1. Asset Allocation Review & Outlook
June 2012
Koen Maes, Head of Asset Allocation Strategy & Funds
Nadège Dufosse, Asset Allocation Strategist

2. H1 2012: Strategy Review
Surprise on the upside in Q1 and support of the liquidity effect…
Supportive macroeconomic momentum and earnings revision
Peripheral stress eased with the two LTRO
Liquidity effect was the main performance driver
Central bank balance sheets continue to expand
3
Source : Bloomberg – Dexia Asset Management

3. Table of contents
I. H1 2012: Strategy Review
Surprise on the upside in Q1 and support of the liquidity effect
… weakening global context since April…
… while central banks balance sheets stopped expanding
Model score had deteriorated in Q2
Active management
II. Outlook
Somewhere between the best and the worst case
Deepening crisis in Europe
Risk has not become systemic yet
Historically high level of pessimism
Rapid and credible answer needed
Investors between hope and despair
Tail risk occurrence still possible
Can we believe in decoupling?
Longer term structural call for the US
Cyclical call for China
Compelling valuation for equities
Attractive long term entry points
Too much risk discounted on margins
Does the risk-free rate still exist?
III. Which strategy for H2 2012?
Growing dividend
Convertible bonds
IV. Conclusion
2

4. H1 2012: Strategy Review
… weakening global context since April...
Economic surprise indicator illustrates the turnaround in macroeconomic indicators, all the
regions disappointed:
Europe in harder recession as a consequence of austerity policies
Weak employment data in the US should weigh on consumption
Drop in Chinese macroeconomic indicator revived the fears of hard landing
4
Source : Bloomberg – Dexia Asset Management

5. H1 2012: Strategy Review
…while central banks balance sheets stopped expanding
After the second LTRO, ECB balance sheet stopped increasing
Lack of liquidity injection was concomitant with weaker fundamentals
Risk-off mode started with Emerging markets, then Europe
5
Source : ECB, Fed , Bloomberg – Dexia Asset Management

6. H1 2012: Strategy Review
Our model’s score has deteriorated in Q2, but is not yet at an alarming level
Our shorter term factors are negative (-0.6)
2.00 1400
1.50 1300
1.00 1200
0.50 1100
*
- 1000
-0.50 900
-1.00 800
sum of market action + risk appetite +
-1.50 earnings factors 700
MSCI world
-2.00 600
01/09/08 01/03/09 01/09/09 01/03/10 01/09/10 01/03/11 01/09/11 01/03/12
6
Source : Bloomberg – Dexia Asset Management

7. H1 2012: Strategy Review
Global Score Card
Macro: negative stance
Fundamental
Block Valuation: valuation remains attractive and is positive, considering long term expected return
Earnings Power: the Earnings Revision Ratio remains stable at 0.5
Dynamics
Market Action: fall due to the correction, and remains negative
Block
Risk Appetite: stable over the past weeks, has not reached a worrying level yet compared to last
summer’s level
Reversal Reversal Risk: no reversal risk identified today (based on several indicators and technical
Block analysis to identify a risk of trend reversal as technical divergences, excess momentum, put/ call
ratio, breath, sentiment,…)
Research Block Factor/Model Score Previous
Macro -1.50 -1.50
FUNDAMENTAL
Valuation 1.50 1.50
Earnings Power 0.50 0.50
DYNAMIX Market Action -1.5 -2.00
Risk Appetite/Flows -0.50 -0.50
REVERSAL Reversal Risk 0.00 0.00
Global Score -0.3 -0.40
7

8. H1 2012: Strategy Review
Active Management: we have adapted our exposure to the risk-on / risk-off mode
Neutral exposure equity/bonds in
the first part of the rally
Overweight equity from the end
of January until the end of March
(consolidation of the positive
momentum)
Then decrease of our equity
exposure (economic momentum
has turned more negative)
Negative stance on equities at
the end of April (deterioration of
the macroeconomic context and
aggravation of the crisis in the
Euro-zone)
Recently: reduction of our
underweight exposure to euro-
zone equities. Our core scenario
remains that a compromise will
be found in European
discussions
8
Source : Bloomberg – Dexia Asset Management

9. Table of contents
I. H1 2012: Strategy Review
Surprise on the upside in Q1 and support of the liquidity effect
… weakening global context since April…
… while central banks balance sheets stopped expanding
Model score had deteriorated in Q2
Active management
II. Outlook
Somewhere between the best and the worst case
Deepening crisis in Europe
Risk has not become systemic yet
Historically high level of pessimism
Rapid and credible answer needed
Investors between hope and despair
Tail risk occurrence still possible
Can we believe in decoupling?
Longer term structural call for the US
Cyclical call for China
Compelling valuation for equities
Attractive long term entry points
Too much risk discounted on margins
Does the risk-free rate still exist?
III. Which strategy for H2 2012?
Growing dividend
Convertible bonds
IV. Conclusion
9

10. Outlook: somewhere between the best and the worst case
Deepening crisis in Europe
European crisis has reached a non return point following Greek elections
“Grexit” not a taboo anymore, consequences not measurable
Contagion to Spain not manageable and will worsen if not rapidly stopped
10
Source : Bloomberg – Dexia Asset Management

11. Outlook: somewhere between the best and worst case
Risk has not become systemic yet, worst case not priced in
Lack of “panic” surprising, market drop progressive and well ordered in Europe
High differentiation between safer and riskiest assets in the first correction move
Our market indicators have not pointed out an excessively bearish behavior (risk appetite,
volatility)
11
Source : Bloomberg – Dexia Asset Management

12. Outlook: somewhere between the best and worst case
Despite a historically high level of pessimism
Surveys on the contrary show a historically high level of pessimism
Sell side indicator has reached its lowest level since 1998
Level of cash in the last Fund manager survey close to last year’s highest level
(september 2011)
Those are good contrarian indicators
12
Source : BoA Merrill Lynch

13. Outlook: rapid and credible answer needed
Investors between hope and despair, how long will their patience last?
QE expectations are integrated in investors’ assumptions
In the absence of improving fundamentals, market remains “liquidity addict”
Easing has started in China, favored by lower CPI data and last macroeconomic
indicators weakness
13
Source : Bloomberg – Dexia Asset Management

14. Outlook: rapid and credible answer needed
Investors between hope and despair, how long will their patience last?
QE3 expectations have increased in the US
Fiscal cliff and an anemic job market could be the trigger for further easing, maybe in
September
14
Source : Exane BNP Paribas – Dexia Asset Management

15. Outlook: rapid and credible answer needed
Investors between hope and despair, how long will their patience last?
In Europe, more easing could be necessary to support growth, but ECB answer will
come in last resort and will not be sufficient alone
A credible answer is now needed in Europe given the depth of the crisis
Potential game changer could come from discussions around ERF:
credible because proposed by German people
efficient because could reduce the cost of debt and dependency from markets.
A first step towards Eurobonds
15
Source : Exane BNP Paribas – Dexia Asset Management

16. Outlook: rapid and credible answer needed
Investors between hope and despair, how long will their patience last?
Spanish banks bailout plan not sufficient to save Spain or the European banking system.
A more ambitious plan for banks will be necessary in Europe
Limit contagion between government and bank debt (on the contrary to was has been done until now)
Deposit insurance scheme
Spanish central government funding
EFSF, EFSM and IFM to the rescue
400
350
252
18
23
used for Ireland
67
300
250 80
145
48
used for Greece 67
EUR bn
200
80 87
150
26
26
26
used for Portugal
100
87 0
available if Spain drops of 118
223
117
12
50
list of guarantors 80
38
0
0 50 100 150 200 250 300 350 400 Total funding needs* Bank recap, assumption Cumulative funding needs
EUR bn
rest of 2012 2013 2014 2015
EFSF EFSM IMF
16
Source : Exane BNP Paribas – Dexia Asset Management

17. Outlook: rapid and credible answer needed
Tail risk occurrence still possible
Last couple of weeks in June will be critical as investors’ patience and hope won’t last
forever
Disappointment on European announcement, further deterioration of economy in the US
or emerging markets could lead to a more negative outcome
17
Source : IMF

18. Outlook: can we believe in decoupling?
Longer term structural call for the US
Decoupling was one of 2012 assumption. Despite some disappointment, this remains
our baseline scenario
The US have built a sounder basis for future growth over a longer term perspective
18
Source : IMF - Bloomberg – Dexia Asset Management

19. Outlook: can we believe in decoupling?
Longer term structural call for the US
Deleveraging process well engaged
Real estate market bottoming out
19
Source : McKinsey Global Institute – Dexia Asset Management

20. Outlook: can we believe in decoupling?
Longer term structural call for the US
Increasing cost competitiveness
Energy costs dropped
Flexible labor market, labor costs have been reduced
Decrease of the USD
20
Source : Exane BNP Paribas - Bloomberg – Dexia Asset Management

21. Outlook: can we believe in decoupling?
Longer term structural call for the US
Fiscal cliff shorter term issue
Results of the elections will be critical in this respect
QE3 could help limiting the impact on the economy
21
Source : Congresionnal Budget Office - Bloomberg – Dexia Asset Management

22. Outlook: can we believe in decoupling?
Cyclical call for China, more sceptical on longer term issues
China is a more cyclical call for us
The economy should trough somewhere in Q2 (encouraging last indicators in May)
Authorities have the means to support the economy, have learnt from past errors
Fiscal and monetary easing have started
22
Source : Morgan Stanley Research - Bloomberg – Dexia Asset Management

23. Outlook: can we believe in decoupling?
Cyclical call for China, more sceptical on longer term issues
The transition towards a more consumption oriented growth is a longer term issue
End of the 1st demographic dividend, will China get older before getting rich?
Trend growth will decrease,7- 8% is the intermediate target for the years to come
23
Source : UBS - Bloomberg – Dexia Asset Management

24. Outlook: compelling valuation of equities
Attractive entry points to equities over a longer term perspective
US equities at a historically highly attractive level compared to bonds.
Increasing Equities risk premium covers
the risk of earnings downgrades (disappointment on margins, revisions on top line)
the highly uncertain context in Europe that could impact all the regions
24
Source : Société Générale - Datastream – Dexia Asset Management

25. Outlook: compelling valuation of equities
Too much risk discounted on margins
Margins have already started to decrease
in Europe and in the US
If our baseline macroeconomic scenario
holds, the earnings downwards revisions
risk in Europe is not so high and more
than discounted by current indices prices
25
Source : Goldman Sachs - Bloomberg – Dexia Asset Management

26. Outlook: safer assets not safe from a valuation perspective
Do the risk-free rate still exist?
German bund has benefited from a flight to quality
Current price is historically high. It partly anticipates ECB quantitative easing but does it
reflect the country’s risks?
Bundesbank’s Target2 claim on the ECB shows that de facto a kind of debt mutualisation
exists in Europe
Extreme gap between sovereign bonds and equities valuation is a risk for bonds in many
scenarios
26
Source : Bloomberg – Dexia Asset Management

27. Table of contents
I. H1 2012: Strategy Review
Surprise on the upside in Q1 and support of the liquidity effect
… weakening global context since April…
… while central banks balance sheets stopped expanding
Model score had deteriorated in Q2
Active management
II. Outlook
Somewhere between the best and the worst case
Deepening crisis in Europe
Risk has not become systemic yet
Historically high level of pessimism
Rapid and credible answer needed
Investors between hope and despair
Tail risk occurrence still possible
Can we believe in decoupling?
Longer term structural call for the US
Cyclical call for China
Compelling valuation for equities
Attractive long term entry points
Too much risk discounted on margins
Does the risk-free rate still exist?
III. Which strategy for H2 2012?
Growing dividend
Convertible bonds
IV. Conclusion
27

28. Which strategy for 2012?
Our preferred equity investment themes: growing dividends
An attractive dividend yield, with a globally low pay-out ratio, with a high level of free cash flow yield and healthy balance sheets.
High dividend yield should enhance portfolio returns… but remain selective!
28
Source : UBS – Morgan Stanley - Bloomberg – Dexia Asset Management

29. Which strategy for 2012?
Our preferred fixed income asset class: convertible bonds
Convertible bonds offer carry, which helps to optimise Convertibles are attractively valued
convexity
Delta and Running Yield of the index UBS Convertible Europe
Implied Volatility CB - Implied Volatility 18M DJ Euro Stoxx 50
20
15
Delta Running Yield PREMIUM
80 4.5% 10
70 4.0%
5
60
3.5% DISCOUNT
50 0
3.0%
40 -07 -08 -08 -09 -0 9 -10 -10 -11 -1 1 -12
No v -5 May No v May No v May No v May No v May
2.5%
30
20 2.0% -10
10 1.5% -15
Source : Deutsche Bank
19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 Convertible Research
-20
The current context would imply a resurgence in the primary market Including convertible bonds in a diversified portfolio can boost
performance and reduce risk
€ bn
European CB primary market
7
60 84 90
78 78
Amounts Numbers 80 100% Convertible
50 6
Performance annualized (%)
64 62 64 64 70
57
40 54 53 53 60 5
48
43 50
30 40
53 40 4
44 26
20 30
30 33 16 3
23 26 26 23 11 20
10 50% Equity
13 16 16 13 10
9 12 10 50% Bonds
8 5 2
0 0 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5
Volatility (%)
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
29
Source : Dexia Asset Management

30. Table of contents
I. H1 2012: Strategy Review
Surprise on the upside in Q1 and support of the liquidity effect
… weakening global context since April…
… while central banks balance sheets stopped expanding
Model score had deteriorated in Q2
Active management
II. Outlook
Somewhere between the best and the worst case
Deepening crisis in Europe
Risk has not become systemic yet
Historically high level of pessimism
Rapid and credible answer needed
Investors between hope and despair
Tail risk occurrence still possible
Can we believe in decoupling?
Longer term structural call for the US
Cyclical call for China
Compelling valuation for equities
Attractive long term entry points
Too much risk discounted on margins
Does the risk-free rate still exist?
III. Which strategy for H2 2012?
Growing dividend
Convertible bonds
IV. Conclusion
30

31. Conclusion
Asset Allocation 2012
Asset Allocation Equities Fixed Income
Constructive towards equities Overweight US Corporate bonds more attractive
for the second half of the year Carry in a low interest rate environment
once some credible answers are
Low medium-term refinancing needs
found in Europe Constructive towards EM
Coordinated QE could support the
economy in Q3 Overweight convertible bonds
Quality growth stocks and
Equity risk premium could benefit
from the reduction in stress in
dividend plays
Emerging Debt
Europe, end of June decisions
critical
Short duration
Commodities Alternative Assets Currencies
Long-short market neutral
strategies
Gold and oil as hedge against
USD & Scandies as
fat tail risk Assymetric long volatility diversification currencies
strategies
Opportunistic currency arbitrage
31

32. Conclusion
Our scenario
Quantitative easing will be once again an answer to current crisis. It is already partly discounted by
investors at least in Europe, in the US and China.
Given the non return point we have reached in Europe, it will not be sufficient alone to feed a longer lasting
rally. Our baseline scenario is that a compromise is found in Europe with discussions around the European
Redemption Fund as the most credible game changer. Relaxing the pressure of austerity policies will also
be necessary to give more oxygen to peripheral countries.
The next couple of weeks will be critical in that respect. A binary outcome still possible, since stress and
psychological pressure remain the engine in European negotiations.
Equities: Following recent market drop, valuation of equities relative to bonds is historically attractive.
Investors’ sentiment and positioning has reached extreme pessimism level which is positive from a
contrarian perspective. Current phase of stress could be followed by a more risk-on move if our scenario is
valid. We would not move too aggressively positive until we get some credible answers in Europe.
Safest assets valuation is now a risk for investors. Best rated countries' government bonds have benefited
from a move of flight to quality. Their valuation is now relatively expensive at risk in many scenarios:
developed markets government fundamentals are not safe given the necessity to deleverage, it also
already largely anticipates a possible coordinated QE.
Our favorite themes remain thus rather defensive and growth oriented. We still favor high dividend yield
stocks, attractive given the move on the real yields. We remain also still positive on convertible bonds which
offer carry, an exposure to equities if market rebounds and are attractively valued.
32
Source : MS, Goldman Sachs, Credit Suisse

33. Disclaimer
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expressly agreed otherwise. The information contained in this document was obtained from a number of different sources. Dexia Asset Management exercises the greatest care when choosing its sources of information and
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Moreover, Dexia AM specifies that:
• in the case where performances are gross, the performance may be affected by commissions, fees and other charges;
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This document does not comprise any investment research as defined in article 24, §1 of Directive 2006/73/CE dated 10 August 2006 implementing Directive 2004/39/CE of the European Parliament and Council.
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Money does not perform. People do.
33 September 2010