M C A S S E T M A N A G E M E N T H O L D I N G S, L L C

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1 M C A S S E T M A N A G E M E N T H O L D I N G S, L L C 6 Landmark Square, Stamford, CT Phone (203) Fax: (203) A Global Economy that Sisyphus Would Understand 2013 AAAIM National Conference InterContinental Hotel, San Francisco, CA October 21-22, 2013 Scott B. MacDonald, Ph.D. Senior Managing Director Head of Research

2 Disclaimer The information contained in this presentation is proprietary and confidential, is intended solely for the recipient of this presentation, and may not be reproduced or further distributed or communicated in this or any other form by the recipient without prior written permission of ( MCAMH ). This presentation is for informational purposes only, and does not constitute an offer to sell or a solicitation of an offer to buy interests in any fund or other investment vehicle sponsored or managed by MCAMH. Such an offer or solicitation may be made only at the time a qualified offeree (as determined under applicable law) receives a confidential private placement memorandum (a "Memorandum") describing the offering of such interests and a related subscription agreement and any further requirements of applicable law have been satisfied. Any such offer or solicitation will be made in reliance upon an exemption from registration under the U.S. Securities Act of 1933, as amended, for offers and sales of securities that do not involve a public offering. In considering any such offer or solicitation, prospective investors will be urged to review carefully the Memorandum (including the risk factors described therein), the related subscription agreement and all other related documents, and to discuss any prospective investment with their legal, tax, financial and other advisers. Investment vehicles that pursue alternative investment strategies, such as the long-short relative value credit strategy described in this presentation, are generally subject to less regulation than other types of investment vehicles, may be illiquid and may involve a significant use of leverage. Accordingly, such investment vehicles are suitable only for sophisticated investors that have the financial ability and willingness to accept the risks associated with such an investment. The contents of this presentation are subject to change, and in the event of any inconsistency between the contents of this presentation and any Memorandum, the Memorandum shall prevail. Any projections, market outlooks or estimates contained in this presentation constitute forward-looking statements, and are based on certain assumptions and subject to certain known and unknown risks. Accordingly, such forward-looking statements, as well as any information contained in this presentation regarding historical performance, should not be relied upon as being indicative of future performance or events. Any information contained in this presentation regarding portfolio construction or investment restrictions should be considered solely as guidelines which may be modified by MCAMH in its discretion without notice. MCAREF074 2

3 Global Economic Outlook: Main Themes Sisyphus: A King of Ephyra punished by the Gods by being compelled to roll an immense boulder up a hill, only to watch it roll back down, and to repeat this action forever. Global economic recovery continues, but headwinds persist that leave it fragile. U.S. economic recovery continues, but political issues and debt overhang leave growth at subpar levels. Biggest change in the last 12 months and next year is the shift of global core growth from China and Emerging Markets ( EMs ) to the U.S. and other Advanced Economies. The major challenge is how to manage the shift in U.S. monetary policy from its highly accommodative stance to an eventual rise in interest rates. This is a multi-year process that impacts the global economy. 3

4 Sisyphus Global Economy: Ups and Downs 6.0% World Output 5.0% 5.2% 4.0% 3.0% 3.0% 3.9% 3.2% 2.9% 3.5% 2.0% 1.0% 0.0% -1.0% -0.6% Source: International Monetary Fund, October

5 Main Risks to Global Growth for Changing interest rate regime What if the Fed is not up to the task? 2. U.S. fiscal consolidation (more shutdown/default threats). 3. Potential of a hard landing for China. 4. Emerging Markets slowdown and need for structural reforms. 5. Middle East conflicts (Iran, Syria, etc.). 6. Europe s unfinished sovereign debt problems. 7. Japan s debt (public sector debt currently equal to 237% of GDP). 8. Asian maritime and other disputes. 9. Beggar-thy-neighbor currency wars. 10. U.S. inflation (low concern now, but low rate environment is not without risk). 5

6 For Advanced Economies, The Largest Rock for Sisyphus is Debt Overhang Lingering Leverage in Advanced Economies (public sector debt/gdp %, 2013F) Japan 228.4% Greece 183.7% Italy Portugal Ireland Iceland France UK U.S. Belgium Spain 143.6% 142.8% 129.3% 126.8% 113.5% 109.1% 109.1% 104.7% 97.8% 0% 50% 100% 150% 200% 250% Source: OECD. Leverage is defined by general government gross financial liabilities as a % of nominal GDP. Debt to GDP levels have actually risen in recent years. Large debt burdens and austerity programs continue to function as a drag on global economic growth. Policymakers watching rates with an eye on the potential of rising interest costs on debt. 6

7 Washington s Agenda The To-Do List: Resume budget talks with an eye to January 15, 2014 being set for an end of funding and another possible shutdown. Debt ceiling limit extended to February 7 th. Look for calmer heads to prevail, but a return to a stalemate is a major risk. Living with a new round of sequestration? What about other policy reforms? - Immigration - Fannie Mae/Freddie Mac - Infrastructure Federal Reserve issues: - Confirmation of the new Chairman of the Federal Reserve (Janet Yellen). - It is not a question of whether or not to taper, but of when. - Balance Fed moves with interest rate pressures. 7

8 Despite Washington, the Economy is Still Growing ISM Manufacturing Index Source: Institute for Supply Management. Values below the shaded area of 50.0 are recessionary, values above 50.0 are expansionary. Housing is likely to remain a growth factor as unemployment continues to fall, but a changing interest rate environment could slow sales and construction. Realtors already concerned over tight credit conditions. 8

9 A Slower 2013, but 4.0% U.S. Real GDP 3.0% 2.0% 1.0% 2.4% 1.8% 2.2% 1.7% 2.5% 3.0% 3.2% 0.0% -1.0% -2.0% -3.0% -4.0% -3.1% E 2014F 2015F 2016F Source: Research, International Monetary Fund and Organisation for Economic Cooperation and Development. Outlook on the U.S.: Growth set to continue and will see improvement in Growth is dependent on housing, manufacturing and consumer demand, but stronger growth is kept in check by higher taxes, sequestration and rising rates. 9

10 China is a Swing Factor How Slow is Slow? 12.0% Real GDP Growth 10.0% 8.0% 6.0% 9.6% 9.2% 10.4% 9.3% 7.8% 7.4% 7.0% 4.0% 2.0%? 0.0% E 2014F 2015F Source: Research, International Monetary Fund. Outlook on China: We expect China s real GDP to slow, but no Chinapocalypse. Policymakers must balance tougher external markets with domestic imbalances, which means new reforms, cleaning up the financial sector and slower growth. Many analysts underestimate the Communist Party s ability to manage the economy and society, but the growing danger is the Communist Party s underestimating the depth of economic challenges. 10

11 Japan s Gamble 6.0% Real GDP Growth 4.0% 4.6% 2.0% 0.0% -1.2% -0.6% 1.9% 2.0% 1.4% -2.0% -4.0% -6.0% -5.5% -8.0% E 2014F Source: International Monetary Fund, July Outlook on Japan: Prime Minister Abe is committed to reforms and leaving a positive historical legacy. He is also aware that without a healthier economy, Japan s ability to have influence in regional and global affairs diminishes. Big challenges ahead, but we expect persistence on the policy front. 11

12 Europe s Growth Challenge Looking for Green Shoots Real GDP Growth (%) Euro Area Germany France Italy Spain UK Greece Ireland Portugal Source: Research, International Monetary Fund, October Outlook for Europe: Look for recession to end in 2013, but recovery in 2014 will remain anemic as social turmoil caused by austerity fatigue could postpone reforms needed for sustainable, long-term growth. Long-term prospects for holding the Euro-zone together remain questionable. 12

13 Emerging Markets Dealing with the Changing Interest Rate Regime Russia Brazil India Mexico Sub-Saharan Africa Real GDP Growth (%) ASEAN Current Account Balance of Payments (% of GDP) Lebanon Jordan Ghana Serbia Ukraine Turkey Source of both charts: International Monetary Fund, October Outlook for Emerging Markets: Some EM economies are more highly leveraged than others and are vulnerable to changes in the global interest rate regime (e.g. the U.S.). We have already seen a testing with higher rates in May and June. 13

14 What About Global Trade? 15% World Trade Volume (Goods and Services) 10% 12.6% 5% 7.8% 6.0% 4.9% 5.3% 0% 3.0% 2.7% 2.9% -5% -10% -10.6% -15% E 2014F 2015F Source: Research, International Monetary Fund. Despite an economically more challenging 2013, trade remains in recovery mode. Look to U.S. growth and a marginal European recovery in 2014 to help balance slower Chinese growth. 14

15 Conclusion In the short-term, Washington s follies are a bad distraction. The Fed has to keep its signals clear about a gradually less accommodative policy stance, i.e. tapering. As the Fed has signaled investors, policymakers around the world must make their own adjustments. Deleveraging and growth are the biggest issues in advanced economies. Confidence in economic management, upgrading domestic demand and maintaining trade growth is critical in keeping EM economies healthy. Rising rates will complicate funding efforts and impact currency valuations in some EM economies with large current account deficits. Global economic growth continues, but headwinds remain strong. 15