Prudential International Investments Advisers, LLC. Global Investment Strategy March 2010

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1 Prudential International Investments Advisers, LLC. Global Investment Strategy March 2010 By John Praveen, Chief Investment Strategist For Market Commentary Interviews Contact: Lisa Villareal, Financial Market Outlook & Strategy: Stocks Recover, Resume Uptrend as Markets Refocus on Positive Macro and Earnings Fundamentals John Praveen s Global Investment Strategy March 2010 expects stocks to remain in an uptrend, having recovered from the recent correction, as markets refocus on positive macro and earnings fundamentals. Further stock market gains during H are likely to be driven by: 1) 3-speed global recovery with strong GDP growth in the emerging economies, solid growth in the U.S. and Japan, and weak growth in Europe; 2) Strong earnings rebound with rising revenues, wider margins & improved pricing power; Positive earnings surprises continue; 3) Low inflation in the developed economies and modestly rising inflation in the emerging economies; 4) Developed central banks keeping rates low through late 2010 (U.S.) and into 2011 (Europe and Japan); Emerging central banks undertaking gradual policy normalization and modest rate hikes. However, market volatility is likely to remain high with a continued tug of war between positive macro data and strong earnings versus renewed concerns about rate hikes in the Emerging Markets, fresh fears about fiscal deficits and debt defaults, and continued regulatory uncertainty (financial services & healthcare) from Washington. Bond yields have been under downward pressure due to the Greek crisis and growth disappointments in Europe. However, with the Greek crisis close to being resolved, risk appetite is likely to improve, decreasing the safe haven appeal of bonds in the near-term. Continued GDP recovery is also likely to push yields higher. However, central banks keeping policy rates low for most of the year and weak core inflation are likely to support bonds. Among global stock markets, we remain overweight Emerging Markets, but trimmed overweight on interest rate concerns. We retain overweight in the U.K., and modest overweight on Japan. We have upgraded Eurozone to modest overweight. We remain underweight on the U.S. Among global government bond markets, we remain overweight in Japan and Emerging Markets. We have upgraded Eurozone to modest overweight and downgraded U.K. to underweight. We remain underweight in U.S. Treasuries. Among global sectors, we remain overweight in Materials, Industrials, and Info. Technology. We have trimmed Energy and Financials to a modest overweight. We remain neutral in Consumer Discretionary and underweight in Consumer Staples, Healthcare, Telecomm, and Utilities. Financial Market Outlook: Stocks Recover, Resume Uptrend as Markets Refocus on Positive Macro and Earnings Data Stocks: Equities Recover & Resume Uptrend as Markets Refocus on Positive Macro & Earnings Fundamentals Equity markets recovered from the late January/early February correction as the Greek crisis moved closer to resolution with Eurozone nations pledging support to Greece after it submitted a second package of expenditure cuts and tax hikes to reduce the deficit. The late February/early March gains lifted Developed Markets into positive territory for the year (+1.7%) and trimmed YTD losses for Emerging Markets to under -1%. The macro backdrop for stocks remains favorable with GDP recovery on track, inflation remaining low in the developed economies, modestly rising in the emerging economies, developed central banks on hold and modest rate hikes in the emerging economies. GDP growth in Q1 is expected to be strong in Emerging Markets (EM), especially China (11%) and India (7%), solid in the U.S. (3.5%) and Japan (3%) and weak in Europe as Eurozone (1.2%) and U.K. (1.5%) struggle with a drag from fiscal tightening and the bitter winter. Headline inflation remains low in the developed economies but rising in China, India and several other emerging economies as surging food prices are adding to price pressures. However, core inflation remains low with high unemployment and low capacity utilization. Corporate earnings recovery continues from Q into Global earnings are on track for around 29% growth in 2010, driven by revenue growth stemming from solid GDP growth in the developed economies and strong growth in emerging economies. In addition, margins remain solid with controlled labor costs and rising productivity, while pricing power is rising with positive inflation and low inventories. Equity market valuation multiples improved further in February as strong earnings rebound offset modest stock market gains. P/E multiples are expected to improve further in coming quarters with strong earnings growth outpacing price gains. Having recovered from the recent correction, we expect stocks to remain in an uptrend as markets refocus on the positive macro backdrop and strong earnings outlook. We expect equity markets to post gains during H driven by: 1)3-Speed global recovery with strong GDP growth in the emerging economies, solid growth in the U.S. and Japan, and weak growth in Europe; 2) Strong earnings rebound with rising revenues, wider margins & improved pricing power; Positive earnings surprises continue; 3) Low inflation in the developed economies and modestly rising inflation in the emerging economies; 4) Developed central banks keeping rates low through late 2010 (U.S.) and into 2011 (Europe and Japan); Emerging central banks undertaking gradual policy normalization and modest rate hikes. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information. Page 1

2 However, market volatility is likely to remain high with a continued tug of war between positive macro data and strong earnings versus renewed concerns about rate hikes in the Emerging Markets, fresh fears about fiscal deficits and debt defaults, and continued regulatory uncertainty (financial services & healthcare) from Washington. Bonds: Greek Crisis Lifts Bonds. GDP Recovery & Greek Crisis Resolution to Push Yields Higher Global government bonds posted a modest gain in February with continued concerns about deficits and debt levels in Greece and other Southern European countries. U.S., Eurozone, and EM bonds posted modest gains in February, while U.K. bonds declined modestly. Bond yields have been under downward pressure due to the Greek crisis and growth disappointments in Europe. However, with the Greek crisis close to being resolved, risk appetite is expected to improve, decreasing the attractiveness of bonds over the near-term. Continued GDP recovery is also likely to push yields higher. However, central banks keeping policy rates low for most of the year and weak core inflation are likely to support bonds. Japanese bonds are likely to be supported by persistent deflation, the BoJ on hold, and elevated real yields. GDP growth solid in Q1 but likely to soften as stimulus wanes. In Eurozone, the Greek debt situation is likely to be the primary driver of yields in the near-term. However, weak Eurozone GDP growth, a lack of inflationary pressures and the ECB likely to leave rates on hold through 2010 are positive for Eurozone bonds. EM debt should benefit as EM spreads narrow with the resolution of the Greek crisis. Treasury yields are expected to rise with solid GDP growth, reduced safe-haven appeal, elevated headline inflation, rising fiscal deficit, and the Fed beginning to unwind its non-traditional measures. The outlook for U.K. Gilts is mixed with weak growth and BoE on hold supporting Gilts, but the big fiscal deficit, elevated inflation and low real yields are negatives. Investment Strategy: Stocks Recover, Resume Uptrend as Markets Refocus on Positive Macro and Earnings Data ASSET ALLOCATION: Stocks vs. Bonds Stocks - Remain Overweight: Risk aversion is easing with the Greek crisis close to being resolved. Stocks have recovered from the late January/early February correction and are likely to remain in an uptrend as markets refocus on the positive macro backdrop and strong earnings outlook. However, market volatility is likely to remain with any renewed concerns about rate hikes in the Emerging Markets, fresh fears about fiscal deficits and debt defaults, and continued regulatory uncertainty from Washington. Bonds - Remain Underweight: The resolution of the Greek crisis is likely to improve risk appetite, decreasing the attractiveness of bonds. Continued GDP recovery is also likely to push yields higher. However, central banks keeping policy rates low through late 2010 and weak core inflation are likely to support bonds. GLOBAL EQUITIES Overweight: Emerging Markets, U.K. 1) E.M.: GDP growth remains strong in Q1 after solid Q4 with solid consumption growth, recovery in external demand, and firm oil and commodity prices. Earnings outlook remains strong. However, EM now trades at a premium to DM on some valuation measures. Interest rate hikes a risk, hence trim overweight; 2) U.K.: Valuations and sector composition (Financials and Energy) are attractive. BoE expected to remain on hold through Rise in manufacturing PMI suggests economic outlook is improving. Modest Overweight: Japan, Eurozone 1) Japan: Earnings are on track to a solid recovery ~81% in BoJ remains on hold. GDP growth solid in Q1 but likely to soften as stimulus phases out. However, recent yen strength and stock valuations are negatives. 2) Eurozone: Resolution of the Greek crisis is a positive. Solid earnings outlook and attractive valuations are further positives. However, Q1 GDP growth tracking just 1.2% as auto programs roll off and deficit reduction plans depress growth. Underweight: U.S. GDP is expected to rise 3.5% in Q1. Solid Q1 earnings outlook after better than expected Q4 earnings season. However, U.S. is relatively more expensive and is likely to underperform as global markets resume the uptrend after the recent correction. GLOBAL BONDS Overweight: Japan Persistent deflation and the BoJ expected to remain on hold through 2010 are positives for JGBs. GDP growth solid in Q1 but likely to soften as stimulus phases out. JGBs are valued relatively attractively against Japanese stocks, relative to other markets. Modest Overweight: Eurozone Greek debt situation remains the primary driver of Eurozone yields in the near-term. However, weak GDP growth, a lack of inflationary pressures and the ECB likely to leave rates on hold through 2010 are positive for Eurozone bonds. Underweight: U.S., U.K. 1) U.S.: Treasury yields likely to be under pressure with a solid GDP growth and relatively elevated headline inflation. Resolution of Greek crisis likely to reduce risk aversion and safe-haven appeal. 2) U.K.: Inflation remains elevated in early 2010 before falling in Q2. Big fiscal deficit is a negative. Relatively weaker GDP recovery and the BoE unlikely to raise rates in 2010 are positives. GLOBAL SECTORS Overweight: Materials, Industrials, Info. Technology. Modest Overweight: Financials, Energy. Neutral: Consumer Discretionary. Underweight: Consumer Staples, Healthcare, Telecomm, Utilities. CURRENCIES Overweight: U.S. Dollar; Neutral: Yen, EM currencies; Underweight: Sterling, Euro. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information Page 2

3 The U.S. dollar should continue to remain in an uptrend against the developed currencies in the near-term. The resolution of the Greek debt crisis could lead to a rebound in the euro and pound in the near-term. However, the dollar should remain strong, given the much weaker growth in Eurozone and the U.K. relative to the U.S., and the ECB & BoE likely to remain on hold into Yen weakens against the dollar as risk appetite improves with Greek crisis resolution. Relative to euro and pound, the yen s outlook is relatively better with a stronger growth outlook and healthier banking system. Regional Equity Strategy Emerging Markets (EM): Most emerging economies are expected to post strong GDP growth in Q with around 11% in China, around 7% in India and solid growth in Latin America. However, some emerging central banks have started reducing the excess liquidity and normalizing interest rates. China, India and Brazil are expected to raise rates over the next few months. However, the rate hikes are expected to be modest. Growth in Emerging Asia continues to be driven by strong domestic demand and continued recovery in external demand. Emerging Europe and Latin America are benefitting from the strong oil and commodity prices. Emerging Market earnings growth for 2010 is expected around 29%, around 31% in China and around 20% in India. Earnings growth in EM Europe and EM LatAm is expected to post a solid rebound in Currency appreciation is a further negative for EM stocks. Trim overweight on interest rate concerns. Trimmed Overweight on interest rate concerns. U.K.: GDP growth in Q1 is expected to be just 1.5% annualized as a VAT increase related dip in consumer spending depresses growth. However, business spending is likely to support growth with the surge in manufacturing confidence. Valuations and sector composition remain positives for U.K. stocks. The BoE held the U.K. bank rate at 0.5% in March and is assessing the impact of its 200bn asset purchase program which was completed in February and is likely to resume asset purchases if GDP growth slows. Remain Overweight. Japan: Japanese earnings outlook is strong, with earnings expected to rise around 81% in GDP growth outlook is positive with GDP around 3% (from 3.8% in Q4) driven by exports and Capex. However, GDP growth likely to soften as stimulus phases out. Recent yen strength is a headwind for Japan s recovery. The BoJ left its target overnight call rate unchanged at 0.1% in February, and is likely to remain on hold through However relative valuations remain expensive. Remain Modest Overweight. Eurozone: Eurozone stocks and the euro have been battered by the Greek crisis. A resolution of the Greek crisis is expected to give a big boost to Eurozone stocks. Hence raised to modest Overweight. Further, Eurozone earnings are expected to rise around 29% in 2010, while Eurozone stocks are attractively valued and trading at a discount to the U.S., Japan and Emerging Markets. The ECB continue to hold rates at 1% at the March meeting and is unlikely to raise rates in 2010 due to weak GDP growth and to offset the drag from fiscal tightening. On the negative side, Eurozone GDP growth is expected to remain anemic in Q1 2010, around 1.2% as auto purchase programs roll off in several countries and deficit reduction plans in Greece, Spain and Portugal depress growth. Upgrade to Modest Overweight. U.S.: The U.S. economy is on track to a solid GDP growth, around 3.5% in Q driven by inventories and investment spending. Retail sales were strong in January and February driven by robust growth in core sales, suggesting stronger Q1 consumer spending. The Fed hiked the discount rate in February, but is unlikely to raise the Fed funds rate until late U.S. Q4 earnings season ended on a strong note, with earnings rebounding 201% YoY, ending several quarters of earnings decline. U.S. earnings are expected to rise a strong 37% in Q and 26% for full year However, U.S. is relatively more expensive and is likely to underperform as global markets resume the uptrend after the recent correction. Remain Underweight. Regional Bond Strategy Emerging Markets: The debt crisis in Greece and other Southern European countries has had some impact on appetite for Emerging Market bonds. Over the short-term, EM bonds are likely to post modest gains (relative to their strong historical returns) as the risk of contagion clouds EM prospects. However, relative to other markets, the returns to EM bonds, especially outside of Emerging Europe, could be attractive. Growth in emerging economies is on track to accelerate with exports growing, suggesting a further narrowing of spreads. There is still room for spreads to narrow, since they are still higher than they were before the crisis. Commodity prices have been relatively range-bound since October, but are getting close to where they can test the recent January high. On the other hand, EM central banks have either begun (China, India) or are soon to begin (Brazil) removing the monetary stimulus. Rising rates will likely put some upward pressure on yields. Remain Overweight. Japan: Macro factors are most favorable for Japanese bonds with persistent deflation and the Bank of Japan (BoJ) on hold. Japan s GDP growth is expected to be solid in Q1 but soften with fiscal stimulus phasing out, removing some of the support to consumer spending while consumer fundamentals remain soft. Japanese inflation remains in negative territory, largely driven by domestic deflationary pressures with the share of items showing price declines at record highs. The BoJ left its target rate unchanged at 0.1% in February. Further, there was no change in the BoJ s assessment of the economy and financial market conditions. The BoJ is expected to keep rates at 0.1% through 2010 amid severe domestic deflationary pressures and to support the GDP recovery. Elevated real yields are also positive for Japan. In the shortrun, the Greek situation has made little impact on Japanese yields, though by pushing up the yen it has boosted dollar returns for Japanese bonds. Finally, Japanese bonds are valued relatively attractively against Japanese stocks, relative to other markets. Remain Overweight. Eurozone: The Greek debt situation is likely to be the primary driver of Eurozone yields in the near-term. However, as of early/mid March, there has been substantial progress in resolving the situation with the EU/ECB endorsing Greece s second austerity plan. Looking beyond the debt problems in Southern Europe which may still cause volatility, Eurozone yields are likely to decline with weak GDP growth and lack of inflationary pressures. The aggressive spending cuts and tax increases in Greece, Spain, and Portugal is expected to depress Eurozone GDP growth. January and February inflation data from Eurozone and the individual countries indicates a lack of inflationary pressures. Deflation appears to be a bigger risk than inflation. Eurozone headline HICP inflation fell to 0.9% YoY in the February from 1% in January. Further, the ECB may be constrained to leave rates on hold through 2010 to offset the drag from fiscal tightening in Southern Europe. Thus, the outlook for Eurozone bonds is positive. Upgrade to Modest Overweight. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information Page 3

4 U.K.: The outlook for U.K. Gilts is mixed with weak GDP growth and BoE on hold supporting Gilts, but the big fiscal deficit a negative. GDP growth is expected to anemic as the U.K. is forced to undertake fiscal tightening to reign in the budget deficit, currently running around 12%. Further, inflation is elevated in early 2010 before beginning to ease in Q2 and Q3. When inflation begins to fall, this will be a positive for U.K. Gilts, but until then inflation will put upward pressure on yields. Finally, the BoE is unlikely to raise rates during 2010 to offset the offset the drag from fiscal tightening, and could even resume their QE program if growth disappoints, a positive for Gilts. This is a positive for U.K. bonds. Downgrade to Underweight. U.S.: We expect Treasury yields to rise with solid GDP growth in H1 - albeit slower than the Q4 pace combined with relatively elevated headline inflation. Further, a resolution of the Greek crisis should reduce the safe-haven appeal of Treasuries at least for the short-term. U.S. GDP is on track to solid GDP growth around 3.5% annualized in Q1 from the strong 5.9% pace in Q4. However, the rise in Treasury yields will likely be capped by declining core inflation, the Fed remaining on hold, and the steep yield curve increasing the demand for longer-dated securities. In the near-term, the outlook for U.S. Treasuries is driven by the Greek situation, but the outlook is more negative later on as the Fed begins to remove some of its non-traditional policy in anticipation of a rate hike later in the year. The huge fiscal deficit is another negative for Treasures. Remain Underweight. Global Sector Strategy Our global sector model ranks sectors on a comparative basis using macro factors, valuation, earnings and risk measures. Materials - Commodity prices rebounded in February/early March. Base metal demand is supported by OECD restocking and solid demand from EM, and is positive for Metal & Mining industry. Sector earnings are expected to surge 65% in Sector earnings revisions at 4.1% in January. However, sector valuations are expensive. Remain Overweight. Industrials - Business confidence remains solid, though moderating in February. Industrial Production continues to improve globally. Global sector earnings expected to rise 27% in 2010 supported by the ongoing GDP recovery. Improvement in the macro outlook is expected to translate into positive revenue growth and earnings revisions for the sector. Remain Overweight. Information Technology - Earnings expected to rise around 42% in Earnings revisions for Info Tech still remains the highest among all sectors. Outlook for semiconductors and hardware better than the less economically levered segments such as software. The ongoing commercial PC refresh cycle and other new product introductions are positives. Remain Overweight. Energy - Oil prices recovered to over $80 in February/early March. Fundamentals remain positive for oil prices with recovery in OECD demand and solid EM demand. However, concerns about the impact of the fiscal tightening in Europe and monetary tightening in Emerging Asia on demand are likely to pressure oil prices in the short-term. Modest Overweight. Financials - Capital market and M&A activity are recovering sharply. Credit conditions continue to improve. Financials earnings expected to rise 41% in Banks likely to benefit from the decline in credit losses and steep yield curve. Current valuations are expensive. Uncertainties about U.S. financial regulatory reform and proposed Basel III are negatives. Modest Overweight. Consumer Discretionary - Sector fundamentals remain soft with elevated unemployment rates globally. Consumer confidence moderated in Developed Markets. Recovery in consumer net worth and labor market likely to support consumption. Sector earnings expected to rise 61% in Discretionary likely to outperform Staples. Remain Neutral. Consumer Staples - Risk aversion is easing with the resolution of the Greek crisis, a negative for the sector. The sharp rise in input costs including energy and commodity prices are likely to make a dent on margins. Sector earnings are expected to grow just 11% in Sector s valuation remain attractive. Remain Underweight. Healthcare - The uncertainties about the Obama Administration s healthcare reform are likely to continue to pressure the sector in the near-term. The sustained recovery in the global economy and the decline in market volatility are negatives. Sector valuations are attractive. Earnings are expected to rise 9% in Remain Underweight. Telecomm Services - Telecomms are likely to underperform other sectors with the ongoing economic recovery still in its early stages. Sector valuations are attractive with a high dividend yield. However, increasing competition has put downward pressure on margins. Negative consumer fundamentals still a drag for the sector. Globally, earnings expected to rise 7% in Remain Underweight. Utilities - Easing of risk aversion is a major negative for the sector. Further, higher energy prices are likely to cut into profit margins. Sector earnings are expected to rise just 5% in 2010, while earnings revisions remained negative in February. Valuations are attractive with Utilities offering an attractive dividend yield. Remain Underweight. Strategy Summary: Asset Allocation Remain Overweight: Stocks. Remain Underweight: Bonds. Global Equities Overweight: Emerging Markets, U.K.; Modest Overweight: Japan, Eurozone; Underweight: U.S. Global Bonds Overweight: Japan; Modest Overweight: Eurozone; Underweight: U.S., U.K. Global Sectors Overweight: Materials, Industrials, Info. Technology. Modest Overweight: Financials, Energy. Neutral: Consumer Discretionary. Underweight: Consumer Staples, Healthcare, Telecomm, Utilities. Currencies Overweight: U.S. Dollar; Neutral: Yen, EM currencies; Underweight: Sterling, Euro. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information Page 4

5 Disclosure: Prudential International Investments Advisers, LLC (PIIA), a Prudential Financial, Inc. company, is an investment adviser registered with the Securities and Exchange Commission of the United States. The commentary presented is for informational purposes only, and is not intended as investment advice. This material has been prepared by PIIA on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information. All opinions and views constitute judgments of PIIA as of the date of this writing, and are subject to change at any time without notice. There can be no assurance that any forecast made herein will be realized. Distribution of this information to any person other than the person to whom it was originally delivered and to such person s advisers is unauthorized, and no part of this material may be reproduced or distributed further without the written approval of PIIA. These materials are not intended for distribution to, or use by, any person in any jurisdiction where such distribution would be contrary to local law or regulation. The companies, securities, sectors and/or markets referenced herein are included solely for illustrative purposes to highlight the economic trends, conditions, and the investment process, but may or may not be held by accounts actually managed by PIIA. The strategies and asset allocations discussed do not refer to any service or product offered by PIIA or by its affiliates The global asset and strategy allocation models presented are hypothetical allocation models shown for illustrative purposes only, and do not necessarily reflect the management of any actual account. Following the allocation recommendations presented will not necessarily result in profitable investments. Past performance is not an assurance of future results. Nothing herein should be viewed as investment advice to adopt any investment strategy, nor should it be considered an offer to provide investment advisory or other allocation services. Prudential and the Rock Logo are proprietary service marks and may not be used without the permission of the owner. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information Page 5