AEGON Asset Management

Olaf van den HeuvelHead of Tactical Asset Allocation

CFA Forecasting dinner

2

Enough already

Financial innovation Emerging Markets

Stability

3

Enough already II

Historic analysis tells us growth is negatively impacted if debt/GDP exceeds 230%

Growth and debt for 18 OECD countries

Source: BIS

4

Enough already III

It is contagious!

1980 2010United States 46 97Japan 53 213Germany 31 77France 34 97Greece 26 132Netherlands 65 76Portugal 36 107Spain 27 72

Government debt as percentage GDP

2010268456241321262327366356

Total debt (government, household and corporations)

as percentage GDP

Source: BIS

5

Austerity

6

10 Years + of the Euro: benefits and imbalances

What happened and did not happen

EMU created one of the largest economic areas

Reduced transaction costs

Increased intra-EMU trade

Resulted in low inflation

Reduced interest rates / interest rate differentials

Resulted in further integration of financial markets

Resulted in economic convergence

Disciplined national budgetary policies

Resulting in:

Increased economic growth throughout the eurozone ... McKinsey calculates EMU effects on GDP at ~0.3%pt p.a. for the

eurozone (over period 1999 – 2010)

Germany strongly profited from an increase in competitiveness

Peripherals strongly profited from lower interest rates

... but also a build-up of economic imbalances Productivity differentials

Government finances where not sufficiently redressed

Low interest rates contributed to increase in household deficits and

housing market bubbles

7

The issue

8

Fiscal, economic and political union

Fiscal union

Eurobonds

Budget rules and “Marshall plan” for peripherals

“United States of Europe”

Sustainability and required integration

Agreement has been reached on tighter budget rules► “The proof of the pudding is in the eating”

More will probably be needed► Ad hoc conditional crisis loans have been provided, but

not a systemic solution (ie eurobonds, EU IMF)► Marshall plan for peripherals► Fiscal union

Insufficient integration (too little, to late) increases likelihood of core eurozone scenario

Degree of integration

Sustainability / Market credibility

High

High

Core Eurozone

Enforceable budget rules

Present Eurozone

9

Cyclical outlook

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

jul-0

7

nov-

07

mrt

-08

jul-0

8

nov-

08

mrt

-09

jul-0

9

nov-

09

mrt

-10

jul-1

0

nov-

10

mrt

-11

jul-1

1

nov-

11

Leading indicators

Eurozone PMI

Germany PMI

Italian PMI

US PMI

Source: Bloomberg, Datastream

10

Economic outlook

GDP US Euro zone UK Japan2012 2.0 0.7 1.1 1.22013 1.7 1.0 1.6 1.22014 1.8 1.1 1.7 1.62015 2.7 1.7 2.1 1.9

Inflation US Euro zone UK Japan2012 2.4 1.8 3 -0.52013 2.8 1.7 2.9 -0.42014 2.7 1.6 2.9 -0.32015 2.7 1.6 2.9 -0.3

11

Low growth for longer

Not necessarily bad for markets

12

Valuation good predictor of long term equity returns

13

Dividend yield and positive effect of rerating of equities cause a higher expected return in Europe compared to the US

Components of equity returns

14

Expected returns

Annualized returns until 2015

Basecase EU AAA Sovereign -1%

Italian Sovereign 5%US Sovereign -1%

Inflation Linked Bonds (EU) 0%EU Investment Grade 3%

EU High Yield 7%US Investment grade 1%

US High Yield 3%EMD 4%

Lev loans 5%ABS 8%

Equity - WORLD 7%Equity - US 5%Equity - EU 9%

Equity - EMERGING MARKETS 8%Real estate - WORLD 9%

Commodities 3%

1515

Discuss!

16

High level indication of main (potential) costs and benefits

Scenario Costs Benefits

Fiscal Union flight forward

(60%)

Funding rescue mechanism (larger than present ESFS) Debt restructurings to restore sustainability Fiscal transfers Negative impact on economic growth from tough austerity packages Loss of sovereignty

Exchange rate stability continues Potential as political and economic powerhouse survives Institutional changes plus forced restructuring of pressured

countries improves stability and long term growth outlook Avoids costs of break-up of Eurozone

Core Eurozone economic

convergence is leading (30%)

Loss of exchange rate stability and return to competitive devaluations, with negative growth impact and deflationary risks for Core Eurozone and inflationary risks and higher interest rates for exiting/devaluating countries

Increase in euro-denominated debt burden for exiting countries, triggering defaults including systemically important banks

Membership of Core Eurozone driven by high degree of economic convergence and therefore less need for rescue mechanisms and fiscal transfers

Pressured countries restore competitiveness through devaluations

Break-up Eurozone,

survival EU large step back (9%)

Further loss of exchange rate stability Larger growth, inflation and interest rate risks Wealth effects from redenomination of all debts and assets, triggering

defaults including systemically important banks

Monetary policies can be better aligned to domestic circumstances

Break-up EU chaos (1%)

As above, plus negative growth impact from break down of cooperation, harmonisation and integration and increase in isolation and protectionism

Complete loss of Europe as (potential) political and economic powerhouse

Maximum sovereignty

High

Small