January 2018 GLOBAL INVESTMENT OUTLOOK AND STRATEGY

TAX REFORM WILL PROPEL U.S. ECONOMIC GROWTH AND EQUITY MARKETS HIGHER IN 2018

Source: Tax Foundation, Tax Policy Center, KPMG, BofA/Merrill Lynch, Sit Investment Associates, 12/31/17

5.8%11.8%

6.7%9.1%

7.9%6.3%

3.9%2.8%2.3%

0.0%

TechnologyHealth Care

S&P 500Staples

IndustrialsMaterials

DiscretionaryEnergyUtilities

Telecom

0.0%0.3%

3.0%3.3%4.3%5.3%5.5%6.6%6.9%7.0%7.5%7.8%

UtilitiesReal Estate

TechnologyMaterials

EnergyS&P 500

FinancialsHealth Care

IndustrialsStaples

TelecomDiscretionary

0.0%0.7%

6.2%6.5%

8.6%10.6%10.9%

13.2%13.7%14.1%14.9%15.5%

UtilitiesReal Estate

TechnologyMaterials

EnergyS&P 500

FinancialsHealth Care

IndustrialsStaples

TelecomDiscretionary

InitialEPS Impact

RecurringEPS Impact

Corporate EPS Boost from Tax Reform

30% 30%25% 25% 23% 22%

13%

Prior Tax Rate 2018 Tax Rate

U.S. Corporate Tax Rate Now More CompetitiveS&P 500Sectors

Tax Reform Will Have A Modest Direct Impact on Personal Income

2.2%

3.4%

1.7%

2.9%

0.2%0.9%

All Income Groups Top 1%

2018 2025 2027

Percent Change in After-Tax Income

12.5%6.2%6.2%

3.2%4.1%

2.0%2.6%2.3%

0.3%0.2%

TechnologyHealth Care

S&P 500Staples

IndustrialsMaterials

DiscretionaryEnergyUtilities

Telecom

Potential Beneficiaries of Repatriation

S&P 500Sectors Cash Non-Cash

Overseas Assets (% of Market Cap)

Corporate Statutory Tax Rate (including state/local)

39%

Total18.3%

18.0%12.8%12.3%

12.1%8.3%

6.4%

5.1%2.6%

0.2%

Special Topic: Tax Reform Potential Not Fully Priced into Stocks

U.S. Fiscal Stimulus, Deregulation & Capex Are Added Catalysts

The U.S. Yield Curve Will Continue to Flatten as the Fed Tightens

Stock Picker’s Market: Company Fundamentals Matter as Global Central Banks Unwind Accommodative Monetary Policies

2 Sit Investment Associates

U.S. Tax Reform Potential Not Fully Priced into Stocks 2017 was an excellent year for investors as virtually every major asset class produced solid gains. The “Goldilocks” environment of continued low interest rates, combined with an uptick in global growth (and corporate earnings), was augmented at year-end by the passage of U.S. tax reform. This is a sweeping piece of legislation that will likely have both cyclical and structural impacts on the economy and financial markets.

Key beneficiaries of the Tax Cuts and Jobs Act include consumers, domestic-centric firms with a high effective tax rate currently, and multinational corporations that can repatriate large offshore cash balances. Our judgment is the equity markets have only partially priced in the benefits of tax reform and that upward earnings revisions will be an additional catalyst for stocks in the months ahead. Furthermore, we expect M&A activity to accelerate in many sectors as clarity around tax reform (and, to a lesser extent, regulatory reform) emerge. We believe tax reform will likely incentivize acquirers to pursue U.S.-based assets.

Corporate Tax Reform Beneficiaries, by Sector

Source: BofA Merrill Lynch, Sit Investment Associates, 12/31/17

While a tax cut amounting to a relatively small amount of gross domestic product (GDP) may not seem like much (approximating 0.5-0.6 percent of GDP over 10 years), we anticipate that the impact on businesses and financial markets will be quite significant. One of the intriguing aspects of the tax package simply relates to when it is occurring. The U.S. unemployment rate is exceptionally low, both businesses and consumer confidence are at cyclical

highs, and the economic expansion is in its eighth year. While overhauls of the tax code are rare events, it is worth noting that prior reductions generally occurred when the economy was cyclically weak. According to Evercore ISI, the average U.S. unemployment rate when the past seven tax cuts occurred was 7.0%, compared to the reported rate of 4.1% in December 2017.

In terms of bill specifics, while the vast majority of consumers will get a tax reduction, businesses are clearly the big winners. The plan is a pro-investment reform of the tax code that dramatically lowers corporate rates, promotes repatriation of offshore cash, and offers incentives for capital investment. The ultimate success of these reforms will depend on the degree to which they generate a “virtuous cycle” that include a prolonged period of capex, productivity gains, and accelerating wages as labor markets tighten. With unemployment so low, it is critical that non-inflationary, investment-led productivity growth improves from anemic levels experienced throughout much of this economic cycle. Moreover, small business formation, which has also lagged this cycle, may also improve in a more stimulative regulatory and tax backdrop. Highlighted below are the key business provisions of the Tax Cuts and Jobs Act.

Tax Cuts and Jobs Act of 2017

Source: Raymond James, 12/21/17

Average Initial RecurringU.S. Sales EPS EPS Offshore

S&P 500 Sectors Exposure Impact Impact CashDiscretionary 72% Telecom 98% Staples 68% Industrials 67% Health Care 67% Financials 81% Energy 75% Materials 53% Technology 46% Utilities 96%

Corporate Rate (Federal) 21%Worldwide vs. Territorial TerritorialCapital Expenditures/ 100% Expensing Through 2022Full Expensing 80% in 2023

60% in 202440% in 202520% in 20260% thereafter

Interest Deduction Limited to 30% of adj. taxable income (~EBITDA through

2021/EBIT after), carryforward of disallowed deduction for 5 years

Net Operating Losses Capped NOL usage to 80% of taxable income, unlimited/

indefinite carryforwardCorporate AMT EliminatesOther Eliminate most other

expenditures, keep R&D creditInternational/ Cash and equivalents taxed Repatriation at 15.5%. Other earnings

and profits at 8%

Global Investment Outlook & Strategy – January 2018 3

With the prospect of tax reform supporting market gains late in 2017, investors are evaluating just how much is already discounted in equity valuations. While difficult to assess with precision, we believe it is only partially reflected for three key reasons. First, we attribute much of the rise in markets over the past year to a near-perfect backdrop, with improving economic growth throughout the world and minimal inflationary pressures. Second, investors were broadly skeptical on the passage of tax reform until the final weeks of the year. Finally, while some specific stocks/sectors received a late year boost (particularly domestic firms with high tax rates), we believe other provisions will play out as 2018 progresses, including accelerating capital spending, repatriation, and higher consumer spending. In addition, we expect a strong uptick in capital returns (both dividends and share repurchases) as corporate earnings power and liquidity improve. In our view, the vast majority of U.S. companies will benefit from aspects of U.S. tax reform, but to greatly varying degrees. This reinforces our view of a “stock picker’s” market as policy beneficiaries reward investors with improved earnings and dividend growth over the near to intermediate term. In terms of investment strategy, we continue to focus on a “barbell” approach at this stage of the market cycle. This calls for maintaining positions in visible secular growth/less cyclical stocks, balanced with stocks/sectors levered to policy changes, particularly related to tax reductions and higher capital spending. As tax reform gained momentum in recent months, we have added to several groups that are attractively valued and stand to benefit from policy change across a number of different industries. Financial stocks, particularly banks and life insurers, are increasingly attractive given their high (current) tax rates and leverage to an uptick in economic growth, including the likelihood that interest rates will gradually move higher in 2018. In addition to financial groups, other industries with improving fundamentals (via policy change) include manufacturing, defense, food/beverage, managed care, media, retail, airlines, railroads, and telecommunications. While investors have not recently focused on the health care and technology sectors, largely because many of these firms are global enterprises with very low tax rates, these groups have the most to gain from

repatriation (e.g., we estimate that Apple alone has nearly $250 billion in cash overseas, based on recent filings). We expect this to drive incremental merger and acquisition activity and capital returns for these sectors.

Profits Held Outside of the United States

Source: Institute on Taxation and Economic Policy, 10/17/17

While we strongly believe that tax reform represents a catalyst for both the economy and financial markets, we do not dismiss the risks. First, even after the assumed benefits of faster growth, the plan will most certainly add to disturbingly high U.S. debt levels. Second, adding stimulus to an economy near full employment could precipitate higher inflation and interest rates, negating the growth benefits. Finally, there will most certainly be unintended consequences from legislation of this size and complexity, with the manifestation of underlying risks perhaps not evident until an economic downturn ensues. While the introduction of tax reform adds intricacy to the current market environment, we strongly believe it also represents opportunity for active investors. Our research team remains focused on identifying those companies that are well positioned for improved growth in this dynamic period.

$246B$199B

$142B$82B

$71B$66B$66B$63B$61B

$54B$49B$48B$47B$46B$46B

Top 15 Companies with the Most Profits Held OverseasBillions of U.S. Dollars

4 Sit Investment Associates

GLOBAL MACRO DEVELOPMENTS

The United States Tax reform, deregulation, federal outlays, and business investment provide upside catalysts for the U.S. economy in 2018 and 2019. However, increasing federal debt, higher potential inflation, and tighter monetary policy will likely dampen the positive impact.

The Tax Cuts and Jobs Act Will Boost GDP Growth; Could Also Be Inflationary We project real GDP growth will accelerate to +2.7 percent in 2018 from an estimated rate of +2.2 percent in 2017 driven by buoyant consumer spending, improving business investment, supportive financial conditions, and stimulative fiscal policies. The so-called “Goldilocks” pace of the current economic expansion has undoubtedly contributed to its longevity, as excesses that have historically triggered a recession have largely been absent. Along with higher near-term fiscal spending and regulatory relief, the Tax Cuts and Jobs Act (TCJA) is poised to kick-start a virtuous cycle of stronger economic growth that will elongate the expansion should “animal spirits” endure. However, this unprecedented late cycle stimulus could also prove inflationary, particularly given the tight labor market, and motivate the Federal Reserve to normalize monetary policy at a quicker-than-expected pace. Nevertheless, various indicators suggest a low probability of a recession within the next 18-24 months and that the bias for GDP growth is decidedly to the upside in 2018.

Typical Late Cycle Capital Spending Will Likely Receive an Extra Boost The degree to which corporate tax cuts will accelerate economic growth is contingent on how much of the tax savings and repatriated cash is allocated to domestic investment, acquisitions, debt repayment, dividends, share buybacks, and compensation – a portion of the tax benefit could also be competed away. As illustrated in Exhibit 1, previous tax legislation has had a mixed influence on equipment spending. However, synchronized global growth, improving corporate earnings, and ongoing regulatory relief have buoyed business confidence in recent quarters. Equipment spending has continued to recover as a result, with capex plans suggesting additional strength in 2018 (Exhibit 2). The tax bill’s provision through 2022 for the full and immediate expensing of short-lived capital investments should further bolster businesses spending and, combined with the overall lower corporate tax rate, may very well spur a U.S. manufacturing renaissance driven by investments in advanced robotics, artificial intelligence, and other emerging technologies.

Exhibit 1: Nonresidential Equipment Spending Exhibit 2: U.S. Composite Capex Plan Index

Source: BEA, Sit Investment Associates, 12/31/17 Source: Federal Reserve, BEA, Sit Investment Associates, 12/31/17

❶ ❷ ❸❹ ❺❻

3%

4%

5%

6%

7%

8%

9%

10%

1977 1982 1987 1992 1997 2002 2007 2012 2017

Percent of GDP

Trend+1 SD

Trend-1 SD

❶ Economic Recovery Tax Act❷ Tax Reform Act

❻ Tax Relief Reconciliation Acts

❸ Budget Reconciliation Act

❺ Taxpayer Relief Act

Tax Cuts:

Tax Increases:

❹ Revenue Reconciliation Act

01/ 01/ 2012 02/ 01/ 2012 03/ 01/ 2012 04/ 01/ 2012 05/ 01/ 2012 06/ 01/ 2012 07/ 01/ 2012 08/ 01/ 2012 09/ 01/ 2012 10/ 01/ 2012 11/ 01/ 2012 12/ 01/ 2012 01/ 01/ 2013 02/ 01/ 2013 03/ 01/ 2013 04/ 01/ 2013 05/ 01/ 2013 06/ 01/ 2013 07/ 01/ 2013 08/ 01/ 2013 09/ 01/ 2013 10/ 01/ 2013 11/ 01/ 2013 12/ 01/ 2013

-10%

-5%

0%

5%

10%

15%

20%

25%

0

5

10

15

20

25

30

35

2012 2013 2014 2015 2016 2017 2018

Capex Plans Index - 3MMA (LHS)

Equipment Spending - Y/Y% (RHS)

Global Investment Outlook & Strategy – January 2018 5

Tight Labor Conditions Portend Higher Wage Growth and Consumer Spending The current unemployment rate of 4.1 percent versus the average trough level of about 4.5 percent for the previous ten economic expansions points to limited slack in the labor market (Exhibit 3). The “U-6” measure of labor utilization, which includes marginally attached workers and those employed part time for economic reasons, also is close to the lows achieved in the last two business cycles. While the decline in the labor participation rate has likely stabilized this cycle, a skills mismatch may still hamper business expansion near-term. According to the National Federation of Independent Business, 51 percent of small businesses indicate that there are no or few qualified job candidates (Exhibit 4). However, the combination of tight labor conditions and improved economic prospects will further stimulate wage growth and may encourage more people to enter the labor force. Moreover, investments in capital equipment would not only mitigate the impact of the labor shortage but also give worker productivity a much-needed shot in the arm.

Tax Cuts Will Force Congress to Address Unsustainable Federal Debt Growth The Congressional Budget Office projected in June 2017 that the budget deficit would increase from $693 billion in 2017 to $1.5 trillion in 2027, swelling gross federal debt by 52 percent to $30.7 trillion (Exhibit 5). Recent legislation, including tax cuts, sequester relief, and disaster funding could push the budget deficit back above $1 trillion by 2019. While the Tax Cuts and Jobs Act (TCJA) will lift GDP growth near-term, its impact on the economy and federal budget over a longer horizon is uncertain. The Tax Foundation projects that the $1.5 billion tax cut will boost GDP by +1.7 percent over the next decade and create an additional 339,000 full-time jobs, but decrease federal revenue by $448 billion relative to baseline. Other analyses suggest much higher revenue shortfalls over the same period. If tax cuts fail to deliver sustainably higher economic growth, requisite spending cuts and the negative effects of elevated federal debt will diminish the benefits of the TCJA and limit a fiscal response in the next recession. Reductions in spending will almost certainly involve tough decisions on entitlement programs, a subject matter legislators will likely remain reluctant to broach in an election year (Exhibit 6).

Partisanship Will Be an Elevated Macro Risk into the 2018 Mid-Term Elections The approval ratings for both Congress and the President remain decidedly unfavorable despite near-record consumer confidence, suggesting the Republican majority control in both chambers of Congress is vulnerable in the 2018 elections. President Trump has yet to achieve a job approval rating greater than 50 percent according to Gallup, with an

Exhibit 3: Unemployment vs Notable Tax Cuts Exhibit 4: Job Openings vs Qualified Applicants

Source: BLS, ECRI, Sit Investment Associates, 12/31/17 Source: BLS, NFIB, Sit Investment Associates, 12/31/17

❶

❷ ❸❹

2%

4%

6%

8%

10%

12%

1957 1967 1977 1987 1997 2007 2017

Recession

❶ Tax Reduction Act❸ Tax Reform Act ❹ Tax Relief Reconciliation Acts

❷ Economic Recovery Tax Act20%

30%

40%

50%

60%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2007 2009 2011 2013 2015 2017 Job Opening Rate (% of Nonfarm Employment) - LHS

% of Small Businesses Reporting Few or No Qualified Job Candidates - RHS

Previous Cycle Peak

6 Sit Investment Associates

average rating of about 38 percent for his first year in office versus the mean presidential job approval rating of 53 percent over the last eighty years (Exhibit 7). Since 1946, the political party of a sitting president has lost an average of 36 House seats and 6 Senate seats in mid-term elections when the presidential job approval rating is below 50 percent. A loss of this magnitude would result in a shift to Democratic majorities in both the House and Senate. Figures from a Quinnipiac poll jibe with this historical tendency and currently indicate that Democrats have a 15-point lead over Republicans in a generic Congressional vote, 52 to 37 percent. It is unclear at this point if tax cuts will be an asset or a liability for Republicans come November 2018 as various polls point to low public support for the legislation. Still, the fact that only eight seats currently held by Senate Republicans are up for election in 2018 poses an uphill battle for Democrats (Exhibit 8). Although a split Congress will likely slow further implementation of President Trump’s agenda, the effects of tax reform, deregulation, and executive actions will be lasting.

Exhibit 5: U.S. Federal Budget and Debt Exhibit 6: U.S. Federal Outlays by Category

Source: BEA, OMB, U.S. Treasury, Sit Investment Associates, 12/31/17 Source: CBO, Sit Investment Associates, 12/31/17 Exhibit 7: U.S. Presidential Job Approval Exhibit 8: 2018 U.S. Senate Race Ratings

Source: Gallup, Sit Investment Associates, 12/31/17 Source: The Cook Political Report, 12/15/17

0%

20%

40%

60%

80%

100%

-$2.0T

-$1.5T

-$1.0T

-$0.5T

$0.0T

$0.5T

1977 1987 1997 2007 2017E 2027E

Federal Budget Surplus (Deficit) - L Debt Held by Public (% of GDP) - R

CBO Forecast * Forecast as of June 2017

Social Security

24%

Medicaid9%

Medicare15%

Other Mandatory

15%Net

Interest6%

Defense15%

Non-Defense

16%

Mandatory Spending

69%

Percent of Outlays, 2016

1976: 53%1986: 56%1996: 66%2006: 62%2016: 69%2026E: 77%

MandatorySpending

(% of Total)

Percent ApproveInitial Low High Avg Last

Harry S. Truman 86 22 91 42 32 Dwight Eisenhower 68 47 77 64 59 John Kennedy 72 56 83 70 58 Lyndon B. Johnson 77 34 79 55 49 Richard Nixon 59 22 66 47 24 Gerald Ford 70 36 70 46 53 Jimmy Carter 66 28 74 46 34 Ronald Reagan 51 35 71 53 63 George Bush 51 29 89 60 56 William J. Clinton 58 36 71 56 66 George W. Bush 57 25 89 51 34 Barack Obama 68 38 69 48 59 Average 65 34 77 53 49 Donald J. Trump 45 33 46 38 38

Safe Likely Lean Toss Up Lean Likely SafeCA MT FL IN TX CT NJ ME (I) MO MS DE PA ND WV NE HI WI OH MN UT

MD MI AZ WY MA NV NM TN NY RI

VT (I)VA WA MN

Democrat Republican

Safe : These races are not considered competitive and are not likely to become closely contested.Likely : These seats are not considered competitive at this point, but have the potential to become engaged.Lean : These are considered competitive races, but one party has an advantage.Toss-Up : These are the most competitive; either party has a good chance of winning.

Global Investment Outlook & Strategy – January 2018 7

United States: Notable Data Points U.S. Leading Indicators Remain Favorable Capital Spending Is a Top Corporate Priority

Source: Conference Board, Sit Investment Associates, 12/31/17 Source: Evercore ISI, Sit Investment Associates, 11/16/17 Deregulation: Underappreciated Growth Driver Global Corporate Taxes: A Race to the Bottom?

The Worlwide Distribution of Statutory Corporate Income Tax Rates, 1980-2017

Source: Cornerstone, Mercatus, Sit Investment Associates, 12/31/17 Source: Tax Foundation, 9/7/17 Household Balance Sheets in Good Shape Wage Growth Poised to Accelerate

Source: BEA, Federal Reserve, Sit Investment Associates, 12/31/17 Source: Atlanta Fed, Conf. Board, Sit Investment Associates, 12/31/17

0

0

0

1

1

1

40

60

80

100

120

140

'82 '87 '92 '97 '02 '07 '12 '17

Recession

U.S. Composite Index of 10 Leading Indicators2010 = 100

Reinvest/Capex41%

M&A18%Lower

Debt15%

Pay Dividends

11%

Hold for a Rainy Day

10%

Buyback Shares

5%

Top Use of Incremental Corporate Cash in 2018Percent of Repondents

0255075

100

1957 1967 1977 1987 1997 2007 2017E

Pages in the Federal Register (Thousands)

2017 Estimate

500

750

1,000

1,250

1976 1986 1996 2006 2016

Number Regulatory Restrictions in the Code of Federal Regulations (Thousands)

40%

60%

80%

100%

120%

140%

400%

450%

500%

550%

600%

650%

700%

'77 '82 '87 '92 '97 '02 '07 '12 '17

Household Net Worth (LHS) Household Debt Outstanding (RHS)

Percent of Disposable Income

-60

-40

-20

0

20

40

60

1%

2%

3%

4%

5%

6%

7%

'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

Atlanta Fed Wage Tracker (L)

Conf. Board: "Jobs Plentiful" minus "Jobs Hard to Get" (R)

8 Sit Investment Associates

Europe The Euro Area economy is benefiting from synchronized global growth and accommodative monetary policy. Brexit-related uncertainty continues to cap the UK’s GDP prospects.

Broad-Based Growth in Euro Area Driven by Both Exports and Domestic Demand Economic growth in the Euro Area has been resilient and broad-based, with signs that a virtuous cycle driven by domestic investment is taking hold. Confidence is rising, capital investment is accelerating, and the unemployment rate is declining. Buoyed by a global uptick in capital spending, the manufacturing Purchasing Managers Index (PMI) rose to a record high of 60.6 in December driven, in particular, by strong domestic and export demand for investment goods (Exhibit 9). Similarly, the services PMI is approaching prior peak levels owing to better global growth and the positive feedback loop created by declining unemployment. Still, as exports represent over 45 percent of GDP, the Euro Area is sensitive to global trade conditions and moderating economic growth in China. Ongoing strength in the euro, appreciating +13.8 percent against the U.S. dollar in 2017, could also begin to affect exports negatively. While inflation is poised to accelerate, we expect that monetary policy will remain accommodative and that interest rate increases will not occur before 2019. Altogether, we forecast Euro Area real GDP will increase +2.0 to +2.5 percent in 2018 versus an estimated pace of +2.3 percent in 2017.

Weak Pound Lifting Exports, But UK GDP Growth Capped by Brexit Uncertainty Due to diminished confidence, weak capital formation, and slowing household spending, UK GDP growth is likely capped at roughly +1.5 percent in 2017 and 2018. However, the weaker pound sterling post the EU referendum has boosted export competiveness and contributed to an improving manufacturing PMI (Exhibit 10). Similar to Euro Area counterparts, UK manufacturers have cited particular strength in investment goods from both domestic and export customers (namely the U.S. and Euro Area). Conversely, the services PMI has remained relatively flat as continuing Brexit-related uncertainty has weighed on business activity and confidence. As highlighted last quarter, the UK faces the somber prospect of slower GDP growth and higher inflation (due, in part, to the weaker pound). The UK consumer price index recently increased to over +3.0 percent, encouraging the Bank of England to raise interest rates by 25 basis points in November – the first such hike since 2007. We believe that additional interest rate hikes will occur at a glacial pace so as not to risk further dampening economic growth prospects.

Exhibit 9: Euro Area Purchasing Managers Index Exhibit 10: UK Purchasing Managers Index

Source: IHS Markit, Sit Investment Associates, 1/4/2018 Source: IHS Markit/CIPS, Sit Investment Associates, 1/4/2018

464850525456586062

6/15

9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7

Manufacturing Services

Expansion

Contraction

464850525456586062

6/15

9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7 Manufacturing Services

Expansion

Contraction

Global Investment Outlook & Strategy – January 2018 9

Japan An improving global economy and last year’s stimulus package continue to support Japan’s growth; however, structural challenges and moderating growth overseas dampen the outlook.

Japan continues to grow ahead of modest expectations as improving activity globally lifts its export-driven economy. Strengthening overseas demand, in addition to lifting exports, is supporting corporate profits, sentiment, and capital spending plans while last year’s fiscal spending package continues to work its way through the economy. However, the dampening effect of Japan’s structural challenges remains evident. Consumer confidence is elevated, but consumption remains modest alongside meager wage gains. Corporate spending plans, though up, continue to be steered toward maintaining capacity rather than expansion. Inflation readings continue to hover near zero. This all comes despite the Bank of Japan’s prolonged effort – now nearing six years – to lift prices with an array of unconventional policies. Prime Minister Abe’s election victory in October may provide a renewed opportunity to confront challenges more fully, but we remain skeptical. Looking forward, we expect Japan’s growth to moderate as trade partners’ growth slows and the boost from fiscal stimulus fades.

Japan: Notable Data Points Current Business Activity Remains Firm Economic Growth to Moderate in 2018

Source: IHS Markit/Nikkei, Sit Investment Associates, 1/4/2018 Source: Japan Cabinet Office, Sit Investment Associates, 12/31/17 Bank of Japan Continues to Ease Aggressively Inflation Continues to Hover Near Zero

Source: BoJ, ECB, Federal Reserve, Sit Investment Associates, 12/31/17 Source: Japanese Cabinet Office, Sit Investment Associates, 12/31/17

46

48

50

52

54

56

6/15

9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7

Manufacturing PMI Services PMI

Expansion

Contraction

-0.1%

1.5%2.0%

0.4%

1.4%0.9%

1.5%

0.5%

-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%

'11 '12 '13 '14 '15 '16 '17E '18E

Japan Real GDP Growth, Y/Y%

0%

20%

40%

60%

80%

100%

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Japan Euro Zone United States

Central Bank Assets (% of Nominal GDP)

-3%-2%-1%0%1%2%3%4%5%

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17

All Items Ex. Fresh Food and Energy

Japan Consumer Price Index, Y/Y%

Consumption Tax Hike

10 Sit Investment Associates

Emerging Markets • China’s policy-induced growth moderation will continue from 2H17 into 2018; we are

closely monitoring how policymakers balance reform and growth. • India’s economy continues to strengthen, with fiscal year 2018 growth forecast at +6.7

percent, paced by industrials and consumption. • South Korea’s 2017 economic growth revised upwards to +3.1 percent, on stronger

exports and consumption. • Brazil’s economy is slowly recovering, led by investment and consumption.

Cautiously Optimistic That China Can Balance Growth and Structural Reform Policymakers have introduced additional supervisory tightening measures post the recent 19th Party Congress to include removing unqualified projects from the public-private partnership system, cracking down on online lending, and issuing new guidance on asset management products. Combined with rising government bond yields, these actions have led to renewed market concerns of a hard landing/debt crisis in China. Yet, given solid long-term growth prospects, heavy state involvement in the economy, limited external debt, and ample domestic savings (Exhibits 11), we believe the probability of debt crisis within the next couple of years is low. In fact, deleveraging efforts thus far have been gradual to avoid causing significant disruptions to the economy (Exhibit 12). Looking into 2018, we expect the policy-induced growth moderation to continue. At the Central Economic Work Conference, senior officials emphasized the “quality of growth” over GDP growth targets, suggesting a higher tolerance for slower growth. The tone of monetary policy has also become incrementally more hawkish, consistent with ongoing deleveraging efforts. However, we expect policymakers to pivot if there are signs that economic growth is slowing too much. Consequently, we currently expect GDP growth to decelerate only slightly to +6.5 percent in 2018 from +6.8 percent in 2017.

India’s GDP Growth Will Continue to Recover Post Major Reforms We expect GDP growth to rebound to +7.3 percent in fiscal 2019 from +6.7 percent in fiscal 2018, supported by buoyant consumption and industrial strength. The lingering effects of major reforms, such as currency demonetization and the Goods and Services Tax, hampered economic growth in fiscal 2018. However, the Indian government has since taken steps to integrate these reforms more successfully in order to lessen the impact on the economy. The government is also improving the health of the banking

Exhibit 11: China Household Savings Exhibit 12: China Debt Breakdown (% of GDP)

Source: OECD, Sit Investment Associates, 12/31/17 Source: Morgan Stanley, 12/10/17

38.0%

7.2% 6.0% 5.5%0.7%

China S. Korea U.S. Euro Area Japan

Percent of Disposable Income

18 18 19 22 24 28 34 39 44 48

136 138 148 157 167 180 196 196 195 19342 39 38 41 44

4947 47 48 49

0

50

100

150

200

250

300

350

'10 '11 '12 '13 '14 '15 '16 '17E '18E '19E

GovernmentNon-Financial CorporationsHousehold

Global Investment Outlook & Strategy – January 2018 11

system by initiating a recapitalization program to address the ongoing problem of non-performing assets. A sign of confidence in Prime Minister Modi’s reforms came from Moody’s upgrade of India’s debt to investment grade (Baa2), which should be positive for foreign direct investment inflows. In terms of monetary policy, the Reserve Bank of India (RBI) left its repo rate at 6.0 percent during the quarter. We believe interest rates have bottomed and expect the RBI to pause on any further rate increases.

South Korea’s 2018 Economic Growth to Be Led by Exports and Consumption GDP grew at a faster-than-expected pace of +3.6 percent in third quarter 2017 as higher exports and government outlays offset slower consumer spending (Exhibit 13). We expect consumer spending to recover as the benefits of the government’s supplementary budget to create jobs and boost economic growth are realized (Exhibit 14). We have raised our 2017 GDP growth estimate to +3.1 percent from +2.8 percent and forecast 2018 growth of +3.0 percent, led by exports and consumer spending. Although November’s CPI of +1.3 percent year-over-year was below the central bank’s target of +2.0 percent, the Bank of Korea took proactive action and raised its policy rate +25 basis points to 1.5 percent in November in anticipation of higher inflation from stronger economic growth. Finally, the risk of North Korea’s ongoing provocations has diminished as China and the United Nations continue to negotiate to ease tensions.

Brazil’s 3Q17 GDP Growth Flat, but 2018 GDP Growth to Hit +2.5 Percent Brazil’s economic growth grew only +0.1 percent quarter-over-quarter in the third quarter of 2017 on strong fixed investment. However, second quarter’s growth was revised upwards to +0.7 percent from +0.2 percent on stronger agriculture and private consumption. Accordingly, we have increased our 2017 GDP growth forecast to +0.7 percent (from +0.5 percent) and 2018 to +2.5 percent (from +1.8 percent) on improved fixed investment, agriculture, and consumption. November’s inflation of +2.8 percent year-over-year is below the central bank’s target of +4.5 percent. However, we expect inflation to rise to about +4.5 percent in 2018 because of higher food prices. Nevertheless, Brazil’s central bank should still be able to cut interest rates until inflation concerns develop. The central bank cut its Selic-rate -50 basis points to 7.0 percent in December and signaled additional interest rate cuts are forthcoming given the low inflation environment. On the risk front, a major task remains in resolving pension reform. Total pension expenditures account for over 10 percent of GDP and are a primary cause for the country’s high budget deficit of 9 percent of GDP.

Exhibit 13: Asia Export Growth Exhibit 14: South Korea Employment Growth

Source: CEIC, Sit Investment Associates, 12/31/17 Source: CEIC, Sit Investment Associates, 12/31/17

-40%

-20%

0%

20%

40%

60%

-15%

-5%

5%

15%

25%

'01 '03 '05 '07 '09 '11 '13 '15 '17 US Real Business Equipment Investment (LHS) Asia Exports, 3MMA (RHS)

Y/Y Percent

-8%-6%-4%-2%0%2%4%6%8%

'12 '13 '14 '15 '16 '17

Salary Workers, 3MMA Of Which, Regular Workers, 3MMA Of Which, Temporary, 3MMA

Y/Y Percent

12 Sit Investment Associates

FIXED INCOME: ENVIRONMENT AND STRATEGY

Taxable Bonds New Blood at the Fed Janet Yellen will retire in February of 2018 when her term as Chair of the Federal Reserve Board of Governors ends. Jerome Powell, who has already served as a member of the Board for five years, will replace Yellen as the new Chair. Mr. Powell is well aware of the issues at hand and more likely to tolerate fluctuations in the financial markets than did his predecessor. He has previously stated that the economy does not need additional stimulus, which implies the Federal Reserve (Fed) will continue to raise rates gradually until a neutral fed funds rate is achieved, which we believe is around +3 percent. This translates to six 25 basis point increases in the fed funds rate. We anticipate three 25 basis point rate increases in 2018, but believe these actions are data dependent. Initiated in the fourth quarter of 2017, the balance sheet reduction program will remain in place. The reversal in QE will likely push rates higher and act as another headwind to growth. Along with the change in leadership at the Fed, there will still be four vacancies to fill on the Board of Governors, in addition to William Dudley’s announced retirement in 2018 (Exhibit 15). Mr. Dudley currently holds the Vice-Chair position of the Federal Open Market Committee and is the head of the Federal Reserve Bank of New York, a very high-profile position. We expect the tone of the Fed to become more pragmatic going forward, with a better balance of practitioners versus its current academia-heavy representation. Recent appointments by President Trump of Marvin Goodfriend and Randal Quarles show an attempt at balance. We believe that much of monetary policy simply entails understanding real life cause and effects of economic incentives on human behavior, which can be superior to sophisticated econometric models using theoretic assumptions. New blood at the Fed will bring fresh ideas and a greater resolve to return monetary policy back to what had worked relatively well for decades. For investors, this means more and much needed volatility – complacent markets are unhealthy markets.

Exhibit 15: Structure of the U.S. Federal Reserve

Source: Sit Investment Associates, 12/31/17

Federal Reserve Board Of Governors (7)

Janet Yellen Outgoing

Chair

Jerome Powell Incoming

Chair

Vice Chair(Vacant)

Randal Quarles

LaelBrainard (Vacant) (Vacant)

Regional Federal Reserve Bank Presidents (12)

William Dudley, New York (Retiring 2018)(Permanent Voting Member of the FOMC)

Loretta MesterCleveland

Charles Evans Chicago

Loretta MesterCleveland

Thomas BarkinRichmond

Eric RosengrenBoston

Patrick Harker Philadelphia

Raphael BosticAtlanta

James BullardSt. Louis

Robert KaplanDallas

John Williams San Francisco

Esther GeorgeKansas City

Neel KashkariMinneapolis 2020

FOM

C Vo

ting

Mem

bers

Vacant as of 12/31/17

Will become vacant or change in 2018

2019

2018

Federal Open MarketCommittee - FOMC (12)

Board of Governors

5 Fed Bank Presidents

Global Investment Outlook & Strategy – January 2018 13

Taxable Fixed Income Outlook and Strategy The yield curve will likely continue to flatten as the Fed continues to increase short-term interest rates (Exhibit 16). However, we do not think a flatter curve is sending recessionary signals because economic circumstances and technical factors, such as the reduction in the balance sheet, are causing some distortion (Exhibit 17). In terms of investment strategy, we have positioned the portfolios to benefit from this forecast, with a focus on tighter spreads and yield curve positioning. In addition, as the positive impacts of tax reform and deregulation continue to make their way through the financial markets, we maintain a positive position bias towards credit spreads in areas such as corporate bonds, asset-backed securities, select areas of commercial mortgage backed securities, and taxable municipals. We favor longer duration, lower investment grade credits as we think some high yield credit areas could be negatively impacted by limiting the deductibility of interest payments.

Municipal Bonds Tax-Exempt Yield Curve Flattens Significantly The AAA tax-exempt municipal bond yield curve flattened over the quarter and year as yields rose at the short end of the curve and decreased at the long end. The curve, at a spread of 98 basis points between the 2-year and 30-year spot yields, is flatter than it has been in over 10 years. For calendar 2017, the 2-year spot yield increased 35 basis points, while the 30-year spot yield fell 50 basis points. We foresee a more modest flattening in 2018, as short yields continue to rise while long yields reverse course and begin to rise, albeit at a slower pace than short yields. The yield of the Bond Buyer 40-Bond Index, which is generally comprised of longer bonds, had declined 38 basis points during the year and 16 basis points since September, closing the year at a 3.87 percent yield.

Bonds with Longer Durations and Lower Credit Quality Outperformed Again The changing shape of the yield curve was reflected in the strong positive performance of long bond indices, while short and intermediate bond indices had negative quarterly returns. For both the quarter and the year, bonds with longer maturities outperformed those with shorter durations. (Exhibit 18). All investment grade municipal bond index returns were positive on the year. Of note, the BBB index was far and away the best performing investment grade category for every quarter during the year. (Exhibit 18). Further, credit spreads for the A-rated revenue curve were relatively unchanged during

Exhibit 16: U.S. Treasury Yield Curve Exhibit 17: U.S. Treasury Spread

Source: FactSet, Sit Investment Associates, 12/31/17 Source: FactSet, Sit Investment Associates, 12/31/17

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y

30Y

Current Curve

One Year Ago

0

0

0

0

0

1

1

1

1

1

1

-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%

'82 '87 '92 '97 '02 '07 '12 '17

U.S Treasury Spread: 10-Year Bond Yield Minus 3-Month Bill Yield

Spreads have compressed, but still not signaling a recession

14 Sit Investment Associates

the quarter, but tightened by around 25 basis points at the longer end of the curve over the course of the year. Performance of the Municipal High Yield Index also remained strong, posting better returns than the investment grade indices for both the quarter and year. Performance variation between revenue bonds and general obligation bonds was meaningful for the quarter, with revenue bonds outperforming by 40 basis points. For 2017, revenue bonds outperformed GOs by 76 basis points, primarily due to the higher income offered by revenue bonds. Within the Revenue bond index, the hospital sector had the best returns for both the quarter and the year, while housing lagged modestly. However, housing remained in the top half of revenue sector indices’ performers for the year. We will continue to emphasize housing bonds, as they have offered strong relative value over longer periods and defensive value in rising rate environments. Tax Law Spurred an Unexpectedly Busy Issuance Period to Close the Year Municipal market activity went into overdrive after the House’s proposed draft legislation of the recently passed tax law was first revealed. Initial legislation contemplated eliminating the future issuance of private activity bonds (PABs) and advanced refundings. This change to PABs would have been very impactful to many municipal bond issuers, but ultimately was not in the final bill. Elimination of tax-exempt advanced refunding did make it into the final law. In response to both these realized and potential changes, municipal supply in the final quarter topped $140 billion, bringing 2017 total supply to more than $430 billion, or within 3.5% of 2016 issuance. December, with over $60 billion of new issuance, was the largest month ever for municipal issuance. For additional perspective, through the third quarter, year-to-date issuance had lagged 2016 levels by nearly 18%. Refundings issuance was a major component of December issuance volume and comprised nearly half of all 2017 issuance, up from 40% through the third quarter. Fortunately, the municipal market held up well in the face of the heavy supply, and municipal bond funds ended the year with an aggregated $18 billion of inflows. Given the minimal changes to individual tax rates, we forecast steady to increasing municipal bond mutual fund demand continuing well into 2018, especially from residents of states with high income tax rates. Tax-Exempt Fixed Income Outlook and Strategy Despite the tax law changes and busy issuance period to end the year, we still have high confidence in the strong fundamental credit quality that the vast majority of municipal bonds provide. Still, it remains to be seen if reduced corporate tax rates will shift corporate investment policy focus away from tax-exempt bonds. It should be noted that on an absolute return basis, municipal bond returns were not dissimilar from taxable returns in 2017 and will continue to offer diversification benefits to both corporate and individual investors. Looking ahead to 2018, supply is likely to be significantly lower than the previous two years, providing technical support to the tax-exempt market. Even so, with the potential for higher interest rates throughout 2018, our tax-exempt investment strategy will continue to place a heavy emphasis on investing in bonds that have high coupons and provide meaningful current income. Income has been shown to be the primary driver of total return over a full market cycle. We expect to maintain most portfolio durations near their current levels while also continuing to focus on investing in bonds with higher credit quality ratings and short call features with limited extension risk. As always, we view diversification as a key tenet in managing portfolio credit risk.

Global Investment Outlook & Strategy – January 2018 15

Exhibit 18: U.S. Fixed Income Index Total Returns

Source: FactSet, Sit Investment Associates, 12/31/17

Percent, as of 12/31/17

Bloomberg Barclays IndicesAggregate 0.39 % 1.24 % 2.70 % 3.54 % 2.24 % 2.10 % 4.01 %Treasury 0.05 0.43 1.63 2.31 1.40 1.27 3.31Corporate 1.17 2.53 5.13 6.41 3.90 3.47 5.62CMBS 0.35 1.14 2.47 3.35 2.54 2.34 4.84Asset-Backed -0.01 0.41 1.01 1.55 1.61 1.28 2.96Mortgage Pass-Through 0.15 1.11 2.00 2.48 1.89 2.04 3.87US Aggregate (AAA) 0.10 0.73 1.80 2.41 1.63 1.61 3.44US Aggregate (AA) 0.61 1.58 3.24 4.23 2.77 2.44 4.24US Aggregate (A) 1.14 2.42 4.91 5.98 3.70 3.31 5.28US Aggregate (BAA) 1.23 2.88 5.64 7.45 4.08 3.66 6.51US Aggregate Govt. - Intermediate -0.40 -0.06 0.59 1.14 1.12 0.92 2.70US 1-3 Year Government -0.27 -0.03 0.17 0.45 0.63 0.58 1.53US Aggregate Govt. & Credit (1-3 Y) -0.21 0.13 0.44 0.84 0.93 0.84 1.85

Bloomberg Barclays IndicesMunicipal 0.75 % 1.82 % 3.81 % 5.45 % 2.98 % 3.02 % 4.46 %1-Year Municipal -0.38 -0.03 0.23 0.92 0.61 0.64 1.483-Year Municipal -0.77 -0.24 0.29 1.56 0.94 1.07 2.365-Year Municipal -0.70 -0.03 1.22 3.14 1.72 1.83 3.547-Year Municipal -0.22 0.55 2.49 4.49 2.40 2.44 4.3110-Year Municipal 0.52 1.59 3.98 5.83 3.13 3.13 4.8615-Year Municipal 1.29 2.83 5.34 6.94 3.72 3.81 5.2720-Year Municipal 1.78 3.32 5.89 7.47 3.92 3.93 5.36Long ( 22+ years) 2.23 3.49 6.34 8.19 4.49 4.35 5.35Revenue 0.96 2.07 4.30 6.00 3.33 3.34 n/aGeneral Obligation 0.56 1.72 3.55 5.24 2.67 2.65 4.33High Yield 1.83 3.36 5.42 9.69 4.77 4.35 5.25Muni Aaa 0.51 1.23 2.98 4.45 2.32 2.31 3.72Muni Aa 0.65 1.50 3.42 4.96 2.70 2.79 4.28Muni A 0.89 2.13 4.37 6.16 3.55 3.64 4.95Muni Baa 1.41 4.24 6.42 8.74 4.39 3.87 4.33

Annualized

Annualized

3 Years 10 Years1 Year9 Months6 Months3 Months 5 Years

3 Years 10 Years1 Year9 Months6 Months3 Months 5 Years

16 Sit Investment Associates

GLOBAL EQUITIES: ENVIRONMENT AND STRATEGY

Synchronized Global GDP Growth = Synchronized Global Equity Performance Synchronized global growth, improving corporate earnings, benign inflation, supportive financial conditions, and a healthy dose of “animal spirits” helped propel equity markets worldwide appreciably higher in 2017. U.S. equities further benefitted from the new administration’s pro-growth fiscal policies including deregulation and tax reform. Larger capitalization, growth-oriented stocks led domestic markets higher, with the Russell 1000 Growth Index generating a total return of +30.2 percent in 2017 (Exhibit 19). The stocks of U.S. companies with international sales exposure also outperformed for most of 2017, while those that are domestic-centric, tax cut beneficiaries, and/or interest rate sensitive led the overall market in the fourth quarter. Internationally, the MSCI Europe Index generated a U.S. dollar total return of +26.2 percent (+13.7 percent local) in 2017, but performance trailed off in the second half as investors fretted about ECB tapering, economic momentum, and the strengthening euro. The MSCI Japan Index finished up +24.4 percent in U.S. dollar terms for 2017 as policy clarity following Prime Minister Abe’s election win in October, upbeat corporate earnings, and cheap valuations spurred a fourth quarter rally. Finally, led by strong gains in Chinese stocks, the MSCI Emerging Markets Index produced a total return of +37.8 percent on a U.S. dollar basis in 2017.

Exhibit 19: Total Returns of U.S. and International Indices

Source: FactSet, Sit Investment Associates, 12/31/2017

Percent, as of 12/31/17 = Top Quartile Performance within Group

DomesticRussell 1000® Growth 30.2🎖🎖 14.2🎖🎖 14.0🎖🎖 13.8🎖🎖 17.3🎖🎖 14.8🎖🎖 10.0🎖🎖Russell MidCap® Growth 25.3🎖🎖 12.4 11.4🎖🎖 10.3 15.3 12.8 9.1Russell 2500™ Growth 24.5 12.5🎖🎖 10.6 10.9 15.5 13.0 9.6🎖🎖Russell 2000® Growth 22.2 11.1 10.0 10.3 15.2 12.3 9.2S&P 500® 21.8 11.4 9.3 11.4🎖🎖 15.8🎖🎖 13.8🎖🎖 8.5Russell 2000® 14.6 9.2 5.0 10.0 14.1 11.6 8.7

InternationalMSCI China 54.3🎖🎖 23.5🎖🎖 25.0🎖🎖 13.0🎖🎖 10.2🎖🎖 7.3🎖🎖 3.2MSCI India 38.8🎖🎖 15.1 20.5🎖🎖 8.7 8.9 2.8 0.5MSCI Emerging Markets 37.8🎖🎖 16.1🎖🎖 18.6 9.5 4.7 2.9 2.0MSCI AC Asia Pacific 32.0 13.9 15.9 11.0🎖🎖 9.0 6.3 3.7🎖🎖MSCI Europe 26.2 8.9 15.9 7.3 8.0 6.7 2.0MSCI EAFE 25.6 10.0 14.2 8.3 8.4 6.5 2.4MSCI Brazil 24.5 20.7🎖🎖 3.1 6.9 -2.4 -5.0 -2.9MSCI Japan 24.4 13.0 10.1 12.0🎖🎖 11.5🎖🎖 7.0🎖🎖 3.4🎖🎖MSCI EM Latin America 24.2 12.5 10.3 4.1 -2.9 -3.9 -1.4MSCI World Index 23.1 10.9 11.0 9.9 12.3🎖🎖 10.2🎖🎖 5.6🎖🎖MSCI Mexico 16.3 -6.6 24.5🎖🎖 -3.2 -3.8 -0.9 0.7

Annualized

Annualized

2H 2017

🎖🎖

3 Years 5 Years 7 Years 10 Years ▼

1H 20172017

3 Years 5 Years 7 Years 10 Years ▼

1H 20172H 20172017

Global Investment Outlook & Strategy – January 2018 17

“Barbell” Strategy across Portfolios Provides a Balanced Risk-Reward Profile We are generally constructive on U.S. equities in 2018 given the supportive global macroeconomic backdrop, outlook for improved corporate earnings, and stimulative fiscal policies. Moreover, we anticipate that earnings growth, rather than price-to-earnings (P/E) multiple expansion, will be the primary determinant of stock appreciation as equity markets continue to shift from a monetary policy-driven market (rising tide lifts all boats) to one driven by company fundamentals. Current bottom-up estimates for the S&P 500 Index imply earnings growth of roughly +10.8 percent in 2018 versus +10.2 percent in 2017 and +1.4 percent in 2016 – tax reform, alone, could boost S&P 500 EPS by an additional +10 percent in 2018. Yet, due to relatively high valuations, U.S. equities remain vulnerable to external shocks. As a result, we continue to believe a “barbell” approach provides a balanced risk-reward profile (Exhibit 20). One side of the “barbell” emphasizes pro-growth/Trump policy beneficiaries while the other focuses on visible secular growth/traditional growth stocks that are attractively valued. Stock correlations continue to decline as global central banks become more hawkish, resulting in market conditions that provide a fertile environment for stock picking and active management. We are also positive on European equities as macroeconomic conditions and valuation remain favorable, particularly for the Euro Area. We are less enthusiastic on UK equities as Brexit continues to cap economic growth in the intermediate term. Political risk associated with the 2018 Italian elections is likely minimal, but the ongoing Brexit negotiations remain a headwind. In general, we favor equities with continental Europe exposure, along with companies that will benefit from tax reform and other pro-growth policies in the United States. We are cautious on securities with emerging markets exposure, given less robust conditions, particularly if we see U.S. dollar strength in 2018 relative to the euro, a reversal from 2017. However, we are mindful that if the stronger euro relative to the U.S. dollar continues into 2018, we may see a modest negative impact

Exhibit 20: Components of Sit Investment Associates’ U.S. “Barbell” Strategy

Source: Sit Investment Associates, 12/31/17

18 Sit Investment Associates

Global Equities: Notable Data Points U.S. Stock Correlations Continue to Decline S&P 500 Earnings Will Get a Tax Reform Boost

Source: BofA/Merrill Lynch, Sit Investment Associates, 12/31/17 Source: FactSet, Sit Investment Associates, 12/31/17 On Track for Longest U.S. Postwar Bull Market Late Bull Market Returns Historically Strong

Source: FactSet, Sit Investment Associates, 12/31/17 Source: FactSet, Sit Investment Associates, 12/31/17 Global Earnings Growth to Continue Global Equity Valuations are Reasonable

Source: FactSet, Sit Investment Associates, 12/31/17 Source: FactSet, Sit Investment Associates, 12/31/17

0%

20%

40%

60%

80%

100%

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Average Pair-Wise Correlations of All S&P 500 Stock Combinations

Clustered/Macro Market

Differentiated/Stock Picker's Market-5%

0%

5%

10%

15%

20%

25%

$80

$100

$120

$140

$160

$180

2012 2013 2014 2015 2016 2017E 2018E

S&P 500 EPS - LHS Y/Y % Growth - RHS

Bottom-Up EPS Estimates

Boost from Tax Reform

Historical S&P 500 Bull Markets Since 1940As of 12/31/17

End Start End S&P 500Date Price Price Years Change

Apr-42 May-46 7 19 4.1 158%Jun-49 Aug-56 14 50 7.1 266%Oct-57 Dec-61 39 73 4.1 86%Jun-62 Feb-66 52 94 3.6 80%Oct-66 Nov-68 73 108 2.1 48%May-70 Jan-73 69 120 2.6 74%Oct-74 Nov-80 62 141 6.2 126%Aug-82 Aug-87 102 337 5.0 229%Dec-87 Jul-90 224 369 2.6 65%Oct-90 Mar-00 295 1,527 9.5 417%Oct-02 Oct-07 777 1,565 5.0 101%Mar-09 ? 677 2,674 8.7 295%

StartDate

S&P 500 Price Returns Preceding Market Peaks

S&P 500Peak -24 -12 -6 -24 -12 -6May-46 72% 33% 15% 46% 19% 8% Aug-56 74% 20% 15% 24% 5% 3% Dec-61 32% 32% 11% 34% 34% 11% Feb-66 30% 11% 11% 34% 12% 12% Nov-68 44% 18% 12% 82% 35% 23% Jan-73 39% 19% 14% 52% 25% 17% Nov-80 65% 39% 29% 44% 25% 18% Aug-87 93% 40% 20% 46% 18% 8% Jul-90 45% 15% 10% 65% 21% 14% Mar-00 42% 22% 20% 11% 5% 4% Oct-07 36% 18% 9% 38% 18% 9% Average 50% 23% 15% 43% 20% 12%

Total Return % of Cycle ReturnMonths Months

0%

5%

10%

15%

20%

World(ex USA)

EmergingMarkets

Europe China Japan

2018E 2019E

Bottom-Up EPS Estimates for MSCI Indices

8x

12x

16x

20x

24x

28x

'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

MSCI World NTM Price-to-Earnings Ratio

Global Investment Outlook & Strategy – January 2018 19

on the European exporters. The portfolios remain diversified, with exposure to high-quality growth stocks that possess secular or niche growth drivers. While “New China” remains our key long-term investment strategy, there may be some profit-taking pressures in the near term given the strong performance of Chinese stocks in 2017. Price-to-earnings multiple expansion contributed roughly 26 percentage points of the +51 percent price return in the MSCI China Index in 2017. While we anticipate that multiple expansion will be less of a contributor to stock returns in 2018 given higher valuation, earnings growth will remain strong. Bottom-up earnings for the MSCI China Index are projected to increase +15.2 percent year-over-year in 2018 versus +21.7 percent in 2017. Looking beyond near-term uncertainty, we prefer companies with solid earnings growth/balance sheets, attractive valuation, and improving fundamentals. We are also positive on Indian and South Korean equities. India’s economy is poised to continue strengthening, led by consumer spending. The last two quarters of sub-6 percent growth were a temporary disruption in the economy from the currency demonetization. There are now signs of renewed economic strength from auto sales, two-wheeler sales, rural wages, credit growth, and exports. In India, we continue to like sectors related to a strong economy (e.g., consumer, financials, and information services). In South Korea, exports and the consumer should drive continued economic growth. Total exports remain robust, as November exports increased +9.6 percent year-over-year, led by semiconductors, general machinery, petrochemicals, and autos. Moreover, consumer spending should increase as the effects of the government’s supplementary budget filter through the economy. The Bank of Korea’s latest interest rate increase should also help improve interest rate margins and bank profits. We favor investments in the technology, financial, consumer, and utility sectors. We remain underweight Japan as we expect a more mixed environment for equities moving into 2018 and continue to prefer exporters and multinationals levered to higher growth regions, such as the U.S. or Continental Europe, and resilient defensive consumption names. Investor focus should remain on policy developments in 2018. Abe will seek to revise the pacifist constitution, necessitated by growing threats from an increasingly assertive China and volatile North Korea. However, with his popularity still fragile and party elections approaching in September, we expect Prime Minister Abe to tread lightly given the issue’s unpopularity with voters and, as a result, to also shy away from contentious structural reforms. The Bank of Japan (BoJ), meanwhile, will maintain the status quo in our view with reappointment of Governor Kuroda likely in the spring. We expect the BoJ to err on the stimulative side as defeating deflation trumps recent concerns regarding monetary easing’s negative side effects. This modestly supportive policy backdrop, together with moderating growth and continued structural challenges, points to a muted outlook for Japan equities In Latin America, we are underweight the Brazil and Mexico equity markets. However, we are becoming more optimistic on Brazil given higher economic growth from the consumer. Consumption should benefit from low interest rates and improving employment. We own balanced holdings of financials and consumer staples. In Mexico, we are underweight the market because of uncertainty over the North American Free Trade Agreement (NAFTA) negotiations on trade and economic growth and high inflation. Inflation remains elevated, at +6.6 percent year-over-year in November, ahead of target +3 percent, which is negative for consumer wages. This resulted in Banco de Mexico raising interest rates +25 basis points to 7.25 percent.

NOTICE: This analysis contains the collective opinions of our analysts and portfolio managers, and is provided for informational purposes only. While the information is accurate at the time of writing, such information is subject to change at any time without notice, and therefore, so may the investment decisions of Sit Investment Associates.

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