December 2010

The current environment seems to be fraught with paradoxes. The pace of growth in business activity has slowed considerably compared to the situation a few months ago. However, the risk of falling back into recession has eased, especially in the industrialized countries.

o Our macroeconomic analysisCertainly, the business cycle had already passed a high point in its recovery phase as the first half of

2010 drew to a close. Since that time, business growth has been less robust, especially in the emerging economies. Indicators for the third quarter support this assessment. For example, South Korean GDP growth has slowed considerably. This has also been the case in Brazil, Taiwan, and even Australia. This trend change reflects the fact that the emerging nations need to find a more solid path to growth, after exiting recession much more quickly than the advanced economies. The emerging markets will require an extended adjustment period, since the recovery tightened resource utilization and heightened inflationary pressures to a greater extent than anticipated. Accordingly, central banks in these countries have adopted slightly more restrictive monetary policies, as seen in China, but also in India and Brazil. In contrast, central banks in the industrialized countries have tended to maintain their accommodative policies in order to support a durable recovery.

After contracting in the manner described above, the emerging economies will return to growth. The requirements of these economies are still considerable. Governments intend to continue implementing measures designed to ensure more balanced growth.

In the United States, the situation is in flux as authorities respond to relatively weak growth momentum. Nevertheless, the business environment is improving, for SMEs as well as large

corporations. But households continue to face major challenges. There is still only limited liquidity in the real estate market, household debt is shrinking but at a slow pace, and not enough jobs are being created. In order to sustain more robust growth, the US Federal Reserve adopted a highly accommodative monetary policy in early November with the aim of lowering all US interest rates. The White House and the Congress have also agreed upon a round of temporary stimulus measures. These twin efforts in the area of economic policy should result in a higher pace of growth in 2011.

In Asia, Japan’s economy has recovered much more quickly than expected. Improvements in exports and a stimulus-fueled rebound in domestic demand (especially for consumer goods) have facilitated this rapid and strongly positive turnaround. But this momentum is very likely to fade as the initial impact of stimulus measures dwindles. Nevertheless, it has allowed the Japanese economy to attain a firmer footing, partially obliterating the negative shocks of the recession.

In Europe, growth indicators resulting from surveys suggest an upturn in the business cycle. However, expansion has not favored all European economies equally. Germany’s leading position in international markets has furthered its economic growth. This country’s exports continue to make steady and rapid gains, prompting a rise in investment, improvements in the labor market and more robust domestic demand. A second group of countries, including in particular France and Italy, has seen some improvement in business activity but without fully recovering from the slowdown created by the recession. These countries are looking for new avenues to growth that will allow them to ramp up their economic performance, which would result in a brighter labor market and greater resilience.

The third group consists of the peripheral European economies, where the pre-crisis growth model can no longer be maintained. This failure has been reflected in a rapid deterioration in budgetary positions due to lower tax revenue combined with higher government spending intended to offset lower investment by the private sector. Investors question the ability of these countries to cut budget deficits and return to growth. Individual countries seem unlikely to successfully address these difficulties alone. It is for this reason that a comprehensive solution has been adopted. A European framework was established in the

Philippe WaechterChief Economist at Natixis Asset Management

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Anticipations Monthly

CORPORATE AND INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES

Anticipations Monthly / December 2010

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Written on 11/12/2010

spring of 2010, with the objective of covering the financing needs of these countries until June 2013. Measures that might be implemented once this deadline has passed are currently under consideration. These will allow for the creation of a lasting institutional structure. However, this uncertain environment heightens investor concerns, resulting in interest rate volatility.

o Our market analysis

n Money markets

The complexities of the current environment have prompted central banks to maintain their accommodative monetary policies.

In the United States, the Federal Reserve voted not to alter its high level of monetary accommodation at its December meeting. The federal funds rate will remain low “for some time” and further Treasury bond purchases have been confirmed. No changes to this policy are expected in the coming months.

In the euro zone, the ECB has recently stepped up its purchases of government bonds of peripheral countries. This move was originally authorized when the rescue package for Greece was decided last spring. The ECB thus purchased nearly €60 billion in government bonds between May 10 and early July. This bond buying program was revived in early November as further difficulties were observed in euro zone countries.

As of mid-December, the total amount of bonds purchased was €72 billion. The ECB’s goal is not comparable to that of the Fed. The ECB is seeking to improve liquidity in the bond markets of peripheral euro zone countries, which have not been functioning well. In contrast, the Fed is planning massive purchases of Treasury bonds in order to push down long-term interest rates. Consequently, these are very distinct objectives.

In measures relating to money market instruments, the ECB extended the period of unlimited liquidity support to the banking system. At its most recent press conference in early December, Jean-Claude Trichet indicated that the ECB would continue to conduct these types of operations at least until April 12, 2011.

There were no particular developments in this vein in the United Kingdom, where discussions concerning measures similar to those implemented by the Fed are ongoing. In Japan, accommodative measures were decided in the autumn.

n Bond markets

In the bond market, interest rates have risen very rapidly. The Fed’s announcement of a second round of quantitative easing, known as QE2, caused some investors arbitrages. Bond yields have made a significant turnaround and are now much higher than before the announcement. But the extent of this rebound depends upon the positions taken. The situation came to a head early in December following the agreement between the White House and Congress on tax cuts. By facilitating economic recovery, the measures adopted have lowered the risk of

recession and increase the likelihood of a faster and stronger upturn in the business cycle. This has pushed long-term interest rates in the United States considerably higher, reflecting heightened inflation expectations rather than a positive growth outlook. This is what is indicated by the growth in real US interest rates. One immediate consequence is the very wide yield spread between 2 year and 10 year-bonds. In our opinion, monetary policy will not be changed in the near future. Yields for 2 year-bonds should therefore remain stable and the correction will be focused on 10 year-bonds, as a healthy adjustment to the overreaction seen in the past few weeks.

European bonds have replicated these trends. Yields for German 10 year-notes are nearing 3%. Concerns about the euro zone also contributed to this phenomenon, as the region has seen its attractiveness diminish somewhat in recent months. The European yield spread between 10 year and 2 year-notes is also significant. Nevertheless, as is the case in the United States, no change in monetary policy is expected in the coming months. This spread will be narrowed through a stabilization, and perhaps a slight correction, in long-term yields.

n Equity markets

In the equity market, US investors are showing renewed optimism. Since early September, this market has grown by nearly 20%. The adjustment in expectations following the QE2 announcement was more rapid than for bonds, thanks to strong corporate earnings growth. The rebound seen in the Japanese equity market since early November has also been significant. European markets have been more tentative due to uncertainties relating to the financing of peripheral economies and pending the implementation of a broader set of European measures.

n Currency markets

In the foreign exchange market, there were relatively significant changes in the US dollar outlook. Until early November, investors remained wary due to the potential impact of quantitative easing. At the time, they thought that QE2 would have serious long-term implications for the health of the US dollar, thus driving the greenback’s value downwards. However, this uncertainty shifted with the deterioration of the Irish situation. The US dollar regained its status as the primary safe-haven currency and thus appreciated against the euro.

n Commodities

Demand has remained strong in commodities, especially crude oil. Emerging market demand in particular has driven prices higher. The Fed’s announcement that it would maintain a strategy with the aim of keeping US interest rates very low for an extended period has also helped to make commodities increasingly attractive to investors, causing them to rally sharply.

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Anticipations Monthly / December 2010

(1) Investment committee as of 28/10/2010.(2) Investment committee as of 25/11/2010.

Written on 27/12/2010

o Our current allocation preferences

Risk categories

Risk sub-categories

Tactical allocation* Commentary

Nov. 10 (1) Dec. 10 (2)

Fixed income + =We are moving to “neutral” on interest rates. The recent rebound, since the tax cuts agreement in the United States in early December, reflects expectations of a quicker pace of growth in 2011. This change in expectations is giving rise to greater volatility. We maintain our stable option in regard to monetary policy both in the United States and Europe. This will limit upward pressure on long-term yields. Hence our move to neutral.

Equities = + We are moving to “positive”. Macroeconomic data for 2011 seem more favorable, especially due to more positive growth forecasts in the United States following the agreement on tax cuts.

Fixed income

United States + = We are moving to “neutral”. The Fed is expected to maintain its policy of keeping interest rates low, although economic growth expectations would tend to push them higher.

Euro-zone + = We are moving to “neutral”. The movement in US bond yields has had a major impact on European bond yields. In Europe, we are in the same situation as the United States.

UK + = We are moving to “neutral”. The movement in US bond yields has had a major impact on European bond yields. In Europe, we are in the same situation as the United States.

Emerging markets + + We remain “positive”. Capital flows are still high.

Japan + = We are moving to “neutral”. Bond yields have risen, prompted by the movement in US bond yields, although the monetary policy is still accommodative and economic growth is less robust.

Euro issuers Corporate inv. grade + + We remain “positive”. Yield spreads are attractive.

Equities

United States = + We are moving to “positive” due to a change in the growth outlook.

Euro-zone = + We are “positive”. Attractively valued equities and a more favorable global environment should give a positive impetus to the market.

UK = + We are “positive” due to the revised prospects for US growth.

Japan = + We are moving to “positive” despite uncertainty about Japan’s outlook.

Currencies(AgAInST THE EUro)

Dollar - = The US dollar has recovered ground due to uncertainties in Europe.

Yen = = “Neutral”: the yen is expected to return to a more stable footing against the euro.

Sterling - = The euro has been pushed into a weak trend due to upheavals in the euro zone. In the short term, this should continue to penalize the European currency.

CommoditiesOil + + Demand is more robust.

Gold + + We remain “positive”.

Scale from -- to ++ *weighting gap vs. strategic allocation of an investor

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