Global Market Outlook-October 2012 This reflects the views of the Wealth Management Group

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1 This reflects the views of the Wealth Management Group 1. Central bank action supports riskier assets Contents Market Performance Economic and Monetary Outlook Investment Strategy Fixed Income Equities Commodities Alternative Strategies Foreign Exchange Conclusion 3-12 Month Market Outlook Disclaimer MSCI AC World total return index and Barcap global high yield bond total return index (=Jan 1 212) Jan -12 Mar-12 May-12 Jul-12 Sep-12 MSCI AC World TR Steve Brice Rob Aspin, CFA Manpreet Gill Suren Chelliah Victor Teo 2. Asset allocation summary October 212 Cash Fixed Income Equity Commodities Alternatives Note: OW = Overweight, N = Neutral, UW = Underweight. Source: Standard Chartered 3. Asset Performance (USD)* JP Morgan Cash MSCI AC World Daily TR CITI BIG DJ UBS Commodities DXY Curncy ADXY * For the period 21 Aug 212 to 19 Sept 212 Barcap global HY TR 12-mth UW UW OW OW N Pg 1 Pg 2 Pg 4 Pg 4 Pg 5 Pg 6 Pg 6 Pg 7 Pg 8 Pg 9 Chief Investment Strategist Head, Equity Investment Strategy Head, FICC Investment Strategy Investment Strategist Investment Strategist 3.84 Monetary vs. fiscal The US Federal Reserve has embarked on an open-ended monetary stimulus while the ECB has indicated a willingness to buy unlimited quantities of peripheral sovereign debt. This has propelled riskier asset classes, such as global equities and high yield bonds, higher. At the same time, we are approaching a critical period in terms of fiscal policy. The US is approaching the so-called fiscal cliff with no apparent solution in sight and Europe budget season in full swing at a time when the focus remains on austerity measures. All this adds up to the central scenario that monetary easing will be insufficient to knock us out of the Muddle Through scenario. We believe our VVIP Investment Strategy remains the appropriate way to access opportunities provided by the global environment. We have a preference for high dividend yield equities, US high yield bonds and Asian local currency sovereign debt. Monetary laxity and fiscal austerity (1) Monetary policy easing should be seen as aimed at offsetting the impact of deleveraging in western economies. Governments are still looking to tighten fiscal policies which will increase the burden on central banks to avoid recession Geopolitical risks are once again on the rise Investment strategy implications (2) Cash: Retain 12m Underweight Negative real returns likely to continue for the foreseeable future Bonds: Retain 12m Underweight Investment grade looking vulnerable post QE3 US high yield and Asian local currency debt preferred Equities: Retain 12m Overweight QE3 may boost cyclicals short term, but prefer high dividend stocks US preferred market given proactive central bank stance Preferred Asian markets are China, Korea and Thailand Commodities: Retain 12m Overweight Gold should remain buoyant given potentially unlimited QE3 Oil looks range-bound near term, but Middle East tensions rising Alternatives: Retain 12m Neutral Prefer CTA as an insurance policy against downside risks Currencies: EUR weakness expected to resume EUR has continued to rally, but may start running out of steam Asian, commodity currencies may consolidate near term, before appreciating further Market performance As with last month, we have seen all asset classes generate positive returns. (3) Equities continued to lead the pack as central banks acted to reduce tail risks. Bonds continued to perform well, led by continued spread compression across the corporate credit spectrum. Commodities also rose slightly, led by precious metals and industrial commodities. Agricultural commodities underperformed. The USD weakened as markets anticipated/ reacted to further Fed quantitative easing, while Asian currencies continued to appreciate. 1

2 4. Divergence between performance of US manufacturing and services sector 6. Total US debt ratio beginning to creep lower of GDP 4 US total debt to GDP ratio break down as of Q Jan - Jan-2 Jan-4 Jan -6 Jan-8 Jan-1 Jan-12 Public Sector Financial Sector Household Corporates 7. European growth outlook remains weak EU PMI and consumer confidence Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 EU Consumer Confidence EU PMI (RHS) 8. Draghi s commitment has lowered peripheral yields, for now 7 US ISM manufacturing and non-manufacturing Aug- Jun-2 Apr-4 Feb-6 Dec-7 Oct-9 Aug-11 US ISM mfg US ISM non -mfg 5. Fed has begun a new round of QE despite rising inflation expectations and a recovering economy US economic surprise index vs. inflation expectations QE1 QE2-2 Jan-9 Jul-9 Jan-1 Jul-1 Jan -11 Jul-11 Jan -12 Jul-12 US Economic Surprise Inflation expectations (RHS) Italy, Spain 1yr bond yields 3.5 Jan -1 Jul-1 Jan -11 Jul-11 Jan -12 Jul-12 Italy 1yr Spain 1yr Operation Twist QE Economic and monetary outlook The economic environment continues to fit with our theme of sluggish growth as western countries are forced to deleverage. This is requiring very loose monetary policies with the Fed easing policy in September and the European Central Bank effectively reducing the tail risks with regards to the sovereign debt crisis. While there are still significant risks to the economic outlook, we expect global policy makers to do enough to avoid pushing the global economy into recession. US: Data improves, Fed acts Labour market data has generally been improving. The recent employment report disappointed with net job creation slowing and the number of people giving up looking for a job rising. However, other indicators for instance, hiring intentions, job openings and job cuts have been on an improving trend. Manufacturing data is a major area of weakness and may hint at the effects of the European crisis and slower growth in Asia. However, the service sector continues to perform strongly and this is more important as it accounts for a far larger part of the economy. (4) A rebound in gasoline prices has boosted inflation and inflation expectations. One concern is whether this erosion of real incomes, at a time of limited employee wage bargaining power, may undermine consumer spending in the coming months. The Fed s decision to ease monetary policy was different in four key aspects. 1.It came as growth and inflation expectations are bouncing (5) 2.It is more directly aimed at spurring an already recovering housing market via purchases of mortgage backed securities 3.Purchases are no longer time-bound, but conditional on a substantial improvement in the labour market we read this to mean the unemployment rate needs to fall below 7 to halt MBS purchases, which the Fed expects to only happen in The Fed has left the door open to more drastic policy action should progress to this goal be disappointing. The Fed s response does not solve the economic challenges. The economy is still heading towards a sharp tightening of fiscal policy. While this is likely to be watered down, it is unlikely to happen ahead of the Presidential election. Uncertainty about the outlook for fiscal policy is inhibiting business willingness to make significant investments. Indeed, given the tight timelines involved, markets may be underplaying the risk of a policy mistake. Therefore, the Fed s action is more likely aimed at helping the economy avoid recession/deflation as the economy continues to go through its deleveraging process. (6) Europe: Reduced tail risks, but no growth (7) Economic data remains weak, the recent bounce in the economic surprises index notwithstanding. Business and consumer confidence remain fragile and there is little to suggest that Europe is going to imminently recover. As far as the crisis is concerned, we have repeatedly highlighted that three things need to be in place: 1.Sovereign debt markets need to be ring-fenced 2.Banking sectors need to be recapitalised 3.Focus on pro-growth policies needs to increase We have seen significant progress over the course of the last 3-6 months. However, there is still much work to do. The ECB s decision to potentially buy unlimited amounts of peripheral sovereign debt is a very significant development. The Long Term Refinancing Operations in December and February significantly reduced the tail risks facing the banking sector. The ECB s recent action reduces the tail risks for sovereign debt markets. (8) 2

3 9. Weak exports have played a key role in China s slowing growth 1. Economic data remains supportive of a muddle-through scenario Macro scenarios: Expected GDP growth U.S. Europe China Strong Growth 1 >2.5 >1. >8.5 Muddle through Managing the fiscal cliff will be key 6 China PMI and exports Feb-5 Aug-6 Feb -8 Aug -9 Feb -11 Aug China export y/y CBO growth and unemployment forecasts assuming fiscal cliff is not mitigated Q4 213 Q1 213 Q2 213 Q3 213 Q4 GDP y/y China PMI (RHS) Unemployment (RHS) Source: Congressional Budget Office, Standard Chartered Global recession 2 <1.5 <-1. < As always, there are some caveats. Support is conditional on countries seeking, and receiving, a bailout from the European Stability Mechanism and agreeing to any attached fiscal requirements. Meanwhile, any purchases will be sterilised which means these actions will not directly lead to quantitative easing. However, one should not under-estimate the ECB s determination to do whatever it takes to keep the Euro substantially intact. In addition, Spain is already making conciliatory noises about possibly seeking assistance. Meanwhile, it is conceivable the ECB is in the midst of a two step approach of 1) containing the crisis and 2) providing liquidity to support the economy. This means further monetary easing is likely with the economy remaining very weak. Asia: Faltering again China continues to slow. While additional policy measures have been announced such as the CNY 1 trillion infrastructure stimulus we have a lower conviction these will lead to a significant acceleration in the coming three months. (9) We have two concerns about the government s willingness to stimulate more aggressively. 1.The strength of the labour market this is naturally the government s primary concern and there still appears to be an excess demand for labour 2.The rebound in property prices The weakness in the Chinese economy is clearly undermining economies elsewhere in the region. However, central banks have been reluctant to ease policy over the past month, despite moderating inflation, possibly due to concerns that US monetary easing could generate local inflation going forward. However, the bias remains for any weakness in economic data to result in further easing. Macro scenarios unchanged (1) Our central scenario (with a 7 probability) remains for the Muddle Through environment to continue. This is expected to equate to approximately 2 growth in the US in 213 while the European economy stagnates. For these outcomes to be achieved, we believe significant monetary easing will be required to offset the impact of the deleveraging process. For China, we expect growth to stabilise around in 213. We continue to see a return to Strong Growth US growth exceeding 2.5, Europe recovering from recession and China experiencing a V-shaped recovery as the least likely outcome (1 probability). A case can be made that US consumers may give into pent-up demand and drive an acceleration in growth, pulling the rest of the world with them. However, the fiscal cliff is a significant hurdle that has to be negotiated before we can even consider this possibility. This, in turn, will require very swift action from policy makers after the election. (11) The above scenarios leave the risk of a Global Recession (2 probability in our opinion). The risks here are clear, including 1.The US experiences an excessive fiscal contraction in Q1 2.Europe fails to manage the sovereign debt crisis sufficiently, pushing Europe into a severe recession 3.China remains reactive to developments and allows the economy to weaken well below 7 growth 4.An escalation of tensions in the Middle East 5.An escalation of tensions in the South China Sea, particularly between China and Japan While one should not ignore these risks, we believe this scenario is an outcome that portfolios should be hedged against rather than positioned for. Investment Strategy What does the above mean for the Investment outlook? The rebound in economic surprises and the monetary policy announcements in both the US and Europe have helped riskier asset classes to rebound. Indeed, we are starting to see equity sectors which are more sensitive to the economic cycle starting to perform markedly better over the past 2 months. This is something we have experienced after past QE announcements. The key question is whether this is a false dawn or a sustained shift in terms of risk appetite and economic growth expectations. While there is scope for this rally in cyclicals to extend in the near term, we continue to expect periodic bouts of volatility. Therefore, we continue to favour the balanced approach embodied in our VVIP Investment Strategy: Value: search for it Volatility: be prepared for, and make use of, it Inflation: do not under-estimate its impact Pay: favour investments yielding a regular return 3

4 12. Asia HY spreads close to post-28 lows Asia HY no longer compensating well for additional risk over US HY 14 JACI HY Corp vs. BarCap US HY spreads () BarCap US HY OAS JACI HY Corp Spread Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Source: JPMorgan Barclays Capital, Bloomberg, Standard Chartered 14. Previous Fed QE episodes have led to higher yields following the event QE1 announced QE2 announced Operation Twist announced US 1yr Treasury yield () QE3 announced 1.3 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep Selected equity market performances over the last month (USD)* MSCI World TR MSCI Emerging Markets TR MSCI US TR MSCI EMU TR MSCI Asia ex Japan TR MSCI Japan TR * For the period 21 Aug 212 to 19 Sept Europe has rallied since Draghi s and ECB comments JACI HY Corp spread (bp) - Jun -9 Dec -9 Jun-1 Dec -1 Jun -11 Dec -11 Jun-12 Source: JPMorgan, Bloomberg, Standard Chartered Euro Stoxx index 2 Jan-12 Mar -12 May-12 Jul -12 Sep -12 Euro Stoxx dma dma 2 dma JACI HY Corp Blended Spread Median +1 std dev (1y) -1 std dev (1y) Fixed income Retain UW while remaining OW US corporate credit We downgrade our view on Emerging Market High Yield (EM HY) to Neutral, from Overweight earlier, but retain our Overweight on Developed Market High Yield (DM HY). We remain Neutral Investment Grade (IG) corporate credit and Underweight G3 government bonds. We continue to like Asia local currency bonds. The attractiveness of HY credit is gradually reducing, in our view. Continued policy efforts to support liquidity and extend the period of low rates is likely to continue supporting the Search for Yield. However, we note that increasingly tight spreads, record low yields and stretched relative valuations versus equities all suggest gradually reducing attractiveness from a risk-reward point of view. We believe the right way to express opposing forces on this asset class is by reducing EM HY to a Neutral weight (from Overweight earlier), but leaving DM HY at Overweight: EM credit spreads are tighter than DM spreads. This reduces the risk-reward trade-off. For example, Asian HY spreads are only about 1 away from post-28 lows, while they are over 7 away from post-28 highs. Valuations, thus, offer less of a buffer. (12) EM HY is a slightly riskier asset class than DM HY. However, spreads on both segments of HY have almost converged, implying investors are being less well-compensated for taking on additional EM risk. EM HY also offers less diversification benefits while US corporate credit, for example, is a much larger and more liquid universe. (13) A risk management framework favours DM HY over EM HY. We believe maintaining our DM HY Overweight allows us to capture the possibility of further extension of the Search for Yield. More importantly, however, we believe (a) the additional diversification offered in Developed Markets and (b) lower volatility relative to Emerging Markets mean DM HY helps manage the risks better than EM HY. That said, there is little on the horizon to suggest HY will underperform IG in the coming weeks. Broad regional exposure to Asian Local Currency bonds attractive: (a) yields remain well above those offered in G3 currencies, (b) credit quality remains strong, and (c) policymakers are generally in no rush to raise interest rates. We do, however, prefer a diversified approach to the region rather than on one or two markets alone. CNH bonds, for instance, still offer attractive yields, but a flat currency would mean they may underperform a broader regional approach. Be increasingly wary of interest rate risk. Recent evidence suggests long term yields have tended to fall in anticipation of Fed quantitative easing, but have tended to rise somewhat after the fact. This underscores the poor risk-reward tradeoff offered by G3 sovereign bonds. We prefer IG corporate bonds over government bonds, but note that narrowing spreads reduce the buffer they offer against the risk of rising interest rates. We continue to prefer to keep the maturity profile short in USD bond portfolios to manage this risk. (14) Conclusion: Reduce EM HY to Neutral to help manage risk but hold DM HY Overweight. Be increasingly wary of interest rate risk by keeping maturity profiles short. Asia local currency bonds, however, continue to look attractive. Equities Retain 12m Overweight Equities generally benefitted from the Fed actions in terms of additional QE and the ECB statements of support for the periphery s bond markets. While we remain constructive on equities over the longer term, we have to be cognisant of the short term risks. We prefer to focus on large capitalisation with high returns on equity, strong balance sheets, defensive business models and high sustainable dividend yields. (15) Our shift to go Neutral on Europe was well timed with the market continuing to perform well. However, those areas previously sold down, namely the periphery and the Financials have been the top performers. By way of example, the Spanish and Italian markets are now up some 35 off their mid-year lows, with the Athens composite index up c.6. Given the scale of the run up, we are of the opinion that a lot of the good news has already been priced in and would not be chasing the market aggressively at this stage. (16) 4

5 17. Technology has been one of the better sectors 12 S&P Tech sector vs. S&P Jan -11 Apr-11 Jul -11 Oct -11 Jan -12 Apr -12 Jul -12 S&P Tech S&P 18. Gold miners have started to play catch up 115 Gold price vs. Gold equities Jan -12 Mar -12 May-12 Jul -12 Sep-12 Gold price Gold equities 19. Equities have rallied following QE S&P and QEs QE1 QE2 QE3 6 Aug-7 Jun-8 Apr-9 Feb-1 Dec-1 Oct-11 Aug Commodity Performance (USD)* DJ UBS Agriculture DJ UBS Precious Metals DJ UBS Energy DJ UBS Industrial Metals * For the period 21 Aug 212 to 19 Sept We see excellent value in Europe, but we prefer to invest in those sectors/ companies that should perform reasonable well regardless of the underlying domestic economy. With this in mind our preferred sectors in Europe are Energy and Industrials. For some, this may be too conservative, but we still see weakness in the underlying data across the periphery, while austerity and deleveraging still have some way to go. We maintain our Overweight to the US market. To date, the US has been ahead of the curve in relative terms and its latest QE3 action is a significant step as it gives the Fed greater freedom to increase the size and scope of the measures. The US deleveraging process has, so far, been very smooth, with total debt/gdp levels and unemployment gradually falling, while inflation has so far remained very muted. While the fiscal cliff is still a concern, we are of the opinion that it will be watered down significantly and should it weaken the economy, the Fed is very likely to be there with additional liquidity. We remain Neutral on Asia ex-japan and Overweight China, Korea and Thailand. While China continues to slow, there are signs that its housing market has stabilised, if not improved in many areas. Furthermore, it is not just the banks that are trading at historical lows, but many sectors are now very cheap and the market is pricing in a lot of pessimism, which is usually a good time to take exposure. Korea should benefit from the Fed s action and the market is attractively valued. The reforms in India are encouraging but we remain Neutral on market as they still have some way to go to get inflation under control and growth back on track. Global Sector preferences: OW Technology: We continue to find the best opportunities in the Technology space. Within an environment of low yields and slowing global growth, the technology sectors still offers substantial earnings growth. This growth is also relatively defensive, as in many cases, companies have no choice but to get the latest software or hardware to maintain competitiveness. With high returns on equity and valuations at trough levels, the sector remains our top pick. (17) OW Energy: As a yield play and a hedge against inflation and increased geopolitical risk, it s hard to beat the energy sector. Valuations of the oil majors are super attractive and the sector yields around c.5 in Europe and c.2 in the US. The Energy sector in Europe is very cheap and would benefit from a weaker Euro. OW Telecoms: The Telco sector in the UK and China, as well as in other emerging markets, is in very good health and offers both defensiveness and, in the mobile segment at least, some growth. We are finding though that consumers are cutting usage back in many markets and that operators are becoming increasingly competitive. Sectors to watch following Fed actions and ECB statements: Materials: parts of the materials complex have performed extremely well and the precious metals sub-sector (gold miners) should continue to perform well in an environment of unlimited QE. (18) Cyclicals: We are Overweight the Consumer Discretionary sector in China and Neutral in the US and EU. Discretionary has significantly underperformed Staples in Asia and we see room for this to reverse. Financials: The Financial sector, particularly in Europe, has rallied on the back of the Fed s comments. Given the banks sub-sector is only c.6 in the US and many investors are still very overweight, the strength in the sector provides a good opportunity to start switching out. (19) Conclusion: As highlighted last month, we are moving towards greater easing from most of the major central banks which has been, and should remain, supportive of equities. Commodities Retain OW Commodity prices surged after the Fed s decision to implement further monetary policy easing on Sept 13. Though the US Fed s decision is now behind us, the possibility of further monetary easing by the ECB and the implementation of further stimulus measures by China are positive particularly for oil and gold. Economic growth disappointments pose the greatest risk to commodities. (2) 5

6 21. Inflation expectations are key for gold prices USD per oz Gold price and inflation expectations 1 Dec-11 Feb-12 Apr-12 Jun -12 Aug -12 Gold price (LHS) US 5 yr breakeven yield 22. Prices likely to remain elevated, but further upside unlikely DJ UBS Agriculture Aug-1 Feb -11 Aug -11 Feb-12 Aug Volatility has been a top-performing alternative strategy YTD* *as of 18th Septembe Global hedge fund index Macro /CTA Event driven Equity Market Neutral YTD returns of various HFRX strategy indices Merger Arb Distressed Volatility Equity Hedge 24. USD looks oversold and is likely to see a small bounce DXY 73 Jun -11 Aug -11 Oct-11 Dec -11 Feb -12 Apr -12 Jun -12 Aug -12 Precious metals Prices rallied on the back of policy decisions by both the US Fed and the ECB, as expected. We remain bullish on gold given central bank policy actions and rising inflation expectations. We also reiterate that, from a longer term perspective, the fundamental drivers pushing gold prices higher (central bank purchases, high debt levels in major economies, currency debasement) remain intact. We are overweight precious metals as gold provides an important inflation hedge within a portfolio. (21) Energy Crude oil prices were lower on the back of easing supply constraints and expectations of moderating demand given slower global growth prospects. However, we remain overweight on oil as geo-political tensions are rising. Oil provides possibly the most direct hedge against rising geopolitical risks in the Middle East. Industrial metals Industrial metals rose strongly after the US Fed decision and are expected to remain elevated in the medium term. However, we believe that prices may have overshot as demand from China remains weak. We prefer to stay neutral on industrial metals until concerns over slow Chinese growth begin to recede. Agriculture Agri prices softened over the last month after prices had earlier approached near-record levels. In our view, the expected decline in wheat production growth is offset somewhat by signs of moderating demand for soybeans, pointing to a more balanced view. However, the risk-reward profile looks unattractive from current, elevated price levels, causing us to remain underweight agri commodities. (22) Conclusion: Continuous support from the US monetary policy is likely to keep commodity prices buoyed with the possibility of a boost coming from the ECB and China. However, signs of slowing economic growth and potential risks arising from the Euro area debt crisis cause us to take a more balanced view. From a portfolio allocation perspective, gold and oil provide an appropriate hedge against inflation and geo-political risks, respectively. Alternative strategies Retain Neutral We continue to believe a Neutral stance is appropriate for Alternative Strategies exposure. Commodity Trading Advisor (CTA) strategies remains our preferred segment to help manage portfolio volatility while we continue to like volatility-linked strategies as a hedge against the risk of a rise in market volatility. Managing volatility remains the key reason to hold CTAs. Our concern remains not only with expected returns from each asset class, but also the volatility associated with those returns. This is where alternative strategies in general, and CTAs in particular, offer value, in our view. CTAs have tended to offer reasonably stable performance across a range of investing environments, with few exceptions. Correlation with other risky asset classes continues to be low, a very attractive characteristic, in our view. Volatility-linked strategies are a great hedge against the risk of a rebound in volatility. Measures of volatility, such as the VIX index, remain very low relative to recent history. This suggests markets may be too complacent following recent policy initiatives, despite the fact that many risks remain. We believe volatility-linked strategies offer an attractive hedge against such risks because they stand to benefit much more directly from any rise in volatility. In our view, therefore, such strategies hold an important place in any well-diversified portfolio. (23) Conclusion: Alternative strategies hold an important place in any well-diversified investment portfolio due to their role in helping manage volatility. We would continue to favour CTAs and volatility-linked strategies where possible. Foreign Exchange The USD weakened further following the US Fed s decision to pursue a third round of quantitative easing on Sept 13. Though the Fed announcement to ease monetary policy further was earlier than we anticipated, it was nevertheless consistent with our currency views. Further weakening in the USD is expected, but we do not rule a temporary bounce in the interim given significant oversold conditions. We believe the current reflationary environment is likely to continue supporting our bearish view on both the USD and EUR and bullish view on Asian and commodity currencies, given our expectations of further monetary easing by the ECB. Our 12-month views across major currencies are outlined below: (24) 6

7 25. Spreads supportive of stronger JPY USD-JPY vs UST 2 yr yields less JGB 2 yr yield Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 UST 2yr yield less JGB 2yr yield USD -JPY USD-JPY EUR-USD We are medium-term bearish on the EUR The recent strength in the pair is mainly attributable to the weakness in the USD, optimism from the ECB s announcement to stabilise the cost of borrowing of peripheral countries and significant EUR short covering. We believe the balance of risks point to the likelihood of EUR weakness from current levels. Further monetary easing by the ECB to support growth is likely sooner than later, which should be negative for the EUR. In addition, continued uncertainty surrounding the Euro area debt crisis continues to pose a risk. Together, these will likely erase recent currency gains. 26. Commodity currencies likely to remain supported by expectations of further monetary easing Commodity currencies Average performance of the AUD, NZD, CAD and ZAR Note: Commodity currencies performance is calculated as an index of the performance of AUD, NZD, CAD and ZAR with equal weights 9 Jan -11 Jul -11 Jan -12 Jul We remain medium-term bullish on Asia ex-japan currencies 121 ADXY Jun-11 Aug -11 Oct -11 Dec -11 Feb -12 Apr-12 Jun -12 Aug -12 USD-JPY We are medium-term neutral on the JPY (25) As expected, the Bank of Japan (BoJ) took further action to expand its quantitative easing program just after the US Fed decision. However, a mere JPY 1 trillion addition to its program continues to be insufficient, in our view. We are medium term neutral on JPY as a stronger currency arising from narrowing spreads between 2yr Treasury yields and 2 yr JGB bonds is likely to be countered by potential weakness arising from deteriorating trade and domestic activity. The impact of geo-political risks remains an uncertainty. GBP-USD We remain medium-term neutral on GBP The weaker USD coupled with a declining probability of further quantitative easing by the Bank of England, due to the string of positive labour market and manufacturing data, is likely provide some support to the GBP, in our view. However, uncertainties regarding the sustainability of the UK economy s current recovery and risks related to developments in the Euro area cause us to remain medium term neutral on GBP. AUD-USD We remain medium-term bullish on the AUD. (26) The US Fed and ECB monetary policy decisions have contributed to stronger demand for higher yielding assets, which has supported the AUD. We believe that sustained demand, coupled with higher prices, for commodities and purchase of Australian bonds by major central banks will likely continue providing strong support for the AUD. Australia remains one of the few developed economies with a stable top notch sovereign rating. We believe these drivers outweigh the risks of moderating growth in China and uncertainty in the Euro area. USD-SGD We remain medium-term bullish on the SGD The SGD strengthened considerably on the back of a weaker USD. Given signs of slowing domestic growth and moderating inflation, we believe the Monetary Authority of Singapore (MAS) is likely to soften its monetary policy stance by reducing the slope of SGD trade weighted index (NEER) to +2 per annum from 3.25 per annum. We remain medium-term bullish on SGD. We remain medium term bullish on Asia-ex Japan and commodity (AUD, NZD, CAD and ZAR) currencies given the US Fed s open ended easing measures, expectations of further monetary easing by the ECB and implementation of stimulus measures by China. However, we reiterate that the rate of appreciation of these currencies is likely to be moderate given growing risk to economic growth and the threat of bouts of risk aversion arising from uncertainty surrounding the Euro area debt crisis. (27) Conclusion: We expect high yielding, commodity and Asia ex Japan currencies to appreciate against the USD and EUR, albeit at a more moderate pace from current levels given the strong rally prior to the Fed announcement. Fiscal stimulus in China and expectations of further easing by the ECB is likely to provide further support for these currencies. Uncertainty of over the Euro area debt crisis remains a source of risk. Conclusion We have seen some very positive developments over the past month, particularly from a monetary policy perspective. Not only has this supported risk appetite in the short term, but it is also likely to have a significant medium term impact. However, the focus is likely to shift towards fiscal policy in the US and Europe in the coming weeks. This risks a temporary pullback in equity markets. Should this occur, we believe it would be a good opportunity for investors, who are still significantly underweight equities, to increase their exposure to this undervalued asset class. 7

8 3-12 Month Market Outlook Central bank policy rates Spot Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 US.25 Europe UK Japan Australia China 6.25 Taiwan Malaysia Indonesia 6.25 South Korea India Philippines Thailand Forex Spot Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 EUR/USD GBP/USD USD/JPY USD/CAD USD/CHF AUD/USD NZD/USD USD/CNY USD/SGD USD/MYR USD/IDR 74 9, 9,6 9,4 9, 9,4 9,2 USD/KRW ,12 1, 1,7 1,7 1,6 1,4 USD/INR USD/THB USD/PHP Commodities Spot Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Gold ,6 1,7 1,8 1,9 Silver WTI Crude Oil Copper ,6 8, 8, 9, Aluminium ,9 2, 2,2 2,2 Corn Soybeans ,7 1,675 1, 1,5 Wheat (Data and forecasts as of 21 st Sept 212) * Period averages for each quarter. 8

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