Focusing on earnings Sticking to a dividend-seeking strategy Weak yen sinks profits and stocks It s time to look for opportunities

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1 Volume 8, Issue 42 3 November 2008 SUMMARY ECONOMIC OVERVIEW US EUROPE JAPAN ASIA US EUROPE JAPAN ASIA BONDS US EUROPE JAPAN ASIA CURRENCIES US EUR JPY GBP AUD Fed may cut interest rates by 50 bps in December ECB likely to bring interest rates down to 2% or lower by mid-2009 BOJ makes 20 bps rate cut to 0.3% Negative wealth effects hit Hong Kong retail sales Focusing on earnings Sticking to a dividend-seeking strategy Weak yen sinks profits and stocks It s time to look for opportunities Favour high grade corporate bonds Cautious on Euro government bonds Less fiscal discipline may undermine Japanese government bonds Remaining cautious on the corporate bond outlook Financial stress to weigh on near-term outlook Further gradual weakening anticipated Modest depreciation expected in late 2009 Pound likely to remain weak AUD expected to remain volatile Page 1 of 9

2 ECONOMIC OVERVIEW Fed may cut interest rates by 50 bps in December Last week s initial gross domestic product (GDP) estimate for the third quarter revealed a sharp pullback in consumer spending. With financial conditions weighing heavily on the immediate outlook, Citi analysts anticipate this drag to intensify in the coming quarters. Nevertheless, in Citi s opinion, given that inflation pressures appear to be dissipating, this may allow room for the Federal Reserve (Fed) to manoeuvre interest rates in a bid to achieve more accommodating financial conditions. In particular, Citi analysts expect another 50 bps cut, probably in December That said, the economy and markets appear to be caught in a mutually reinforcing downturn and Citi analysts believe that discussions on the timing and nature of an economic recovery remain premature. Focusing on earnings Week ending Oct 31, 2008 Dow 11.29% S&P % Nasdaq % While investors continue to grapple with the reality of corporate profit weakness, the most significant uncertainty rests on the extent of deterioration, given a broadening array of possible sources of disappointment. Looking back at past recessions in the last 60 years, Citi analysts note that the average earnings slide has been around 13%, ranging from a high of 22% in and to a low of 3% in In this cycle, the financials sector has already experienced significant losses and both the autos and housing industries have been in the slump for 2 years. Thus, there is reason to believe that earnings downgrades are unlikely to fall below Citi s 2009 S&P 500 EPS estimate of a 27% decline. FIXED INCOME Favour high grade corporate bonds As at Oct 31 vs. Oct 24, yr Try 1.57/ yr Try 2.83/ yr Try 3.97/3.69 Treasuries Citi analysts remain underweight US Treasuries as current rates appear over-valued. However, for long-term investors seeking exposure, Citi analysts favour the 2- to 10-year portion of the yield curve. High-Grade Corporates Citi analysts prefer high-grade corporate bonds given that the risk/reward trade-off seems more attractive and valuations appear compelling. High-Yield Corporates Citi analysts are cautious on high-yield bonds, as high yield spreads have typically risen further during recessions. EMD Citi analysts remain neutral on emerging-market bonds. For investors who are seeking exposure, Citi analysts favour countries which have sound economic fundamentals and minimal amount of political risk. US Leading Indicators Jan 2005 Sep 2008 Source Bloomberg S&P 500 Source Bloomberg US Treasury Yield Curve Oct 31 vs. Sep 30, 2008 Source Bloomberg Page 2 of 9

3 ECONOMIC OVERVIEW ECB likely to bring interest rates down to 2% or lower by mid-2009 There appears to be little doubt that the European Central Bank (ECB) will cut interest rates after the governing council meeting on November 6, after hints by President Trichet. Citi analysts have so far been expecting a rate cut of at least 50 bps. However, given the sharp fall in inflation and economic sentiment readings last week, a rate cut by 100 bps now looks more likely than a rate cut of 75 bps or 50 bps. Going forward, Citi analysts continue to expect further interest rate cuts next year, potentially bringing rates down to 2% or even lower by mid EURO 15 Leading Indicators Jan 2005 Aug 2008 Source Bloomberg Sticking to a dividend-seeking strategy Week ending Oct 31, 2008 CAC 9.18% DAX 16.12% DJ Euro STOXX 10.74% Global equities are on course for the worst annual return since the 1970s. For the UK, this is the second worst year for equities (after 1974) in 300+ years. On the other hand, the collapse in prices has also been mirrored in valuations. In Europe, the crossover of market dividend yields and Price-to-Earnings Ratio (P/Es) appeared to be only 10-15% away at the lows of last week. Given a backdrop of further earnings downgrades, Citi analysts continue to stick to their strategy of favouring high dividend yielding companies with strong balance sheets and positive earnings trends. Dow Jones Stoxx Source Bloomberg FIXED INCOME Cautious on Euro government bonds As at Oct 31 vs. Oct 24, yr Eurobond 2.54/ yr Eurobond 3.20/ yr Eurobond 3.90/3.75 Citi analysts expect the yield curve to steepen as inflation concerns keep long-term rates elevated and weak growth leads the markets to price in policy rate cuts. Euro Yield Curve Oct 31 vs. Sep 30, 2008 Source Bloomberg Page 3 of 9

4 ECONOMIC OVERVIEW BOJ makes 20 bps rate cut to 0.3% The Bank of Japan (BoJ) lowered its policy interest rate from 0.5% to 0.3%, in an extraordinary decision where the BoJ governor made the final decision after a split vote. The BoJ cited increased severity in the global slowdown, and said the domestic economy is likely to suffer increased sluggishness for several more quarters. Citi analysts believe the BoJ was seeking to avoid disappointing expectations for the rate cut, which could have revived a yen surge that would hurt stock markets, corporate profits and ultimately economic activity. Citi analysts expect the new policy rate to be maintained while further measures to boost liquidity may be implemented if necessary. But further rate cuts, possibly to 0.1%, may still be made, depending on economic and financial developments. Japan Leading Indicators Jan 2005 Aug 2008 Source Bloomberg Weak yen sinks profits and stocks Week ending Oct 31, 2008 Nikkei % Japanese stocks have declined more sharply than US equities, with the Topix down 39% since the start of the year, compared to the 33% slump by the S&P 500. Profits of Japanese companies, which depend a lot on export sales, have been hit hard by the rise of the yen. Citi analysts note that Japanese stocks are trading at 1.2 times book value, well below the average of 1.8 times. But until there are clear signs that the global economy is bottoming out, equities may continue to languish. Citi analysts also feel Japanese policy makers have yet to provide sufficient stimulus, while US policy actions are likely to get into motion only next Spring. Until then, conditions may not remain supportive. FIXED INCOME Less fiscal discipline may undermine Japanese government bonds As at Oct 31 vs. Oct 24, yr JGB 0.55/ yr JGB 0.87/ yr JGB 1.48/1.50 Over the near-term, sluggishness in private domestic demand in the wake of higher raw material prices may likely continue to dissuade the BOJ from hiking interest rates. Citi analysts anticipate that the new Prime Minister of Japan, Taro Aso, may not pay as much attention to fiscal discipline as the former Prime Minister, Yasuo Fukada, and that the basic thrust of economic policies may shift going forward. Moreover, Citi analysts are concerned that the upcoming general elections may intensify this tendency, thus undermining the long-term government finance outlook and also the outlook for Japanese government bonds. Nikkei 225 Source Bloomberg Japan Yield Curve Oct 31 vs. Sep 30, 2008 Source Bloomberg Page 4 of 9

5 ECONOMIC OVERVIEW Negative wealth effects hit Hong Kong retail sales Citi analysts believe that Hong Kong's retail sales growth in September, forecasted at 8.4% year on year, was dampened by the negative wealth effect, as the global financial crisis, prompted middle and high-income consumers, and Chinese tourists from the mainland, to cut discretionary spending. On the other hand, with government measures to boost lowincome family disposable income, sales of food and necessities may have increased, and partially offset the negative wealth effect and supported retail growth. In Indonesia, Citi analysts believe that inflation likely moderated to 11.5% in October from 12.1% in September, as stable-to-softer food and commodity prices helped to contain food inflation. However, despite falling global oil prices, Citi analysts do not expect local pump prices to moderate as the average oil price is still above the government's budgeted average price. Citi analysts expect policy makers to remain vigilant in containing inflation and limiting the impact of currency weakness on inflation expectations. In Korea, in light of weakening exports and imports amidst the global financial crisis, Citi analysts expect policy makers to continue its easing cycle toward a policy rate of 3.00% until 1Q09, to address rising downside risks to growth. It s time to look for opportunities Stock prices are now at 1.3 times book value, down 57% from the peak. Citi analysts believe markets have discounted much of the bad news. Over the past 33 years, price-to-book-value ratios have been higher than 1.3 times for 90% of the time. But Citi analysts note that lows of 0.9 times were reached in 1982 and 1998, and much economic pain remains ahead. Citi analysts say earnings estimates are too high and expect many to be downgraded. They note that current forecasts tip Asian profit growth at 10% over the next 12 months. In contrast, earnings fell 30-50% in previous recessions. But Citi analysts note that current valuations suggest markets have already priced in a major retreat in earnings growth. Given current valuations and sentiment, Citi analysts believe investors should look for opportunities to invest, rather than to sell. Based on past recessions, Citi analysts warn against shifting to small- and medium-sized companies, and prefer big companies, cash flow generators and dividend payers. FIXED INCOME Remaining cautious on the corporate bond outlook Citi analysts remain cautious in the near-term about the Asian credit outlook, mainly on concerns about potential pressures within specific sectors in the region and macroeconomic weakness. Citi analysts as such suggest that investors stay defensive and focus on investment grade corporate bonds from issuers that have a stable or positive fundamental outlook. Whilst Citi analysts do not foresee a significant weakening among investment grade Asian bonds, they do believe that the macro backdrop points to further downside risks among high yield Asian bonds. China Business Climate Index Jan 2005 Sep 2008 Source Bloomberg Nb The China Business Climate Index ranges from 0 to 200. When the Index is higher than 100, it indicates that the economic performance is improving. Taiwan Weighted Index Source Bloomberg Hang Seng Source Bloomberg Page 5 of 9

6 USD [USD] Financial stress to weigh on near-term outlook According to Citi analysts, the dollar s appreciation over the summer reflected, in part, evidence that economic weakness was not solely concentrated in the US. Nonetheless, near-term uncertainty about the US economic outlook as well as recurring financial stress is likely to weigh on the dollar. However, over the longer-term, given that the current financial stress remains a global phenomenon, Citi analysts do not expect the consequences of financial stress to fall uniquely on the USD. Euro [Eur] Further gradual weakening anticipated The EUR has continued its sharp deterioration against the USD at a time when the outlook for the US economy deteriorated substantially, suggesting that the market continues to downgrade its outlook for the euro economy and European Central Bank (ECB) rates. However, Citi analysts continue to believe that the market s expectations of euro area GDP growth and ECB rates are still too high. (Citi s 2009 GDP forecast stands at 0.2% and they expect the ECB to cut interest rates to 2% by 2Q09) As such, Citi analysts look for a further gradual weakening of the EUR going forward. Japanese Yen [JPY] Modest depreciation expected in late 2009 The JPY appreciated sharply against high interest rate currencies (EUR and AUD) over the past month as deleveraging intensified. Meanwhile, the yen s appreciation against the greenback has been much more modest. Going forward, Citi analysts expect this combination to probably persist in coming quarters. As the outlook for the US economy improves late next year, a shift of Japanese households portfolio into foreign currency denominated assets may probably generate a modest depreciation of the yen. British Pound [GBP] Pound likely to remain weak The pound is likely to remain weak, reflecting the deterioration in UK economic prospects and the lack of an early recovery. Furthermore, political uncertainty and concerns about the UK s soaring fiscal deficit in the run-up to the next election are also likely to weigh on the pound. Nevertheless, further currency weakness is unlikely to deter the Monetary Policy Committee (MPC) from cutting interest rates further in an attempt to stabilize the economy. Australia Dollar [AUD] AUD expected to remain volatile The AUD continues to trade in a volatile range, with significant deleveraging of the carry trade, lower commodity prices and aggressive policy responses to the outlook for slower global growth. In Citi s opinion, any signs of financial market stability are likely to be supportive for the AUD but for now the risks remain to the downside. EUR/USD May 02, 2008 Oct 31, 2008 Source Bloomberg USD/JPY May 02, 2008 Oct 31, 2008 Source Bloomberg GBP/USD May 02, 2008 Oct 31, 2008 Source Bloomberg AUD/USD May 02, 2008 Oct 31, 2008 Source Bloomberg Page 6 of 9

7 World Markets at a Glance (Data as at 31 October, 2008) Previous Week's Close 12-Mth Weekly High 12-Mth Weekly Low % Return YTD (LC) % Return YTD (USD) Taiwan Weighted Index 4, , , % % Hang Seng 13, , , % % Kuala Lumpur Composite , % % JASDAQ Index (Japan) % % Straits Times Industrial 1, , , % % Dow Jones Euro STOXX % % CAC 40 (France) 3, , , % % S&P , % % DAX (Germany) 4, , , % % NASDAQ 100 1, , , % % All Ordinaries (Australia) 3, , , % % Dow Jones Indus. Avg 9, , , % % NASDAQ 100 1, , , % % FTSE 100 (UK) 4, , , % % Nikkei 225 8, , , % % Mumbai Sensex 30 (India) 9, , , % % Thai Stock Exchange % % Indonesia Stock Market 1, , , % % Philippines Stock Exchange 1, , , % % Korea Composite 1, , , % % Global Currency Forecasts and Forwards (Data as at 23 October, 2008) Source CitiFX Views Page 7 of 9

8 Asian Currency Forecasts and Forwards (Data as at 30 October, 2008) Source The Week Ahead Asia Edition Page 8 of 9

9 GENERAL DISCLOSURE Citi analysts refers to investment professionals within Citi Investment Research and Citi Global Markets (CGM) and voting members of the Global Investment Committee of Global Wealth Management. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information in this document has been obtained from reports issued by CGM. Such information is based on sources CGM believes to be reliable. CGM, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGM's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits or other obligations of, guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Some investment products (including mutual funds) are not available to US persons and may not be available in all jurisdictions. Investors should be aware that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If an investor changes residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Citibank does not provide legal and/or tax advice and is not responsible for advising an investor on the laws pertaining to his/her transaction. COUNTRY SPECIFIC Australia This document is distributed in Australia by Citigroup Pty Ltd Citigroup Pty Limited ABN , AFSL For a full explanation of the risks of investing in any investment, please ensure that you fully read and understand the relevant Product Disclosure Statement (PDS) prior to investing. Hong Kong This document is distributed in Hong Kong by Citibank (Hong Kong) Limited. Indonesia This report is made available in Indonesia through Citibank, N.A. Indonesia Branch, Citibank Tower Lt 7, Jend. Sudirman Kav 54-55, Jakarta. Citibank, N.A. Indonesia Branch is regulated by the Bank of Indonesia. Malaysia This document is distributed in Malaysia by Citibank Berhad. Philippines This document is distributed in Philippines by Citicorp Financial Services and Insurance Brokerage Phils. Inc, Citibank N.A. Philippines, and/or Citibank Savings Inc. Investors should be aware that Investment products are not insured by the Philippine Deposit Insurance Corporation or Federal Deposit Insurance Corporation or any other government entity. Singapore This document is distributed in Singapore by Citibank Singapore Limited (CSL). Co Reg. No K Where material is distributed by CSL, investors should note that Investment products are not subject to the provisions of the Deposit Insurance Act 2005 (Act 31 of 2005) of the Republic of Singapore or eligible for deposit insurance coverage under the Deposit Insurance Scheme. United Kingdom This document is distributed in U.K. by Citibank International plc., it is registered in England with number Registered office Citigroup Centre, Canada Square, London E14 5LB. Authorised and regulated by the Financial Services Authority. Page 9 of 9