The Austrian View

Erste Group Research The Austrian View | Equities | Global 21 December 2011
The Austrian View

An outside the box approach to equity prices. Past stock market cycles have shown that equity investors can gain valuable insight from tracking money and credit statistics.
Debt-driven equity prices? We come to the conclusion that it makes sense for equity investors to track monetary and, especially, debt developments closely. We believe that the changing dynamics of monetary as well as debt aggregates are often a good leading indicator for equity markets. Historic data shows that accelerating money and credit growth drives equity prices, while decelerating growth in the money and credit supply generally puts pressure on equity prices. Financial history shows that equity markets are addicted to new money and credit creation. To keep rallies going, the equity markets need ever more fuel (faster rate of change in the money and credit supply). As soon as the rate of change is negative (decelerating money and credit supply) markets tend to become sluggish and lose momentum, even though in absolute terms the money and credit supply is still rising. Global monetary developments decisive for CEE stocks The financial crisis of 2008/09 has shown that CEE is not an isolated island, but is deeply interwoven into the global economy and highly dependent on monetary developments all over the world. Who would have imagined that a banking crisis would bring the region to its knees in 2008/09? This publication will track monetary and credit trends in the major global currency areas to provide the necessary information to evaluate possible impacts on CEE stocks in a timely manner and ahead of the crowd. Upswing in equities bolstered by accelerating EM debt as well as developed world public debt Global debt statistics reveal that the upswing in equities that started in 1Q09 was quite likely bolstered by (1) substantially accelerating debt growth in major EMs (2) massively accelerating debt growth of the public sector of the developed world. Currently, both forces are decelerating and the weak performance of equity indices YTD is a reflection of this trend; but Right measures taken to support equities monetary aggregates have to respond positively we believe that monetary authorities in many currency areas have already taken the right measures in order to give equities the necessary support in 2012. The response of monetary aggregates to these measures over the next months will be decisive for equities. Due to the fact that markets will have to digest weak and disappointing data for quite some time, we do not believe that a stock market rally is imminent. The first signs that the growth pace of monetary aggregates in sluggish areas, such as the Eurozone, China or India is picking up again, would make us outright bullish.
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All things are subject to the law of cause and effect. This great principle knows no exception. Carl Menger Analysts Gerald Walek, CFA gerald.walek@erstegroup.com Henning Esskuchen henning.esskuchen@erstegroup.com Stephan Lingnau stephan.lingnau@erstegroup.com Contents Equities and monetary statistics S&P 500 2001- 07 Money statistics 2008 - 2011 Debt statistics 2008 - 2011 Monetary developments in CEE Conclusion Where from here? Tables & Charts All prices are as of Dec. 20th 2011.
2 3 5 7 9 11 14
Erste Group Research | The Austrian View
Equities and monetary statistics

Product based on ideas of Austrian School of economics At the heart of this product lies the analysis of the development of historic money and credit statistics. It is called the Austrian View because studying the theories of the Austrian School of economics (especially Ludwig von Mises book: The Theory of Money and Credit; th which, by the way, will celebrate the 100 anniversary of its first publication in 2012) has inspired us to examine the relation between money/credit developments and equity prices. We have come to the conclusion that, indeed, there seems to be a connection between the two. However, it is necessary to have the right angle of vision when poring over the money and credit statistics, because otherwise they are pretty useless. We have to admit that it has become very difficult to determine what money and credit actually is. Money supply aggregates like M0, M1, M2, M3, sometimes even M4, are being published. To complicate things further, central banks publish credit statistics as well. Finally, money and credit are just two sides of the same coin in todays monetary order. Someones savings account (contained in the calculation of M1) is at the same time the credit financing someone elses project (contained in credit outstanding). We therefore believe that one should denote currency (apart from cash in your pocket) in savings and other bank accounts as claim, not as money. We believe that M1 and M2 are good short-term leading indicators for equities. In this publication we also track the development of debt as a supplemental indicator. Apart from the question of which aggregates to track it is important to understand that the rate of change in the money supply is of interest. In order to drive a rally, the rate of change in the money supply has to increase. As soon as the rate of change is slowing down, equity markets tend to get sluggish and weaken. There is, however, a certain time lag effect involved. We decided to use the US stock market cycle 2001 - 2007 as a case study in order to demonstrate how the analysis of monetary forces can improve an investors decision-making process. The appendix of this publication will track several monetary aggregates for the main currency areas. The punch line is that this framework advises investors to establish long positions in equities (or overweight cyclical or financial stocks) as long as the credit supply is loose and accelerating; as soon as the credit supply becomes tight and decelerates, investors should gradually sell their positions or switch into more defensive sectors. In this context, we would like to mention, that in December 2010 an interesting paper was published by Jord, Schularick and Taylor, titled Financial Crises, Credit Booms and External Imbalances: 140 years of lessons. They have studied the experiences of 14 developed countries over 140 years and exploited a long-duration dataset in a number of different ways (application of new statistical tools to describe the temporal and spatial patterns). Their final conclusion confirms our interest in money and credit statistics, because the overall result is that credit growth emerges 1 as the single best predictor of financial instability .
M1 and M2 seem to good leading indicators for equities
Change in rate of money and debt supply drives equity markets
and can act as leading indicator for equity investors
Credit growth as single best predictor of financial instability confirmed by detailed NBER research paper
Retrieved from: http://www.nber.org/papers/w16567.pdf Page 2
Additional tool at the investors disposal
The overall framework has to be understood as an additional tool within the toolbox at the investors disposal. It is not the Holy Grail or something like that, but we believe that it can provide equity investors with an informative basis in times when fundamental analysis does not seem to be of any use.
S&P 500 2001 - 2007

Fundamentally sound equity valuations ahead of subprime bust We will use the US stock market development from 2001 - 2007 to demonstrate how you can use the rate of change in monetary and credit aggregates to build expectations about possible future equity market developments. Fundamental-driven investors could have quite easily avoided the TMT bubble, given the fact that it was mainly driven by lofty valuation levels. The graph below shows that P/E ratios hit a historic high level of around 35 in March 2000 when the bubble burst. However, in October 2007, ahead of the subprime bust, the picture looked different. Back then, the S&P 500 traded on a P/E level of around 17.5. It later turned out that investors were affected by an earnings bubble driven by substantial prior money and credit growth around the globe. S&P 500 P/E Jan-68 Oct-07 P/E at historic averages in October 2007
50 45 40 35 30 25 20 15 10 5 0
Slowing growth of monetary forces as leading indicator for equity markets
Ja n J u - 68 Ja l-69 n J u - 71 Ja l-72 n J u - 74 Ja l-75 n J u - 77 Ja l-78 n J u - 80 Ja l-81 n J u - 83 Ja l-84 n J u - 86 Ja l-87 n J u - 89 Ja l-90 n J u - 92 Ja l-93 n J u - 95 Ja l-96 n J u - 98 Ja l-99 n J u - 01 Ja l-02 n J u - 04 Ja l-05 n07
Source: Datastream
An investor incorporating the rate of change of monetary forces into his investment approach would have been cautious regarding the future development of equity markets in October 2007, despite the fact that, from a fundamental perspective, equities did not look expensive at all. The left hand graph below shows what the situation would have looked like for an investor who had tracked the rate of change in the money supply. The left hand graph below shows what the situation would have looked like for an investor who had tracked the rate of change in the money supply. However, the decelerating money supply (in terms of M1) as of 2004 was a good leading indicator that equities would have to lose momentum sooner or later. The graph however shows that there is a certain time lag involved. While M1 growth already peaked in 2003, it took equities another 4 years to peak. This is the reason why equity investors have to keep a sharp eye on debt developments as well, because total US
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debt growth accelerated well until 3Q06 and entered a decelerating trend thereafter. Thus the time-lag between debt growth and stock market was shorter and thus very useful. USD M1 growth weak ahead of Oct 07 top in S&P500 S&P 500 vs. USD M1 %yoy Jan-98 Oct 07 German M1 growth moves ahead of the DAX M1 Germany % yoy vs, DAX %yoy (8 months time-lag)
Source: US Fed, Reuters
Source: Datastream
German DAX shows a very high correlation to German M1 growth
The right hand graph tracks the development of the growth pace of German M1 (dark blue line) against the growth pace of the DAX (light blue line) with an 8 month lag. It shows the high performance correlation and underlines that German M1 growth pace is a very good leading indicator for the German stock market.
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Money statistics 2008 - 2011

S&P 500 bolstered by brisk USD M1 growth
As of October 2008, the USD M1 growth pace picked up significantly (left-hand graph below, traced against the performance of the S&P 500); well in line with the acceleration of the USD base money supply (see right-hand graph below). The left-hand graph also shows that the acceleration of M1 growth preceded the rise of the S&P 500 as of February 2009. We are not 100% sure whether the recent pick-up in USD M1 growth will ignite another leg up in the S&P 500, but so far it has been sufficient to stabilize the S&P500, while equities in other markets suffered. USD money base Jan-00 - Oct-11 September 2008 changed the game
3,000 2,500 2,000 USD 1,500 55% 1,000 500 0 2011-Apr 2010-Jul 2009-Oct 2009-Jan 2008-Apr 2007-Jul 2006-Oct 2006-Jan 2005-Apr 2004-Jul 2003-Oct 2003-Jan 2002-Apr 2001-Jul 2000-Oct 2000-Jan 35% 15% -5% USD Money Base 135% 115% 95% 75%
S&P 500 vs. USD M1 growth Oct-07 Oct-11 growth pace of M1 easing off in October 2011
y/y growth
Source: US Fed St. Louis, Datastream
Source: US Fed St. Louis
Eurozone M1 growth sluggish; although euro base money supply growth is currently picking up quite significantly
The two graphs below paint a similar picture for the Eurozone since October 2008. First, the growth pace in the base money supply (right-hand graph below) and euro M1 (left-hand graph below) picked up and preceded the pick-up in European equities, as reflected by the EUROSTOXX50 index performance. Currently, however, the Eurozone is developing in a different manner compared to the US. The euro M1 growth pace continues to decelerate; unlike in autumn 2008 it is thus not developing in line with USD M1. The EUROSTOXX50 index has followed the slowdown in euro M1 growth over the months. On the other hand, the growth pace of the base money in the Eurozone is accelerating significantly since July 2011 and has reached a new top of + 24% y/y as of December 15, 2011. It might be a bit early, but, in our opinion, this is a rather bullish signal for European equities.
EuroStoxx50 vs. EURO M1 growth Oct-07 Nov-11

Eurozone money base Feb-2000 Dec-2011

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The sluggish development of M1 is not really supportive for European equities
Growth pace picking up significantly in Nov-2011 (+19% y/y)

1,600 1,400 1,200 EUR bn 1,000 800 600 400 200 0 2011Feb 2010Feb 2009Feb 2008Feb 2007Feb 2006Feb 2005Feb 2004Feb 2003Feb 2002Feb 2001Feb 2000Feb Euro Money Base
y/y growth
50% 40% 30% 20% 10% 0% -10% -20% -30%
Source: Reuters, ECB
Source: ECB
EM money supply data shows similar pattern to developed world
As mentioned above, the money supply data of the two biggest EM economies, China and India, display a similar pattern. In both countries, M1 and M2 accelerated as of October 2008. Deceleration started in 1H10. China shows the most extreme development, in our opinion. The most recent data shows that M1 and M2 growth in both countries is coming to a grinding halt as of September and October. Development of Chinese M1 & M2 Oct-02 Nov-11 M1 growth down to 8.5% y/y in Oct-11
M1 45% 40% 39.0% M2
Development of Indian M1 & M2 Nov-02 Oct-11 M1 growth down to 1.6% y/y in Sep-11
M1
30% 25% 19.5% 20% 15% 10% 5% 0% Jun-10 Sep-09 Jun-07 Mar-08 Dec-08 Sep-06 Jun-04 Mar-05 Dec-05 Sep-03 Dec-02 1.6% Mar-11
M2
35% 30% 25% 20% 15% 10% 5% 0% Dec-02 Sep-03 Dec-05 Sep-06 Dec-08 Sep-09 Jun-04 Mar-05 Jun-07 Mar-08 Jun-10 Mar-11 8.5%
Source: Datastream
Source: Datastream
Debt statistics 2008 - 2011

Erste Group Research | The Austrian View Page 6
USD and Eurozone debt growth dominated by public sector
We would also like to show you how debt statistics have fared since October 2008. You can see on the charts below, that public debt growth has especially driven overall debt growth in the USD as well as the Eurozone since October 2008. You can see on the two graphs below that current debt growth in the Eurozone is currently decelerating. Public sector debt growth in steep decline 2011 Euro area private vs. public debt growth Jan-04- Oct-11:
17.0% Public debt growth
6.5%
Decelerating trend after peaking out in Nov. 2010 Eurozone total debt growth Jan-04 until Oct-11:
9% 8% 7% 6% 5% 4% 3% 2% 1% 2.6% 8.2%
Private debt growth
12.0%
7.0%
2.0% Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Sep-10 Mar-11 Sep-11
0% Okt. 04 Jul. 05 Apr. 06 Okt. 07 Jul. 08 Apr. 09 Oct. 10 Jul. 11 Jan. 04 Jan. 07 Jan. 10
-3.0%
Source: ECB, Level shift as of October 2010 influenced by the creation of the second bad bank in Germany (FMS Wertemanagement)
Source: ECB, Level shift of public debt as of October 2010 influenced by the creation of the second bad bank in Germany (FMS Wertemanagement)
Recent pick up of debt growth pace (+3.7%) of US businesses is a bright spot
The US shows a similar picture, as can be seen on the two graphs below. Total debt growth picked up, but it is still way below the peak level witnessed in March 2006, and, as of recently, it has started to again decelerate. The right-hand graph shows the disparate development between the private and public sector US debt since October 2008. US households even continue to deleverage in absolute terms, with US household debt shrinking at a rate of around 1.5% y/y. The bright spot in the US is the debt growth of businesses, which is in an accelerating trend and posted a debt growth pace of 3.7% y/y as of 3Q11. Brisk public sector debt growth, private sector weak USD private vs. public debt growth Mar-04 - Sep-11
25% Public debt growth Business debt growth Households debt growth
USD total debt growth stabilizing at around 3-4% Mar-04 - Sep-11:

12% 9.9% 10% 8% 6% 4% 2% 0% Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 3.5%
20% 15% 10% 5% 0% Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 -5% Sep-09 Mar-10 Mar-09
Source: US Fed
Source: US Fed
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Substantial debt growth in EM since October 2008
Analysis of debt development in China and India, as the biggest representatives of the EM world, shows a rather different picture. In these areas, loan and debt growth was strong and, in the case of China, easily exceeded previous peak levels. (For India, we have chosen M4 as the closest proxy for development of loans and debts outstanding). India: Picture not as clear as in China India M4 development Jan-05 Sep-11
25% 20% 15% 23.5% 17.0%
China: Slowdown continues Chinese loans development Jan-05 Oct-11

40.0% 34.8%
30.0%
20.0%
10%
10.0%
14.2%
5% 0% Jan-11 Apr-10 Jul-09 Jan-08 Oct-08 Apr-07
0.0% Sep-11 Sep-06 Feb-07 Dec-07 May-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Jan-05 Jun-05 Nov-05 Apr-06 Jul-07 Oct-08
Jul-06
Jan-05
Oct-05
Source: PBoC
Source: Datastream
Sluggish debt growth reflected in weak equity performances YTD
The ongoing deceleration of debt growth in major currency areas (again apart from business debt growth in the USD) is quite well reflected in the weak performance of global equity indices YTD (see graph on the left hand side). However, the recent concerted action of global central banks, as well as the fact that China has lowered bank reserve requirements for the first time in three years, is an early indicator that equities might gain momentum over the next couple of quarters. Equity indices YTD performance 2011
-25.6% -22.2% -22.0% -20.1% -19.1% -9.4% MSCI Emerging Europe MSCI Emerging Latin America DJEUROSTOXX50 MSCI Emerging Asia DAX MSCI World -3.6%S&P 500
-30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0%
Source: Factset, Performance measures in USD; 01/01/2011 13/12/2011
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Monetary developments in CEE

Turkey and Ukraine showing most dynamic monetary development in this cycle From a strict monetary point of view (y/y growth pace of M1 and M2), Turkey and the Ukraine displayed the most dynamic development since 2008. The first two graphs below, showing the development of M1 and M2 for Turkey and Ukraine, reveal that these two economies in our core region developed in a comparable manner from a monetary perspective. However, one could argue that both economies lagged behind developments in the Far East, in both directions. Right now, monetary data continues to be stuck in a decelerating trend, which is a reflection of the global picture. Monetary development in the Czech Republic, as well as in Poland, shows similar development. We have to say that Poland is a better fit into the overall global picture, while the Czech Republic, especially with regards to M2, developed in a more subdued manner. As of October, Polish M1 (decelerating) and M2 (flat) display a mixed picture. It does not come as a big surprise that the monetary picture looks somewhat weak in Hungary and Romania. However, as of July this year, M1 and M2 are accelerating quite significantly in both countries. This acceleration can be explained to a certain extent by the fact that, in both countries, monetary development was quite sluggish in 2010, while it was dynamic in most other countries. Development of Ukrainian M1 & M2 Sep-02 Oct-11 Good fit into the global picture; deceleration trend since early 2011
60.0% M1 50.0% M2
Polands monetary development also good fit into overall global picture
Hungary and Romania currently displaying the most dynamic monetary development
Development of Turkish M1 & M2 Sep-02 Nov-11 Deceleration continues after spiking in 2010
70%
M1 M2
60% 50% 40% 30% 20% 10% 0% Apr-08 Jan-09 Oct-09 Jul-10 Jan-03 Jan-06 Apr-11 Oct-03 Jul-04 Apr-05 Oct-06 Jul-07 -10% 34.7%
17.1%
40.0% 27.3% 30.0% 20.0% 10.0% 0.0%

-0 3 -0 4 -0 5 -0 7 -0 8 -0 9 -0 6 -1 0 -0 3 -0 4 -0 5 -0 6 -0 7 -0 8 -0 9 -1 0 -1 1 Ja n Ja n Ja n Ja n Ja n Ja n Ja n Ja n Ja n Ju l Ju l Ju l
14.7%
-10.0%
Source: Datastream
Source: Datastream
Ju l
Ju l
Ju l
Ju l
Ju l
Ju l
-1 1
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Development of Czech M1 & M2 Sep-02 Oct-11 M1 and M2 responded differently during this cycle
40% 35% 30% 25%
M1 M2
f Polish M1 & M2 Sep-02 Oct-11 M1 trending down; while M2 picking up a bit

35% 30% 25% 20% 17.8% M1 M2
20% 15%
14.6%
15% 10%
10% 5% 0%
5.2%
5% 5.2% 0%
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Source: Datastream
De c02 Ju n03 De c03 Ju n04 De c04 Ju n05 De c05 Ju n06 De c06 Ju n07 D ec -0 7 Ju n0 D 8 ec -0 8 Ju n09 D ec -0 9 Ju n10 De c10 Ju n11
-5%
Source: Datastream
Development of Hungarian M1 & M2 Sep-02 Oct-11 M2 recently picking up quite significantly

30.0% M1 25.0% 20.0% 15.0% M2
Development of Romanian M1 & M2 Sep-02 Oct-11 Displaying the most sluggish performance of all CEE economies; however, as of 3Q11, M1 and M2 are accelerating quite significantly
80% 70% 60% 50% 40%
M1 M2
10.1%
10.0% 5.0% 0.0% -5.0% -10.0%
Ja n03 Ju l-0 Ja 3 n04 Ju l-0 Ja 4 n05 Ju l-0 Ja 5 n06 Ju l-0 Ja 6 n07 Ju l-0 Ja 7 n08 Ju l-0 Ja 8 n09 Ju l-0 Ja 9 n10 Ju l-1 Ja 0 n11 Ju l-1 1
30% 20% 10% 0% Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 -10% -20% Oct-11 7.2%
Source: Datastream
Source: Datastream
Jul-11
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Conclusion
Where from here?
The table below displays the underlying growth trend of M1 and M2 of major global currency areas as well as our core markets. Current Trends in M1 & M2: Asset price weakness in EMs confirmed by weak monetary data US asset prices supported by dynamic growth Mixed picture for CEE
M1 M2 y/y (%) -2m -1m Last 10.2 10.1 9.9 2.4 2.8 2.2 2.7 2.8 3.0 13.6 13.1 12.9 5.5 4.1 1.6 22.4 21.9 20.8 20.9 21.5 19.8 0.3 1.4 1.4 3.1 4.5 4.3 0.0 4.6 5.4 8.3 9.4 9.3 4.0 6.3 6.0 19.4 19.5 15.3 19.0 16.0 15.3 3m/3m (%) -2m -1m Last 3.8 5.0 4.8 0.8 1.1 1.0 0.2 -0.1 0.0 2.4 1.7 2.9 -1.9 -1.3 -0.4 4.9 5.2 4.8 4.4 4.0 3.5 0.8 1.0 1.4 0.4 0.4 0.7 1.2 2.9 3.8 0.9 2.2 3.1 2.7 3.6 3.1 3.4 1.6 0.2 4.0 2.9 2.5
Trend
G3
United States Eurozone Japan China India Brazil Russia Austria Czech Rep. Hungary
y/y (%) -2m -1m Last 20.7 20.6 20.8 1.5 2.1 5.2 5.1 11.9 9.6 5.2 4.1 2.3 2.5 1.8 5.1 9.2 1.6 1.0
3m/3m (%) -2m -1m Last 6.0 8.2 8.7 0.8 1.2 1.3
-0.6 -0.5 0.0 2.0 0.1 0.3
BRIC
-1.9 -1.3 -0.4 0.7 4.6 0.6 0.6 2.1 0.5 -0.1 4.2 3.2 0.1 1.1 0.8 1.3 4.0 4.8
20.1 20.1 17.4 -1.2 0.2 6.3 6.0 1.2 6.8
4.2 8.0 10.1 6.7 6.1 2.3 3.0 5.2 7.2
CEE
Poland Romania Turkey
-0.5 -0.4 -0.2 4.7 5.9 3.3 5.3 4.2 3.6 1.6 1.3 -0.2
23.3 24.6 17.1
14.7 10.6 9.6 Ukraine Source: Datastream, Erste Group Research
USD displays the most dynamic development globally; China and India are coming to a grinding halt
The snapshot shows that, in absolute terms, the USD is currently the only major global currency area displaying a vibrant growth pace of M1 (+20.8% y/y) as well as M2 (+9.9%); even though the trend is not accelerating anymore. Development in the Eurozone and Japan is more or less flat, and on a very low absolute level (growth pace of just 2.2% y/y for M2 in the Eurozone as of October 2011), which leaves us with a more cautious stance regarding these markets. In China and India, the growth pace of M1 and M2 is coming to a grinding halt when compared to peak levels of more than +30% growth in 2009/10. Brazil and Russia are in a sideways trend with a downward bias. The underlying monetary trend is quite well reflected in the performance of major global equity indices. Supported by a dynamic development of monetary aggregates like M1 and M2 the S&P is down just 3.6% YTD. The performance of equities in all other regions is more or less a reflection of a flat or decelerating monetary trend.
Equity indices mirror the somewhat disappointing performance of money statistics YTD
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Equity indices YTD performance 2011

-25.6% -22.2% -22.0% -20.1% -19.1% -9.4% MSCI Emerging Europe MSCI Emerging Latin America DJEUROSTOXX50 MSCI Emerging Asia DAX MSCI World -3.6%S&P 500
-30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0%
Source: Factset, Performance measures in USD; 01/01/2011 13/12/2011
Hungary & Romania display the most promising picture. Turkey & Ukraine clear decelerating trend
In our core region, Hungary and Romania are showing the most promising development, with an accelerating monetary trend. The Czech Republic and Poland are neutral. Turkey and the Ukraine are in the midst of a clear decelerating trend. Monetary data thus does not point towards an immediate stock market rally in our core region. After USD liquidity was increasingly hard to get, central banks (Fed, ECB and four others) began concerted action. They cut pricing (from December 5) on the existing temporary US dollar liquidity swap arrangements by 50bp. On the same day, the PBoC lowered the reserve requirements, for the first time in nearly three years, by 50bp to 21.0%. Equity prices jumped on this news immediately. They are, however, losing steam again.
Right measures taken to support risky assets in 2012 monetary aggregates have to respond
Dollar Index
We believe that monetary authorities in the major currency areas have taken the right measures in order to give equities the necessary support in 2012. The response of monetary aggregates to these measures (especially in major markets that, until now are in a decelerating trend; e.g., China and the Eurozone) over the next months will be decisive for equities. Due to the fact that the markets will have to digest weak and disappointing data for quite some time, we do not believe that a stock market rally is imminent. The USD Index displays the ongoing strength of the USD vs. other global currencies. This is another indication that risk appetite is not yet rising, and leads us to believe that equity markets in our core region will remain sluggish in the short term. However, the first signs that the growth pace of monetary aggregates in sluggish areas like the Eurozone, China or India is picking up again, would make us outright bullish. This could already happen within the next 1-3 months.
Source: Datastream
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Appendix contains detailed statistics as well as a short introduction into the Austrian School of economics as alternative view
The appendix of this product contains detailed statistics about the historic development of key money and credit aggregates in the most important currency areas outside our core region (USD, Eurozone, Japan, China, India, Brazil and Russia), as well as the biggest currency areas in our core region (Turkey, Ukraine, Poland, Czech Republic and Hungary).
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Tables & charts

Eurozone Total debt (y/y)
12% 10% 8% 6% 4% 2% 0% 04 06 08 10
Source: ECB, Datastream, Erste Group Research
Govt. debt (y/y) and nominal GDP (y/y)

14% 12% 10% 8% 6% 4% 2% 0% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 -2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -4% -6% GDP Government Debt
Debt growth (y/y)

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 12.04 -2% 12.06 Households 12.08 Corporate Government 12.10
Household loans (y/y)

14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Consumer credit Households ex. house purch. House purch. 04 06 08 10
Government, corporate and household debt

2007 Government Central Govt. Other Govt. Loans to Govt. Corporations Loans Debt securities Households Consumer credit House purchase Except for house purchase Other Other financial intermediaries Insurance corp. & pen. funds Sum Government Corporations Households Total GDP (nominal) Debt % of GDP Government Corporations Households Total 4.402 369 959 4.388 2.412 618 3.425 751 870 107 y/y 3% 4% 18% 14% 18% 5% 7% 2% 25% 17% 2008 4.768 385 973 4.827 3.094 632 3.486 767 969 104 y/y 8% 4% 1% 10% 28% 2% 2% 2% 11% -3% 2009 5.324 423 1.002 4.691 4.051 631 3.547 774 1.061 89 y/y 12% 10% 3% -3% 31% 0% 2% 1% 9% -14% 2010 5.840 496 1.222 4.667 4.150 639 3.701 819 1.112 95 y/y 10% 17% 22% -1% 2% 1% 4% 6% 5% 7% 08.2011 6.066 516 1.145 4.735 4.072 630 3.798 836 1.162 99 y/y 7,9% 8,9% 7,1% 1,1% 0,2% -2,1% 4,1% 2,7% 4,0% 4,5% 09.2011 6.057 518 1.146 y/y 7,4% 8,1% 6,5% 10.2011 6.076 519 1.145 4.761 4.115 627 3.769 835 1.199 94 y/y 4,5% 7,5% -0,9% 1,7% 0,4% -1,9% 2,6% 2,5% 12,0% 1,3%
4.761 1,4% 4.066 -0,1% 628 -2,0% 3.806 4,2% 836 2,7% 1.152 97 7,6% 4,8%
5.730 6.800 4.793 18.299
5% 16% 6% 10%
6.126 7.921 4.885 20.005 9.242
7% 16% 2% 9% 2,3%
6.748 8.741 4.952 21.591 8.951
10% 10% 1% 8% -3,2%
7.558 8.817 5.159 22.741 9.183
12% 1% 4% 5% 2,6%
7.727 8.807 5.264 23.058 9.268
7,8% 0,7% 3,1% 3,7% 3,2%
7.721 8.827 5.269 23.067 9.323
7,3% 0,7% 3,2% 3,8% 3,1%
7.741 8.876 5.231 23.141 9.323
3,9% 1,1% 2,1% 2,8% 3,1%
9.032 5,4%
#NV #NV #NV #NV
66,3% 85,7% 52,8% 216,3%
#NV #NV #NV #NV
75,1% 8,8% 97,3% 11,6% 55,1% 2,3% 240,2% 23,9%
82,9% 96,7% 56,6% 249,5%
7,8% -0,5% 1,5% 9,3%
83,4% 3,6% 95,0% -2,4% 56,8% -0,1% 248,8% 1,3%
82,8% 94,7% 56,5% 247,4%
3,3% -2,2% 0,0% 1,6%
83,0% 95,2% 56,1% 248,2%
0,7% -1,9% -0,6% -0,8%
Page 14
United States Total debt & nominal GDP (y/y)

14% 12% 10% 8% 6% 4% 2% 0% Q4 1993 Q4 1995 Q4 1997 Q4 1999 Q4 2001 Q4 2003 Q4 2005 Q4 2007 Q4 2009 -2% -4% -6%
5% 10% 20%
Debt (y/y)
25%
15%
0% Q4 1993 -5%
Q4 1995 Q4 1997 Q4 1999 Q4 20 01 Q4 2003 Q4 2005 Q4 2007 Q4 2009
GDP (nominal)
Total Debt
Households
Corporations
Government
Source: Federal Reserve, Datastream, Erste Group Research
Loans and securities in bank credit (y/y)

20% 15% 10% 5% 0% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 -5% -10% -15%
Commercial & industrial and real estate loans (y/y)

25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 92 94 96 98 00 02 04 06 08 10
Commercial and industrial loans
Real estate loans
Loans and leases in bank credit
Securities in bank credit
Government, corporate and household debt

Federal debt State and local governments Nonfinancial corporate business Nonfarm noncorporate business Farm business Household Sector Government Corporations Households Total debt GDP (nominal) % of GDP Government Corporations Households Total % of GDP 2007 9,229 2,868 6,889 3,650 219 13,777 12,097 10,758 13,777 36,633 14,253 85% 75% 97% 257% y/y 6% 5% 14% 14% 7% 7% 6% 14% 7% 8% 4.9% 1% 6% 2% 8% 2008 10,700 2,888 7,222 3,972 224 13,797 13,588 11,418 13,797 38,802 y/y 16% 1% 5% 9% 2% 0% 12% 6% 0% 6% 2009 12,311 2,999 7,004 3,839 218 13,565 15,311 11,061 13,565 39,936 14,087 109% 79% 96% 283% y/y 15% 4% -3% -3% -3% -2% 13% -3% -2% 3% 0.0% 12% -3% -2% 8% 2010 14,025 3,065 7,300 3,627 229 13,324 17,091 11,156 13,324 41,571 14,755 116% 76% 90% 282% y/y 10% 1% 3% -3% 6% -1% 8% 1% -1% 3% 3.3% 7% -3% -6% -2% Q2 2011 14,343 3,013 7,533 3,626 224 13,207 17,356 11,383 13,207 41,946 15,013 116% 76% 88% 279% y/y 9% 0% 6% -1% 3% -1% 7% 3% -1% 3% 3.8% 4% 0% -5% -1% Q3 2011 14,790 3,002 7,631 3,644 220 13,204 17,793 11,495 13,204 42,492 15,181 117% 76% 87% 280% y/y 9% -1% 6% 0% -1% -1% 7% 4% -1% 4% 3.9% 2% 0% -1% 1%
14,082 -1.2% 96% 81% 98% 276% 12% 6% 1% 19%
Assets of commercial banks

05/2011 y/y 06/2011 y/y Bank credit 9,160 9,228 0% 0% Securities in bank credit 2,436 7% 2,447 4% Loans and leases in bank credit 6,724 -2% 6,781 -1% Commercial and industrial loans 1,261 4% 1,264 5% Real estate loans 3,499 -5% 3,497 -4% Consumer loans 1,084 -6% 1,087 -5% Other loans and leases 879 9% 932 12% Allowance for loan and lease losses 189 -17% 186 -18% Interbank loans 127 -19% 118 -30% Cash assets 1,869 48% 1,964 48% Trading assets 291 10% 294 -1% Other assets 1,212 -2% 1,201 -1% Total Assets 12,469 5.4% 12,620 5.4% Source: Federal Reserve, Datastream, Erste Group Research 07/2011 9,294 2,457 6,837 1,285 3,484 1,088 980 183 136 1,945 363 1,213 12,768 y/y 1% 2% 0% 6% -5% -5% 18% -18% -21% 45% 13% -2% 5.7% 08/2011 9,282 2,480 6,802 1,294 3,477 1,087 944 180 119 1,862 339 1,210 12,632 y/y 1% 3% 0% 8% -4% -4% 12% -20% -32% 60% 17% -2% 6.4% 09/2011 9,353 2,474 6,879 1,307 3,492 1,091 989 177 117 1,672 307 1,190 12,462 y/y 1% 1% 1% 9% -4% -3% 17% -19% -37% 50% -8% -4% 4.8% 10/2011 9,404 2,481 6,924 1,320 3,497 1,090 1,017 174 118 1,539 291 1,190 12,368 y/y 2% 1% 2% 10% -3% -2% 21% -19% -38% 47% -3% -4% 5.0% 11/2011 9,437 2,504 6,933 1,315 3,479 1,096 1,042 175 104 1,486 283 1,195 12,330 y/y 2.7% 3.3% 2.4% 8.9% -3.6% -2.2% 25.4% -18.4% -42.5% 43.6% 7.0% -3.4% 5.5%
Page 15
Other major markets Japan (% y/y)
China (% y/y)
India (% y/y)
Brazil (% y/y)
Russia (% y/y)
Sources: Datastream, Erste Group Research Erste Group Research | The Austrian View Page 16
CEE countries
Czech Republic
M1 and M2 (y/y)
45% 40% 35% 30%
15%
Private sector loans (y/y)

30% 25% 20%
M1
M2
25%
10%
20% 15% 10% 5% 0% 5.2%
15,2%
5% 0%
-10% -15%
Source: Datastream, Erste Group Research
O kt .0 2 Ap r.0 3 O kt .0 3 Ap r.0 4 O kt .0 4 Ap r.0 5 O kt .0 5 Ap r.0 6 O kt .0 6 Ap r.0 7 O kt .0 7 Ap r.0 8 O kt .0 8 Ap r.0 9 O kt .0 9 Ap r.1 0 O kt .1 0 Ap r.1 1
Hungary
M1 and M2 (y/y)
30.0% M1 25.0% 20.0% 15.0% M2
20%
M3 (y/y)
25%
15%
10.1%
10.0% 5.0% 0.0% -5.0% -10.0%
10%
Jan-03
Oct-03
Jul-04
Apr-05
Jan-06
Oct-06
Jul-07
Apr-08
Jan-09
Oct-09
Jul-10
-5%
Poland
M1 and M2 (y/y)
35% 30% 25% 20% 15% 10% 17.8% M1 M2
M3 (y/y)
25%
20%
15%
10%
5%
5% 5.2% 0%
Jan-04 Jul-04 Jan-05 Jan-03 Jul-03 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
0%
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
-5%
-5%
Jul-11
Apr-11
Ja n03 Ju l-0 Ja 3 n04 Ju l-0 Ja 4 n05 Ju l-0 Ja 5 n06 Ju l-0 Ja 6 n07 Ju l-0 Ja 7 n08 Ju l-0 Ja 8 n09 Ju l-0 Ja 9 n10 Ju l-1 Ja 0 n11 Ju l-1 1
kt .0 2 Ap r .0 3 O kt .0 3 Ap r .0 4 O kt .0 4 Ap r .0 5 O kt .0 5 Ap r .0 6 O kt .0 6 Ap r .0 7 O kt .0 7 Ap r .0 8 O kt .0 8 Ap r .0 9 O kt .0 9 Ap r .1 0 O kt .1 0 Ap r .1 1
-5%
5%
0%
Page 17
-20% 10% 20% 30% 40% 50% 60% 70% 80% 0%
-10%
10%
20%
30%
40%
50%
60%
70%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Turkey
Ukraine
Jan-03 -10% 0%
Romania
M1 and M2 (y/y)

Apr-06 Jul-06 Oct-06
M1
M1 and M2 (y/y)
M1 and M2 (y/y)
-10.0%
0.0%
Oct-03 Jul-04
Jan-07 Apr-07
M2
Apr-05
Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
Jan-06 Oct-06
M1

Jul-07
M2
M1
Apr-08 Jan-09 Oct-09
M2

Apr-10 Jul-10
Jul-10
Oct-10 Jan-11 Apr-11 Jul-11

7.2%
34.7%
Ja n03 Ju l-0 3 Ja n04 Ju l-0 4 Ja n05 Ju l-0 5 Ja n06 Ju l-0 6 Ja n07 Ju l-0 7 Ja n08 Ju l-0 8 Ja n09 Ju l-0 9 Ja n10 Ju l-1 0 Ja n11 Ju l-1 1
Apr-11
17.1%
27.3%
14.7%
Oct-11
10% 5%
15%
20%
25%
45%
30%
35%
40%
0%
10%
20%
30%
40%
50%
60%
0%
Ja n-
10%
20%
30%
40%
50%
60%
70%
80%
90%
M3 (y/y)
M3 (y/y)
Credit outstanding (y/y)
-10%
0%
Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Ja n M -03 ay S e -03 p J a -0 3 n M -04 ay S e -04 p J a -0 4 n M -05 ay S e -05 p J a -0 5 n M -06 ay S e -06 p J a -0 6 n M -07 ay S e -07 p J a -0 7 n M -08 ay S e -08 p J a -0 8 n M -09 ay S e -09 p J a -0 9 n M -10 ay S e -10 p J a -1 0 n M -11 ay S e -11 p11
03 Ju l-0 3 Ja n04 Ju l-0 Ja 4 n05 Ju l-0 Ja 5 n06 Ju l-0 Ja 6 n07 Ju l-0 7 Ja n08 Ju l-0 Ja 8 n09 Ju l-0 Ja 9 n10 Ju l-1 Ja 0 n11 Ju l-1 1
Page 18
Disclaimer
Published by Erste Group Bank AG, Neutorgasse 17, 1010 Vienna, Austria. Phone +43 (0)5 0100 - ext. Erste Group Homepage: www.erstegroup.com On Bloomberg please type: EBS AV and then F8 GO. This research report was prepared by Erste Group Bank AG (Erste Group) or its affiliate named herein. The individual(s) involved in the preparation of the report were at the relevant time employed in Erste Group or any of its affiliates. The report was prepared for Erste Group clients. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgment on the date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may from time to time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Further information on the securities referred to herein may be obtained from Erste Group upon request. Past performance is not necessarily indicative for future results and transactions in securities, options or futures can be considered risky. Not all transactions are suitable for every investor. Investors should consult their advisor, to make sure that the planned investment fits into their needs and preferences and that the involved risks are fully understood. This document may not be reproduced, distributed or published without the prior consent of Erste Group. Erste Group Bank AG confirms that it has approved any investment advertisements contained in this material. Erste Group Bank AG is regulated by the Financial Market Authority (FMA) Otto-Wagner-Platz 5,1090 Vienna, and for the conduct of investment business in the UK by the Financial Services Authority (FSA) and for the conduct of investment activities in Croatia by the Croatian Financial Services Supervisory Agency (CFSSA). Notice to Turkish Investors: As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. Please refer to www.erstegroup.com for the current list of specific disclosures and the breakdown of Erste Groups investment recommendations.
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Erste Group Research The Austrian View | Equities | Global 21 December 2011

The Austrian View

Erste Group Research | The Austrian View

Equities and monetary statistics

M1 and M2 seem to good leading indicators for equities

Change in rate of money and debt supply drives equity markets

and can act as leading indicator for equity investors

Retrieved from: http://www.nber.org/papers/w16567.pdf Page 2

Erste Group Research | The Austrian View

Additional tool at the investors disposal

S&P 500 2001 - 2007

Slowing growth of monetary forces as leading indicator for equity markets

Erste Group Research | The Austrian View

Source: US Fed, Reuters

German DAX shows a very high correlation to German M1 growth

Erste Group Research | The Austrian View

Money statistics 2008 - 2011

Source: US Fed St. Louis, Datastream

Source: US Fed St. Louis

EuroStoxx50 vs. EURO M1 growth Oct-07 Nov-11

Eurozone money base Feb-2000 Dec-2011

The sluggish development of M1 is not really supportive for European equities

Growth pace picking up significantly in Nov-2011 (+19% y/y)

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

Source: Reuters, ECB

EM money supply data shows similar pattern to developed world

Debt statistics 2008 - 2011

USD and Eurozone debt growth dominated by public sector

Private debt growth

Recent pick up of debt growth pace (+3.7%) of US businesses is a bright spot

USD total debt growth stabilizing at around 3-4% Mar-04 - Sep-11:

Erste Group Research | The Austrian View

Substantial debt growth in EM since October 2008

China: Slowdown continues Chinese loans development Jan-05 Oct-11

5% 0% Jan-11 Apr-10 Jul-09 Jan-08 Oct-08 Apr-07

Sluggish debt growth reflected in weak equity performances YTD

Source: Factset, Performance measures in USD; 01/01/2011 13/12/2011

Erste Group Research | The Austrian View

Monetary developments in CEE

40.0% 27.3% 30.0% 20.0% 10.0% 0.0%

Erste Group Research | The Austrian View

f Polish M1 & M2 Sep-02 Oct-11 M1 trending down; while M2 picking up a bit

Development of Hungarian M1 & M2 Sep-02 Oct-11 M2 recently picking up quite significantly

Erste Group Research | The Austrian View

Where from here?

-0.6 -0.5 0.0 2.0 0.1 0.3

20.1 20.1 17.4 -1.2 0.2 6.3 6.0 1.2 6.8

4.2 8.0 10.1 6.7 6.1 2.3 3.0 5.2 7.2

Poland Romania Turkey

23.3 24.6 17.1

14.7 10.6 9.6 Ukraine Source: Datastream, Erste Group Research

Erste Group Research | The Austrian View

Equity indices YTD performance 2011

Source: Factset, Performance measures in USD; 01/01/2011 13/12/2011

Erste Group Research | The Austrian View

Erste Group Research | The Austrian View

Tables & charts

Govt. debt (y/y) and nominal GDP (y/y)

Source: ECB, Datastream, Erste Group Research

Debt growth (y/y)

Household loans (y/y)

Source: ECB, Datastream, Erste Group Research

Source: ECB, Datastream, Erste Group Research