Seven investment management

STRATEGY

OUTLOOK FOR 2013

January 13 1

KEY POINTS

• A year of healing for the global economy

• Crisis risks are falling

• What to do about bonds

• Sticking with equities

January 13 2

January 13 3

•Political stalemate leads to growth disappointment

•US or European setbacks undermine confidence and activity. Corporate earnings expectations weaken further.

•US debt ceiling impasse and/or AAA rating downgrade causes market disruption.

• Increasing risk of widespread deflation.

Paint it Black

•Economic stagnation leads to wider adoption of loose fiscal policy alongside loose monetary policy – refocus of policy on growth rather than austerity.

•Future uncertainty around whether fiscal stimulus is productive, but initial reaction could be positive?

• Inflation risks seen increasing.

It’s All Over Now.....

•Ongoing gradual healing of world economy –central banks retain easy stance.

•US fiscal cliff and debt ceiling resolved with modest fiscal tightening

•Europe muddles on – scope for periodic scares, but ECB backstop keeps fears of systemic risk at bay.

•China achieves soft-landing and reacceleration. Political transition stable.

You Can’t Always Get What You

Want

•US economic performance ahead of expectations, driven by consumer recovery

•Global economy also supported by US consumer recovery.

•China / EM stimulus aids revival in world trade.

•QE + recovering growth cause commodity price rises and inflation pressures.

•Ongoing recovery in peripheral Eurozone, helped by structural reform and improved competitiveness

•Markets look ahead to eventual tightening of monetary policy

Jumping Jack Flash

Scenarios

January 13 4

•Political stalemate leads to growth disappointment

•US or European setbacks undermine confidence and activity. Corporate earnings expectations weaken further.

•US debt ceiling impasse and/or AAA rating downgrade causes market disruption.

• Increasing risk of widespread deflation.

Paint it Black

10%

•Economic stagnation leads to wider adoption of loose fiscal policy alongside loose monetary policy – refocus of policy on growth rather than austerity.

•Future uncertainty around whether fiscal stimulus is productive, but initial reaction could be positive?

• Inflation risks seen increasing.

It’s All Over Now.....

15%

•Ongoing gradual healing of world economy –central banks retain easy stance.

•US fiscal cliff and debt ceiling resolved with modest fiscal tightening

•Europe muddles on – scope for periodic scares, but ECB backstop keeps fears of systemic risk at bay.

•China achieves soft-landing and reacceleration. Political transition stable.

You Can’t Always Get What You

Want

55%

•US economic performance ahead of expectations, driven by consumer recovery

•Global economy also supported by US consumer recovery.

•China / EM stimulus aids revival in world trade.

•QE + recovering growth cause commodity price rises and inflation pressures.

•Ongoing recovery in peripheral Eurozone, helped by structural reform and improved competitiveness

•Markets look ahead to eventual tightening of monetary policy

Jumping Jack Flash

20%

Scenarios

EUROPE – EMERGENCY OVER

January 13 5

EUROPE – HEALING

SOURCE: MACROBOND

January 13 6

GERMANY NEEDS EUROPE

SOURCE: MACROBOND

January 13 7

•Exports 40% to EuroZone, 31% to rest of Europe, 6% to China and 7% to USA!

USA – BROADENING RECOVERY

SOURCE: MACROBOND

January 13 8

JAPAN – HOPE SPRINGS ETERNAL

January 13 9

JAPAN – WHAT IF THEY GET IT RIGHT THIS TIME?

SOURCE: MACROBOND

January 13 10

Highlighted areas are 12-month periods of >45% returns

CHINA GENTLY REBOUNDING

SOURCE: HSBC

January 13 11

HSBC/Markit China Flash PMI (manufacturing)

•Hard landing avoided for now – no repeat of 2008 Source: HSBC

UK – LOW AND SLOW

SOURCE: BOE

January 13 12

•Austerity + Europe wobbles = Low growth potential for some time

Bank Of England GDP Growth Forecasts

QE – STILL PUMPING

SOURCE: MACROBOND

January 13 13

Central Bank Balance Sheets

•More to come?

RISKS ARE STILL THERE

January 13 14

Europe

• Elections in Italy and Germany

• Spanish bailout?

• ECB’s resolve?

Japan

• We’ve heard it all before.......

• Why is this time different?

China

• Political transition

• Civil unrest?

• Demographic wall

US

• Spending cuts & debt ceiling

• Fed tightening?

• Political logjam

AS ARE THE POLITICIANS

January 13 15

BEWARE THE FED? REMEMBER 1994 Chart of US 10yr yield and S&P 500 from Jan 1993 to Dec 1995

January 13 16

January 13 17

AND THE TAIL RISKS

Debt ceiling

and loss of

AAA status?

Japan debt

crisis

Renewed

Eurozone

panic

Major conflict

Inflation spiral

THE BIG QUESTION IS THIS ONE

SOURCE: 7IM

January 13 18

•…or part of a much longer one?

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1800 1825 1850 1875 1900 1925 1950 1975 2000

Yield on UK Long-term Government Bonds Consols up to 1984, then 10-year Government Bond

AND INFLATION WILL BE THE NEXT

SOURCE: MACROBOND

January 13 19

GILT YIELDS IN THE 7IM SCENARIOS

January 13 20

Paint it Black

It’s All Over Now.....

You Can’t Always Get What You

Want

Jumping Jack Flash

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Ch

an

ge i

n P

rice

Change in Yield

30Yr 10Yr 3Yr

PRICE SENSITIVITY TO YIELD SHIFTS

January 13 21

1% fall in yields:

30yr = +20%

10yr = +9%

3 Yr = +3% 1% rise in yields:

30yr = -13%

10yr = -8%

3 Yr = -3%

THE ALTERNATIVES TO GILTS

What if Gilt

yields rise?

Reduce duration of

bond holdings

Corporate bonds & HY

Emerging market debt

Peripheral government

debt

Linkers?

January 13 22

?

CORPORATES AND HIGH YIELD

January 13 23

Spreads over Bunds

0

200

400

600

800

1000

1200

1400

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Investment Grade High Yield

EMERGING MARKETS

January 13 24

PERIPHERAL EUROPE

January 13 25

• Past the worst

• ECB backstop

• Eurozone integrity

assured

• Decent yield at short

maturity especially

when compared to

Gilts

• Not without risks

INFLATION-LINKED

January 13 26

WHAT IF BOND YIELDS DO RISE MORE?

7IM BALANCED OEIC 7 JAN 2013

January 13 27

UK Equity

North American Equity

European Equity

Japan Equity

Far East Equity

Emerging Markets Equity

Global Govt Bonds

Gilts

Short-term Gilts

Index-linked Bonds

Sterling Corporate Bonds

Global Corporate Bonds

Global High Yield

Emerging Market Bonds

Commodities

Property

Infrastructure

Currency Funds

Cash & Money Market

EQUITIES

• Value in most markets?

• Politics still matters.....

• ... But is there a gradual focus shift to fundamentals?

• US more expensive, Europe cheap

• Japan a bet on BoJ and weaker Yen

January 13 28

EQUITY PRICES IN 7IM SCENARIOS FTSE scenarios

January 13 29

Paint it Black

It’s All Over Now.....

You Can’t Always Get What You

Want

Jumping Jack Flash

CAN EQUITIES SURVIVE A RISE IN BOND YIELDS?

SOURCE: BLOOMBERG

January 13 30

There were 49 periods in the last 50 years

when US Treasury yields rose 1% in six

months.....

During 28 of those, the

S&P500 rose

SEEKING VALUE IN EUROPE

January 13 31

IF THE BOJ DELIVERS... Topix scenarios

January 13 32

Paint it Black

It’s All Over Now.....

You Can’t Always Get What You

Want

Jumping Jack Flash

ALTERNATIVE INVESTMENTS

• Tail risks easing?

• Recovery in global property markets

• Cost matters!

January 13 33

UNCERTAINTY FADING?

Gold Price

January 13 34

7IM INVESTMENT TEAM VIEWS 5 OCTOBER 2012

January 13 35

ASSET ALLOCATION

Equities Bonds

Overweight

Europe and Eastern Europe

Japan

Equity dividends (2014 onwards)

Underweight AAA governments

Shorten duration

Hold Spain and Italy bonds

Take profits on credit

Reduce cash in favour of equity

Alternatives FX

Reduce gold

Add Global property

Private Equity in higher risk portfolios

Leave EUR exposure unhedged

Hedge JPY exposure

Remain 50% hedged on USD

January 13

CURRENT TARGET ALLOCATIONS

36

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Cash

Alternatives

Fixed Income

Equity

Balanced

90

100

110

120

130

140

150

160

170

180

190

200

7IM BALANCED 10 YEAR PERFORMANCE

7IM Balanced after costs*

Balanced Strategic Asset Allocation after costs*

UK Consumer Price Index

*1.48% Average TER

90

100

110

120

130

140

150

160

170

FIRST PERIOD: 2002-2007 7IM Balanced after costs: annualised compound return 10.2%

IMA 20-60 Mixed Investments: annualised compound return 8.4%

UK Consumer Price Index: annualised compound return 2.0%

78

88

98

108

118

128

-20.3%

-14.8%

SECOND PERIOD: 2008 – 2012 7IM Balanced after costs: annualised compound return 2.3%

IMA 20-60 Mixed Investments: annualised compound return 1.7%

UK Consumer Price Index: annualised compound return 3.2% 7IM’S 2008

AA LIMITS

CAPITAL

EROSION

90

100

110

120

130

140

150

160

170

180

190

WHOLE PERIOD: 2002-TO 2012 7IM Balanced after costs: annualised compound return 6.4%

IMA 20-60 Mixed Investments: annualised compound return 5.2%

UK Consumer Price Index: annualised compound return 2.6%

SUPPORTING YOUR PROPOSITION

COST - 7IM FUNDS + PLATFORM

Platform Charge

0%

7IM AAP Balanced Ongoing Charge

0.74%

Adviser Fee

0.5%

1.24%

Total

Adviser

Platform

AAP Fund

ON DEMAND CLIENT REPORT

ON DEMAND CLIENT REPORT

WHAT 7IM OFFERS: AN INVESTMENT PLAN

PLATFORM LOANS &

DEPOSITS

SERVICE

YOUR

PLAN

INVESTMENT

MANAGEMENT

CONTACT US FUND AND NEW BUSINESS RELATED

ENQUIRIES AND OVERALL MANAGEMENT

RELATIONSHIP:

INVESTMENT MANAGEMENT ENQUIRIES AND

CLIENT RELATIONSHIP:

PLATFORM RELATED ISSUES AND SUPPORT:

Regional Relationship Team

Telephone: 0207 760 8781

E-mail: [email protected]

Nick Bowman

Client Relationship Manager

Telephone: 0207 760 8806

E-mail: [email protected]

Odran Rochford

Client Relationship Manager

Telephone: 0207 760 8843

E-mail: [email protected]

Pete Wyatt

Head of Platform

Telephone: 020 7760 8823

E-mail: [email protected]