Themes for the decade

Themes for the Decade April 2013

1

www.castlestonemanagement.com

Four Main Themes for the Next Decade

2

The devaluation of money versus real assets.

This has been occurring in the last decade and will continue throughout this decade.

Outperformance of equities markets with low levels of Debt-to-GDP versus equities markets with

high levels of Debt-to-GDP.

BRIC, Next 11 Emerging Markets will outperform Developed Equity Markets.

High-yielding stocks are appealing.

High-yielding, stable, partly-monopolistic, inelastic-demand stocks will remain attractive given interest

rates are likely to remain low for many years.

Direct and indirect taxes will continue to rise.

Overview

Source: Castlestone Management.


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

1946 1957 1968 1979 1990 2001 2012

US Federal Expenditure

US Government Revenue

Changes in population growth and government spending on Social Security and Medicare have permanently

increased Expenditure creating an eternal deficit between the two: Expenditure and Revenue.

Government Expenditure vs. Government Revenue

Source: Castlestone Management & Bloomberg. Data as at February 2013.

Bill

ions o

f D

olla

rs

Themes for the Decade


23%

20%

19%

6%

13%

18%

US Expenditure 2011

Medicare & Medicaid

Social Security

Defense Department

Net Interest

Other Mandatory

Discretionary

4% 8%

19%

3%

24%

41%

US Expenditure 1960's

Medicare & Medicaid

Social Security

Defense Department

Net Interest

Other Mandatory

Discretionary

Expenditure has permanently changed

This is similar for other developed markets (Europe, Japan, Canada)

Social Security & Welfare spending across Europe and North America has permanently changed budgets across

developed markets.

Permanent Expenditure Changes

Sources: Castlestone Management & Congressional Budget Office, http://www.bis.org/ Data as at February 2013.



Four Stages of a Secular Bear Market


Source: Morgan Stanley Research, Castlestone Management & Bloomberg. Chart represents the typical secular bear market on a sample of 19 such bear markets and overlaid by the dates of the recent market trend.

Note: Past performance cannot be relied on as a guide to future performance.

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MSCI Europe Price Index Since June 2007

Typical Secular Bear Market

TYPICAL REBOUND

RALLY: +71% over

17 months

TYPICAL BEAR

MARKET: -57%

over 30 months

TYPICAL NEXT

CORRECTION:

-25% over 13

months

TYPICAL TRADING RANGE:

52% wide 5.6 years long


Source: Castlestone Management & Bloomberg. Data range January 1990 – February 2013.


Strong Correlation Between Gold and M1

PM16

% R

etu

rn

The Devaluation of Money vs. Real Assets

Money s

upply

/ U

S $

bn

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

M1 Money Supply

Gold Spot Price


Precious Metals Will Outperform


Source: Castlestone Management & Bloomberg. Data range February 2000 – November 2012.


0%

100%

200%

300%

400%

500%

600%

700%

900

1100

1300

1500

1700

1900

2100

2300

2500

2000 2002 2004 2006 2008 2010 2012

M1 Money Supply

Gold Spot Price

Barclays Precious Metals Index

% G

old

and P

M R

etu

rns M

oney s

upply

/ U

S $

bn


400

600

800

1000

1200

1400

1600

1800

2000

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

Jan-2008 Nov-2008 Sep-2009 Jul-2010 May-2011 Mar-2012 Jan-2013

M1 Money Supply (LHS)

Gold Spot $/oz. (RHS)

Relationship Will Continue as in 2008

Source: Castlestone Management & Bloomberg. Data range January 2008 – January 2013.


Money s

upply

/ U

S $

bn

Divergence

US

$/o

z.

Convergence

Divergence



-100%

-50%

0%

50%

100%

150%

200%

2000 2002 2004 2006 2008 2010 2012

Emerging Markets Index

S&P 500 Index (US)

Nikkei 225 Index (Japan)

Equities Show Close to Zero Percent Returns

Source: Castlestone Management & Bloomberg. Data range February 2000 – December 2012.


Debt-to-GDP

% R

etu

rns


Source: Bloomberg & Castlestone Management. Data as at February 2013.

Developed vs. Developing Countries

+3.8% +1.1%

+15.4%

Annual equity returns for Developed and Emerging

market countries over the past ten years

% D

ebt/G

DP

Debt-to-GDP

0%

30%

60%

90%

120%

150%

180%

210%

240%Jap

an

US

A

Can

ad

a

Ge

rma

ny

Fra

nce

UK

Eg

yp

t

Me

xic

o

Nig

eri

a

So

uth

Ko

rea

Vie

tna

m

Tu

rke

y

Pa

kis

tan

Ph

ilipp

ines

Indo

nesia

-4%

0%

-3.22% -1.2% +12.05

+15.77%

+14.49%

+5.5%

+12% +13.4%

+20.64% +21.5%


High Income Class: China and N11

Source: Castlestone Management & GS Global ECS Research, Global Economics Paper No: 170, http://www.ryanallis.com/wp-content/uploads/2008/07/expandingmiddle.pdf

N1105

0

100

200

300

400

500

600

700

800

900

1000

2010 2020 2030 2040 2050

Brazil

China

India

Russia

US

Western Europe

Japan

N 11

The number of people with incomes

above $30,000 in 2007 PPP

Debt-to-GDP


Global Growth Potential

Source: Castlestone Management & GS Global ECS Research.

N1105

4.90% 4.80%

3.70%

2.10%

0%

1%

2%

3%

4%

5%

6%

N 11 BRIC World G7

By 2050 N11 could 1) Be significantly larger than the US

2) Become twice the size of Europe 3) Account for a fifth of the global economy

Debt-to-GDP

N11 – Key Driver for Growth:

Average Growth Rate (2011-2050)



High-Yielding Stocks

Some High-Yielding Stocks Remain Attractive

High-yielding, stable, partly-monopolistic, inelastic-demand stocks

McDonald’s +3.08% Deutsche Telecom +8.49% Trustworth +5.09%

Vodafone +6.56% Telstra Corp +8.68% Sasol +4.51%

Coca Cola +2.67 Singapore Telecom +5.59% Vodacom +5.81%


Source: The Big Picture, http://www.ritholtz.com/blog/wp-content/uploads/2010/04/top-rate.jpg

Taxes Need to Increase as They Have Historically

Taxes & Debt


0%

25%

50%

75%

100%

125%

1907 1922 1937 1952 1967 1982 1997 2012

US Marginal Tax Rate

US Gross Public Debt % GDP

US Marginal Tax Rate vs. Gross Public Debt

Taxes & Debt



The Only Solution to This Problem

Source: Darren Whittingham, http://www.shutterstock.com

Taxes & Debt

Important Information

Appendix

CMD

This document is intended for and directed at investment professionals and is not intended for retail customer use. Persons who do not have

professional experience in matters relating to investments should not rely on it.

This document is not offering to sell any product. Any transaction requires our subsequent formal agreement which will be subject to internal approvals and binding

transaction documents. Castlestone Management (“We”) will not be liable for any use you make of any information in this document. We are not your advisor or

fiduciary. We are not recommending or making any representations as to suitability of any product or the tax, legal or accounting treatment of any product. We are

not responsible for information stated to be obtained or derived from third party sources. All opinions are given as of the date hereof and are subject to change. We

are not obliged to inform you of any such changes.

Any simulated performance data and/or past performance data contained herein is not a reliable indicator of future performance. Income from investments may

fluctuate and investors may not recoup the amount originally invested. Any forward-looking statements concerning the financial condition, results of operations and

businesses of Castlestone Management expressed or implied, are based on management's current expectations and assumptions, which may change without

notice, and are no guarantee of future results, performance or events.

This document is confidential. No part of it may be reproduced, distributed or transmitted without Castlestone Management’s written permission. Neither this

document nor any copy of it may be distributed, directly or indirectly, in the United States of America or its territories or possessions (the “United States” or to any

US Person as defined in Regulations under the United States Securities Act of 1933 (as amended). Any failure to comply with these restrictions may constitute a

violation of United States securities law. This is not exhaustive; other regional-specific wording may apply. If in doubt, please consult with Castlestone

Management’s Legal and Compliance department.

Castlestone Management Inc. is regulated by the British Virgin Islands Financial Services Commission.

This scheme has been entered into the List of Restricted Schemes by the Monetary Authority of Singapore under paragraph 2(3) of the Sixth Schedule to the

Securities and Futures (Offers of Investments)(Collective Investment Schemes) Regulations 2009 for distribution to institutional and accredited investors.

No invitation to the public in Hong Kong to buy or subscribe for any product is permitted to be made. You should consult your own attorney, business adviser and

tax adviser as to legal, business, tax and related matters concerning any of the contents of this document.

This document has not been delivered for registration to the Registrar of Companies in Hong Kong, its contents have not been reviewed by any regulatory authority

in Hong Kong, nor has the product been authorised by the Securities and Futures Commission. Accordingly, this document must not be issued, circulated or

distributed in Hong Kong other than (1) in circumstances which do not constitute it as a “prospectus” as defined in the Companies Ordinance (Cap.32) or which do

not constitute an offer to the public within the meaning of that ordinance, or (2) to professional investors as defined in the Securities and Futures Ordinance

(Cap.571) and the Securities and Futures (Professional Investor) Rules made thereunder. Unless permitted by the securities laws of Hong Kong, no person may

issue in Hong Kong, or have in its possession for issue in Hong Kong, this document or any other advertisement, invitation or document relating to any products

other than to a professional investor as defined in the Securities and Futures Ordinance (Cap.571) and the Securities and Futures (Professional Investor) Rules

made thereunder.

Themes for the decade

Business

Transcript of Themes for the decade