Lazard Insights
Global Outlook for 2016 Ronald Temple, CFA, Managing Director, Co-Head of Multi Asset and Head of US Equity
Summary • We expect the Fed to continue to gradually increase the federal funds rate to 1.50%–1.75% by the end of 2017 even while the ECB and BoJ sustain or further ease their highly accommodative monetary policies. • We believe US oil production will decline further in 2016, which will likely contribute to the stabilization, if not a rebound, of oil prices. • We expect China to be a source of volatility as authorities are increasingly challenged by the twospeed economy—services-oriented provinces growing rapidly but industrial-oriented provinces in recession. We expect greater monetary policy stimulus and a range of fiscal incentives. • Ongoing geopolitical situations may have a major impact in 2016 as well as elections where the leadership of important economies can change. • Valuations have reached levels where security selection is particularly important as prices are not broadly attractive across a range of asset classes. We expect liquidity to generally be favorable through the next six to twelve months and sentiment to be positive for capital markets.
While there are always many factors that drive the economy and markets, in 2016 we believe the most critical topics will be global monetary policy, oil prices, China, and political and geopolitical uncertainty. In this paper, we will review and discuss the investment implications of each of these topics.
Global Monetary Policy In terms of monetary policy, it is best to start with the Fed now that the Federal Open Market Committee (FOMC) has initiated the first rate increase in nine years. The futures market expects the federal funds rate to average just under 80 basis points (bps) in December 2016 and just over 1.25% in December 2017 (Exhibit 1). The gray dots in Exhibit 1 show the level of the median “dot” from the dot plot that is released at every other FOMC meeting. However, this is Exhibit 1 Markets Expect a Very Cautious Fed (%) 3.5 3.0
Fed funds rate implied by fed funds futures Median FOMC ”dot”, December 2015
2.5 2.0 1.5 1.0
Lazard Insights is an ongoing series designed to share valueadded insights from Lazard’s thought leaders around the world and is not specific to any Lazard product or service. This paper is published in conjunction with a presentation featuring the author. The original recording can be accessed via www.LazardNet.com.
0.5 0.0 Dec 15
Jun 16
Dec 16
Jun 17
As of 17 December 2015 Source: Bloomberg, Chicago Board of Trade
Dec 17
Jun 18
Dec 18
2
The economic backdrop that is likely to lead to this base case scenario is one with real GDP growth of 2% to 2.5% in 2016 and 2017. We believe this level of growth will be supported by the broadening of the recovery to be more inclusive of the middle class on the back of a strong job market, lower energy prices, and improved access to credit for the families that were hurt the most by the housing crisis. We expect inflation to remain tame as stronger wage growth is partially offset by lethargic commodity prices. Wage growth will likely accelerate from the stubbornly low 2% level, seen through much of the last few years, to an approximate 3% rate as private sector payroll growth remains at a pace close to 200,000 per month. This strong job growth should draw in more workers, increasing the labor force participation rate and the employment-to-population ratio toward more sustainable levels. In the euro zone we believe extremely accommodative monetary policy will extend well into 2017. On 3 December the European Central Bank (ECB) disappointed markets when it announced it was reducing the interest rate on the overnight deposit facility by 10 bps to negative 30 bps and extending its asset purchase program from September 2016 to at least March 2017. The ECB also announced it would begin reinvesting principal payments on securities as they mature. In spite of an initial sell-off, interest rates in the euro zone remain at unprecedented levels. In fact, as of mid-December, an investor had to buy bonds with a maturity of at least six years in Germany to earn a positive yield. Even in Portugal, sovereign borrowing rates are below 1% out to four to five years in maturity.1 As of 15 December approximately one-third of euro zone government debt had a negative yield. In Germany, nearly 60% of all government debt had a negative yield (Exhibit 2). In 2016, we expect the ECB
(%) 60 40
Euro Zone Outstanding:
Portugal
Malta
Spain
Italy
Ireland
Euro Zone
Finland
Belgium
Austria
0
France
20
Luxembourg
Our base case scenario, as discussed in Beyond Lift-Off: Scenarios for the Federal Funds Rate, has not changed materially since June. We projected lift-off on 16 December 2015, which we have now seen come to pass. Beyond that date, we expect to see a 75 bps rate increase in 2016 and an additional 75 bps in 2017 before the rate tightening ends with the federal funds target range at 1.50% to 1.75%. The only change in our expectations since June is that the peak rate during this cycle is likely to be slightly lower than we previously forecast and could take a couple of quarters more to be reached.
Share of Government Bonds with Negative Yield by Amount Outstanding
Netherlands
The divergence between the FOMC dots and the futures market likely reflects three primary differences between the views of FOMC forecasters and the debt markets. Specifically, debt investors appear to believe that the US economy is less resilient than the FOMC believes; there will be a policy mistake such that the FOMC cannot execute on its own projections; and/or non-US risk factors could undermine growth and force the FOMC to adopt a more dovish policy.
Exhibit 2 One-Third of Euro Zone Government Debt Has Negative Yields
Germany
not a forecast of where the federal funds rate will actually end at the close of each year but, rather, it is a combination of an economic and philosophical forecast of where the rate would be if optimal monetary policy were pursued. These projections for the federal funds rate are based on individual FOMC participants and represent the value of the midpoint of the projected target range for the federal funds rate at the end of the specified calendar year or over the longer run.
Total: €7.6 trillion Negative Yield: €2.5 trillion
As of 15 December 2015 Source: Bloomberg
to sustain its purchases of government debt, continuing to absorb a significant portion of the available supply. Although the ECB is not legally allowed to buy new issues from governments, it can buy any government debt on the market that has a yield of at least -30 bps as long as it does not accumulate more than 33% of the issue. We do not expect to see the ECB raise interest rates from the current negative level at least until 2017 as it tries to prod inflation rates toward the target of 2%. The Bank of Japan (BoJ) has been the most aggressive central bank. As of September 2015, the BoJ’s assets exceeded 70% of GDP. In comparison, the Fed’s assets were only 25% of US GDP and the ECB assets were only 25% of euro zone GDP.2 We expect the BoJ to remain aggressive through 2016, growing its balance sheet and expanding the securities it will purchase beyond Japanese government bonds, including more ETFs and other equity securities. While negative rates could become a reality in Japan, we do not believe the BoJ will resort to this lever in 2016, unless there is an emergency situation given how politically unpopular such a move would be with households sitting on large deposit accounts. In regards to incremental easing in 2016, central banks might face more political challenges as inflation rates increase. We can forecast an increase in inflation (CPI) in the United States, euro zone, and in Japan largely as a result of the base effects of energy prices (Exhibit 3). Unless oil prices decline to, and stabilize at, a level around the $20s per barrel, we expect the year-on-year change in overall prices to be higher than those in 2015. In fact, in the United States, lower oil prices have subtracted over 1 percentage point from the most recent year-on-year inflation figures while in the euro zone and Japan the comparable figure has been almost 1 percentage point. We are not arguing that further central bank action will be precluded, but the criticism that would come from further easing when inflation is rising could be intolerable for central bankers, especially in the euro zone.
3
Will Oil Prices Stabilize? We believe global oil markets are getting closer to stabilization. Even though oil prices have collapsed since mid-2014, oil supply has actually increased by over 3 million barrels per day between the third quarter of 2014 and the third quarter of 2015 (Exhibit 4). Of this increase in supply, close to 1 million barrels per day came from Iraq while the United States and Saudi Arabia each generated an additional 700,000 barrels per day. These three countries accounted for twothirds of the incremental global supply. Over the same period demand rose, but only by 2.5 million barrels per day, increasing the excess supply—thus justifying 2015’s price decline. China represented onethird of demand growth for non-OECD countries, while the United States represented more than one-half of OECD demand growth. As it relates to supply, one of the biggest questions facing the oil market is whether the sanctions imposed on Iran will ultimately be eliminated. Iran’s oil minister has indicated that the country will be able to increase oil production by as many as 500,000 barrels per day as soon as the sanctions are eliminated and up to 1 million barrels per day within months of that date. Importantly, the International Energy Agency has estimated that Iran could have 38 million barrels of oil in floating storage as of the end of October 2015, though there is market speculation that some of the reported increase in Iraqi production might actually be Iranian oil being exported in violation of the sanctions that are still in place. Other wild cards in global oil supply include Libya where production has declined from 1.3 million barrels per day in early 2013 to only 400,000 barrels per day in 2015 and Saudi Arabia where production is at or near record highs. In the United States, oil supply is likely to decline. After representing over 80% of the global increase in oil production from 2009 to 2014, US oil capital expenditure (capex) declined by over 40% in 2015 while the oil rig count in the United States has declined by over 60% (Exhibit 5). Moreover, the collapse in rig levels foretells a decline in production as existing wells are depleted with no available alternative replacement source. In fact, US crude oil production has already declined since July 2015 from 9.6 million barrels per day to just below 9.2 million barrels per day in November 2015. Looking ahead to 2016, we expect US production to decline further, contributing to a likely stabilization in oil prices, if not the beginning of a rebound in prices. Importantly, this does not mean the pain in the energy industry is over. In fact, we expect to see a further 20% to 25% reduction in capex in North American oil companies in 2016 with negative effects spilling over to industrial companies that service the oil industry. That said, the supply reduction from the United States could be the beginning of the end of the oil price collapse.
Exhibit 3 Base Effects Will Lift Headline Inflation Measures in the Euro Zone, Japan, and the United States United States Contribution to YOY change in CPI (%) 4.0 2.0 0.0 -2.0
2013
2014
2015
Euro Zone Contribution to YOY change in CPI (%) 4.0 2.0 0.0 -2.0
2013
2014
2015
Japan Contribution to YOY change in CPI (%) 4.0 2.0 0.0 -2.0
2013 Energy
2014 Other Items
2015 CPI
US and Euro Zone as of November 2015. Japan as of October 2015. Japan data includes the effects of the April 2014 consumption tax hike. Source: Bureau of Labor Statistics, Eurostat, Haver Analytics , Ministry of Internal Affairs and Communications
Exhibit 4 Global Oil Supply Has Outpaced Demand Despite Low Prices Change, 3Q 2015 vs 3Q 2014 (mb/d) 3.40 United States
2.55 United States
Growth in China
1.70
The third major topic in 2016 is economic growth in China. For over two years, we have made clear that we believe China’s growth is going to decelerate more rapidly than many economists expect. In the third quarter of 2015, sentiment finally caught up with us and, in fact, reached levels that were too negative in terms of short-term expectations. Investor confidence was undermined by the equity
0.85 0.00
Rest of OECD
Rest of Non-OPEC
China
Iraq
Rest of Non-OECD
Saudi Arabia
Demand
Supply
As of 13 November 2015 Source: International Energy Agency
Rest of OPEC -0.02
4
market bubble and bust that occurred through the first half of 2015 and then by the surprise devaluation of the Chinese yuan in August. While August may have represented the nadir in market confidence related to China, we continue to expect much slower growth over the next five years. One major reason why investors lost confidence so quickly is due to the questions surrounding the accuracy of macroeconomic statistics being produced by China. In Exhibit 6, we show the Li Keqiang Index, which is composed of 40% weight to outstanding bank loans, 40% to electricity production, and 20% to rail freight volume and effectively presents a view of growth of the industrial economy in China. Growth, as measured by this index, has declined to 2% as of October, which stands in contrast with the 7% reported real GDP growth rate. This divergence is one reason why investors lost confidence as the old high frequency data series that had been considered reliable guides for GDP growth have lost some of their predictive power in an economy that includes an increasingly important services sector. The pain in the more industrial regions of China can be seen in yearon-year changes in nominal GDP. Of the 31 provinces in China, three saw nominal GDP shrink year-on-year to the third quarter of 2015 while two provinces had growth of less than 4%. Another six provinces have grown between 4% and 6%.3 These lower growth provinces have economies that are more reflective of the Li Keqiang Index than are the wealthier provinces where services have increased as a share of activity. Effectively, China has a two-speed economy. Exhibit 7 illustrates this divergence. The nominal growth in GDP in the secondary sectors, or the industrial economy, has slowed to 0%. In contrast, the services sector is growing 12% in nominal terms. Putting the entire economy together, nominal growth is about 7%. Yet again, the key story is that China is a country of two economies. Not only is the industrial economy no longer growing fast, it is not growing at all. At this point, it is not clear how sustainable the services growth is and what the ramifications of the industrial recession will be on the rest of the country. What will China do to manage this transition? In 2016, we expect to see more monetary policy stimulus in the forms of lower interest rates and lower regulatory reserve requirements. We also expect to see more local government financing-vehicle debt swapped into municipal debt which lowers debt servicing costs and better matches liabilities with assets. We also expect other incentives for consumption including those similar to what we have already seen. For example, in late September, China cut the tax on cars with smaller, more fuel-efficient engines in half— which almost immediately resulted in increased auto sales.
Geopolitical and Political Risks Have Intensified The fourth and final major issue in 2016 is political and geopolitical risk. Focusing on the political calendar, there are a number of situations in 2016 and 2017 where the leadership of important economies can change (Exhibit 8).
Exhibit 5 United States Oil Production May Finally Be Turning Negative United States Crude Oil Production and Oil Rig Count (kb/d)
(Rigs)
9,800
1,800 Rig Count [RHS]
9,200
1,200
8,600
600 Oil Production, Weekly Estimate [LHS]
8,000
0
Jan14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul15 Oct 15 As of 11 December 2015 Weekly estimates are subject to significant revision. Source: Baker Hughes, Bloomberg, US Department of Energy/Energy Information Agency
Exhibit 6 Measures of China’s “Old Economy” Have Collapsed Li Keqiang Index vs Real GDP YOY change (%) 30 Li Keqiang Index 20 10 Real GDP 0 2005
2007
2009
2011 40% 40% 20%
Li Keqiang Index consists of:
2013
2015
Outstanding bank loans Electricity production Rail freight volume
As of October 2015 Source: Bloomberg
Exhibit 7 Growth in China’s Service Sectors Has Held Up Nominal GDP Growth by Industry Sector YOY change (%) 30
Total GDP
20
Secondary Sectors Service Sectors
10 0 2005
2007
2009
2011
2013
2015
As of September 2015 Secondary sectors consist of mining & quarrying, manufacturing, utilities, and construction. Service sectors consist of all other industries excluding agriculture, forestry, fisheries, and secondary sectors. Source: Haver Analytics, National Bureau of Statistics
5
Regarding geopolitical risks, we have listed the most well-known questions facing global investors in Exhibit 9. One concern for us is that geopolitical risks appear to be at their highest level in years and yet investors seem to discount this risk. In particular, the tinderbox in the Middle East has become much more complicated in the last several years as the Syrian conflict has effectively been globalized. Beyond the localized impact of Syria, Europe continues to face an internal political crisis as a result of the flood of refugees seeking to escape Syria and other nations in political and economic turmoil. This crisis then also complicates how Europe addresses the unresolved Russian aggression in Ukraine. Put simply, these challenges have become increasingly entangled and complex, often leaving decisionmakers with few attractive policy options. We should note that not all geopolitical uncertainty is positive. The Trans-Pacific Partnership could still be approved in 2016 or 2017 and Cuba could be at the beginning of a liberalization.
Market Forecast How does this relate to investors? So far we have focused primarily on macroeconomic drivers of uncertainty. Clearly, when investing, we take into account multiple other factors beyond the macro economy. Among the primary considerations are valuation, liquidity, and sentiment. In Lazard’s Multi Asset team’s latest Market Forecast we evaluate the next six to twelve months and then forecast a probability of four different scenarios relative to each consideration. To understand how this forecast works, we can look at the US macro economy as an example. We look out six to twelve months and then forecast a probability of four different scenarios relative to potential GDP. For the United States, potential GDP can be considered as approximating 2% in real terms. In this case, we believe there is a 5% chance of slipping into an unforeseen recession in the next six to twelve months. There is a 30% chance of growing at a pace below 2%, a 60% chance of growing at potential, and a 5% chance of overheating. The resulting forecast is obtained from this probabilityweighted average. This approach is taken through each region as well as assessing valuation, liquidity, and sentiment. In summary, our global macro view is one of low growth, which is in line with the growth potential in the United States, Europe, and Japan and below the historical view of China’s growth potential. We recognize that valuations have reached levels where security selection is particularly important as asset prices are not broadly attractive across a range of asset classes, including commodities. We expect liquidity to generally be favorable through the next six to twelve months and expect sentiment to be positive for capital markets.
Exhibit 8 Key Global Election Dates Date
Country
Type
20 December 2015
Spain
Parliament
24 January 2016
Portugal
President
6–13 March 2016
Germany
Local and state elections
May 2016
Italy
Referendum on constitutional changes, municipal elections
5 May 2016
United Kingdom
London, Scotland, Northern Ireland, and Wales elections
July 2016
Japan
Senate
4–-18 September 2016
Germany
Local and state elections
18 September 2016
Russia
Parliament
8 November 2016
United States
President, Congress, State, and Local
March 2017
Netherlands
Parliament
April 2017
France
President
October 2017
Germany
Parliament
Autumn 2017
China
19th National Congress of the Communist Party of China
2017
United Kingdom
Referendum on EU membership
As of 8 December 2015 Some dates are tentative and still to be decided. Source: National sources and news reports
Exhibit 9 Well-Known Geopolitical Challenges Region
Issue
Americas
Brazil: potential impeachment Cuba: lifting of the embargo
Western Europe & European Union
Refugee crisis and EU border policy Brexit and EU cohesion Greece and peripheral Euro zone: pushback against austerity
Eastern Europe
Russia and Ukraine: continuing conflict Turkey: political crisis
Middle East & Northern Africa
Syria: civil war and ISIS Iraq, Libya, and Afghanistan: continuing conflict Iran: nuclear agreement and phase-out of sanctions
Asia
Trans-Pacific Partnership: push for ratification East China Sea and South China Sea: Chinese expansionism
A Closer Look at Equity Valuations
Oil Producers
Digging a bit more deeply into equity valuation, we can see that the US and European markets are trading at a meaningful premium to historical median forward price-to-earnings (P/E) ratios. Comparing to the last ten years, the United States ended November at a 2.5 multiple premium to the 10-year median while European equities
As of 8 December 2015
Fiscal stress
Source: National sources and news reports
6
traded at a 3.6 P/E premium to its 10-year median forward ratio. In contrast, the MSCI Emerging Markets and MSCI Japan indices are both about in line with historical levels (Exhibit 10). However, when looking at valuations it is important to consider the return on capital being generated by companies in each market. On this count, the United States generates a return on equity (ROE) well above the other regions at 14.8% versus emerging markets at 11.8% and Europe at 11.4%. Japan still lags at 8.8% but the trend has been improving in recent quarters. Part of the reason why the US equity market generates a much higher ROE and deservedly trades at a higher multiple is due to the market composition. When comparing global markets against each other, it is important to realize that the composition of each market is different and hence the valuation and ROE profile should be different. Consider technology, for example. The margins for the tech industry in aggregate are the highest of any sector and the growth potential is also higher considering the amount of innovation in the industry. In the United States, almost 21% of the S&P 500 Index is composed of technology companies while in Europe that figure is only 3.8% and in Japan it is 10.6%. On the opposite side of the coin, in a world that is deleveraging and where Basel 3 and Dodd–Frank have re-regulated banks, one would expect a discount valuation on financial firms that extend credit. In this case, 16.6% of the S&P 500 Index is in financials versus 22.6% of the MSCI Europe and 19.2% of the MSCI Japan indices.4 Within each market, there is also a differentiation in terms of the composition of the financials sector with banks representing a much larger portion of the European and Japanese financials sector weight than they do in the United States. In our view, the US valuation is justified against peers as well as against history as the composition of the market reflects a higher tech weight than it did in prior years and as the companies that are largest in the tech sector itself are increasingly generating exceptional margins and returns on capital. In the case of Europe, the strongest arguments for further valuation upside are the quantitative easing (QE) policies of the ECB and the fact that profit margins in Continental Europe have not yet returned to pre-crisis levels. For some sectors, we believe profits will not return to pre-crisis levels any time soon due to new regulations, specifically as it relates to financials, but for others we continue to expect upside in earnings that should make the valuation appear more attractive as we look further out on the calendar. In the case of Japan, if we continue to see better results coming from Abenomics and if corporate governance reforms sustain ROE improvements, we could see the further upside in the market. Last, in emerging markets, to the extent we see a reduction in fears over Fed policy now that lift-off is in the rearview mirror and if we see commodity price stabilization in 2016, we could see a floor under valuations. However, we should not expect to see all emerging markets behave in the same way as differentiation in economic and corporate profit performance is likely to diverge across countries more substantially as China’s economic growth slows in the years ahead and net commodity exporters to China suffer while net commodity importers benefit.
Exhibit 10 Valuations Not Cheap But Still Attractive Forward P/E (NTM) S&P 500 Index
MSCI Europe
MSCI Japan
MSCI Emerging Markets
Current
17.6
16.3
15.0
11.6
3 Months Ago
16.7
15.4
14.3
11.1
5-Year Median
14.8
12.9
14.5
11.0
10-Year Median
15.1
12.7
15.3
11.3
2.5
3.6
-0.3
0.3
S&P 500 Index (%)
MSCI Europe (%)
14.8
11.4
Current minus 10-Year Median Forward ROE (NTM)
Current
MSCI MSCI Emerging Japan (%) Markets (%)
8.8
11.8
As of 30 November 2015 Forward P/E is the Bloomberg estimate. Forward ROE is I/B/E/S consensus from FactSet. Forecasted or estimated data do not represent a promise or guarantee of future results and are subject to change. Source: Bloomberg, FactSet, I/B/E/S Consensus, J.P. Morgan
Conclusion As active managers, we do not buy or sell entire markets. Instead we buy individual securities that our analysis leads us to believe will be relative winners. In the environment we expect in 2016, with divergent monetary policies, potential for oil price stabilization, uncertainty around China’s level of sustainable growth, and geopolitical and electoral uncertainty, we expect to see increased dispersion in securities markets and improved opportunities for active managers to outperform the relevant benchmarks. Putting it all together, we see three primary objectives for most investors: inflation protection, income generation, and capital appreciation. In terms of inflation protection, we do expect higher reported inflation in 2016 due to base effects for oil. However, we do not expect to see a meaningful acceleration in core inflation beyond the current 1%–1.5%. Looking beyond 2016, we do not anticipate a substantial ramp in inflation rates for at least a few years given the deflationary forces we see in play globally. As it relates to income generation, this is much more challenging in 2016 given the low absolute level of rates we expect. Having said that, given the sell-off we have seen in high yield markets and in emerging markets debt in 2015, there are some very good opportunities for selective investment in the higher quality spectrum within high yield and in certain segments of the emerging debt markets. However, it is crucial to be active in these spaces as there are serious challenges facing the energy sector in the US market and certain economies and companies in emerging markets. As it relates to capital generation, we believe equity markets continue to be attractive on their own merits and especially relative to fixed income. In spite of our moderate expectations for real GDP growth
7
in the United States of 2%–2.5% and in the euro zone of around 1.5%, we believe S&P 500 Index earnings growth can approximate 6%–7%. In our base case, we expect P/E ratios to be stable at current premium levels due to the low absolute levels of interest rates and hence less attractive alternatives in fixed income. In our bull case, equity valuations could increase further on the back of QE in Europe and Japan and low interest rates which lead to lower discount rates for future earnings from equities.
Looking beyond the aggregate market level, we see good opportunities in concentrated equity strategies with high conviction. We also see advantages in global equity strategies that allow managers to nimbly take advantage of opportunities as they arise from global dispersion. We would also suggest considering small- and mid-cap strategies that can take advantage of inefficiencies driven by lower levels of coverage of these stocks. Although the timing of the optimal entry point is difficult to determine, we see emerging markets as being very well positioned for investors with medium- to long-term horizons presuming one engages the markets actively rather than passively to take advantage of differentiation in those markets.
This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management. Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a robust exchange of ideas throughout the firm.
Notes 1 Source: Bloomberg, as of 15 December 2015 2 Source: Bank of Japan, Bureau of Economic Analysis, Cabinet Office of Japan, European Central Bank, Federal Reserve, Haver Analytics, OECD, as of September 2015 3 Source: National Bureau of Statistics, as of September 2015 4 For sector weight data, Source: I/B/E/S Consensus, Lazard, MSCI, as of 30 November 2015
Important Information Published on 21 December 2015. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change. The securities and/or information referenced should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any of the referenced securities were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. 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