Special Edition | Ten For 2013

This material has been prepared by GSAM. We have leveraged the research insights of Goldman Sachs Global Investment Research in preparing the material provided below. The views and opinions expressed below are the views of Global Investment Research. GSAMs (or other departments or divisions of Goldman Sachs and its affiliates) views and opinions may differ from those expressed below. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

TEN FOR 2013: PERSPECTIVES FROM GOLDMAN SACHS GLOBAL INVESTMENT RESEARCH
1) Growth1,2
We expect below-trend annual growth of 2.0% in 2013, and an acceleration to 2.9% in 2014. Our forecast for near-term weakness but long-term strength is based on competing impulses from the private and the public sector. While we expect the fiscal cliff to be averted, we nevertheless forecast a step-up in the pace of fiscal retrenchment to outweigh the ongoing healing in the private sector. In the long-term, we see further strength in the private sector, led by the ongoing housing recovery, rising business investment, and financial rebalancing in the household sector.

Key Forecasts (Annualized %)

2011 Real GDP Growth1 Unemployment Rate1 Headline CPI1 Core CPI1 Fed Funds Rate1 2-Year Note Yield1 10-Year Note Yield1 S&P 5004 WTI Crude Oil 3 Brent Crude Oil 3 Gold3 Copper3 Dollar/Euro1 Yen/Dollar1 1.8% 8.5% 3.1% 1.7% 0.10% 0.24% 1.88% 1258 $99 $108 $1565 $7601 1.30 77 2012 2.3(f) 7.8% 1.8% 1.9% 0.10% 0.25% 1.76% 1426 $92 $111 $1675 $7931 1.32 87 F2013 2.0% 7.6% 2.2% 1.8% 0.10% 0.40% 2.20% 1575 $99* $105* $1800* $8000* 1.40 80 F2014 2.9% 7.0% 1.7% 1.8% 0.10% .60% 2.75% 99+ 105+ $1600+ $7000+ 1.40 80

2) Employment1
Data from the labor market continues to suggest that most of the unemployment we see is cyclical rather than structural. By our estimates, employment is about 4% below its potential level, and the unemployment rate will fall only slowly as more workers rejoin the labor force. This is likely to keep wage growth very subdued.

3) Inflation1
Despite the Feds easy monetary policy, we continue to see an environment of ample spare capacity and wage containment that keeps the inflation picture benign. We expect inflation to remain slightly below the Feds 2.0% target.

4) Federal Reserve Policy 1

With high unemployment and limited inflation, accommodative policy should continue for the foreseeable future, including purchases of MBS and longer-term Treasuries of around $85 billion/month and a move to outcome-based forward guidance.

2013-2016 US Economic Forecast1

GDP 4% 3% 2% 1% 0% 2013 2014 2015 2016
Source: GS Global ECS Research
2.0% 2.9% 3.2%

Unemployment 8%
3.0% 7.6% 7.0% 6.5% 6.2%

Headline CPI 3.0%

2.2% 2.0% 2.0%

5)

Housing6
The upside surprises in both homebuilding and home prices have been large and persistent. The depressed level of housing starts has eliminated a significant share of the excess supply, and the normalization of household formation now underway foreshadows substantial further gains in homebuilding.

6% 4% 2% 0%

2.0% 1.0% 0.0%

1.7%

6) Energy

3,7,8

The shale revolution is changing the global energy landscape, gradually loosening the oil price constraint that has previously risked choking off global recovery. Benefits from the structural stabilization of the energy market include: 1) backwardated curves that improve the carry from owning oil indices, 2) comparative advantage for energycentric manufacturing, and 3) economic gains from energy independence, job creation, and current account improvement.

2013

2014

2015

2016

2013

2014

2015

2013 Total Return Expectations

20% 15% 10% 5% 0% -5% S&P 500
Source: GS Global ECS Research 2.4%

Rates 14.4%
11.9% 5% P/E Expansion 7% EPS Growth

Yield

Risk/Price

7) S&P

5004,5

We recommend pro-risk allocations with an overweight to equities given our 2013 S&P 500 target of 1575. We expect 2013 top-down EPS of $107 and P/E multiple expansion to 13.8X from 13.3X. There are policy risks of being early, however, these risks should be viewed as temporary.

7.9%
3.4% 5.7% -1.1%

1.6%
1.4% 1.4% -1.1%

-1.1%
0.6% -1.7%

8) Interest Rates and Credit9,10

We anticipate steeper curves in major government bond markets in 2013 with the 10year Treasury ending the year at 2.20%. In spread sectors, we expect modest spread tightening and a limited default environment with high yield defaults edging up to 3.8% in 2013. We see re-leveraging as a top risk.

High Yield

Investment Grade

5-year UST

9) Currency11
Assuming no rise in risk aversion and strict inflation targeting by global central banks, we see a period of USD weakness, EUR rebound, and solid EM FX results. Over the long-term, our expectation for Dollar weakness is supported by persistently large twin deficits and the easy monetary policy stance of the Fed.

Stocks Up, Rates Too

1800 1600 1400 1200
S&P 500 (left axis) 10-Year Treasury (right axis)

Forecast
1550 1450 1.9% 2.0% 1575 2.2%

5% 4% 3% 2% 1%

10) Commodities3
While tempting to declare the end of the commodity supercycle, long-term stability does not prevent near-term shortages. As the economy improves into 2H2013, we expect positive carry to emerge as a meaningful contributor to investment returns despite our view for more stable longterm prices. Gold should reach a cyclical peak in 2013 as an improving growth recovery outweighs Fed balance sheet expansion.

1000 0% Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13
Source: GS Global ECS Research

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2016

Special Edition | Ten For 2013

This material has been prepared by GSAM and is not a product of Goldman Sachs Global Investment Research. The views and opinions expressed may differ from those of Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.

GOLDMAN SACHS ASSET MANAGEMENT The potential for yield normalization anchors our strategic view
Our positive outlook on equities is based on the expectation that the spread between the S&P 500s earnings yield (inverse of forward P/E ratio) and the US 10-Year Treasury yield begins to revert to its 10-year trailing average. We anticipate that the S&P 500 price change closes half the gap and the remainder closes due to changes in bond yields. 12 10 8 Yield (%) 6 US 10-Year Yield 4
Underweight Duration

S&P 500 Earnings Yield (E/P)

As the equity earnings yield converges once again with the 10-Year Treasury yield, we believe investors should:
Overweight Equity

2 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Overweight Equity
Rising Dividend Equity Long-term investors should increase core equity exposure Rising dividends have historically generated better riskadjusted returns than high dividend equities or S&P beta Low downside capture is essential in current macro setting High yielding and defensive equities appear expensive, sector concentrated, and exposed to policy risk Small and Mid Cap Growth Macro clarity could drive corporate willingness to redeploy cash; small and midcaps well-positioned for a lift in M&A Recovering equity markets often benefit styles that have a high degree of company differentiation but limited coverage Supportive relative valuation as segment has lagged Any flow reversal from large cap could amplify results

Underweight Duration
Short Duration Municipals Low duration limits interest rate sensitivity Short end of muni curve anchored by current Fed policy Positive state revenue trends and net negative supply Attractive tax equivalent yields and comparative ratios Uncertain tax legislation, though marginal rates likely moving higher Unconstrained Fixed Income May de-emphasize duration; potential to be short rate risk Global market exposure diversifies risk profile and expands alpha opportunity set Dynamic risk budgeting evolves with macro and idiosyncratic events Potential overlay of top down strategies such as country, currency, and sector rotation

Source: I/B/E/S, FirstCall, FactSet, GSAM, and Goldman Sachs Global ECS Research. As of 11/30/2012.
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Special Edition | Ten For 2013

GENERAL DISCLOSURES
The following disclosures apply to the Goldman Sachs Global Investment Research content found on page 1 of this piece: The views and opinions expressed are of Goldman Sachs Global Investment Research and is not a product of GSAM. The views expressed may differ from those of the GSAM or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Global Investment Research has no obligation to provide any updates or changes. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. The views and opinions expressed under Ten for 2013 Summary are of Goldman Sachs Global Investment Research and is not a product of GSAM. The GSAM and Goldman Sachs Global Investment Research views may differ from each other or other departments or divisions of Goldman Sachs and its affiliates. This information may not be current and Global Investment Research has no obligation to provide any updates or changes. The economic and market forecasts presented herein are provided for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. The following disclosures only apply to the Goldman Sachs Asset Management content on page 2 of this piece. This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research. The views and opinions expressed may differ from those of the Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. This presentation is provided for educational purposes only and should not be construed as investment advice or an offer to sell or the solicitation of offers to buy any Goldman Sachs product or service. In the event any of the assumptions used in this presentation do not prove to be true, results are likely to vary substantially from the examples shown herein. The information provided herein should not be construed as providing any assurance or guarantee as to returns that may be realized in the future from investments in any asset or asset class described herein. The opinions expressed in this presentation are those various authors, and do not necessarily represent the opinions of Goldman Sachs. The investments and returns discussed in this presentation do not necessarily represent any Goldman Sachs fund, separate account, or product. The information contained in this presentation is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations. This presentation makes no implied or express recommendations concerning the manner in which any clients account should or would be handled, as appropriate investment strategies depend upon the clients investment objectives. This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client. This information does not represent any Goldman Sachs product. Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The economic and market forecasts presented herein are provided for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without Goldman Sachs Asset Managements prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Risk Considerations Special risks are inherent in international investing including those related to currency fluctuations and foreign, political, and economic events. All investing involves risk. Equity securities are more volatile than bonds and subject to greater risks. Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities. Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets. An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Corporate bonds offer a high yield compared to some other investments, but is subject to the risk the corporate issuer will default on its debt obligations. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. Source: 2013 and 2014 estimates US Economics Analyst" Issue 12/52 December 28, 2012. Under 2012 and 2013 Forecasts, GDP Growth and CPI are expected averages for the entire year. All other numbers are year-end forecasts. 2 Source: Global Economics Weekly: Top Trades for 2013" Global Economics, Commodities and Strategy Research December 12, 2012. 3 Source: The Old Economy Renaissance: 2013-2014 Issues and Outlook" Global Economics, Commodities and Strategy Research December 5, 2012. 4 Source: GOAL :Adding risk: Upgrading equities to overweight, downgrading cash Global Economics, Commodities and Strategy Research November 30, 2012. 5 Source: US Weekly Kickstart: Money flow: forecasting the demand for shares and corporate uses of cash in 2013" Global Economics, Commodities and Strategy Research December 14, 2012. 6 Source: US Daily: A Retrospective on 5 Questions for 2012" Global Economics, Commodities and Strategy Research December 11, 2012. 7 Source: Global Viewpoint: Top Ten Market Themes for 2013 Global Economics, Commodities and Strategy Research November 28, 2012. 8 Source: Global Economics Weekly: The shale revolution and the global economy Global Economics, Commodities and Strategy Research December 5, 2012. 9 Source: The Credit Line: 2013 HY forecasts: tighter spreads, low defaults Global Economics, Commodities and Strategy Research December 7, 2012. 10 Source: Fixed Income Monthly: Themes for 2013: Steeper Curves and Seniority Shifts" Global Economics, Commodities and Strategy Research December 7, 2012. 11 Source: The Global FX Monthly Analyst: Long-term FX Outlook: Fair Value, BoP and Country specifics" Global Economics, Commodities and Strategy Research December 14, 2012 * 2013 price targets for commodities and currencies represent the 12-month forecasts as of December 2012. + 2014 price targets for commodities and currencies represent average price during the 2014 calendar year. 2013 Goldman Sachs. All Rights Reserved. Date of First Use: December 21, 2012. 88719.OTHER.OTU SPMKTPULSE 12-12
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