L0284 Solving2012 Global Equities

7/31/2019 L0284 Solving2012 Global Equities

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Overview: Beneath the Surface,Opportunities AwaitJop V. Aao, Pri a Ci Iv Ofcr

the Japan earthuake, the U.S.

Treasury downgrade or the ongo-

ing drama in Europe, these actors

coalesced to heighten market turbu-

lence and reinorce the notion that

markets are truly interconnected as

never beore.

Looking ahead to 2012, we see little

sign that such issues are abating.

European nations, despite ongo-

ing dialogue, continue to struggle

to achieve a credible solution to the

debt crisis. The region, in our opinion,

reuires concrete steps toward scal

consolidation ollowed by meaningul

intervention by the European CentralBank. The political process has been

taking much longer than markets de-

mand. While this is understandable,

given the complexities o the political

process, nancial markets may yet

orce the political leadership to move

more uickly.

In the U.S., Congress has postponed

hard decisions about budget cuts un-

til ater the November elections. This

will likely result in important policy

initiatives going into suspended

animation. The world is also watch-

ing closely as to whether China can

successully achieve a sot landing or

its infuential economy. In short, it

seems like heightened volatility, tight

correlations and near-term ocus on

high-level investment choicessuch

as asset class, region and sector

will continue to predominate in the

short term.

Despite this, as evident in our outlookpieces on the U.S., Europe, Emerg-

ing and China euities, we believe

there are exceptional opportunities

or bottom-up investors. For example,

i you look past the general gloom

in Europe, you nd that there are

numerous high-uality companies

domiciled there with broad global

exposure that are providing strong

earnings at reasonable multiples.

Elsewhere, despite a dicult 2011,

emerging markets continue toprovide secular advantages over

developed counterparts. Economic

growth is much aster, governments

and individuals carry less debt, and

demographics are avorable, as

young and growing populations raise

their living standards and increase

consumption. Among stocks, the

sell-o o 2011 has provided ample

opportunities or bargain hunters.

As or the U.S., individual companies

are actually doing better than the

sluggish economy would suggest.

Many continue to generate healthy

earnings and boast cash-rich bal-

ance sheets, low nancing costs

and limited wage pressures. Overall,

Over the past year, the most commonly used words in relation to the markets were probably macro,volatilityand contagion. The least uttered? Id say fundamentals, as in what dierentiates individual

companies at any given time. Clearly, the big picture was ront and center in 2011, as investors grap-

pled with an array o unanticipated, signifcant events oten simultaneously. Whether the Arab Spring,

GLOBAL EqUITIES

solvingfor 2012 | Market Insights and Outlooks rom Senior Investors at Neuberger Berman

As originally published in:


2/13

they seem well-positioned to ride

out a downturn and perorm well

should the economy maintain modest

growth (our expectation) or surprise

on the upside.

In all likelihood, 2012 is going to be

another eventul year. But i, like us,

you think o current volatility and

pessimism as opening and not just

shutting doors, then you may also

see this as a good time to capitalize

on the attractive opportunities thatawait, especially given that many

stocks have seen lower valuations in

the wake o undierentiated market

turbulence. In our view, the key in this

environment is to exert patience and

maintain investment discipline, while

waiting out the structural, big-picture

issues that continue to heighten anxi-ety around the world.

This material is presented solely or inormational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or holda security. Any views or opinions expressed may not reec t those o the frm as a whole. Third-part y economic or market estimates discussed herein may or may not be realizedand no opinion or representation is being given regarding such estimates. This material may include estimates, outlooks, projections and other orward- looking statements.Due to a variety o actors, actual events may dier signifcantly rom those presented. Investing entails risks, including possible loss o principal. Past perormance is noguarantee o uture results.

Please see disclosures at the end o this publication, which are an important part o this ar ticle.

GLOBAL EqUITIES

Uncertainty abounds as we enter

2012or euities and xed income,

in the U.S. and globally. It could be

another trying year. We expect a

barrage o macro issues, including

uestions about the ongoing Euro-

pean sovereign debt crisis, whetherChina can avoid a hard landing, the

health o the U.S. economy and the

November elections, to continue to

shape investor sentiment. Against this

backdrop, strong corporate unda-

mentals, which are usually a orceul

driver o euity returns, continue to

take a back seat to daily headlines

and the periods o heightened volatil-

ity that oten ollow. While investors

could be in or a bumpy ride, we are

generally positive on the prospects

or the U.S. euity market and the

eventual return o undamentals-

driven perormance.

2011: RIsk AVeRsIOn suRged As

the YeAR PROgRessed

The U.S. euity market, which began

the year with much promise, was

soon hampered by a confuence

o events that resulted in a signi-

cant fight to uality and, at times,

indiscriminate selling. The shit rom

robust risk appetite (risk on) to

risk aversion (risk o) began in the

late spring. Ater a period o resil-iency in the wake o the uprisings in

the Middle East and the devastating

earthuake in Japan, investor senti-

ment started to sour. Data pointed to

moderating economic growth, and

ears o Greece deaulting on its debt

obligations again took center stage.

Risk aversion gained momentum in

the third uarter due largely to the

downgrade o U.S. Treasuries by Stan-

dard & Poors. Mixed economic data,

ears o contagion rom the European

sovereign debt crisis, and growing

expectations or a double-dip reces-

sion compounded investor concerns.

At times, investors were willing to

park their money in Treasuries earning

minimal returns as they took shelter

in the rising storm. Despite a strong

rally or stocks in October, inves-

tor goodwill soon aded with new

concerns in Europe, including ears

about Italian debt and a surge in the

countrys borrowing costs. Political

gridlock in Washington also came to

a head as the debt-reduction super

committee ailed to reach a compro-mise to meet budgetary targets by

the agreed-upon deadline.

eCOnOmY, FROnt And CenteR

As we look ahead to 2012, the

economy, as usual, will be central

to the health o the stock market.

Unortunately, economic data have

been less than conclusive in gauging

a clear course or recovery. Consumer

and business spending, manuactur-ing activity and other metrics have

fuctuated rom month to month,

leading to shiting expectations by

turn rom expansion to contrac-

tion and back again. However, two

constants remain: elevated unemploy-

mentrecently at nearly 9%and

weakness in the housing market,

which has had little momentum ater

U.S. Equities:In the Back Seat Now, Fundamentals Should Eventually Drive ResultsLa moiliai, mli-A Cla srai


3/13

dramatic declines in volume and pric-

ing. These actors, combined with wor-

ries about global macro developments,

have in turn negatively impacted

condence and consumption.

Still, we think the U.S. economy has

enough momentum to avoid a dou-

ble-dip recession in 2012, and grow

at a positive, even i subpar, pace.

Among the actors that could poten-

tially support growth are the sizable

cash holdings o many companies

that have been hesitant to deploycapital in an uncertain environment.

I condence improves, the increased

use o this cash could augment

GDPas could a positive change in

spending by consumers, who have

been relatively conservative in their

spending over the past several years.

Even i the U.S. alls back into reces-

sionwhich we see as the less likely

scenariowe think it would probably

be relatively shallow, due to what

we consider to be a lack o excesses

in the economy. In the housing

sector, or example, construction

starts, residential sales and home

prices all declined dramatically or

several years, and appear to have

little room to all urther rom todays

depressed levels. Corporations, hav-

ing cut costs during the depths o the

economic crisis, are operating leanly,aided by healthy balance sheets and

inexpensive nancing. We believe

deault rates on company debt are

likely to come in below average next

year. Indeed, given modest infation

numbers and ears about the econ-

omy, the Federal Reserves monetary

policy is likely to remain accommoda-

tive. This monetary stimulus may be

particularly important given that U.S.

budgetary pressures and political

gridlock suggest that meaningulscal stimulus is unlikely to be put

into place in the coming year.

euROPeAn debt sAgA

COntInues

With unprecedented connectiv-

ity among businesses across global

markets, U.S. economic health will

depend in part on whats happening

elsewherewhether in Berlin, Hong

Kong or Tehran, or that matter. Atthis point, sovereign debtin the

U.S., but particularly in Europecon-

tinues to have an enormous impact

(at least psychologically) on business

and consumer condence as well as

market perormance.

As we write this report, the Euro-

pean situation continues to shit

rapidly. A late October agreement by

European Union members to reduce

Greeces debt by 50% and substan-tially increase the European Financial

Stability Facility (EFSF), designed to

support euro-area member states,

was initially viewed by investors as

a signicant step in uelling the

escalating crisis. However, it soon

became clear that the various players

remain at loggerheads on how to

deal eectively with major issues o

implementation, timing and unding.

Indebted nations bridle under pres-sure to implement austerity mea-

sures and reduce expenditures while

core countries (Germany and France)

have shown reluctance to bear the

brunt o potential bailouts, and the

European Central Bank seems cau-

tious about taking on a larger role in

uelling the crisis.

Will rebound in Market volatility Continue in 2012?

Number o Trading Days with Intraday Swings Above 3% or S&P 500

0

10

20

30

40

50

60

70

80

11*1009080706050403020100

Source: FactSet. *As o November 30,2011.

GLOBAL EqUITIES

Corporate balanCe sheets reMain healthy

Percentage o Assets in Cash: S&P 500 Companies (ex Financials)

10%

8

6

4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: FactSet, through September 30, 2011.


4/13

GLOBAL EqUITIES

France and Germany have called or

reworking the European Union (EU)

as a whole and amending Euro-

pean treaties to include centralized

oversight o national budgets andautomatic sanctions against countries

in violation o new stricter rules, at

least or the 17 eurozone countries.

But the U.K. has so ar vetoed the

proposed EU-wide agreement, and

some European voters are voic-

ing complaints as well. Meanwhile,

the prolonged inability to come up

with a decisive x to its debt woes

appears to threaten the credit ratings

o even core eurozone countries. All

told, the ongoing uncertainty and

hobbled banking system will likely

impact economic activity in the near

termsomething that new European

Central Bank President Mario Draghi

acknowledged in noting the potential

or a mild European recession by

the end o 2011.

OtheR Issues:

ChInese hARd LAndIng

Beyond the maneuverings in Europe,

we are keeping a close eye on devel-

opments in China, which have signi-

cant implications or global growth

and the euity markets in 2012. Much

has been written about whether

China has the ability to orchestrate a

sot landing or its economy by end-

ing a two-year tightening cycle that

has included numerous interest rate

increases and higher bank reserve

reuirements. Indeed, the countryseconomy has decelerated somewhat,

rom 10.4% GDP growth in 2010, to

around 9.2% or 2011.

I the Chinese governments mea-

sures to cool the property market

and tame infation turn out to have

been too heavy-handedespecially

with economic pressures mounting in

the developed worldthe resulting

slowdown could substantially impact

global business activity. From ourperspective, although Chinas eco-

nomic expansion is likely to urther

moderate in 2012, we dont believe

the country will experience anything

too severe. Chinas infation rate now

appears to be at, or near, a peak

while its property market has shown

signs o cooling. As a result, we think

that Chinese policymakers have the

fexibility to stop or potentially reverse

course on their tightening measures

in pursuit o the elusive sot landing.

eLeCtIOn gRIdLOCk?

Finally, one issue that is a bit harder

to handicap is the potential impact

o election politics in 2012, when

the U.S. will choose its President and

both the House and Senate have

the potential to change hands. (See

2012 Election on page 6.) Despite

extensive wrangling, little progress

has been made toward reducing the

ederal budget decit and level o

ederal debt, which has now reached

a staggering $15 trillion. Moreover,

should the economy soten, as noted,

it seems unlikely that there would be

agreement on any major stimulus.

Indeed, given the political games-

manship displayed during the debt

ceiling crisis and with the ailure o

the Congressional super committee

to reach budgetary compromise, we

think that the run-up to the election

will only intensiy current polarization

and extend gridlock. This, in turn,

could infuence Standard & Poors and

other rating agencies as they consider

a potential urther downgrade o U.S.

Treasuries, as well as the willingness

o businesses to make major invest-ments in euipment or hiring in an

uncertain environment. Although

there may be some movement on tax

reorm, it seems that the most impor-

tant policy initiatives will probably

have to wait until ater November.

WhAts AheAd FOR stOCks

Many o the key issues acing the

worlds governments and economies

will likely take time to play out. Assuch, we think that the short-term

movements o the U.S. euity market

in 2012 will continue to hinge on

unCertainty, MaCro foCus heightened Correlation aMong stoCks

S&P 500 Industry Groups: 30-day Roll ing Correlation

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

20112010200920082007200620052004

Source: FactSet, through November 30, 2011.


5/13

signs o improvements and/or set-

backs in these key issues, as well as

the outcome o economic data along

the way. This, in turn, could lead to

additional periods o heightenedmarket volatility and a continuation o

the risk-on/risk-o investor mental-

ity that characterized 2011. Similarly,

with macro issues dominating the

markets, we expect that higher-than-

average correlations among asset

classes and among individual securi-

ties will continue, making it more

challenging or investors to build

meaningully diversied portolios.

Ultimately, where the market endsup on December 31, 2012 will, in our

view, depend on whether cumula-

tive progress is made on key ronts,

such as Europes debt crisis, Chinas

economic path, or U.S. business and

consumer condence. From a unda-

mental perspective, we believe U.S.

stocks are a good value. Low interest

rates are extremely supportive and

valuations are attractive rom

a historical perspective, with the

S&P 500 Index trading at a orward

price/earnings ratio o roughly 10.9,

versus 15.0 over the past 10 years.1

Despite challenging economic condi-tions, corporate prots generally

remain solid. Companies within the

S&P 500, or example, are expected

to generate earnings per share o

$107 in 2012, up rom a projected

$97 in 2011. As mentioned, corporate

balance sheets are generally cash-

rich, which could provide some-

thing o a cushion i the economy

stumbles. Using some o this cash or

shareholder-riendly activities, such

as increased dividends and share

buybacks, would likely lend support

to the stock market, as would an

increase in mergers-and-acuisitions

activity. That being said, corporate

guidance or 2012 has been vague

or noncommittal, given the macro-

economic headwinds; so investors

currently lack the clear visibility

to increase their condence rom

current levels.

Taking into account both the macro

issues and underlying undamen-

tals, we recognize the likelihood o

continued near-term market volatility,

but we also think that U.S. euitiesare generally attractive at these levels

and have attractive upside potential

or long-term investors. Near term,

should the economy surprise on the

upside, we could see investors begin

to rotate rom deensive to early

cyclical stocks (while, o course,

a downturn could have the opposite

eect). Regardless, we are encour-

aged by corporations resiliency since

the credit crisis and eel that many

businesses are well-positioned to

capitalize on opportunities or growth

that we expect to materialize once

a more stable global ramework and

a better economic backdrop begin

to emerge.

1. Source: FactSet, as o November 25, 2011.

This material is presented solely or inormational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or holda security. Any views or opinions expressed may not reect those o the frm as a whole. Third-part y economic or market estimates discussed herein may or may not be realizedand no opinion or representation is being given regarding such estimates. This material may include estimates, outlooks, projections and other orward-looking statements.Due to a variety o actors, actual events may dier signifcantly rom those presented. Investing entails risks, including possible loss o principal. Past perormance is noguarantee o uture results.

Investing in the stocks o even the largest companies involves all the risks o stock market investing, including the risk that they may lose value due to overall market or eco-nomic conditions. Small- and mid-capitalization stocks are more vulnerable to fnancial risks and other risks than stocks o larger companies. They also trade less requently andin lower volume than larger company stocks, so their market prices tend to be more volatile.

Please see disclosures at the end o this publication, which are an impor tant part o this article.

GLOBAL EqUITIES


6/13

Politicians have long recognized therelationship between voter approval

and the state o the nancial markets

and economy. This is most evident in

U.S. presidential election years, when

campaign promises and stimulus

packages become the norm and tend

to benet stocks. In 2012, however,

things could be a bit dierent. Histori-

cally, presidential cycles and U.S. stock

markets have exhibited some recurring

trends, with euity market returnstending to be stronger in the third and

ourth years o presidential administra-

tions, as incumbents have pumped

stimulus into the economy in hopes

o urthering their reelection chances.

Since 1926, the S&P 500 total return

has averaged 8.2%, 9.0%, 19.4% and

11.0% in years 1, 2, 3 and 4, respec-

tively, o each presidential term.

Under President Obama, however,

euity returns have been ront-loaded,with the S&P 500 returning 26.5%

and 15.1% in his rst (2009) and

second (2010) years as President, andonly 1.1% year-to-date as o Novem-

ber 30, 2011. To be air, the market

environment throughout Obamas

tenure to date has been tumultuous

early gains refect the rebound rom

the depths o the March 2009 market

lows, while more recently the Euro-

pean debt crisis and economic ears

have had a dampening market impact.

An AusteRItY eLeCtIOnLooking toward 2012, we do not

expect major stimulus measures to

be enacted by the ederal govern-

ment, as has oten been the case

in an election year. Fears over debt

levels and the vast political divide in

Congress have simply changed the

debate. Instead o proposing tax cuts

and spending increases, politicians are

generally contemplating tax increases

and spending cuts. All things beingeual, such austerity measures will

likely be a drag on economic growth.

As some will observe, the economyis not the stock market and the stock

market is not the economy. We agree,

but the 2012 elections are particularly

uncertain, with the President appearing

to be hanging on by a thread and the

major political parties deending slim

margins in the House and Senate.

Moreover, tax reorm, health care

regulation, international trade and

many other issues are still up in the

air and may not be decided until aterNovember 6. This will likely prompt

businesses and individuals to take a

cautious approach until greater

clarity emerges.

As a result, we anticipate the elec-

tions to have a dampening eect on

both the economy and stock market

in 2012i we do happen to reach

the 11.0% average S&P 500 return or

year 4 o the election cycle, I highly

doubt it would be a result o govern-ment largesse.

obaMa and the stoCk Market

S&P 50 0 Total Return by Presidential Year

Source: FactSet. Year 3 Obama data through November 30, 2011.

Historical Average Obama

0

5

10

15

20

25

30%

Year 4Year 3Year 2Year 1

2012 Election: An Exercise in Austeritymaw L. Ri, dircor o Iv sray

This material is provided or inormational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold asecurity. The views expressed herein are generally those o Neuberger Bermans Investment Strategy Group (ISG), which analyzes market and economic indicators to developasset allocation strategies. ISG consists o fve investment proessionals who consult regularly with portolio managers and investment ofcers across the frm. This materialmay include estimates, outlooks, projections and other orward-looking statements. Due to a variety o actors, actual events may di er signifcantly rom those presented.Any views or opinions expressed may not reect those o the frm as a whole. Investing entails risks, including possible loss o principal. Indexes are unmanaged and are notavailable or direct investment. Past perormance is no guarantee o uture results.



7/13

With so much uncertainty in the

past years global euity markets,

courtesy o the eurozone sovereign

debt crisis, investors may wonder

how much appeal an international

euity allocation holdsespecially as

the crisis and related concerns remain

an ongoing risk. In our opinion,

plenty. We think a global perspective,

along with a bottom-up, uality-

and valuations-ocused investment

approach, can continue to uncoverattractive long-term opportunities or

both appreciation and diversication,

and help mitigate many o the

risks associated with a tougher

macroeconomic backdrop.

From a regional perspective, we think

its critically important or investors

to dierentiate between sources o

opportunity and sources o anxiety

in the developed international arena.

The weak perormance o the MSCI

EAFE Index in 2011 was clearly driven

by the eurozone, with its news o

downgrades, potential deaults and

bailout-related political concerns.

The eurozone continues to garner

attention, as the debt accumulated

by the weaker GIIPS economies1

strains stronger nations such as

Germany, and taxes the capabilities

o the European Financial Stabil-

ity Facility and commitment o itsmember states. Additionally, austerity

programs and higher taxes aimed at

reducing large decits, while neces-

sary or the longer term, will likely

continue to impede growth and

weaken consumer and business

sentiment in the near term. This

suggests that serious challenges

remain as the region works toward

economic stability.

While the U.K. is not part o the euro-

zone, the outlook there seems airly

unappealing or many o the same

reasons. The U.K. has high levels o

consumer and government debt, as

well as large government decits.

Attempts to cut government spend-

ing have met with signicant resis-tance and have acted as a drag on an

already slowing economy. This con-

trasts with other non-eurozone coun-

tries like Switzerland and the Nordic

region that oer more economic

and scal stability. On the other side

o the globe, Japan struggles with

an aging demographic prole, high

public debt levels, and an export sec-

tor exposed to an appreciating yen

and slowing global economylikely

a recipe or continued anemic growth

going orward. Elsewhere in Asia, and

more broadly in emerging markets,

new middle class consumers and

corporations oer opportunity or

growth and investment.

nAVIgAtIng WeAkeR mARkets

With most mature economies seeking

to reduce scal decits, we believe

economic growth in the developed

world is likely to remain weak. As a

result, infation should stay subdued,

and interest rates can remain at low

levels. We believe that spending

will remain weak, and thereore see

little appeal in companies that rely

on a buoyant consumer in Europe or

Japansuch as auto manuacturers

and more appeal in companies with a

more deensive customer prole. We

also believe that prospects or multi-

national businesses with established

operations in North America and

Emerging Markets are more attractive

than those with operations ocused onEurope or Japan. A number o Europe-

based companies have many decades

Developed International Markets: Looking Beyond the Eurozonebjai sal, CFA, Porolio maar a ha o gloal eqiy ta

eurozone likely to lag, While eM should lead global groWth

% Year-over-Year Economic Growth

Projcio

2010 2011 2012

Eurozone 1.8 1.6 1.1

United Kingdom 1.4 1.1 1.6

United States 3 1.5 1.8

Canada 3.2 2.1 1.9

Japan 4 -0.5 2.3

Emerging Markets 7.3 6.4 6.1

World Output 5.1 4 4

Source: IMF World Economic Outlook, September 2011.

1. Greece, Italy, Ireland, Portugal and Spain.

GLOBAL EqUITIES


8/13

This material is provided or inormational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold asecurity. Investing entails risks, including possible loss o principal. Indexes are unmanaged and are not available or direct investment. Past perormance is no guaranteeo uture results.

Investing in oreign securities involves greater risks than investing in securities o U.S. issuers, including currency uctuations, interest rates, potential political instability,restrictions on oreign investors, less regulation and less market liquidity. Investing in emerging market countries involves risks in addition to those generally associated withinvesting in developed oreign countries. Securities o issuers in emerging market countries may be more volatile and less liquid than securities o issuers in oreign countrieswith more developed economies or markets.


o experience operating in emerging

markets, oer strong corporate gover-

nance and transparency, and trade at

attractive valuation levels today.

Within Europe and Japan, we believe

deensive sectors like health care

and consumer staples hold appeal.

We also nd certain segments o the

consumer discretionary sectors attrac-

tivesuch as cable TV and satellite

broadcastingwhere many compa-

nies maintain a recurring stream o

revenue that tends to be insensitive to

the economic backdrop. We also view

parts o the inormation technology

and industrial sectors in the samelight, as many companies in these

areas derive most o their prots rom

maintenance or service revenue.

Even in mature markets, we believe

that telecommunications spending will

continue to rise, as consumers adopt

more data-intensive devices and appli-

cations. Within this area, we believe

that cellular operators and euipment

suppliers are likely to benet rom

greater volumes and capital spending.

In contrast, we are generally pes-

simistic about the nancial sector, as

we believe that the developed world

is in a prolonged period o deleverag-

ing. Credit markets globally remainvulnerable to policy in Europe, which

represents an area o potential risk

that it seems prudent to avoid.

IdentIFYIng AReAs OF stRength

In Europe, once one steps outside

the markets at the center o the debt

issue, we believe there are attractive

investment opportunities. Countries

such as Norway and Switzerland are

good examples. Norway has retainedits own currency, has limited public

debt, and maintains signicant oil

reserves. Switzerland has also re-

tained its currency and is home to

several world-class global health care

and consumer staples companies that

operate in a variety o developed and

emerging markets. Similarly, while we

expect the U.K. economy to remain

lackluster, there are solid companies

in Britain that appear well-positionedwith global brands and operations.

From our perspective, a well-rounded

approach to international euity

investing should also consider non-

EAFE index exposure. The Canadian

economy ared well through theglobal nancial crisis o 2007-09,

and is home to some o the worlds

leading energy, precious metals and

agricultural commodities companies.

Emerging markets include many com-

panies that are relatively insensitive to

policy changes in their home markets

and oer a strong strategic position

in global markets.

Overall, we believe that international

markets oer compelling valuations

and select areas or secular growth.

While there are countries and sec-

tors to avoid, we think there are also

world-class opportunities or long-

term investors willing to look beyond

the headlines.

GLOBAL EqUITIES


9/13

Emerging Markets: Real Growth in a Weakening Global EconomyCora A. salaa, CFA, Porolio maar gloal eqiy ta

Ater sharp losses stemming romextreme risk aversion during 2011,

we believe emerging markets

(EM) euities may be poised or a

reboundrst or larger-capitalization

stocks and then smaller-cap issues. In

our view, undamentals remain strong

and, ater the sell-o, valuations

have become compelling. Perhaps

most importantly, compared with the

headwind that we expect developed

market companies to experience, EMcompanies are currently beneting

rom real secular growth. While risks

remain, including domestic infation

and ongoing global economic pres-

sures, we believe that EM companies

ocused on meeting domestic demand

have attractive return potential in the

year ahead.

seLL-OFF In 2011 WAsIndIsCRImInAte

As 2011 began, loose monetary policy

in the developed markets helped push

commodities and energy prices higher.

This caused EM central bankers to

ocus on taming infation. The need

or vigilance was particularly pertinent

in high-growth economies such as

China, India and Brazil, and policymak-

ers embarked on monetary tightening

programs in an eort to limit the risko their economies overheating. While

this made sense economically, the

policy caused EM investors to worry

about slowing growth. In the second

hal o the year, the European sover-

eign debt crisis intensied. This, along

with signs o slowing growth across

the major developed economies, and

a potential hard landing or the Chi-

nese economy, led markets to a period

o massive risk aversion.

Given the risk-aversion sentiment,although undamentals generally

remained strong, investors sold o

EM euities. This risk-o trade began

in the third uarter, with the MSCI

Emerging Market Index declining

22.5%, the worst perormance since

the ourth uarter o 2008. Now, with

valuations at attractive levels, and rela-

tively superior economic growth rates,

we view this as an attractive time or

investors with a longer-term view toreconsider emerging markets.

seCuLAR gROWth And the

dOmestIC AdVAntAge

From our perspective, the secular

advantages emerging markets enjoy

over developed markets have only

increased, driving and sustaining their

longer-term growth trajectories. Gross

domestic product (GDP) growth is

highin act, some research suggests

eMerging Markets: unparalleled groWth at a loW priCe

MSCI Emerging Markets MSCI World

Forward Price/Earnings* Forward EPS Growth Rates

0

5

10

15

20

25

30

35

11/119/113/119/103/109/093/099/083/089/073/079/063/060

5

10

15

20

25%

11/119/113/119/103/109/093/099/083/089/073/079/063/06

Sources: MSCI, FactSet, RIMES. Data as o November 30, 2011.* Based on one-year estimates. Based on 3-5 year earnings-per-share growth rates.

1. Source: Morgan StanleyGlobal Economics, August 2011.

GLOBAL EqUITIES


10/13

that up to 80% o global GDP growth

will be generated rom the emerging

markets in 2012.1 In addition, emerg-

ing markets countries tend to have

strong balance sheets versus the overlyindebted developed market countries.

Longer term, we believe one o the

most important secular drivers or EM

economies is their demographic pro-

le: Young and growing populations

are rapidly increasing their standards

o living and consumption habits,

driving growth or many domestically

ocused consumer staples, consumer

discretionary and health care com-

panies. These countries also have tospend on local inrastructure that will

benet local growth, improving e-

ciency and raising capacity.

A new positive shit weve seen is

taking place within emerging markets

export sectors, which have tradition-

ally been aimed at developed markets.

In light o a slow global economy,

intra-emerging markets trade has been

the key growth driver or the export

sector, and has resulted in more

exports remaining in EM. Clearly, com-

panies with the brand, distribution and

exposure to other growing economies

appear, at this point, better positioned

than those relying on developed mar-

kets or their growth.

In terms o market capitalization, we

see the most compelling valuations

in small- and mid-cap stocks, as they

underperormed or much o 2011

when investment und fows migrated

out o EM. With a longer-term view,

we think they oer an attractive risk/

reward prole as, in general, they are

well-positioned to benet rom thedomestic growth.

Issues RemAIn but

ARe ReLAtIVe

The types o issues we see in emerg-

ing markets can be categorized either

as exogenous (such as eects o

the global economic slowdown, EM

investor behavior and liuidity issues)

or internal (infation or sub-optimal

growth). While any o these couldimpact euity market perormance, we

take comort in the idea that strong

secular growth stories with solid

company and economic undamen-

tals should hold investment appeal,

particularly in light o the challenges

acing developed euity markets.

Regarding infation, while emerg-

ing markets companies continued to

see strong growth in 2011, higher

raw material and input costs as wellas higher wages created some mar-

gin pressure. We think these eects

will start to taper o; and, rom an

earnings growth standpoint, we

continue to eel more comortable

with the domestically oriented sec-

tors. To maintain growth in a slowing

global economy, many countries are

either already cutting rates or near-

ing the end o tightening cycles. In

cases where infation has remained

airly sticky, as in China and India,

policymakers appear to want to see

evidence that infation has abated

beore making denitive moves. On

the other hand, in Turkey, Indonesiaand Brazil, rate cuts are already under-

way. For Brazil, specically, high rates

had strengthened the real, which has

hurt export sectors. A surprise rate cut

last summer was aimed at removing

some o the upward currency pres-

sure. The act remains, however, that

there is structural infation in emerg-

ing markets, with wages increasing

considerablywhich, in part, also

uels strong domestic demand. To help

increase productivity and oset wage

pressures, investments in capacity will

be needed. A general lack o capac-

ity is an ongoing problem hampering

overall growth, but it provides another

secular investment theme ocused on

industrial and materials companies.

CAutIOus OPtImIsm

As we look to the year ahead, we are

cautiously optimistic. When the market

returns to ocusing on the unda-

mentals, we think domestically driven

emerging markets companies could be

a real growth story or 2012.

GLOBAL EqUITIES

This material is provided or inormational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or holda security. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates.Investing entails risks, including possible loss o principal. Indexes are unmanaged and are not available or direct investment. Past perormance is no guarantee outure results.

Investing in oreign securities involves greater risks than investing in securities o U.S. issuers, including currency uctuations, interest rates, potential political instability,restrictions on oreign investors, less regulation and less market liquidity. Investing in emerging market countries involves risks in addition to those generally associated withinvesting in developed oreign countries. Securities o issuers in emerging market countries may be more volatile and less liquid than securities o issuers in oreign countrieswith more developed economies or markets.



11/13

Greater China: Challenges, Select OpportunitiesFra Yao, sior Porolio maar grar Cia eqiy ta

In recent years, China has achieved

generally stable and rapid economic

growth, averaging 10% gross domes-

tic product (GDP) growth in the last

31 years, and 9.4% in the rst three

uarters o 2011.1 As we look to 2012,

however, the sluggish world economy

and market volatility may pose sig-

nicant challenges or investors. Does

the Greater China region continue to

provide opportunities? In our view,

the answer is yes, especially in view

o 2011 market declines; althoughselectivity, as always, will be important

in this relatively volatile segment o the

worlds capital markets.

gROWth RemAIns stROng,

VALuAtIOns COmPeLLIng

Projected growth rates or China,

albeit lower than those seen recently,

remain strong. The Chinese govern-

ment has targeted GDP growth o

approximately 7% or the next ve

years,2 and we anticipate Chinese GDP

growth rates o 8.5% and 8% over the

next three and ve years, respectively. I

GDP growth rates or other economies

remain in line with consensus estimates,

these gures would be among the

highest in Asia and about two times

that o U.S. and Europe combined.

Chineseper capita GDP and private

consumption are much lower than

those o other major economies. Thisrefects the vast gap in living standards

between China and developed econo-

mies and, we believe, supports the case

or continued strong growth.

Also important, bargain-hunting

opportunities have emerged ollowing

the recent market corrections, with

valuations near 2008 lows despite

what we consider to be very strong

earnings potential. For example, the

trailing 12-month price/earnings ratio

or the MSCI China Index was 8.4 as

o September 30, 2011.3 This is despite

projected 2012 earnings-per-share

growth in the low teens or MSCIChina and mid-teens or the China

A-shares market.

undeRWeIghted In

gLObAL IndICes

In our view, Greater Chinas weight-

ing in global indices does not prop-

erly refect its size, importance and

infuence in relation to global markets.

Mainland China is the worlds largest

emerging market and Greater China4(including Hong Kong and Taiwan) is

the second-largest euity market in

terms o market capitalization. How-

ever, the MSCI global indices only

include a subset o the Greater China

markets and do not refect the entire

opportunity set. The MSCI World Index

contains only Hong Kong companies

listed in Hong Kong, which represents

just 1.3% o the index total.5 Mean-

while, China is captured in the MSCIEmerging Markets (EM) Index only as

mainland Chinese companies listed in

Hong Kong, and comprises 17.3% o

the index (see display)6 versus 15.3%

or Brazil. In act, Greater China has

a market capitalization o over three

times that o Brazil, but the market is

under-represented by global indices

because only a portion o it is cap-

tured. In our view, this misalignment

underscores the magnitudeand,

thereore, the opportunity seto the

potential investment universe within

the Greater China euity markets (see

display on page 12).

shIFt tOWARd dOmestIC

COnsumPtIOn

Historically, GDP growth in China

has been driven by government

investment. Today, although still the

worlds largest exporter, the country

is becoming less dependent on xed

asset investment and oreign trade or

growth, refected by its standing as

the worlds second-largest importer.

In the rst three uarters o 2011,

growth o imports outpaced that o

exports, up 26.7% versus 22.7%,

respectively.7 Another key metric is

retail sales, which we consider an

important indicator o domestic con-

sumption. Retail sales rose 17.7% year-

over-year in September 2011 and 17%

in the rst three uarters o 2011.8 We

believe these shits in Chinas growth

model will contribute to the sustain-

ability o its long-term expansion.

1. National Bureau o Statistics o China.2. Outlines or the 12th Five-Year Plan on National Economic and Social Development , March 2011.3. Bloomberg, as o September 30, 2011.4. Greater China includes companies incorporated, organized under the laws o, or that have a principal ofce in, the Peoples Republic o China, Hong Kong SAR, Macau

SAR or Taiwan. It also includes companies that derive a majority o their revenue or profts or that have a majority o their assets in mainland China or Taiwan.5. Barclays Capital, as o August 31, 2011. Greater China represents Hong Kong companies listed in Hong Kong, which is in the MSCI World Index.6. Barclays Capital, as o August 31, 2011. China represents Mainland China companies listed in Hong Kong, which is in the MSCI Emerging Markets Index.7. Chinas Foreign Trade to Top $3 trillion This Year: Ofcial, China Daily, October 29, 2011.8. Total Retail Sales o Consumer Goods in September 2011, National Bureau o Statistic s, China.

GLOBAL EqUITIES


12/13

GLOBAL EqUITIES

InFLAtIOn COnCeRns AbAte

Throughout 2011, the Chinese

government grappled with balanc-

ing slowing growth and the potentialor high infation. Since September

2010, the Peoples Bank o China

(the countrys central bank) has been

active in its tightening policyrais-

ing benchmark interest rates ve

times and increasing the reserve

reuirement ratio or major banks to

a record 21.5% rom 17% last year.9

However, o late, policymakers have

eased these measures due to poten-

tial concerns over social unrest and

slowing growth.

Overall infation (as represented by

the Consumer Price Index) peaked in

July 2011 at 6.5% and has gradually

decreased, easing to 6.2% in August

2011 and dipping slightly below 6.1%

in September 2011.10 We expect infa-

tion o approximately 5% or the last

uarter o 2011. Compared with the

countrys savings rate o approximately

3.5%, the real savings rate (ater infa-

tion) is still negative. While we believe

it remains too early to conrm that

infation has abated, we eel that the

easing to date is a positive indicator.

AmId sLOWIng, LOOk tO

IndustRY LeAdeRs

Looking ahead to 2012, Chinas eco-

nomic prospects will likely be aected

by slower projected growth in the

U.S. and Europe. However, we think a

healthy job market supported by ris-

ing wages reinorces the potential or

select opportunities in sectors driven

by economic growth and consump-

tion, such as consumer discretionary

and consumer staples. Within these

sectors, we are more optimistic about

companies that are leading players in

their respective industries, with high

top- and bottom-line visibility, stable

and recurring operating cash fows,

and robust distribution channels.

More broadly, although short-term

uncertainties persist, we believe the

Greater China euity markets are

at compelling valuations and seem

likely to rebound during the coming

year. In our view, taking a bottom-

up approach using on the groundresearch will be the best way to try to

limit the potential pitalls and capital-

ize on the opportunities in the region.

9. Corporate Yield Gap Shrink s as China Curbs Ease, Bloomberg, October 30, 2011.10. National Bureau o Statistics o China.

This material is provided or inormational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold asecurity. Investing entails risks, including possible loss o principal. Indexes are unmanaged and are not available or direct investment. Past perormance is no guaranteeo uture results.


China index Weightings underWeight Major Market

Growth, Market Capitalization o LargestEmerging Equity Markets

12%

10

8

6

4

2

0

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

GDP Real Rate (% as of July 2011)

Market Capital ($ in billions as of September 30, 2011)

India

MainlandChina

Brazil

South Korea

Taiwan

Mexico

Turkey

Russia

Malaysia

Source: Bloomberg and CIA World Fact Book, as o September 30, 2011. Size o circlerepresents size o market capitalization. Mainland China includes A and B shares only.

Others2

17.25%

6.95%

6.74%

7.89%

10.99%

17.64%

14.38%

15.32%

2.83%

Taiwan

South Afr

Russia

Korea

Indonisia

India

China1

Brazil

MSCI Emerging Markets Index Constituents

Source: Barclays Capital, as o August 31, 2011.1. China represents Mainland China companies listed in Hong Kong, which is in the

MSCI Emerging Markets Index.2. Others include Chile, Colombia, Czech Republic, Egypt, Hungary. Malaysia, Mexico,

Morocco, Peru, the Philippines, Poland, Thailand, Turkey.


13/13

This material is presented solely or inormational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or holda security. Inormation is obtained rom sources deemed reliable, but there is no representation or warrant y as to it s accuracy, completeness or reliability. All inormation is cur-rent as o the date o this material and is subject to change without notice. Any views or opinions expressed may not reect those o the frm as a whole. Third-par ty economicor market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates. This material may include estimates,outlooks, projections and other orward-looking statements. Due to a variety o actors, ac tual events may dier signifcantly rom those presented. Indexes are unmanagedand are not available or direc t investment. Unless otherwise indicated, returns shown reect reinvestment o dividends and distributions. Past perormance is no guaranteeo uture results.

Investing in the stocks o even the largest companies involves all the risks o stock market investing, including the risk that they may lose value due to overall market or economic

conditions. Small- and mid-capitalization stocks are more vulnerable to fnancial risks and other risks than stocks o larger companies. They also trade less requently and in lowervolume than larger company stocks, so their market prices tend to be more volatile. Investing in oreign securities involves greater risks than investing in securities o U.S. issuers,including currency uctuations, interest rates, potential political instability, restrictions on oreign investors, less regulation and less market liquidity. Investing in emerging marketcountries involves risks in addition to those generally associated with investing in developed oreign countries. Securities o issuers in emerging market countries may be morevolatile and less liquid than securities o issuers in oreign countries with more developed economies or markets.

This document is issued or use in Europe and the Middle East by Neuberger Berman Europe Limited which is authorised and regulated by the UK Financial Services Authority(FSA) and is registered in England and Wales, Lansdowne House, 57 Berkeley Square, London, W1J 6ER. Neuberger Berman is a registered trademark.

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