Asset Allocations• Relative valuations: doubts about sustainable equity earnings and Treasury supply• Periodic bouts of risk aversion have favored bonds globally, e.g., bunds during Greece crisis• Safety and liquidity of US Treasury bonds and bills still being sought• Macro policy-mix uncertainty in economies globally – exit strategies?• Equity upside as risk appetite returns; evidence of buying in select markets• Risks: another debt crisis? growth setback? spike in price pressures?• Emerging markets as an asset class attractive – both equities and bonds

iFlow Daily E-Mail as of 20 April 2010


Equity/BondPositions

Strategic & Tactical Allocations/Trading

Ideas

Quant AnalysisFundamentals

Portfolio Flows

Deviationsfrom Benchmark

Strategic

Tactical

Strategic

Tactical

Key 2010 focus on whether investors1. raise or reduce risky exposure2. adjust asset allocations 3. remain selective

P&RA (formerly MAS/Russell Mellon)

• ASSET MIX• COUNTRY & SECTOR

ALLOCATIONS

iFlow:


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