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From: "Pil, Anton C" < To: "Pil, Anton C" Subject: GIO: Looking Forward to 2014 Date: Thu, 19 Dec 2013 20:01:28 +0000 Attachments: GIO_Holiday_Letter_2013.pdf Inline-Images: image003.png L;:,O313-0217 GIO banner for word & email.jpg Happy Holidays December 2013 As we head into year end, we wanted to take a moment to reflect on 2013 and what a tremendous year it has been. Given our high conviction in equity markets at the beginning of the year, we are very happy to see global equity markets up over 20%' driven by strength in the US and Japan, the two countries we were most confident in. In addition to our macro equity calls, our sector focused themes such as Internet Mobility 2.0 (content), healthcare, and defense contractors also worked well and have generally outperformed the market although some, such as being long Latin American equities in 2Q, did not. Lastly, while we didn't quite get a Great Rotation, US rates still rose as we had called for and we believe this mini-rotation out of cash in 2013 leaves room for more next year. Where does this leave us for 2014? We believe many of the same trends from 2013 will continue but given fairer valuations, we will be refining our focus to high conviction themes such as the ones highlighted below. Lastly, as we head into yearend we wanted to take a moment to wish everyone a happy holiday season and thank you for your continued partnership and trust in us. 2014 OUTLOOK THEMES UNDER CONSIDERATION FOR 2014 Equities over Fixed Income Life Sciences We continue to favor equities over fixed income but are We believe life science technologies are entering a new cycle expecting a more "normal" 10-15% return in developed market with increased uptake of genetic testing given declining testing equities in 2014 with potential for more from Japan if time and costs. Within medicine, the foundation for better momentum from reform continues. Our forecast incorporates diagnostics and analytics is currently being built and increased high single digit earnings growth plus the potential for some collection of data is driving demand for sequencing instruments. multiple expansion (driven by relative value versus fixed There are also growing applications outside medicine especially income). in fields such as food authenticity and materials testing. Developed Markets over Emerging Markets Airplane Replacement Continue to prefer developed markets over emerging markets. Consolidation among carriers has driven a return of pricing Macroeconomic conditions continue to solidify and improve power to the industry which is benefiting not just airlines, but across US and Europe (for now) and while central banks may aircraft orders given demand for improved fuel efficiency and not be as unified in 2014 with the Federal Reserve tapering in cheap funding costs. Additionally, we believe it makes sense to January, we believe central banks will generally remain focus on companies exposed to widebody planes which are accommodative with rates. That said, emerging markets seeing faster order growth than narrowbody planes. (outside some specific economies) are facing headwinds from US tapering and political risks in some countries. New China China is entering the next phase of its multi-decade transition. Mixed Rates Outlook While many focus on the shift from an export driven economy With tapering set to begin in January, we expect long end US to an internally driven one, we believe "internalization" extends rates to rise although with a watchful Fed, it may be more beyond just a growing middle class and services industry to gradual than what we had expected in 2013. No tightening in other agendas such as national identity and potential view. Across the Atlantic, however, there remains room for rates geographic expansion. We will be focused on investments that to decline further, particularly in the periphery as the ECB will benefit from this shift. EFTA00979205  remains accommodative. Lastly, given our concerns about emerging markets headwinds, we will be looking for Continuing Themes from 2013 opportunistic shorts in USD denominated emerging markets In Japan, we are sticking with Abenomics given a dedicated Sol debt or buy protection on emerging market bonds. and the likely increase in reform talk. Data proliferation is happening and we continue to focus on companies benefiting from increased investment in internet infrastructure and storage. Lastly, the US energy landscape is undergoing a multi- year transformation towards broad energy independence and we will continue to bring to you our best thinking in this space. Happy Holidays, Anton Pil • Based on year to date total return of the MSCI World Index through December 17, 2013. IMPORTANT INFORMATION Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.. Opinions and views expressed herein are those of GIO and may differ from the opinions expressed by other areas of including research. This material contained herein is not a product of the. Morgan Research Department and is not a research report, although it may refer to a research report or research analyst. This presentation should be reviewed in conjunction with U.S. research published by. Morgan Securities, LLC to the extent that such research exists. The opinions and ideas expressed herein do not take into account individual client circumstances, objectives and needs. Transactions in any securities that may be referenced herein may not be suitable for all investors. This has been prepared for information purposes only. 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