SEA CHANGE: THE EBBING OF QUANTITATIVE EASING POLICY AND ITS IMPACT ON THE CAPITAL MARKETS

THE GLOBAL FINANCIAL CRISIS – INITIATED BY A LIQUIDITY CRISIS

Z-Score Euro Zone U.S. BFCI

Source: Bloomberg. August 2013 The Bloomberg U.S. Financial Conditions Index combines yield spreads and indices from U.S. money markets, equity markets, and bond markets into a normalized index.

The Bloomberg Euro-area Financial Conditions Index combines yield spreads and indices from euro-area money markets, equity markets, and bond markets into a normalized index.

FINANCIAL CRISIS – THE KEY ROLE OF FINANCIAL SECTOR LEVERAGE

U.S. financial sector debt as a percent of GDP

Source: Federal Reserve, Epoch Investment Partners, Inc. 2013

THE SET-UP

The liquidity pyramid: Global liquidity by source of claim

976% of world GDP 145% of world GDP Derivatives Securitized Debt 80% of world GDP 7% of world GDP Bank Loans Power Money 6% of liquidity 1% of liquidity 81% liquidity 12% of liquidity

Source: Independent Strategy, CLSA; 2009

POLICY RESPONSE TO THE GFC ENDED THE LIQUIDITY CRISIS

Z-Score U.S. BFCI Euro Zone

Source: Bloomberg. August 2013 The Bloomberg U.S. Financial Conditions Index combines yield spreads and indices from U.S. money markets, equity markets, and bond markets into a normalized index.

The Bloomberg Euro-area Financial Conditions Index combines yield spreads and indices from euro-area money markets, equity markets, and bond markets into a normalized index.

DEBT REMAINS A GLOBAL PROBLEM – POLICY CHOICES

Advanced economies’ gross general government debt to GDP

Debt to GDP (%)

1. Growth

Potential solutions to the overriding debt problem

4. Financial Repression (QE) 2. Austerity 5. Devaluation 3. Default 6. Hyperinflation

Source: International Monetary Fund, World Economic Outlook Database, Epoch Investment Partners 2013

QUANTITATIVE EASING BECAME A GLOBAL PHENOMENON

Central bank balance sheet expansion

Source: Pavilion Global Markets; 2013

Sea Change – June 19, 2013

THE END OF EASY MONEY “We also see inflation moving back toward our two percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.”

– Federal Reserve Chairman Ben Bernanke, June 19, 2013

BERNANKE’S TAPERING COMMENTS DRIVE YIELDS HIGHER

U.S. Treasury yield curve: May 1, 2013 vs. September 6, 2013

(%)

128 bps

September 6, 2013 May 1, 2013 10-Year Treasury yield June 18, 2013 September 6, 2013

Source: US Department of the Treasury, Epoch Investment Partners; September 6, 2013

2.20

2.94

30-Year Treasury yield 3.34

3.87

APPLE’S BOND OFFERING • On April 30, 2013, Apple issued a total of US$17.05 billion worth of bonds in six tranches with a weighted coupon of approximately 1.8% and a weighted duration of approximately 10 years.

Issue Coupon Current Price 1

10 Year 30 Year 2.40% 3.85% 88.84

82.05

1 As of September 11, 2013

THE “MOVIE RUN BACKWARDS”

10-year Treasury constant maturity rate

(%)

Source: Federal Reserve, Epoch Investment Partners; September 6, 2013

MATURITY AND CREDIT QUALITY SPREADS WIDENING

Yield spreads

US 10Y - US 3M Yield BAA - AAA Yield

Source: Federal Reserve, Epoch Investment Partners. September 6, 2013.

RECENT GLOBAL RETURNS DRIVEN BY MULTIPLE EXPANSION

Breakdown of MSCI World Index performance

Annualized Total Return: 19% Annualized Total Return: 33% Expected Earning Growth

Source: Bloomberg, MSCI, Bernstein Analysis; May 2013

Fwd P/E Expansion

Dividend (Inc. Reinvestment)

CHINA’S SHADOW BANK LIQUIDITY SQUEEZE

China interbank 7-Day repo

(%)

Source: Bloomberg, Epoch Investment Partners; August 2013

CHINESE MANUFACTURING ACTIVITY CONTINUES TO SLOW . . .

China Manufacturing PMI

Source: Bloomberg, Epoch Investment Partners; September 1, 2013

FLOWING THROUGH TO COMMODITY-BASED ECONOMIES

Emerging Market Economic Surprise Index 1

1.

Aggregates economic data from multiple EM countries; positive numbers indicate that the data is beating expectations; negative numbers show data missing expectations Source: Citigroup Global Markets. August 15, 2013.

EMERGING AND COMMODITY-BASED MARKETS HIT HARD IN 2Q

World equity market returns 2Q 2013

(%)

Source: MSCI, S&P, Russell; June 2013

QE – BANK OF JAPAN ACCELERATING ASSET PURCHASES . . .

Bank of Japan: Total assets

Source: Bank of Japan; July 2013

. . . DRIVING YEN LOWER AND SPURRING GROWTH

¥/$

Yen/dollar exchange rate

Index

Japanese Manufacturing PMI

Source: Federal Reserve; Bloomberg; Epoch Investment Partners; September 2013

STRUCTURAL REFORMS REQUIRED FOR ABE-NOMICS TO WORK • • • • Labour market reforms Introduction of favourable corporate tax structure Reduce trade barriers and encourage foreign direct investment Reform agricultural policy, in particular the supply management policy

U.S. EMPLOYMENT: A SLOW BUT STEADY RECOVERY

Change in total U.S. non-farm employment 3/2010 through 7/2013: 6.7 million jobs gained 2/2008 through 2/2010 8.8 million jobs lost

Source: Federal Reserve Economic Data; July 2013

INFLATION IS STILL NOT A FACTOR

Personal Consumption Expenditures Price Index

Source: Federal Reserve Economic Data; June 2013

U.S. RETURNS ALSO DRIVEN BY MULTIPLE EXPANSION

S&P 500 and forward earnings multiples

15x 14x 13x S&P 500

Source: Standard & Poors, Yardini Research, Epoch Investment Partners; August 16, 2013

LOOKING BEYOND QE IN THE U.S.

• • • • Stocks are attractive in the long term, especially relative to bonds, providing the world grows.

Extreme valuation disparities present an investment opportunity.

As interest rates rise and other macro factors wane, equity returns will be more dependent on company fundamentals.

Companies with growing free cash flow and effective capital allocation policies should outperform.

BEGINNING OF THE “GREAT ROTATION”

Net flows into mutual funds

Source: Strategas; August 2013

A “RISK AVERSION RALLY”

Source: Strategas; June 2013

-45%

Discount/premium 1-year forward P/E to 15-year avg. P/E

Utilities Telecommunication Services Materials Industrials

Discount/premium 1-year forward P/E to S&P 500

Telecommunication Services Utilities Health Care Industrials

S&P 500

Health Care Information Technology Materials Information Technology

DEFENSIVE SECTORS ARE EXPENSIVE RELATIVE TO CYCLICAL SECTORS

Ratio S&P 500 Defensive Sectors* NTM P/E to S&P 500 Cyclical Sectors # NTM P/E

Parity Defensive sectors expensive

Source: Strategas; June 2013

* Defensive: Health Care, Staples, Utilities, Telecom; # Cyclical: Industrials, Discretionary, Energy, Tech, Materials

Defensive sectors relatively cheap

INVESTORS BECOMING MORE DISCRIMINATING ABOUT YIELD

High payout ratio less of a dominant factor

108 106 104 102 100 98 96 94 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Dividend Payout Ratio High to Low Performance

Source: Cornerstone Macro; May 2013

Jun-13

OPPORTUNITIES AFTER THE END OF ZIRP

Most crowded factors Percentile of crowding vs.

10-Year history* Least crowded factors Percentile of crowding vs.

10-Year history**

*U.S. Large Caps, 100% = Most Crowded **U.S. Large Caps, 0% = Least Crowded Source: FactSet, Thomson Reuters and Bernstein Analysis; May 2013

SUMMARY • • • A sea change underway – the end of ZIRP in the U.S.

– Discount rate for financial assets will rise – Bonds most adversely affected – Equities to experience P/E headwinds Global themes – Best positioned geography: U.S.

– Worst positioned geography: Emerging markets – Wait and see: Japan – Valuation beginning to be attractive in Europe As macro factors wane, equity returns will be more dependent on company fundamentals – Slow economic growth will limit revenue and earnings growth – Shareholder yield will continue to play a dominant role in total return strategies – Companies with growing free cash flow and effective capital allocation policies should outperform – P/E upward move at an end

Thank you

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