investment outlook Temporary dip in global economic growth Reality check More defensive equity exposure is justified

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1 investment outlook June / July 2011 six-weekly newsletter Temporary dip in global economic growth Since April, the economic growth outlook has deteriorated. We expect that, as in 2010, this will be a temporary phenomenon, though the risks are somewhat greater than last year. The soft patch will relieve some of the upward pressure on inflation, which has risen as a result of higher oil and food prices. investment environment and special > pages 2 and 4 Reality check Reality check is the theme of the Quarterly Outlook Q Due to the signs of growing instability, we intend to watch market developments even more closely during the third quarter. By keeping a sharp eye on the direction of the global economy and the financial markets, we can respond even better to evolving developments. outlook > page 5 More defensive equity exposure is justified The interruptions in the supply of commodities and semi-finished products from Japan, the increased oil price and the soft patch in the global economy are unfavourable for equities, though only the last factor is new. Our positioning was already relatively defensive. As there are also positive factors (strong corporate sector), we see no reason to alter our neutral stance. outlook > page 5

2 investment environment Global economic slowdown Over the past three months, the global economy has suffered a substantial loss of momentum. In March, indicators that measure producer confidence, such as the purchasing managers index, were still at rarely-seen high levels. By May these had fallen sharply, though not yet to recessionary levels. Though the deceleration may last one or two quarters, we share the view that a recession is unlikely. In the first place, we believe that the causes of the current economic weakening are largely temporary (see also the special on page 4). In the second place, the majority of companies are in good shape in both solvency and cash terms and (US) household incomes are improving. Receding inflationary threat Inflation around the world with the exception of Japan has climbed further in the past months, driven both by rising oil and other commodity prices and by rising food prices. The latter factor had a particular impact on inflation in emerging countries (where food accounts for a larger proportion of the household budget). The extremely expansionary US monetary policy is probably also playing a role in the background. The money created as a result of this policy is searching for high yields, which are found in emerging countries where they contribute to price increases via extra demand for goods and services. The pace of inflation is expected to slacken in the coming months due to the decelerating economy as well as somewhat lower prices for oil and other commodities. Though the European Central Bank (ECB) will probably continue to hike interest rates at a gradual pace, lower inflation gives other central banks room to take things a little easier. Inflation in US, Eurozone and China % (year on year) % (year on year) US Eurozone China (right ax) Source: Datastream Inflation has risen around the world, but a gradual easing is anticipated as a result of decelerating growth. Germany versus periphery spreads %-point Deepening European debt crisis Despite a contracting economy, Greece has succeeded in reducing the public deficit from 15% of the gross domestic product in 2009 to 10% in Nevertheless, pressure for further austerity cuts is growing. Politicians are also pressing for a partial restructuring of the Greek debt, but the ECB opposes any forced reprofiling. The absence of a comprehensive solution to this problem is making the financial markets extremely nervous. ABN AMRO is in favour of such a comprehensive solution in order to restore confidence to the bond markets and avert a new banking crisis April July October 2011 April Greece Ireland Portugal Spain Italy Belgium Source: Datastream Interest rate spreads versus Germany have risen sharply for Greece, Ireland and Portugal. The other countries are not really seen as a problem.

3 market developments The financial markets have been nervous since March, with frequent sharp price swings. Increased uncertainties in several areas largely explain this volatility. The causes mentioned elsewhere in this report, such as decelerating economic growth, the European debt crisis, the consequences of the nuclear disaster in Japan and the persistent unrest in North Africa and the Middle East, are keeping a strong hold on the markets. Bond markets show a mixed picture In the second quarter, the bond markets were dominated by concerns over a rapid cooling of the global economy. Yields on 10-year government bonds fell in the United States and the eurozone to about 3% (from 3.5% in late March), thus following a very similar pattern to the one seen last year when fears arose of deflation and a new recession ( double dip ). In the United States, the Federal Reserve s ongoing bond purchasing programme played a role in the recent decline in yields. This programme is due to terminate at the end of June and we do not foresee the Federal Reserve embarking on a fresh round of quantitative easing. The deepening European debt crisis is a factor in the core eurozone countries, as the flight from Greek, Irish and Portuguese bonds towards the stronger euro countries is pushing down yields on the latter group. Uncertainties reflected in equity markets The global equity markets, which clocked up satisfactory gains in the first quarter, succumbed in the second quarter to the uncertainties detailed above. These effects were clearly visible in Japan and the Middle East. In Japan, prices plunged in the wake of the nuclear disaster in mid-march and suffered further losses in the second quarter to date. Turning to the Middle East and North Africa, equity prices in Saudi Arabia, Dubai and Abu Dhabi (where the situation remained relatively calm) recovered in the second quarter, while the other leading markets in the region continued to slide lower. On balance, Latin America also witnessed substantial price falls due to political developments (elections in Peru) as well as fears of monetary tightening (Brazil). Emerging Asia presented a mixed picture, with prices rising in Indonesia and Taiwan and falling in China and India. The United States has so far lost about half of the first-quarter gains in the second quarter. In this light, Europe turned in a fairly satisfactory performance. With the exception of the Netherlands (AEX -8.6% in Q2 to date), most countries suffered minimal damage in the second quarter. Switzerland was no doubt perceived to be a safe haven in this turbulent period and bucked the trend by gaining over 9% in the second quarter. The best-performing sectors so far in the second quarter were Healthcare and Consumer Staples. This has sent government bond yields in Greece, and to a lesser extent Ireland and Portugal, sharply higher. The mounting risk of government debt restructuring prompted extra sell-offs by the holders of these bonds. The possible restructuring of Greek debt is now the subject of heated debate. German politicians are among the chief proponents with a view to sparing taxpayers. Meanwhile, the ECB is among the opponents in view of the forced nature of such a move, and the fact that it may open the door to further debt restructurings in other problem countries.

4 special Double dip/soft patch In April, the macro-economic outlook took a sudden turn for the worse in many major economies. This is reflected in many confidence indicators which, incidentally, are still pointing to growth as well as in harder indicators such as output and order intake. The cause can be traced to the following four factors: A fairly normal decline in the stock cycle; An increase in the oil price; Interruptions in the supply of parts and semi-finished products after the disaster in Japan; A shift to a more restrictive policy, particularly in Europe. Though the shift in government policy was more gradual, the above developments followed each other in fairly rapid succession. The response in the financial markets was comparable to the slowdown in 2010, which sparked fears of a new recession (also known as a double dip ). Capital market rates have started to fall and equity prices have come under pressure. Though the double dip predictors got it wrong in 2010, similar fears are being voiced once again. US and European manufacturing purchasing managers indices Index: 50 = growth deceleration US Eurozone China Source: Datastream Purchasing managers indices for manufacturing point to a growth deceleration comparable with We feel it would be helpful to briefly discuss the differences between now and 2010 and analyse whether these differences point to a looming recession. As indicated in the previous edition, we consider an escalation of the conflicts in North Africa and the Middle East an unlikely scenario. Based on this assumption, we foresee some easing of the oil price, which will, however, remain higher than in Meanwhile, the situation in Japan is set to remain uncertain for as long as radioactive radiation impedes the reconstruction work. However, the interruptions in the supply chain can probably be resolved sooner. The reduction in stock levels is cyclical and will therefore, in our opinion, have a short-lived impact on the international economy. Finally, there is the shift towards restrictive fiscal policies, which we expect to expand to a growing number of countries. On balance, we believe the risks are somewhat greater than in 2010, but a recession does not seem very likely. It would be more appropriate to speak of a renewed soft patch, which may persist for one to two quarters.

5 reality check outlook Bonds Despite the higher inflation, yields in the international bond markets declined in the past two months amidst fears of noticeable global economic weakening. As we expect this slowdown to be limited in both size and duration, we anticipate a renewed rise in interest rates from the fourth quarter. Against this backdrop, we remain negative on bonds in general and, more specifically, will maintain an underweight position in government bonds. In view of the favourable global economic outlook for 2012 and the fact that corporate balance sheets are still robust, we remain overweight in corporate bonds. In order to limit our exposure to the anticipated rise in interest rates, relative short durations and the accompanying low interest rate sensitivity are given preference in our bond portfolio. Equities The equity markets are under the spell of both positive and negative factors. The positive factors include the favourable financial position of many listed companies (both solvency and cash) and the relatively attractive valuations vis-à-vis bonds. The negative factors are the depressed market sentiment (due to the European debt crisis) and the problems in the real economy owing to interruptions in supply from Japan, the higher oil price and the risk of an economic deceleration. Apart from the deceleration risk, these problems are not new, which is why we recently took up a more defensive position in our equity weightings and sector preferences. We consider it unlikely that the soft patch will develop into a full-blown recession and therefore see no need for any further changes to our neutral weighting in equities. Overweight positions in the Materials and Information Technology sectors may not appear to be defensive, but traditionally defensive sectors are currently less interesting for other reasons. Tactical asset allocation: Portefeuillemodel I II III IV V VI Tactical asset allocation Equities Real estate Bonds Cash

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