January 2014 Rebecca H. Patterson Chief Investment Officer Bessemer Trust The Year Ahead: Looking for Surprises.

January 2014

Rebecca H. PattersonChief Investment OfficerBessemer Trust

The Year Ahead: Looking for Surprises

Agenda

1. What The CFA Thinks

2. Where You Might Be Surprised

3. Macro and Market Views For the Year Ahead

4. Key Takeaways

3

What CFA Members Think: Getting More Upbeat

4

As of October 17, 2013.Source: CFA Institute

2012 2013 2014

34%

40%

63%

Percent of Members Expecting Global Economy to Expand in

Coming Year

Percent of Members Expecting a Global Financial Bubble to Burst in

2014

Not Antic-ipating a Bubble

Real Estate

Equities Bonds Other

47%

26%

13%10%

4%

Asset Class of Potential Bubble

Room For At Least Three Surprises

1. Emerging-Market Growth

2. Geopolitics

3. Shift in Federal Reserve Policy

5

Emerging Markets: Not Enough Focus?

6

Biggest Risk to Global Capital Markets in 2014

Wea

k Ec

onom

ic Con

ditio

ns

Politica

l Ins

tability

System

ic Disr

uptio

ns

Growth

Rat

es A

mon

g Em

erging

Eco

nom

ies

Exce

ss R

egulat

ion

Wea

k Reg

ulat

ion

Other

0%

5%

10%

15%

20%

25%

30%

35%

As of October 17, 2013.Source: CFA Institute

U.S. Dollar and Yields: Headwinds for Emerging Markets

7

1As of December 31, 2013. EM/DM reflects MSCI Emerging Markets Index divided by MSCI World Index, with both indices in U.S. dollars and indexed at 1 on January 4, 1995. The Trade-Weighted U.S. Dollar Index is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.2Reflects IMF estimates for 2013.Source: FactSet, Federal Reserve, International Monetary Fund

-4

-3

-2

-1

0

1

2

3

4

5

6% GDP

Developed Mar-kets

Emerging Mar-kets

Em

erg

ing

Mark

ets

O

utp

erf

orm

Develo

ped

Mark

ets

O

utp

erf

orm

Rising Dollar Suggests Emerging-Market Underperformance1 Current Account Balance2

Surplus

Deficit

1995 2000 2005 20100.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

70

80

90

100

110

120

130

Trade-Weighted U.S. Dollar In-dex (R)

EM Index/DM In-dex (L)

2014 Elections Create Policy Uncertainty, Especially in Emerging Markets

As of November 30, 2013. European Union includes 28 member states. GDP is based on IMF estimates for 2013.Source: International Monetary Fund

Country 2014 Election GDP ($B)E.U. May 17,267U.S. November 16,724 Brazil October 2,190 India May/June 1,758 Indonesia April/July 868Turkey August 822Sweden September 552Belgium May 507 South Africa April/July 354World   73,454 % of World GDP   56%

8

Geopolitical Risks: Could History Repeat?

Source: Bloomberg

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Yom Kippur War/Oil Embargo 1973-1974

Iranian Revolution1979-1980

Invasion of Kuwait1990

205%

163%

132%

Percent Change in Price of Oil During Periods of Conflict

Feb 12 Aug 12 Feb 13 Aug 1385

90

95

100

105

110

115

120

125

130

0.5

1.0

1.5

2.0

2.5

3.0$/bbl YoY % Chg

Crude Oil Price (L)

CPI (R)

2009 2010 2011 2012 2013

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

0

U.S. Energy Trade Balance

Bill

ion

sU.S. Economy To Positively Surprise this Year?

10

Jobs and Housing

Stimulus

Oil and Inflation

Net Federal Fiscal Stimulus/Drag

Drag

As of December 31, 2013, except for Building Permits and CPI (as of November 30, 2013). Crude oil price represents Brent. Source: Commodity Research Bureau, FactSet, Federal Reserve, Strategas Research Partners, U.S. Census Bureau, U.S. Department of Labor

2003 2005 2007 2009 2011 2013 2015 2017 2019-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%% GDP

Jan 10 Jan 11 Jan 12 Jan 13500

600

700

800

900

1,000

1,100

250,000

300,000

350,000

400,000

450,000

500,000

550,000

Thousands

Jobless Claims (R)

Building Permits (L)

Net Federal Fiscal Stimulus/Drag

Stimulus

Drag

Actual Estimated

European, Japanese Economies Also Showing Relative Improvement

As of December 31, 2013. Consumer confidence is measured on a scale of -100 to 100, where -100 indicates extreme lack of confidence about the economy, 0 indicates a neutral view, and 100 indicates extreme confidence. Bank of Japan’s balance sheet assets are indexed at 100 on December 31, 2006.Source: Bank of Japan, European Commission, FactSet, Strategas Research Partners

11

Low Risk

High Risk

Bank of Japan Adding LiquidityEMU Borrowing Costs Lower, Confidence Higher

Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 133.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.010-Year Bond Yields%

Spain

Italy

2010 2011 2012 2013

(30)

(25)

(20)

(15)

(10)

(5)

0

Euro Area Consumer Confidence

80

100

120

140

160

180

200BoJ Balance Sheet

China: Longer-term Challenges Remain but Near-term Looks Stable

12

Exports by Region: Looking Up

1992 1996 2000 2004 2008 201230

32

34

36

38

40

42

44

46

48

50

% GDP

Household Consumption

Investment

Domestic Rebalancing Still Needed

As of December 31, 2013, except for right chart, which is as of December 31, 2012. Exports shown represent a 5-month moving average.Source: Bloomberg, The World Bank

2008 2009 2010 2011 2012 2013-30

-20

-10

0

10

20

30

40

50

% Change,

YoY

Asia, ex-HKU.S.EU

Cyclical Assets Helped by Global Liquidity, Not Just Fed

13

Actual as of October 31, 2013 with J.P. Morgan estimates thereafter.Source: Bank of England, Bank of Japan, European Central Bank, Federal Reserve, J.P. Morgan

1.2

2.2

3.2

4.2

5.2

10

15

20

25

30

% % of GDP

Global Policy Rate (L)

G-4 Central BankBalance sheets (R)

1997 1999 2001 2003 2005 2007 2009 2011 2013600

800

1000

1200

1400

1600

1800

2000

As of December 31, 2013. P/E ratio represents price-to-earnings ratio for next 12 months, based on FactSet aggregated consensus estimates.Source: FactSet, Standard & Poor’s

Bottom-Up: U.S. Equity ValuationsNot at Highs

14

The S&P 500 Index

+106% +101%

Dec 31, 1996

Level = 741P/E = 15.9x

Oct 9, 2002Level = 777P/E = 13.8x

-49%

Mar 24, 2000

Level = 1527

P/E = 25.2x

Oct 9, 2007Level = 1565

P/E = 15.2x

Mar 9, 2009

Level = 677P/E = 10.2x

Dec 31, 2013

Level = 1848

P/E = 15.4x

-57%+173%

Market Positioning Not Even Close to Stretched

Left chart as of November 30, 2013. Right table as of December 31, 2013. Fund flows reflect cumulative net flows into mutual funds and ETFs from January 1, 2007 through November 30, 2013. Source: FactSet, Strategas Research Partners

15

Cumulative Net Fund Flows

Start End

Duration (Months

)

Total Percent Return

8/12/82 8/25/87 60 229%

12/04/87 7/16/90 31 65%

10/11/90 3/24/00 113 417%

10/09/02 10/09/07 60 101%

3/09/09 --- 57 203%

Four Most Recent Bull Markets

2007 2008 2009 2010 2011 2012 2013$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

496

1,346

Billion

Bonds

Equi-ties

Key Taper Transmission Channels

16

Taper BeginsHigher Longer-

Dated U.S. Treasury yields

Stronger U.S. Dollar

Pressure on Emerging Markets

Pressure on Commodity

Prices

• Low inflation• Moderate EM demand• Greater supplies

• EM debt positioning• Focus on deficit

countries with inflation• 2014 political risk

Positioning Going into 2014

Asset Class Outlook

Traditional Government Bonds

Credit

Commodities

Developed Market Equities

Emerging Market Equities and Debt

U.S. Dollar

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