From: "Pil, Anton C" <

From: "Pil, Anton C" < To: "Pil, Anton C" Subject: GIO: Looking Forward to 2014 Date: Thu, 19 Dec 2013 20:01:28 +0000 Attachments: GIO_Holiday_Letter_2013.pdf Inline-Images: image003.png L;:,O313-0217 GIO banner for word & email.jpg Happy Holidays 2013 December As we head into year end, we wanted to take a moment to reflect on 2013 and what a tremendous year it has been. Given our high conviction in equity markets at the beginning of the year, we are very happy to see global equity markets up over 20%' driven by strength in the US and Japan, the two countries we were most confident in. In addition to our macro equity calls, our sector focused themes such as Internet Mobility 2.0 (content), healthcare, and defense contractors also worked well and have generally outperformed the market although some, such as being long Latin American equities in 2Q, did not. Lastly, while we didn't quite get a Great Rotation, US rates still rose as we had called for and we believe this mini-rotation out of cash in 2013 leaves room for more next year. Where does this leave us for 2014? We believe many of the same trends from 2013 will continue but given fairer valuations, we will be refining our focus to high conviction themes such as the ones highlighted below. Lastly, as we head into yearend we wanted to take a moment to wish everyone a happy holiday season and thank you for your continued partnership and trust in us. 2014 OUTLOOK THEMES UNDER CONSIDERATION FOR 2014 Equities over Fixed Income We continue to favor equities over fixed income but are expecting a more "normal" 10-15% return in developed market equities in 2014 with potential for more from Japan if momentum from reform continues. Our forecast incorporates high single digit earnings growth plus the potential for some multiple expansion (driven by relative value versus fixed income). Developed Markets over Emerging Markets Continue to prefer developed markets over emerging markets. Macroeconomic conditions continue to solidify and improve across US and Europe (for now) and while central banks may not be as unified in 2014 with the Federal Reserve tapering in January, we believe central banks will generally remain accommodative with rates. That said, emerging markets (outside some specific economies) are facing headwinds from US tapering and political risks in some countries. Mixed Rates Outlook With tapering set to begin in January, we expect long end US rates to rise although with a watchful Fed, it may be more gradual than what we had expected in 2013. No tightening in view. Across the Atlantic, however, there remains room for rates to decline further, particularly in the periphery as the ECB Life Sciences We believe life science technologies are entering a new cycle with increased uptake of genetic testing given declining testing time and costs. Within medicine, the foundation for better diagnostics and analytics is currently being built and increased collection of data is driving demand for sequencing instruments. There are also growing applications outside medicine especially in fields such as food authenticity and materials testing. Airplane Replacement Consolidation among carriers has driven a return of pricing power to the industry which is benefiting not just airlines, but aircraft orders given demand for improved fuel efficiency and cheap funding costs. Additionally, we believe it makes sense to focus on companies exposed to widebody planes which are seeing faster order growth than narrowbody planes. New China China is entering the next phase of its multi-decade transition. While many focus on the shift from an export driven economy to an internally driven one, we believe "internalization" extends beyond just a growing middle class and services industry to other agendas such as national identity and potential geographic expansion. We will be focused on investments that will benefit from this shift. EFTA00979205 remains accommodative. Lastly, given our concerns about emerging markets headwinds, we will be looking for opportunistic shorts in USD denominated emerging markets debt or buy protection on emerging market bonds. Happy Holidays, Anton Pil Continuing Themes from 2013 In Japan, we are sticking with Abenomics given a dedicated Sol and the likely increase in reform talk. Data proliferation is happening and we continue to focus on companies benefiting from increased investment in internet infrastructure and storage. Lastly, the US energy landscape is undergoing a multi- year transformation towards broad energy independence and we will continue to bring to you our best thinking in this space. • Based on year to date total return of the MSCI World Index through December 17, 2013. IMPORTANT INFORMATION Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.. Opinions and views expressed herein are those of GIO and may differ from the opinions expressed by other areas of including research. This material contained herein is not a product of the. Morgan Research Department and is not a research report, although it may refer to a research report or research analyst. This presentation should be reviewed in conjunction with U.S. research published by. Morgan Securities, LLC to the extent that such research exists. The opinions and ideas expressed herein do not take into account individual client circumstances, objectives and needs. Transactions in any securities that may be referenced herein may not be suitable for all investors. This has been prepared for information purposes only. Nothing in this material is intended to be a solicitation for any product or service offered by a Morgan's Private Bank or any of its affiliates. Information contained herein has been obtained from sources believed to be reliable but we do not guarantee its accuracy or completeness and accept no responsibility for any direct or consequential losses arising from its use. The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is being provided merely to illustrate a particular investment strategy. Past performance is no guarantee of future results. Investing in fixed income products are subject to certain risks, including; interest rates, credit, inflation, call, prepayment and reinvestment risk. The price of equity securities may rise or fall because of changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile. This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or sale of securities, accuracy and completeness of information, viruses, confidentiality, legal privilege, and legal entity disclaimers, available at EFTA00979206