Why we need a crisis?Saxo Bank Capital Markets

Johannesburg, November 2012

2

30 years of experience in a few lessons

Macro

Micro

Joseph Schumpeter

John Maynard Keynes

Denial

Protest

Mandate for change

3

Printing money: the only game in town…

4

Entitlement South Africa?

• ZAR will weaken (-5%)

• SARB will cut 100 bps

• Public Sector need to slow-down vis-a-vis investments

• Cohessive social policy of essence

5

Europe is drowning in denial

6

Social unrest: 101

Organic Growth

Leverage

7

Everybody’s hero: Prez Reagan started the excess….Obama perfected it…

8

US fiscal cliff will happen…but to what degree?

9

Why does fiscal cliff matter to investor…the math:

.

10

Game changer: US shale gas

11

Demographics are not a drag compared to peers

12

Eurozone indicators point towards more gloom

13

Eurozone’s growth trajectory below bond yields…

14

China’s next phase looks difficult

• Nov 8-18th Party Congress

• Q4 2013 – Meeting of the “third

plenary”

• Economic growth is slowing

• Labour force to begin shrinking

• Transition to domestic consumption

• Competitiveness is declining

15

China slows down to 2008 levels

16

…more evidence of slowdown

17

Unsustainable wage pressure in China

18

“Reality divergence” largest since Dot-com bubble

19

Implied earnings growth of 12-16%…complete fantasy

20

Earnings fear elevated but with good reason

21

Market at ”fair value”?

22

Global equities trade below historical average

23

Saxo Bank favours small cap stocks

24

Commodities will dance to the “tune of 2012”

• Commodities to repeat 12’ unless oil

spikes

• Oil is all about geopolitical risk

• Gold to reach 2,075 in 13’ on demand

• Crop prices to remain elevated

25

Commodities likely to repeat 2012 unless…

26

Crude oil in 13’ is all about geopolitical risk

27

Gold driven by financial investment demand

28

The impact of the highly improbable

It’s an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

It carries an extreme impact

In spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable

Source: New York Times, April 22, 2007: Nassim Taleb

29

Prediction for Brent in December 2010 - Consensus

30

Reality was very different

31

This happened……

32

Black Swans has formed history

A “man” walks on water - 32

X-ray - 1895

World War I - 1914

Penicilin - 1928

Data “machines” - 1941

The Big Bang Theory - 1965

Internet - 1983

Berlin Wall falls- 1989

Internet - 1983

Viagra - 1996

9-11- 2001

African Spring uprise - 2011

Tsunami Japan - 2011Source: Saxo Bank & Holberg Fondene

33

Black Swans has formed financial markets

End of Gold standard 1971

Stock market crash 1987

Iraq invades Kuwait

Saving- and Loan crisis 1991-92

Russia default 1998

Dot.came Dot.gone - 2000

World Trade Centre 2001

Lehman Banrupcty 2008

SNB starts FX war -2011

Source: Saxo Bank & Holberg Fondene

34

Macro Themes

Less is more Global imbalances will start reversing Unit Labor cost importance will fall. US will retake global growth lead from Asia Asia needs decade of ”transition” Energy prices will fall over next decade (Shale gas) Mandate for change will be coming via micro-economy

35

Macro Predictions(12-24 months)

EURUSD in 1.0000 (Growth and capital access) USDJPY in 100 (Yield pick-up) Crude to fall to 50 $ a barrel (Shall gas and lack of growth) Gold in 3.000 (Printing even more money) AUDUSD in 0,8000 Global yields to hit rock bottom inside next six months Stocks to perform during Pretend-and-Extend but trailing during

”early expansion” but next decade will be >+50 pct return USDZAR +5% and SARB to cut by 100 bps in 2013