Growth, Capital Markets, Currency The impact of the Euro Crisis

May 23, 2012 Kathleen Stephansen

Managing Director Senior Investment Strategist and Global Head of Sovereign

Research

The Global Economy

2

Global growth should withstand the mild recession in Europe and is set to reach 3-3.5% this year, down from 3.8% in 2011

3 Source: Credit Suisse; Global Insights; AIG Asset Management;

Global Growth (quarterly year-on-year % change PPP-basis)

Projection

Emerging Asia continues to lead the global expansion The EA conundrum: will renewed fiscal restraint restore confidence or deepen the recession?

Emerging Markets (EM) contribute the most to global growth, with Non-Japan Asia (NJA) leading the charge

4 Sources: Credit Suisse; AIG Asset Management

Global growth levels (Q4:2007=100)

Real GDP (shares, growth, contribution) Shares of World GDP 2012 E 2013E

Region (2011 PPP) Growth Contribution Growth Contribution% % ppt % ppt

Global 100 3-3.5 3.3 3.7 3.7

US 19.1 2.3 0.4 2.5 0.5Europe 18.6 0 0.0 0.5 0.1Japan 5.6 1.5 0.1 1.5 0.1Canada 1.8 2.2 0 2.5 0.0

Subtotal 45.1 0.5 0.7

Non-Japan Asia 27.2 6.8 1.8 7.1 1.9 China 14.4 8 1.2 8.6 1.2Latin America 8 3.5 0.3 4 0.3EMEA 10.3 3.2 0.3 4 0.4

Subtotal 45.6 2.5 2.7

Others 9.4 3.8 0.4 4 0.4

… With the rise of the EM consumer

The integration of EM economies implies a rise in income and a shift in the sources of global demand:

EM consumer spending as a share of global consumption has risen steadily over the past decade

5

The composition of growth has shifted, with a sharp rise in the share of EM consumer spending (as a % of world consumption)

Source: IMF; AIG Asset Management

Strong inflows in EM debt and equities in recent years (apart from 2008), with periods of risk aversion prompting outflows

6 Sources: IIF; JP Morgan

EM Market Funds: Debt and Equity Net Flows (USD bn)

Fixed income flows into EM funds, (USD bn, cumulative flows) sovereign (hard- and local-currency) and corporate debt

A move to local currency assets and corporate issuance

7 Sources: Citi; IIF; HKMA; AMG

Fund Flows (Mutual / ETFs), cumulative inflows in USD mm, starting from 2005 in EM (Local Debt and Hard Currency (External) Debt)

The East Asian (ex-Japan) local currency bond market has grown by >10x since 1998 to an outstanding volume of $5.7 trillion (2/3 government and 1/3 corporate bonds

Offshore RMB market in Hong Kong

In two years, 8% of China’s trade has become denominated in Renminbi (RMB). In Q1:2012, 25% of foreign direct investment was denominated in RMB, and the offshore market in Hong Kong has reached RMB 600 billion.

USD Trillions

Billions of yuan, total CNY deposits

Recent Developments

8

Euro Area (EA) weakness has negatively affected global trade…

9 Source: Credit Suisse; Eurostat; AIG Asset Management; Institute of International Finance; China and Korea Customs Offices

Global Growth (year-on-year % change- PPP basis)

Global trade has decelerated

China and Korea export growth (3m rolling sum, annual % change) has slowed from 20% y/y in2011 to less than10% currently

EA: Imports from emerging markets have declined 3.5% per quarter since Q2:11

... Which, coupled with sluggish growth performance in the US and China, has put a dent on the Q1:2012 risk appetite rally

10 Sources: Bloomberg; Barclays; AIG Asset Management; Institute of International Finance (IIF); JP Morgan

Relative performance of EM corporates and equities (JPM CEMBI and MSCI EMF indices, end-2009=100)

Global Equity markets April monthly returns (%) EM Equity and Sovereign bond returns (year-to-date April, %): Still positive

The EA crisis brought an intensification of the risk-off trade in early May

11 Sources: Morgan Stanley; AMG Asset Management

Equities MSCI EM GDUEEGF Index -4.6 -1.2 -3.3 6.0 7.6 -18.2MSCI Europe GDDUE15 Index -4.7 -2.1 -0.5 6.4 3.4 -10.5S&P 500 SPX Index -3.0 -0.6 3.3 4.3 8.5 2.1MSCI World GDDUWI Index -3.9 -1.1 1.3 4.9 6.2 -5.0MSCI Japan GDDUJN Index -4.6 -3.2 1.4 5.0 2.8 -14.2Canada S&P/TSX Comp. SPTSX Index -5.0 -0.6 -1.6 1.7 -1.4 -8.7

Currencies EUR USDEUR Curncy -2.5 -0.8 0.1 1.8 -0.3 -3.3DXY DXY Curncy 1.7 -0.3 0.3 -0.7 -0.1 1.5CAD USDCAD Curncy -1.5 1.1 -0.9 1.3 1.8 -2.3

Commodities Brent Oil CO1 Comdty -5.2 -2.8 0.2 10.5 5.4 13.3S&P GSCI SPGCCI Index TR -5.4 -0.5 -2.4 6.1 -0.3 -1.2Gold GC1 Comdty -4.2 -0.3 -2.5 -1.5 1.7 10.2

Bonds Emerging Mkts SBGIMS Index 6.2 1.5 0.2 2.8 0.1 8.5TIPS SBUSILSI Index 0.2 2.1 -1.1 -0.4 3.0 14.0Gilts SBUKL Index 1.5 0.4 -0.9 -1.4 0.1 16.9Bunds SBDML Index 0.8 1.0 0.1 0.1 2.3 9.6Treasuries SBUSL Index 0.3 1.4 -1.0 -0.7 0.5 9.6Canada SBCDL Index 0.8 0.2 -0.4 -0.5 0.3 9.5

% Index April March FebMay 9 YTD 5/9/12 Year 2011

Negative sentiment in global asset markets intensified in early May on renewed sovereign-crisis related fears of a potential euro-area exit by Greece and rising concerns over Spanish and Italian funding.

The ensuing flight to quality…

12 Sources: Bloomberg; AIG Asset Management; Institute of International Finance (IIF); NBC

2. Into long dated Bunds: The German yield curve has flattened relative to those of the US, UK, and Japan

1. Into Bunds: German and Japanese 2-year government note yields (%)

3. Into US Treasuries: 10-year Treasury note yield (%) 4. Canada’s government bonds held by foreigners /bonds held by the public*

…Has led to partial reversal of EM capital flows

13 Sources: Credit Suisse; AMG; IIF

Capital Flows to dedicated EM Funds vs. risk appetite Net flows to BRIC equity funds

Uncertainties in the EA put downward pressures on the EURO, with some regional spillover effects

14 Sources: Bloomberg; AMG;

EUR-Yen EUR-USD

EUR-Singapore dollar EUR-PLN

Risks

15

Funding flows fail to offset retrenchment in bank financing

16 Sources: ECB; Federal Reserve; AMG; IIF

EA credit to the private sector: Banks are reducing lending to households and businesses

US primary dealer corporate security inventory has fallen sharply

Credit Market Instruments, (Billions of Dollars, SA): Liquidity in many market segments remains impaired

EA banks are pulling back

Cross border lending to EM has declined starting late last year and are set to intensify

Growth of international bank lending to EM slowed, driven by declines in EA banks

17 Sources: IIF; BIS. AMG

Cross-border Claims* on developing countries

*Cross-border claims by sector, immediate borrower basis (consolidated claims) International Bank claims* on developing countries

*Consolidated foreign claims, ultimate risk basis

Tighter EM lending conditions

The recent deterioration in EM lending conditions reflects the tightening of credit standards Europe.

Policy responses in both EM and the G4, particularly the ECB mitigated the tightening in Q1:12.

By category, trade finance has improved markedly.

18 Sources: IIF

Global EM bank lending conditions index (diffusion index –50=neutral- non-weighted average of responses from 132 banks domiciled in EM and prepared by the IIF)

Central bank policy accommodation must remain in place

The expansion of the G4 central banks’ balance sheets supports the risk rally

19 Sources: Cumberland Advisors; ECB; Federal Reserve; Bank of England; Bank of Japan

Global growth withstands the retrenchment in EA activity. It reflects the rising EM economic contribution to the global economy, and rising capital inflows into EM, with a commensurate move to local currency assets and corporate issuance.

A deepening of the EA crisis poses risks to this dynamic through the trade and more particularly the capital flow channel:

- Global trade has weakened.

- The retrenchment in bank financing has put downward pressure on funding flows.

- The lending pull-back is concentrated in EA banks.

- EM lending conditions have turned tighter.

Central bank liquidity must offset these deflationary forces. At the very least, central banks should limit contagion stemming from the deteriorating political landscape in Greece or an eventual euro-exit by Greece. In the latter scenario, the ECB should restart its bond-buying program and provide unlimited supply of liquidity, while the EUR500 billion EMS fund would provide additional firewalls that were not in place last year when the crisis last flared up.

20

Conclusions

AIG Asset Management comprises a global team of investment professionals that provide investment advisory and asset management services to American International Group, Inc. (“AIG”) and its businesses. AIG Asset Management is not soliciting or recommending any action based on any information in this document. This information is proprietary and cannot be reproduced or distributed.

Certain statements provided herein are based solely on the opinions of AIG Asset Management and are being provided for general information purposes only. Any opinions provided on economic trends should not be relied upon for investment decisions and are solely the opinion of AIG Asset Management. Certain information may be based on information received from sources AIG Asset Management considers reliable; AIG Asset Management does not represent that such information is accurate or complete. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change.

21