Climate change Tristan Hanson Investment Outlook June 2009

Investment Briefing June 2009  Uncertainty is unavoidable  “Safe haven” assets offer low or negative prospective real returns  Risk-assets are offering high compensation for risk by historical standards  Important distinction between types of risk: liquidity; volatility; fundamental  Global policy stimulus efforts are unprecedented: $2.5trn fiscal boost  Close to the end-game in the banking crisis? Decent odds “news” perceived as less bad over 2009 and risk-assets rally Strategy Conclusions (Feb 2009)

Investment Briefing June 2009 Rollercoaster ride for equities since last briefing Ashburton Replica Sterling Asset Management Fund JP Morgan Global GBI MSCI World GBP 02-Feb Feb Mar-0916-Mar-0930-Mar Apr-0927-Apr May-0925-May-09

Investment Briefing June 2009  Equities – further upside potential  Government bonds (US/Europe) - oversold and no longer overvalued  Sterling preferred currency major Macro views  Global economy poised for recovery  Long-term structural growth concerns remain  Inflation fears overdone Key points

Investment Briefing June 2009 The glass is still half empty Source: BCA Research

Investment Briefing June 2009 The glass is still half empty Source: Bloomberg AAI Investor Survey: % Bulls, 13 week average PESSIMISM EUPHORIA 20% 30% 40% 50% 60% 70% 80% Jun-90Jun-93 Jun-96 Jun-99Jun-02 Jun-05Jun-08

Investment Briefing June 2009 The glass is still half empty Source: Ned Davis Research, Bloomberg US Money Market Funds / stock market capitalisation 0% 5% 10% 15% 20% 25% 30% 35% 40%

Investment Briefing June 2009 Pessimism reflected in depressed valuations Source: Ashburton, S&P US: cyclically-adjusted PE ratio Mar-50Mar-55Mar-60Mar-65 Mar-70Mar-75Mar-80Mar-85Mar-90Mar-95Mar-00 Mar-05

Investment Briefing June 2009 S&P 500 PE ratio using 12 month forward EPS Source: Factset US PE ratio (12mf EPS) Jun-89Jun-91Jun-93 Jun-95Jun-97Jun-99Jun-01Jun-03Jun-05 Jun-07

Investment Briefing June 2009 Consensus expectation is a weak recovery Source: Macroeconomic Advisers (MA forecast) Strength of recovery versus severity of preceding recession Negative growth in recession (relative to versus trend) Sharper recovery Deeper recession

Investment Briefing June 2009 Earnings expectations are very depressed Source: Nomura, IBES Net Earnings Revisions %, (Up -Down) / Total, 3MMA World Earnings Revisions Balance

Investment Briefing June 2009 Asian outperformance expected to continue Source: Bloomberg Asia ex-Japan relative to MSCI World Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08Dec-08 Mar-09

Investment Briefing June 2009 Government bonds: oversold US 10yr Treasury Yield - 8 week change Jan-90Jan-92Jan-94 Jan-96 Jan-98Jan-00Jan-02Jan-04 Jan-06 Jan-08

Investment Briefing June 2009 US government bonds: no longer so overvalued US 10yr yield & 10yr average Fed Funds rate May-92May-96May-00May-04May-08 % 10yr Treasury yield Fed Funds rate (10yr average)

Investment Briefing June 2009 Yield curves are extremely steep US yield curve: 10yr-2yr Jan-86Jan-89Jan-92 Jan-95Jan-98Jan-01Jan-04 Jan-07 %

Investment Briefing June 2009 German 30yr bunds attractive given macro risks Value opportunity: yields are higher than during a global boom Jan-03Jan-04 Jan-05Jan-06Jan-07 Jan-08Jan-09 %

Investment Briefing June 2009 Fear #1: increased government issuance  Like all forecasts, predictions of government finances are subject to bias Effect on Government Bond Prices Growth EffectFiscal EffectNet Effect Growth stronger than forecast -ve+ve?? Growth weaker than forecast +ve-ve??

Investment Briefing June 2009 Fear #2: “printing money” & inflation  Central banks are filling the hole left by the private sector First post-WW2 contraction in household borrowing! Mar-80Mar-85 Mar-90Mar-95Mar-00 Mar-05 US Household Borrowing ($bn annualised quarterly rate)

Investment Briefing June 2009 Fear #2: “printing money” & inflation  Central banks are filling the hole left by the private sector Source: Bloomberg US: net change in consumer credit ($bn, 3m avg) Dec-88Dec-93Dec-98Dec-03Dec-08 US$ bn

Investment Briefing June 2009 Fear #2: “printing money” & inflation  Central banks are filling the hole left by the private sector 8.5% 0% 20% 40% 60% 80% 100% 120% May-06Nov-06 May-07Nov-07May-08 Nov-08 US M2 (% YoY) US Monetary Base (% YoY)

Investment Briefing June 2009 Sterling – positive trend Source: BIS CHEAP EXPENSIVE GBP: real effective exchange rate (100 = 2005) Jan-64Jan-69Jan-74 Jan-79Jan-84Jan-89Jan-94 Jan-99Jan-04 Jan-09

Investment Briefing June 2009 US$ - prone to swings in sentiment, but downward trend Source: Bloomberg US$ vs US equities Jan-08 S&P 500 Index US$ Index US equities US$ index

Investment Briefing June 2009 Taiwan dollar: long-term valuation case + catalyst Source: Bloomberg Asian FX performance vs US$ (100=Sep 1994) Sep-94Sep-99Sep-04 Sep 1994=100 Asian Basket TWD

Investment Briefing June 2009 Taiwan dollar: long-term valuation case + catalyst Source: Bloomberg Taiwan: current account -2, ,000 4,000 6,000 8,000 10,000 12,000 14,000 Mar-94Mar-99Mar-04Mar-09 TW$ m Taiwan: foreign exchange reserves Mar-94Mar-99Mar-04Mar-09 US$ bn

Investment Briefing June 2009 Ashburton Investment Strategy

Investment Briefing June 2009 Investment Strategy Replica Asset Management Asset Allocation Bonds 54% Govt/Govt Guaranteed24% Supranational13% Inflation-linked bonds13% Corporate4% Equities 39% US13% Pan Europe11% Asia15% Cash/Tbills7% 100% Source: Ashburton - as at 4 June 2009

Investment Briefing June 2009 Investment Strategy Replica Asset Management – currency overlay Currency Weightings (%) £€$ GBP8955 EUR-75- USD-482 JPY--- AUD-3- NOK35- TWD555 Other Asia338 Source: Ashburton

Investment Briefing June 2009 Two ways to beat the market*: (1)Predict the “news” better  Short-term forecasting is pointless  Focus on understanding medium-term structural trends (2) Predict the reaction to “news” better  Sentiment, positioning, consensus views  Valuations  Technical analysis/trend analysis What is important is not the “news”, but how the “news” differs from what was expected  Diversification: reduce risk but also augment returns *adapted from Woody Brock’s work ( Investment Process

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