RESEARCH

13 December 2010

GLOBAL MACRO SURVEY Fiscal issues to prevail in 2011

More than three out of five institutional investors believe that fiscal issues will prevail in 2011, according to our inaugural Barclays Capital Global Macro Survey, which captured the views of more than 2,000 institutional investors on the outlook for 2011. Among the respondents, which included hedge funds, money managers, proprietary trading and corporate trading desks, 37% cited increasing concerns about advanced-economy fiscal issues and a further 25% cited a euro-area crisis as the key themes to dominate financial markets in 2011. Fears of asset price bubbles and inflation seem to have dissipated somewhat, with only one in six (17%) citing them as concerns in 2011. Despite the focus on fiscal issues, only 4% of clients surveyed believe that a fullfledged euro-area crisis, with a break-up of the EUR, is a likely outcome suggesting that an overwhelming majority think the euro area will be able to pull out of the crisis. Indeed, more than 50% of investors say that the impact of the sovereign debt crisis on EUR over the next quarter will be modest, as clients expect the situation to deteriorate but remain under control. Moreover, 56% of investors believe that the European sovereign problems will either remain contained within the periphery, or affect banks with limited implications outside of financials. 57% of respondents believe that the end game of the peripheral debt crisis will be a bailout of countries other than Greece, while only one in three are expecting a default/restructuring of at least one peripheral sovereign. We agree with these findings and believe that at least in 2011 a European default is unlikely (even if it is difficult to be categorical given the fluidity of the situation). Still, respondents who believe that it makes sense to be short Italy and Spain outnumber those who believe it is better to be long those names by a ratio of 2 to 1. The U.S. is set to experience a period of below-trend growth, according to 86% of respondents. Among them, 55% believe that the U.S. will not experience a new round of quantitative easing, while 31% believe that the below-trend growth will lead to QE3. Investors expectation of below-trend growth stands in contrast to the consensus view among economists that growth will be between 2.6% and 2.8% in 2011. This suggests that either investors have a more bearish view of 2011 growth than economists, or, more likely, they may be overestimating U.S. trend growth (which in our view is now 2.25%). Indeed, fewer than 8% of respondents subscribe to our above consensus view that private demand will pick up and generate growth north of 3% in 2011. Still, in line with the improved economic data following the summers soft patch, fewer than 6% of investors expect a double-dip recession in the U.S.
Piero Ghezzi +44 (0) 20 3134 2190 piero.ghezzi@barcap.com

Global Macro Survey Results Macro Equities Credit Rates Foreign Exchange Emerging Markets 3 5 7 9 11 13

About the Global Macro Survey The Barclays Capital Global Macro Survey was launched on 29 November and captured the views of 2,007 participants who responded to a questionnaire on Barclays Capital Live. Among the respondents, 30% were EM and FX investors; the remaining 70% were almost equally divided between equities, rates and credit. All respondents were asked to answer seven global macro questions. After that, investors were asked to answer the questions relevant to their asset class of interest.

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 14

Barclays Capital | Global Macro Survey

39.5% of respondents believe that the Fed is making a policy mistake by having monetary policy that is too easy, while an almost equal number (40.6%) say that it is the ECB that is making a policy mistake by being too hawkish. The divide between investors is symptomatic of the uncertainty about the eventual effectiveness of the policy tools available to policymakers. Interestingly, only 13% of investors believe that all three central banks the FED, the ECB and the BoE will be hiking by the end of 2011, compared with 48% who believe that none will be hiking next year1. Investors are also almost evenly divided on the effect of QE2 on the USD over the next few months: 45% believe that QE2 is unlikely to have a large impact on the USD as the Fed will not telegraph a change in course in the near future, while 37% think that it may be mostly negative on the dollar as a weak dollar is part of the Feds strategy. The survey suggests that technicals are favorable. More than 30% of investors say they have light exposure, compared with only 13% who indicate they are running large (10%) or at limit (3%) exposures. Interestingly, however, almost 20% of investors believe other investors are running large or at limit exposures. The asset classes of choice in 2011 are equities (40%) and commodities (34%). Fewer than 10% expect USTs to outperform. Among equity investors, the majority believes the main catalysts for a potential correction are either a deterioration of the European periphery debt crisis (28%) or monetary tightening in China/EM (26%). Global FX investors like Asian EM (32%) and commodity currencies (27%). The overriding theme in EM appears to be growth 40% of investors in EM believe that the currencies and equity markets likely to outperform are those with strong growth stories regardless of carry and valuation. In addition, more than 50% of investors believe that assets that will do best will be those of high-growth Asia. This is consistent with the view that we have expressed in the past (Advanced Emerging Markets: The Road to Graduation) that high growth stories normally dont get fully priced in and hence there is a positive correlation between high growth and asset price outperformance. Accordingly, 60% of investors believe that global asset allocation into EM and EM economic outperformance are going to be the main EM market drivers in 2011. And in striking contrast with the past, only 4% of investors believe that political or policy-related events in EM will be a dominant factor in performance. When it comes to risks for EM performance, 46% of investors believe a significant China slowdown would rank first, well above the 19% of respondents who believe that it would be a European periphery debt crisis. In our view, the uniformity of positive views on EM (see The Emerging Markets Quarterly: A crowded consensus) is one of the reasons for taking some of the potential triggers very seriously.

Most of the client responses came before ECBs 2 December announcement that it will postpone tightening until conditions warrant such action.

13 December 2010

Barclays Capital | Global Macro Survey

MACRO
What do you expect the key theme for financial markets will be for 2011?
70% 60% 50% 40% 30% 20% 10% 0%
A sset-price bubbles and inflatio n glo bally Do uble-dip recessio n and disinflatio n in the US Euro -area crisis Impro ved risk sentiment Increasing co ncerns abo ut advanced eco no mies fiscal deterio ratio n QE3

What is the most likely outcome for the euro area fiscal issues in 2011?
70% 60% 57%

37% 25% 17% 12% 6% 3%

50% 40% 30% 20% 10% 0%

B ailo ut by EU/IM F o f peripheral co untries o ther than Greece Default /restructuring o f debt o f at least o ne peripheral so vereign Successful eventual return Full-fledged euro zo ne crisis with a break-up o f the o f peripheral so vereigns to capital markets EUR

33%

4%

6%

What is the most likely outcome for the US? Which asset will perform best in 2011?
70% 60% 50% 40% 30%
30% 70%

55%

60% 50% 40%

31%

40%

34%

20% 10% 0%
B elo w-trend gro wth leading to further po licy easing Do uble-dip recessio n P rivate demand picks up leading to sustainable gro wth Sustained perio d o f po sitive, but belo w-trend, gro wth witho ut further po licy easing

6%

8%

20% 10% 10% 0%

Co mmo dities Credit Equities High-quality go vernment bo nds P eripheral Euro pe go vernment bo nds

9%

7%

13 December 2010

Barclays Capital | Global Macro Survey

How would you characterize the size of positions you are currently running in terms of your risk limit or capacity?
70% 60% 50% 40% 31% 30% 20% 10% 10% 0%
A t Limit A verage Large Light

How do you believe that other investors are currently positioned in terms of their risk limit or capacity?
70%

56%

60% 51% 50% 40% 31% 30% 20% 10% 3% 0%

A t Limit A verage Large Light

16%

3%

For the remainder of the survey, please select one area that best describes your primary focus:
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
CREDIT EM EQUITIES FX RA TES

23%

25% 22% 18% 12%

13 December 2010

Barclays Capital | Global Macro Survey

EQUITIES
What factor was the top catalyst for the equity market rally from late August?
70% 60% 50% 40% 30% 19% 20% 10% 0%
Expectatio ns o f an extensio n o f the current tax rates Impro ving macro eco no mic o utlo o k QE2 Stro ng earnings The U.S. midterm electio ns

What is your outlook for equities for 1H11?

50% 45%

54%

40% 35% 30% 25% 20% 15% 10% 5% 0%

A bro ad range A co ntinued rally A much larger co rrectio n A small (appro ximately 1 0%) co rrectio n A tight range

28%

25% 17%

25%

19% 6%

4%

2%

What do you view as the most significant risk or catalyst for a correction?
60% 50% 40% 30% 20% 10% 10% 0%
Chinese & EM mo netary po licy tightening o wing to rising inflatio n Euro pean so vereign crisis reignites P ublic po licy M acro data deterio ratio n i.e. stalemate leading to do llar crisis unemplo yment rises to 1 0% Weakening co rpo rate earnings

What sectors do you expect to perform best in 1H11?

70% 60% 50% 44%

26%

28% 20% 16%

40% 30% 20% 10% 0%

Defensive secto rs Early stage cyclical High yielding secto rs Late stage cyclical secto rs co nsumer secto rs industrials, discretio nary, energy financials Stro ng develo ping wo rld gro wth beneficiaries materials, techno lo gy, energy

16%

13%

12%

15%

13 December 2010

Barclays Capital | Global Macro Survey

Which factor is most bullish for US equities for 2H11?

70% 60% 50% 40% 30% 20% 10% 0%
A ll o f the abo veEarnings gro wth No ne o f the Increasing Impro ving Fed QE purchases and macro eco no mic dividends and abo ve equities are go ing to buybacks gro wth the po rtfo lio underperfo rm fo r rebalance effect so me o r all o f the reaso ns cited previo usly o r o thers we have no t mentio ned Valuatio n

22% 8% 12%

26% 11% 12% 8%

13 December 2010

Barclays Capital | Global Macro Survey

CREDIT
Where do you expect CDX IG OTR to end 1H 2011 (currently 93; range YTD 76-131)?
40% 35% 30% 25% 20% 15% 10% 5% 0%
<80 >1 20 1 05-1 20 80-95 95-1 05

Which of these strategies is likely to generate the highest excess returns in 2011?

37% 32%

50% 45% 40% 35% 30% 27% 17% 20% 25% 20% 15% 10% 36%

18%

7%

6%

5% 0%
Increasing duratio n to take advantage o f steep credit curves M o ving do wn in credit quality M o ving up in credit quality Sho rting event-risk candidates

By the end of 2011, the European sovereign crisis will

Where do you expect financial spreads to be with respect to industrials in six months (currently 63bp wide; YTD range 48-98bp wide)?
40%

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

47% 34%

35% 30% 25% 23%

30% 27%

8% 3%
have affected the have been the spreads o f catalyst fo r peripherals and underperfo rmance banks, with few o f Euro pean credit implicatio ns o utside acro ss secto rs financials have caused widespread underperfo rmance o f credit acro ss regio ns have dissipated witho ut majo r implicatio ns fo r markets

9%

20% 15% 14% 6%

have put pressure o n peripherals, witho ut affecting the rest

10% 5% 0%
Co mpress by 1 020bp

Co mpress by 20+ bp

Remain in a range +/- 1 0bp

Widen by 1 0-20bp

Widen by 20bp+

13 December 2010

Barclays Capital | Global Macro Survey

Given the current market environment, what is the most attractive part of the bank capital structure?
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Co mmo n Sto ck Depo sits Senio r Debt Sub Debt Tier 1

43%

14%

16% 13%

14%

13 December 2010

Barclays Capital | Global Macro Survey

RATES
Who is most likely to make a policy mistake? Which of these - the Fed, the BoE and the ECB - do you expect to start hiking in 2011?
80% 70%
41% 40% 39%

60% 50%

60% 50% 48%

30% 20% 10% 0%

The B o E by being behind the curve o n inflatio n The B o E by no t do ing The ECB by QE2 tightening po licy to o quickly The Fed by do ing to o The Fed by no t do ing much QE2 eno ugh QE2

40% 30%
8% 7%

20% 10% 0%

5%

13%

11%

12%

15%

A ll three will be hiking B o th the B o E and the No ne o f these will be by end 201 1 ECB will be hiking hiking in 201 1

The B o E will be the o nly o ne to hike

The ECB will be the o nly o ne to hike

How much QE2 will the Fed do?

70% 60% 50% 40% 30% 20% 10% 3% 0%
1 000bn 2000bn o r mo re 600bn, as anno unced Less than 600bn

From here, what is the best trade for 2011 in terms of global rates?
50%
57%

45% 40% 35% 30% 25% 34% 28%

27%

20% 15%
13%

17% 11% 10%

10% 5% 0%
Curve flatteners in the US, UK and euro Lo ng Germany o utright o r vs US Lo ng inflatio n breakevens everywhere Lo ng US rates o utright o r vs euro Sho rt gilts/UK rates o utright

13 December 2010

Barclays Capital | Global Macro Survey

What is the best trade in US rates?

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
1 0s/30s steepeners Lo ng M B S Lo ng o utright, as 1 0y rates will trade belo w 2% Sho rt acro ss the curve Swap spreads wideners

What is the best trade in European rates?

70% 60%
34%

50% 40% 35%

20% 17% 13% 17%

30% 20% 10% 0%

Lo ng Italy and Spain Lo ng lo ng-end German rates, as the B und yield will trade belo w 2% Sho rt 1 rates 0y o utright Sho rt Italy and Spain Swap spread wideners

15%

17%

19% 14%

13 December 2010

10

Barclays Capital | Global Macro Survey

FOREIGN EXCHANGE
What do you think the most underpriced risk for G10 FX is: What is the most likely effect on the EUR of the sovereign crisis over the next quarter?
70% 60% 53%

40% 35% 30% 25% 20% 15% 10% 5% 0%

Chinese gro wth mmo dity prices Currency Co Euro area Geo po litical crisis ne o f the abo ve USD crisis No slo ws sharply increase quickly war/pro tectio nism blems escalate pro

26%

50%

25%
40% 30% 21% 14% 1% 0%
M o destly negative - Neutral - it matters No thing - it do es no t P o sitive - wo rries will the situatio n will but there will be little affect the value o f lessen deterio rate but news o ver the next the currency remain under co ntro l quarter Very negative - the pro blems are much mo re serio us than reflected in prices

13% 9% 8% 5%

13%

20% 10%

11%

What is the most likely effect on the USD of Fed policy over the next quarter?

Which currency grouping offers the best risk-reward over the next quarter as a buy?
40% 32% 30% 20% 10% 9% 9% 9% 27% 14%

70% 60% 50% 40% 30% 20% 10% 0%

M o destly negative Neutral the Fed is P o sitive US gro wth Very negative a a weak USD is part o f unlikely to change its will mean that the weak USD is the the Feds strategy if plans o ne way o r the Fed do es no t need primary sho rt-term the USD appreciates o ther o ver the next to meet its current go al o f Fed po licy, it will send mo re few mo nths planned purchases and what the Fed do vish co mments wants, the Fed gets Very negative but because the market lo ses faith in US mo netary po licy, no t because the Fed wants a very weak USD

45% 37%

6%

9%

4%

0%
A sian EM the engine o f gro wth Co mmo dity Euro pean G4 (USD, EUR, LatA m EM Safe havens currencies currencies JP Y, GB P ) to o many o f the plus (JP Y, CHF, USD, lo o se mo netary o utside the EUR much is made o f sides o f A sia but EUR) tro uble po licy and stro ng the peripheral structural witho ut the awaits glo bal gro wth will pro blems will pro blems valuatio n do minate divert Euro pean co ncerns funds to o ther parts o f the co ntinent

13 December 2010

11

Barclays Capital | Global Macro Survey

Which currency grouping offers the best risk-reward over the next quarter as a sell?
40% 30% 20% 9% 10% 0%
A sian EM China blo ws up A sian EM to o much is priced in Co mmo dity currencies gro wth will slo w and they are likely to be the primary lo sers Euro pean currencies gro wth will co me last to Euro pe, a weak euro area will depress all Euro pean currencies G4 (USD, EUR, LatA m EM a Safe havens (JP Y, CHF, weak US and JP Y, GB P ) USD, EUR) co ncerns just lo o k at lo o se abo ut capital their mo netary inflo ws eco no mies, po licy and do minate co mpare and stro ng glo bal co ntrast with gro wth will o thers dampen fears

28%

27% 17%

11% 5%

3%

13 December 2010

12

Barclays Capital | Global Macro Survey

EMERGING MARKETS
What do you expect will be the dominant driver of EM asset market performance in 2011?
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

On a risk-adjusted basis, what EM asset market is positioned to perform best in 2011?

50%

37%

45% 40% 38%

21% 11%

23%

35% 30% 25%

4% 4%
P o litical o r po licy-related events in EM

25% 18% 13% 6%

20% 15%

A sset-price bubbles

EM eco no mic Co mmo dity price sho cks, o utperfo rmance inflatio n and EM mo netary tightening

Glo bal asset allo catio n into EM

M o netary-po licy no rmalizatio n in industrial eco no mies

10% 5% 0%
Co rpo rate credit Equities

External debt

Fo reign Exchange

Lo cal currency debt

What region is likely to outperform in 2011?

60% 52% 50% 40% 30% 20% 10% 0%
A frica A sia EM EA Latin A merica

What will be more important in 2011?

60% 51% 50% 40% 49%

26% 16% 6%

30% 20% 10% 0%

Getting the asset right Getting the co untry right

13 December 2010

13

Barclays Capital | Global Macro Survey

What is the biggest downside risk to EM asset markets in 2011?

60% 50% 40% 30% 23% 20% 10% 0%
Co mmo dity price Euro pean debt crisis P o litical pro blems in sho ck and inflatio n EM Significant slo wdo wn in China Weak industrialeco no my gro wth

In EM FX, what is your highest conviction long?

50% 45%

46%

40%

40% 35% 30% 25% 20% 23% 20% 11% 7%

19%

15% 10%
6% 6%

5% 0%
Currencies where autho rities are less inclined to impo se capital co ntro ls Currencies with high Currencies with high beta to glo bal risk carry, even where facto rs valuatio ns are stretched Currencies with reaso nable valuatio ns, even if carry is limited Stro ng gro wth sto ries, regardless o f carry o r valuatio n

In EM external debt, what is your favourite long position?

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Co rpo rate credit High quality, liquid so vereign credits High-yield so vereigns Smaller, o ff-the-run so vereigns

37%

27%

26%

10%

13 December 2010

14

Analyst Certification(s) I, Piero Ghezzi, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgibin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.

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