Put on your seat-belt, and stay the course

Asia Quarterly Macro Strategy

Pranay Gupta

Chief Investment Officer

Lombard Odier Darier Hentsch (Asia) Limited

September 2013

-300

-200

-100

0

100

200

300

-20

-15

-10

-5

0

5

10

15

20

2009/Q1 2010/Q1 2011/Q1 2012/Q1 2013/Q1

Quarterly increase in public payroll (rhs)

Federal spending

State and local spending

(%, Q/Q SAAR) (Thousand persons)

Source: Bloomberg

US growth still underpinned by domestic demandBusiness cycle in the US

HOUSING BOOM FAR FROM ITS PEAK

US household debt service ratio and housing starts (quarterly)

FISCAL IMPULSE STEADILY IMPROVING

Spending and hiring growth by Federal and local governments

0

500

1000

1500

2000

2500

0

2

4

6

8

10

12

80/Q1 85/Q1 90/Q1 95/Q1 00/Q1 05/Q1 10/Q1

Homeowner Mortgage DSR (left)

Homeowner Consumer Loan (lhs)

Housing Starts (rhs)

(% of personal

disposable income)(thousand units, saar)

Source: Bloomberg (right), CEIC (left)

Europe finally emerging from recessionBusiness cycle in the Eurozone

LOWER RATES FOR LOANS DESPITE UPTICK IN EONIA

Interest rates for new loans (over 5 years) and EONIA averagePERIPHERY LEADING THE WAY

Recent change in OECD CLI for key Eurozone members

-100

-80

-60

-40

-20

0

20

2012/Jan 2012/May 2012/Sep 2013/Jan 2013/May

Consumer credit

Housing

Nonfin Businesses (under EUR 1 mn)

EONIA

(Cumulative change in basis points since Jan 2012)

-0.5 0.0 0.5 1.0 1.5

IE

AT

FR

DE

NL

ES

IT

PT

GR

(3M change in normalized index)

Japan basically alone in quantity targeting frameworkMonetary cycle

PBOC (China)

Financial liberalization

BoJ (Japan)

QQE w/ 2% Core CPI

FRB (US)

Unemployment 6.5%

Inflation 2.5%

BoE (UK)

Unemployment 7%

Inflation 2%

ECB (EA)

Inflation 2%

Quantity

targeting

Interest rate

targeting

Current

Guidance

(Positive rate)

Forward

Guidance

(Near 0% rate)

Majority of the

world’s central

banks

Source: Bloomberg, CEIC

Asia tracking a bumpy roadBusiness Cycle in Asia (Domestic Demand)

-10

-5

0

5

10

15

20

JP CN IN KR TW SG HK ID TH MY PH

12/Q4

13/Q1

13/Q2

13/Q3 (F)

(% Q/Q SAAR)

-19.6%-40

-30

-20

-10

0

10

20

30

-4

-3

-2

-1

0

1

2

3

JP KR TW SG CN(rhs)

HK(rhs)

IN(rhs)

ID(rhs)

TH(rhs)

MY(rhs)

PH(rhs)

Apr

May

Jun

Jul

(%, Y/Y, 3M MA) (%, Y/Y, 3M MA)

Retail sales (value) Auto sales (volume)

…AND DOMESTIC CONSUMPTION

Retail sales (or volume proxies) in key Asian economies

IN NORTH ASIA, STEADY MOMENTUM IN GROWTH…

Quarterly sequential GDP growth in key Asian economies

Source: Bloomberg, CEIC

Credit demand strengthening in DM, faltering in EM AsiaCredit Cycle

…CREDIT PARTY LIKELY OVER IN EM ASIA

Deviation of domestic credit growth (y/y) from historical average

DEMAND FOR CREDIT STRENGTHENING ACROSS DM…

Bank lending surveys for households in US, EA, and JP

-3

-2

-1

0

1

2

3

TH JP ID SG PH IN MY CN HK US TW KR UK EA

2012 Q4 2013 Q1 2013 Q2(%p deviation from

historical average)

-30

-20

-10

0

10

20

30

40

50

60

USCreditcard

USAutoloan

USPrime

Mortgage

USNon-trad.mortgage

JPHouseholds

EAHousing

EAConsumerLoan

2013 Jan 2013 Apr 2013 Jul(%, net affirmative

response for stronger

…BUT EXPORTS BEGINNING TO PROVIDE RELIEF

Cumulative portfolio inflows since Q1 2009

Source: Bloomberg (left), CEIC (right)

Portfolio flows will be replaced by exports, but with a lagBusiness Cycle in Asia (Capital Flows and Trade)

FINANCIAL CONDITION DETERIORATING SHARPLY…

Bloomberg Financial Condition Indices for US, Europe, and Asia

-20

-15

-10

-5

0

5

10

15

20

25

30

01/2011 06/2011 11/2011 04/2012 09/2012 02/2013

EU

China

US

(%, Y/Y, 3M MA)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013/Jan 2013/Mar 2013/May 2013/Jul

US Asia ex Japan Eurozone(Z-Scores)

No pain, no gainRisk factor: policy constraints

JAPAN’S OBVIOUS CHOICE TO ADDRESS FISCAL RISKS

Comparison of OECD and Japan VAT rates since the mid 1990s

Source: OECD (left), CEIC (right)

0

5

10

15

20

25

1996 2000 2002 2004 2006 2008 2010 2011 2012 2013 2014 2015

Japan

OECD Average excluding Japan

(%)

Planned

Possible

Revision

in October

FUEL SUBSIDY REFORM ARRIVES IN INDONESIA

Retail price for subsidized fuel (rupiah per liter)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000/Jan 2002/Oct 2005/Jul 2008/Apr 2011/Jan

Gasoline (Ron 88)

High speed diesel

(IDR / liter)

Most crucial period in 2013 approachingRisk factor: political calendar

Date Event (Downside Scenario)

Sep 2013 German parliamentary election

Australian federal election

G20 Summit in St. Petersburg

September FOMC (possible QE taper)

Oct 2013 Japan’s VAT decision / structural reform measures

US FY 2013~14 budget deadline (October 1st)

US debt ceiling deadline (mid-October)

Nov 2013 China’s 18th CPC Central Committee Meeting

2014 Indonesian presidential election

Indian general election

Uncertain Thaksin’s return to Thailand, Fed chair appointment

POLITICAL RISKS RISING IN SOUTH ASIAEIU political risk index (change from year ago)

KEY POLITICAL EVENTS IN 2013-14Election, budget deadline, and other political events

Source: News reports (left), Economist Intelligence Unit (right)

-2 -1 0 1 2 3 4

KR

TW

PH

CN

SG

TH

MY

ID

IN

HK

Potential racial tension (affirmative action)

Amnesty Bill (precursor for Thaksin’s return)

Risk risingRisk falling

Cross-asset allocation viewContinued preference for equities, slightly contrarian on DM / EM outlook

CROSS ASSET VIEW -10% N 10% Rationale

Cash Deploying some cash into value in equity and credit, with a firm macro view

Government Bond Somewhat vulnerable to QE taper and macro upswing

Corporate Credit Business cycle to drive spreads lower, opportunities emerging in EM

Equities Global growth to underpin equity gains, positioning not as bullish as before

Commodities ex gold Likely to react sensitively to growth after months of underperformance

Gold Decent hedge against tail risks in Japan, Europe, and MENA

No bias (0%)

Bias for

(+20%)

Current

Environment

Bias against

(-20%)

Equities vs. Bonds Bias

Current

Environment

Developed vs. Emerging Bias

No bias (0%)

Bias for

(+20%)Bias against

(-20%)

Preferences ‘within’ key asset classesFavor equities in Europe and ‘global’ Asia

EQUITIES -10% N +10% Rationale

US Priced for perfection at this point, focusing more on sector rotation

Europe (EA 17 & UK) Macro tailwinds to underpin better earnings going forward

Japan Constructive on reflation story, markets too bearish on reform prospects

China Policy to become more supportive, but keen to start reducing to neutral

India Fixed income seen as better way to invest when FX stabilizes

NIE-4 (KR, TW, SG, HK) Positioned to benefit from strength in the US, Korea and Taiwan favored

ASEAN-4 All except PH in macro consolidation phases, pessimistic earnings outlook

SOVEREIGN

DM sovereign Time to reduce outright underweight in duration, particularly in USTs

EM sovereign Cautiously predicting stabilization in select EMs, including Asia

CREDIT

DM credit Selective exposure to European names

EM credit (Hard currency) Many attractive opportunities in EMs, increasing exposure to some in Asia

FX & Gold

EM Asian currencies Favor economies with structural CA surpluses, CNY to weaken modestly

Gold Still a reasonable hedge against tail risks in Japan, Europe, and MENA

Source: Bloomberg

Buy stocks in ‘global’ AsiaAttractive valuation and effective way to capitalize on global growth

ATTRACTIVE RISK PREMIA IN ‘GLOBAL’ ASIAN EQUITIES

Equity risk premia (country level) based on Bloomberg surveys

0% 5% 10% 15%

IN

ID

MY

SG

US

PH

TH

CN

KR

EA

HK

JP

TW

HINTS OF STABILIZATION IN ASIA’S EXPORT CANARIES

Export growth of Korea, Taiwan, and Singapore

-20

-10

0

10

20

30

40

01/08/2010 01/04/2011 01/12/2011 01/08/2012 01/04/2013

Korea

Taiwan

Singapore (NODX)

(%, Y/Y, 3M MA)

Source: Bloomberg

Time to reduce underweight in duration and favor USTsMarket Cycle: Sovereign

CHANGE IN SOVEREIGN YIELD CURVES YEAR TO DATE

UST actives and Bund EUR curves

TREASURIES MOVED SIGNIFICANTLY WIDER THAN BUNDS

Yield curve shift by tenors, comparison between USTs and Bunds

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1 61 121 181 241 301

UST (19 Aug 2013)

UST (31 Dec 2012)

Bund (19 Aug 2013)

Bund (31 Dec 2012)

(%)

(Months)-20

0

20

40

60

80

100

120

1M 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y15Y20Y25Y30Y

UST

Bund

(bp)

Source: Bloomberg

Sell-off in Hard Currency EM debt offers an entry pointMarket Cycle: Credit

CHANGE IN EM USD DEBT INDICES YEAR TO DATE

JPMorgan EMBI and Corporate EMBI indices since January 2ndASIAN UNDERPERFORMANCE QUITE PRONOUNCED

CDS spreads for investment grades in North America and AexJ

232

237

242

247

252

257

262

580

600

620

640

660

680

700

2013/Jan 2013/Mar 2013/May 2013/Jul 2013/Sep

JPM EMBI Global (rhs)

CEMBI Broad (rhs)

(Index) (Index)

0

20

40

60

80

100

120

140

160

180

200

2013/Jan 2013/Mar 2013/May 2013/Jul 2013/Sep

CDX North America IG (Gen 5Y)

iTraxx Asia ex Japan IG (Gen 5Y)

(bp)

Stay short JPYArgument for weaker JPY from interest rate differential

YIELD CURVES STEEPENING IN GUIDANCE REGIMES…

3M and 10 year bond yield spread in the US and UK

…BUT STABLE IN QE REGIME

3M and 10 year bond yield spread in Japan

Source: Bloomberg

100

120

140

160

180

200

220

240

260

280

2013/Jan 2013/Mar 2013/May 2013/Jul

UK

US

(bp)

0

50

100

150

200

250

2013/Jan 2013/Mar 2013/May 2013/Jul

JGB 3M - 10YR Term Spread

UST 10YR - JGB 10 YR Spread

(bp)

Summary

� The US will continue on the path of recovery, despite the short term issues.

� European recovery is happening, but contingent upon sustainable reform.

� Japan may finally be prepared to make the changes required to restart growth, and emerge from

deflation.

� Asia will go through a period of adjustment as money flows change and global recovery takes root, but

this is not a 1997 type issue.

� Prefer Equities to bonds. Overweight Europe, Japan and North Asian equities.

� Buy hard currency Asian debt.

� Minimize exposure to Asian currencies including JPY. Long USD.

Important information - Investment professionals

This document has been prepared by Lombard Odier Darier Hentsch (Asia) Limited or an entity of the Lombard Odier & Cie Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use

in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security, funds or any investment product. It contains the opinions of Lombard

Odier Darier Hentsch (Asia) Limited, as at the date of issue and do not represent those of Lombard Odier’s investment teams in London and Geneva. These opinions do not take into account individual investor

circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal

recommendation to any investor. Each investor must make his/her own independent decisions regarding any securities or financial instruments mentioned herein. Before entering into any transaction, an investor

should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit,

tax, and accounting consequences.

The information and analysis contained herein are based on sources believed to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in

this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Past performance is no guarantee

of current or future returns, and the investor may receive back less than he invested.

The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, securities lending, forex, or money

market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at sophisticated investors who are able to understand and accept the risks. If

opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any given instruments. In order to ensure their independence,

financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. On request, Lombard Odier will be pleased to provide investors with more detailed information

concerning risks associated with given instruments.

The value of any investment in a currency other than the base currency of a portfolio is subject to the foreign exchange rates. These rates may fluctuate and adversely affect the value of the investment when it is

realized and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market

conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.

Hong Kong: This document has been distributed by Lombard Odier Darier Hentsch (Asia) Limited, a licensed entity regulated and supervised by the Securities and Futures Commission in Hong Kong for the general

information of professional investors and other persons in accordance with the Securities and Futures Ordinance (Chapter 571) of the laws of Hong Kong.

Singapore: This document has been distributed by Lombard Odier Darier Hentsch & Cie (Singapore) Ltd. for the general information of accredited investors and other persons in accordance with the conditions

specified in Sections 275 and 305 of the Securities and Futures Act (Chapter 289). Recipients in Singapore should contact Lombard Odier Darier Hentsch & Cie (Singapore) Ltd., an exempt financial adviser under

the Financial Advisers Act (Chapter 110) and a merchant bank regulated and supervised by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with this report. The recipient

of this report represent and warrant that they are accredited investors and other persons as defined in the Securities and Futures Act (Chapter 289).

United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States or given to any US person.

United Kingdom: UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or

services provided by an overseas person. This material has been approved for issue in the UK by Lombard Odier Darier Hentsch (UK) Limited (hereafter Lombard Odier (UK)), Queensberry House, 3 Old Burlington

Street, London W1S 3AB. Lombard Odier (UK) is authorised and regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS. Lombard Odier (UK) does not provide tax

advice.

This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.

© 2013 Lombard Odier & Cie – all rights reserved.

This document has been prepared by Lombard Odier Darier Hentsch (Asia) Limited or an entity of the Lombard Odier & Cie Group (hereinafter “Lombard Odier”). It is not intended for distribution,

publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security, funds or any investment product. It contains the opinions of

Lombard Odier Darier Hentsch (Asia) Limited, as at the date of issue and do not represent those of Lombard Odier’s investment teams in London and Geneva. These opinions do not take into account

individual investor circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy

constitutes a personal recommendation to any investor. Each investor must make his/her own independent decisions regarding any securities or financial instruments mentioned herein. Before entering into

any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as

well as any legal, regulatory, credit, tax, and accounting consequences.

The information and analysis contained herein are based on sources believed to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information

contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Past

performance is no guarantee of current or future returns, and the investor may receive back less than he invested.

The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, securities lending, forex,

or money market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at sophisticated investors who are able to understand and

accept the risks. If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any given instruments. In order

to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. On request, Lombard Odier will be pleased to provide

investors with more detailed information concerning risks associated with given instruments.

The value of any investment in a currency other than the base currency of a portfolio is subject to the foreign exchange rates. These rates may fluctuate and adversely affect the value of the investment

when it is realized and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market

or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.

Hong Kong: This document has been distributed by Lombard Odier Darier Hentsch (Asia) Limited, a licensed entity regulated and supervised by the Securities and Futures Commission in Hong Kong for

the general information of professional investors and other persons in accordance with the Securities and Futures Ordinance (Chapter 571) of the laws of Hong Kong.

Singapore: This document has been distributed by Lombard Odier Darier Hentsch & Cie (Singapore) Ltd. for the general information of accredited investors and other persons in accordance with the

conditions specified in Sections 275 and 305 of the Securities and Futures Act (Chapter 289). Recipients in Singapore should contact Lombard Odier Darier Hentsch & Cie (Singapore) Ltd., an exempt

financial adviser under the Financial Advisers Act (Chapter 110) and a merchant bank regulated and supervised by the Monetary Authority of Singapore, in respect of any matters arising from, or in

connection with this report. The recipient of this report represent and warrant that they are accredited investors and other persons as defined in the Securities and Futures Act (Chapter 289).

United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States or given to any US person.

United Kingdom: UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any

investment or services provided by an overseas person. This material has been approved for issue in the UK by Lombard Odier Darier Hentsch (UK) Limited (hereafter Lombard Odier (UK)), Queensberry

House, 3 Old Burlington Street, London W1S 3AB. Lombard Odier (UK) is authorised and regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS. Lombard

Odier (UK) does not provide tax advice.

This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.

© 2013 Lombard Odier & Cie – all rights reserved.