Barings

Baring AssetManagement Limited155 Bishopsgate,London EC2M 3XY

Tel +44 (0)20 7628 6000Fax +44 (0)20 7638 7928

www.barings.com

Authorised and regulated by theFinancial Services Authority

Andrew Cole

Tax , Inflate, Confiscate

January 2011

NMA Conference

1

The New Policy Directive

TAX

INFLATE

CONFISCATE

Source: Barings as at 2nd November 2010

What Governments have in store for us all and our savings.

2

Not just in the UK

Our forecast

Every G7 sovereign will pursue Fiscal Austerity (Tax)

Every G7 sovereign will Print (Inflate)

Every G7 sovereign will Default (Confiscate)

Every G7 Government struggling with the same issues.

Source: Barings, as at 2nd November 2010

3

The issues? Which way out of a debt crisis?

1950 1960 1970 1980 1990 2000 2010

Deb

t/ G

DP

(%)

Sovereign Debt to GDP in the G7

Sovereign Debt to GDP for G7 nations1950 - 2009

0

20

40

60

80

100

120

Source: Fathom and OECD, June 2010

4

In theory, 4 ways out

A higher growth rate of GDP

Fiscal pain, meaning an increase in taxes and/or a cut in public spending

Increased Seigniorage, the increased printing of money by the central bank leading toinflation.

Default, including every form of non-compliance with the original terms of the debt contract,including repudiation, standstill, moratorium, restructuring, rescheduling of interest orprincipal repayment etc.

Source: Barings 2010

5

Actually, only 3 ways out

A higher growth rate of GDP

Fiscal pain, meaning an increase in taxes and/or a cut in public spending

Increased recourse to seigniorage (printing money) by the central bank

Default, including every form of non-compliance with the original terms of the debt contract,including repudiation, standstill, moratorium, restructuring, rescheduling of interest orprincipal repayment etc.

Source: Buiter (2010)

Tax, Inflate, Confiscate

6

Source: OECD and Barings, June 2010. Primary surplus targets to stabilize government debt/ GDP ratios assume Barings trend real growth rates of1% in Japan, 2.3% in US, 2.2% in UK, and 1.5% in Germany. It is assumed that real interest rates are 1%. The projections take IMF assessments ofcurrent government debt. Net debt has been used for Japan, gross debt for others.

Government Primary Balances1970 – 2009 (%GDP)

Govt Primary Balances to StabiliseDebt/GDP by 2020

Debt Crisis, ways out. Option #1:Fiscal Pain

-15

-10

-5

0

5

10

15

1970 1980 1990 2000 2010 2020

UK USJapan Germany

15yr Avto ‘07

2010 60%Target

80%Target

-15

-10

-5

0

5

10

15

UK US Japan Germany

7


Source: Bloomberg, as at 1st November 2010

Ten Year Government Bond YieldsJune 2007 – October 2010

Yie

ld to

Mat

urity

(YTM

) (%

)

Japa

n Y

TM (%

)

2

2.5

3

3.5

4

4.5

5

5.5

6

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

10yr US Treasury 10yr Germany 10yr UK Gilt 10yr Japan (RHS)

http://www.bankofengland.co.uk/publications/speeches/2009/speech413.pdf

8

Source: Bank of England, http://www.bankofengland.co.uk/publications/speeches/2009/speech413.pdf , 2nd December 2009. (a) Excludes loansand associated deposits in course of settlement.

Debt Crisis, ways out. Option #2:Print

APF

Phase II25

20

15

10

5

0

Lehman

Jun Oct Feb20072006 20092008

Jun Oct Feb Jun Oct Feb Jun Oct

Federal Reserve

Euro System

Bank of England (a)

Central Bank Total Balance Sheet as % of Annual Nominal GDP

9Source: Barings as at 31st May 2010


China Real M1 Growth (yoy) & Chinese Producer Price Inflation (yoy)lagged by 9 mths

-20

-10

0

10

20

30

40

Dec 98 Dec 00 Dec 02 Dec 04 Dec 06 Dec 08 Dec 10

Pro

duce

r Pric

e In

flatio

n (%

)

-5

0

5

10

15

20

25

30

35

40

Rea

l M1

YoY

PPI (9mth Lag) China Real M1

10


Source: Bloomberg and Barings, 30th June 2010

UK

0.53

EU

0.67

0.81

US

0.57

0.82

0.82

CH

UK

EU

US

CH

YoY Change in PPIs for China, US, EU & UK1999 – 2010

Correlation of PPI annual changes2000 – 2010

China inflates the World

-10

-8

-6

-4

-2

0

2

4

6

8

10

Aug 99 Aug 02 Aug 05 Aug 08

YoY

% C

hang

e

-20

-15

-10

-5

0

5

10

15

20

Chi

na P

PI y

oy %

chg

US PPI Eurostat PPI EurozoneUK PPI China PPI (RHS)

11Source: Bloomberg and Barings, as at 1st November 2010

Breakeven Inflation Rates30th June 2007 – 1st November 2010


Bre

akev

en In

flatio

n R

ate

(%)

Japa

nese

Bre

akev

en In

flatio

n R

ate

(%)

US 5y5y Fwd Breakeven Inflation UK 10yr Breakeven InflationItaly 10yr Breakeven Japan 8yr Breakeven Inflation (RHS)

-0.50

0.51

1.52

2.53

3.54

4.5

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

-5

-4

-3

-2

-1

0

1

12Source: Bloomberg, as at 1st November 2010

5yr Credit Default Swap Spreads – Eurozone Periphery

Debt Crisis, ways out. Option #3:Default

5 ye

ar C

DS

Spr

ead

(bps

)

0

200

400

600

800

1000

1200

Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct07 07 07 07 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10

Greece Portugal Ireland Spain Italy

13Source: Bloomberg, as at 1st November 2010

5yr Credit Default Swap Spreads – G5

Debt Crisis, ways out. Option #3:Default

5 ye

ar C

DS

Spr

ead

(bps

)

0

20

40

60

80

100

120

140

160

180

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

France Germany UK US Japan

14Source: McKinsey & Matt King - Citigroup, Arresting the Sovereign Avalanche?, June 2010.

GDP Growth vs Previous Trend Real Growth by Deleveraging Strategy


70

75

80

85

90

95

100

105

t=0 t+2 t+4 t+6 t+8 t+10 t+12 t+14

Belt tightening Inflation Default Belt tightening Inflation Default

7

GD

P G

row

th (%

)-4-3

-2-1-1

2345

6

10yr pre 1-2 yrs 2-3 yrs 4-5 yrs Trend+10yr

15

Summary

There is no easy way to deleverage

Although markets are busy deciding which will be the route of choice, governments willcommit the all three sovereign sins:

Taxation

Inflation

Confiscation

For Investors and Savers, the outcomes have quite different portfolio implications (oftenrepresented by the inflation/deflation debate)

Markets will likely swing from one extreme to the other as evidence emerges supportingeach route

Understanding the risk premium on different assets will be an increasingly importantdiscipline.

Source: Barings, as at 2nd November 2010

16

Forecast returns & risk10 year asset class forecasts (GBP)

Source: Barings as at 1st May 2010* Risk (standard deviation of annualised returns)

* Source: Barings. Risk= standard deviation of annualised return. As at 15th June 2010** Barings data, gross of fees, 10 year strategy derived from index returns of all the

ingredients of the annually revised strategy2008 calendar year, 10 year strategy: -22.4%, portfolio: -4.6%

Gold

Fund of hedge fundsProperty

Emerging Bonds

UK Index LinkedUK Gilts

UK 3 Mth Cash

UK Corporate Credit

US Equities

FTSE All shareEmerging Europe Equities

Japanese Equities

Latin America Equities

Emerging Asia Equities

European Equities

0

2

4

6

8

10

12

14

0 4 8 12 16 20 24 28 32

Return (% per annum)

Risk (% per annum) Strategic thinking helps identify areas of focus

17

Tactical asset allocation protects capital and seeks to maximise return

8.7

7.9

4.6

4.3

30.8

35.0

39.6

50.5

Corporate Bonds

UK Bonds

Cash

Overseas Bonds

Gold Bullion

Asia ex Japan

Japan Equity

Emerging Equity

2005

15.3

29.0

29.6

37.4

19.0

22.9

24.0

33.4

Cash

UK Bonds

Japan Equity

Overseas Bonds

Europe Equity

UK Equity

Asia ex Japan

Emerging Equity

2009

0.5

-1.2

-5.9

-9.7

19.4

30.1

53.3

59.4

7.2UK Bonds-24.4Europe Equity4.5Hedge Funds0.8Corporate Bonds

5.3Europe Equity-29.9UK Equity1.8Corporate Bonds0.7UK Bonds

4.8Hedge Funds-31.3Asia ex Japan-5.5Property-7.4Japan Equity

0.4Cash-35.2Emerging Equity-6.5Japan Equity-7.5Overseas Bonds

N. America Equity4.7CashEurope Equity16.3Emerging Equity

Emerging Equity12.8UK BondsAsia ex Japan16.8UK Equity

Asia ex Japan42.8Gold BullionGold Bullion18.1Property

Gold Bullion58.1Overseas BondsEmerging Equity19.7Europe Equity

2010200820072006

Source: Barings as at 31st December 2010

Best and worst performing asset classes

18

Irish Bond Risk vs. Return

Source: Barings, Bloomberg & Merrill Lynch as at 17th December 2010 – 6 month annualised returns 1995 - 2010

“It’s not what we don’t know that hurts us; it’s what we know for sure thatjust ain’t so.”

Mark Twain – Nobel Prize Laureate (Literature)

November 2010

-20

-15

-10

-5

0

5

10

15

0 1 2 3 4 5 6

Risk - %

Ret

urn

-%

19

Irish Bond Equity Correlation vs. Irish Bond Returns

Source: Barings, Bloomberg & Merrill Lynch as at 17th December 2010 – 6 month annualised returns 1995 - 2010

November 2010

-20

-15

-10

-5

0

5

10

15

-1.00 -0.50 0.00 0.50 1.00

Correlation - %

Ret

urns

-%

20

Risk Premia on offer today in the UK

Source: Barings, as at 30th November 2010

Breakeven InflationRates

2.3

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

Credit Spreads

29

79

129

179

Inflation LinkedBonds

0.5

1.0

1.5

2.0

2.5

Equities

3%

4%

5%

6%

7%

8%

21

Your Multi-Asset Fund Manager

Casting his net far and wide!

22

Multi Asset Fund & RPI+4%

Past Performance is not a guide to future performance

Source: Financial Express as at 31/12/2010, Net Returns, Bid To Bid.Fund Inception date 20th March 2009

23

Dynamic Asset Allocation Fund vs. Cautious Managed

Past performance is not a guide to future performance

9.86

10.29

Return

01/01/201031/12/2010

8.6416.18-15.541.57IMA OE Cautious Managed

36.5020.23-5.448.86Baring Dyn Asset Alloc I GBP

DAA vs IMA Cautious Managed

ReturnReturnReturnReturnGroup/Investment

17/01/200731/12/2010

01/01/200931/12/2009

01/01/200831/12/2008

17/01/200731/12/2007

Source: Morningstar 06/01/2011

24

Baring Dynamic Asset Allocation –Return & Risk:16/01/2007 – 31/12/2010

Source: Barings as at 31st December 2010Net of fees. Reference to the index is for comparative purposes only. The DAA returns should be considered as supplemental information whichcomplements the Multi Asset Strategy GBP

Baring DAA LIBOR +4% FTSE All Share FTSE All World

36.5 33.3

10.1

26.4

Return (%) Risk (%)

8.10.7

18.24 18.92

Past performance is not a guide to future performance

25

Biography

Andrew is a member of the Multi Asset Team responsible for the management of multi asset portfolios. He is lead manager on a number of segregated portfolios.Andrew was appointed to the Strategic Policy Group (SPG), the company’s global macro research and asset allocation team in 2005. He is chair of the SPG Risk SubGroup and is a member of the Economic Group. Both groups provide key inputs to the debate of the monthly SPG meetings. Andrew joined the Fixed Incomedepartment at Baring Asset Management in 1986. He was appointed a Director in 1994 and joined the Multi Asset portfolio team in 1995.

Andrew Cole

Member of the Multi-Asset Team

Location: LondonInvestment Experience: 29 Years

26

Important Information

Compliance (London) 7th January 2011

For Professional Investors/Advisers only. This document is approved and issued by Baring Asset Management Limited and in jurisdictions other thanthe UK it is provided by the appropriate Baring Asset Management company/affiliate whose name(s) and contact details are specified herein. Theinformation in this document does not constitute investment, tax, legal or other advice or recommendation. It is not an invitation to subscribe and is forinformation only.

The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance is not a guide to futureperformance. Quoted yields are not guaranteed. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets.Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negative impact onincome and capital value. Income payments may constitute a return of capital in whole or in part. Income may be achieved by foregoing future capitalgrowth We reasonably believe that the information contained herein from 3rd party sources, as quoted, is accurate as at the date of publication. Theinformation and any opinions expressed herein may change at any time. Companies and employees of the Baring Asset Management group may holdpositions in the investment(s) concerned. This document may include internal portfolio construction guidelines. As guidelines the fund is not required toand may not always be within these limits. These guidelines are subject to change without prior notice and are provided for information purposes only.

This document must not be used, or relied on, for purposes of any investment decisions. Before investing in any product, we recommend that appropriatefinancial advice should be sought and all relevant documents relating to the product, such as reports and accounts and prospectus,( which specify theparticular risks associated with a product, together with any specific restrictions applying and the basis of dealing) should be read. Compensationarrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available in respect to any Offshore Fund.

Research MaterialBaring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as anexample of research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. Theinformation and opinions expressed herein may change at anytime.

For data sourced from Morningstar: © Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or itscontent providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its contentproviders are responsible for any damages or losses arising from any use of this information.

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