29 April Dear Investor,

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1 From the desk of the Chief Investment Officer, Chan Chia Lin 29 April 2010 Dear Investor, Tug of War Risk assets have traded higher since the beginning of the year, against heightened market volatility. The significant correction in equities in late Jan-Feb notwithstanding, markets have been relatively resilient, given the number of threats that have emerged so far this year. These include Greek concerns, Chinese tightening and local government debt jitters, Sino-US tensions over the issue of RMB appreciation and the regulatory offensive against global banks. MSCI Asia ex-japan And JACI Returns % Change 23 Apr 2010 YTD JACI MSCI Asia ex-japan 1Q 2010 Returns MSCI China A MSCI Taiw an MSCI Singapore MSCI China MSCI Korea MSCI Asia ex Japan MSCI India ADXY MSCI HK MSCI World MSCI Malaysia MSCI EU JACI MSCI US MSCI Indonesia MSCI Japan MSCI Thailand % Source: Bloomberg, Apr 2010

2 Markets remain caught in a tug of war between cyclical and structural factors the cyclical global economic rebound and lingering structural headwinds. On the cyclical front, news flow continues to show a broadening of the global economic recovery. Consensus GDP forecasts and earnings are being upgraded across most countries, and the IMF now expects output in the advanced economies to reach 2.3% in 2010, an upward revision of 1 percentage point from its forecast in Oct 09. In the US, not only have earnings surprised positively for the th consecutive quarter in the current 1Q 10 reporting season, the size of the surprise has exceeded that in previous quarters. Analysts have raised their estimate for S&P00 1Q operating EPS by 11% since 1 Apr. We are also seeing a pick-up in capex spending on equipment and software. The rebound in profits, combined with relatively healthy corporate cashflows, suggest that the recovery in capex can continue for now. At what point will the upturn in economic activity lead to more aggressive monetary tightening? We remain convinced that monetary policy in the developed world will remain accommodative for a prolonged period. The Fed is likely to err on the side of caution when it comes to raising interest rates, a view that has been reflected in Chairman Bernanke s carefully couched rhetoric thus far. The recovery in the labour market in the developed economies has been anemic, and unemployment rates are still at record highs. While the tightening of bank lending standards appears to have stabilised and major banks are no longer reliant on emergency lending facilities, we have not seen a discernible pick-up in credit growth. The money multiplier in the US and Europe remains in the doldrums. Concerns that the cessation of the purchase of mortgage backed securities (MBS) by the Fed at the end of Mar would lead to a significant back-up in MBS yields have not materialised, as demand for agency papers remains strong among commercial banks. Real interest rates are therefore likely to remain in negative territory for some time longer, providing a supportive liquidity backdrop. Money Multipliers Remain Weak No Pick Up In US Credit Growth Yet M2 / Base Money 9 7 % YOY Change 0 3 Jan-00 Nov-00 Sep-01 Jul-02 May-03 US Mar-04 Jan-0 Nov-0 Sep-06 EU Jul-07 May-08 Mar-09 Jan Jan- J an- 01 Jan-02 Jan-03 Jan-04 Jan-0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: Bloomberg & CEIC Database, Apr 2010

3 Global decoupling in monetary policy The picture is somewhat different in Asia ex-japan, where growth has been much stronger and inflationary pressures are on the risk, fuelled in part by commodity price rises. I highlighted in last quarter s letter that regional central banks were likely to tighten ahead of and more aggressively than their developed market counterparts. This has been borne out by interest rate increases in Malaysia and India in Mar, and the move by the Monetary Authority of Singapore to switch to a stronger exchange rate policy this month. Although China has till now relied on other policy tools to tighten liquidity, raising the reserve requirement ratio (RRR) for banks twice in the first quarter, speculation is that it will soon increase the key policy rate. We anticipate another 2 to 3 RRR increases this year, and about 81bps of policy rate hikes. In addition, we are seeing increasing micro measures by the regional authorities to avert a property market bubble. In the last 2 weeks, we have seen new measures by China on an almost daily basis in this area. The latest measures include reducing the cap on the loan to value ratio for second mortgages; tightening the definition of second mortgages to include mortgages taken by members of the immediate family; raising lending rates to 11o% of the benchmark; and requiring 41 property developers to submit their capital raising plans for review of land use compliance to the Ministry of Land and Resources. Diverging trends in sovereign risk The economic dichotomy of a fragile West and resurgent East is also paralleled by diverging trends in sovereign risk. In contrast to the fiscal sustainability concerns in peripheral Europe, the ratings outlook for Asian sovereigns has remained positive. In Mar, S&P upgraded the outlook on India to stable from negative and affirmed the long-term rating of BBB-, after the country unveiled a clear roadmap to control its budget deficit, which currently stands at 80% of GDP. S&P also upgraded Indonesia s sovereign debt rating to BB, two levels below investment grade. The risk remains that investors may switch their focus to the health of government finances in the major developed markets, particularly in the US and UK, where the dramatic rise in public debt has raised questions about the sustainability of current government spending. US public debt to GDP is expected to reach 94% in 2010, and with the passing of the healthcare reform bill, the debt expansion is likely to continue. In the UK, this ratio is estimated at 72% for the current year. A bullish case for Asian currencies The combination of growth outperformance, earlier monetary policy tightening and improving sovereign outlooks has been bullish for the Asia ex-japan currencies. The JP Morgan Asia Dollar Index has risen 2.3% year-to-date, supported by buoyant capital inflows. Indeed, currency gains have accounted for close to 8% of the 3.2% gain in the MSCI Asia ex-japan Equity Index since the beginning of the year, compared to a 13% contribution in The currency gains would have been stronger, if not for the still interventionist tendencies of the region s central banks. On a purchasing power parity basis, Asia ex-japan currencies, in particular the Chinese RMB, are undervalued compared to the US dollar. Pressures are rising for RMB appreciation. The key issue here is not just increased political pressure from the US, but China s rising domestic imbalances and burgeoning property market

4 bubble. A stronger RMB would help the Chinese authorities contain inflation and boost the purchasing power of Chinese consumers, reducing the economies reliance on export- and investment-driven growth. Indeed, expectations of RMB revaluation are attracting foreign capital inflows, keeping Chinese money in the country, and exacerbating the property market bubble. We may well see a moderation in capital inflows post a RMB revaluation. The US Treasury s decision to delay its report on whether it regards China as a currency manipulator has increased hopes of an imminent currency move by the Chinese and allayed fears of a sharp escalation in Sino-US trade tensions. The latter can only be negative for global markets. Although talk of sanctions may appeal to US voters, it would lead to a tit-for-tat response from China. A spreading backlash of trade protectionism could deal the still fragile global recovery a blow that it can hardly afford at this juncture. Expectations of a sharp RMB adjustment would be unrealistic, however. Our belief is that China will resume its policy of gradual currency appreciation, allowing the RMB to strengthen by about % over the next 12 months. Much of that has been priced in by the NDF markets. We prefer to play the theme of Asian currency strength by going long a basket of Asian currencies, including the RMB, KRW, IDR and INR, against the USD, EUR and JPY. Local versus Global shocks The global rebound in economic activity and corporate earnings would likely help risk assets to move higher in time. However, the headline newsflow will remain fluid, especially regarding sovereign risk concerns in the euro zone. While the announcement that Greece would finally seek official IMF/EU aid was helpful, investors remain concerned about whether Greece can stomach painful structural reforms over the next 3-4 years. Moreover, contagion risks remain non-negligible as countries such as Portugal and Ireland are running sizeable deficits. Indeed, the ratings agencies have downgraded Greece and Portugal and put them on negative watch. Having said that, as long as developed market central banks retain their accommodative monetary stance, we think that Greece and China tightening concerns would likely remain local rather than global shocks. The impact would then be seen in the underperformance of affected countries, rather than a more significant setback for global risk appetite. We will retain our slight bias towards risk assets for now, and expect equities to grind modestly higher. Valuations for Asian equities are clearly not cheap, but are not yet at extreme levels consensus earnings growth estimates are still being upgraded. The current forecast of 31.% appears reasonable, given historical revenue growth trends. Given monetary tightening headwinds, however, Asian markets, particularly China, may underperform the US and Japan in the near-term. Currency gains should continue to account for a good part of the total return from Asian equities. Within Asia, we are maintaining our cyclical theme and retaining our overweight position in Korea and Taiwan, and cyclical sectors such as industrials, materials and financials (ex property) and technology. We are neutral on China. Chinese valuations are relatively attractive, but Chinese equities will find it difficult to outperform until there are clearer indications that the bulk of Chinese monetary tightening is behind us. With the politics-inspired sell off in Thai equities in the last 2 weeks, Thai equity valuations have become even cheaper. But the ongoing

5 political turmoil is unlikely to see a quick resolution that would trigger a sustained re-rating of the market. We are underweight the property sector throughout the region as we expect further regulatory measures by governments targeting property market speculation. MSCI Asia ex-japan Valuations Not Excessive (12M Forward PE) P/E Band Average +1 ST Dev -1 ST Dev Source: Bloomberg & Datastream, Apr 2010 Despite the massive spread compression, it is also too soon to be substantially reducing exposure to Asian bonds. We have shortened spread duration in our Asian bond portfolios slightly, and switched out of sovereign names, which have rallied substantially over the past month. We favour financials, which are trading cheap relative to corporates. The overall bond market is likely to be supported by strong foreign inflows from the search for higher yield and more robust sovereign fundamentals. Indeed, Asian bonds have been a major beneficiary of the more than US$7 billion that has flowed into emerging market bond funds since the start of While interest rates are on the rise within Asia, local yield curves are relatively steep and have priced in a fair amount of tightening over the next 12 months. We are nevertheless cognisant of the lingering structural imbalances in the developed world, and are mindful that the momentum of economic and earnings upgrades will start to roll over in the latter half of the year, removing a tailwind for stock markets. Investor positioning and sentiment is such that resurgent risk aversion could trigger broad outflows. The potential for further volatility cannot be discounted. The risk is that the current combination of still abundant liquidity and positive surprises could see markets trade much higher in the near-term, setting the stage for a substantial setback later in the year. We are watching the short-term economic and positioning indicators closely. Yours truly, Chia Lin

6 Disclaimer This commentary is for informational purposes only. It is not the basis for any contract to deal in any security or instrument, or for Fullerton Fund Management Company Ltd ( Fullerton ), or their affiliates to enter into or arrange any type of transaction as a consequence of any information contained here. Any opinion or view presented is subject to change without notice. The commentary here may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and you must make your own assessment of the relevance, accuracy and adequacy of the information and make such independent investigations as it may consider necessary or appropriate for the purpose of such assessment. This document does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of you acting on any information, opinion or estimate provided in this commentary. Past performance or any prediction or forecast is not necessarily indicative of future performance. Investments are subject to risks, including possible loss of principal amount invested. For enquiries, please contact: Fullerton Fund Management Company Ltd Regn. No: W Tel: info@fullerton.com.sg