Volume 8, Issue 10 Mar 10, 2008

Volume 8, Issue 10 Mar 10, 2008 >> SUMMARY ECONOMIC OVERVIEW US : 75 bp interest rate cut appearing likely this month EUROPE : Neutral policy stance reaffirmed last week JAPAN : Slowing US economy likely to have greater impact on the Japanese economy going forward ASIA : Bank Indonesia likely to switch policy rate to overnight market rate EQUITIES US : Cautious on Materials, Capital Goods and Energy Equipment & Energy Services sectors EUROPE : Markets seem to be pricing in returns lower than current levels JAPAN : Japanese equities to remain volatile in 1H08 ASIA : Equities likely to de-rate during inflation BONDS US : Favour corporate bonds EUROPE : Remain neutral on Euro government bonds JAPAN : Remain bearish on Japanese government bonds ASIA : Cautious on Asia corporate bonds CURRENCIES US : Modest downward trend likely to persist in the coming months EUR : A pullback likely in 2H08 JPY : JPY to benefit from risk aversion in the near term GBP : Liquidity strains signal downside risks for GBP AUD : AUD appears supported Source: Citi Investment Research Page 1 of 9

US/North America ECONOMIC OVERVIEW: 75 bp interest rate cut appearing likely this month Incoming data last week suggested a broadening of the economic slowdown characteristic of a recession. In particular, declines in construction seem to be spreading into nonresidential construction while the labour market has continued to soften. Furthermore, signs that consumer demand may be slowing could pose yet another hurdle for the outlook. An aggressive policy response may as such be deemed necessary and Citi analysts believe that the Federal Reserve could likely cut the funds rate by at least 75 bp at this month s meeting. US Leading Indicators: Jan 2005 Jan 2008 EQUITIES: Cautious on Materials, Capital Goods and Energy Equipment & Energy Services sectors Week ending Mar 7, 2008: Dow: -3.04% S&P500: -2.80% Nasdaq: -2.16% According to historical data, precious metals typically perform when the dollar weakens. In view of this, Citi analysts believe that any renewed strength in the US dollar, particularly if the European Central Bank (ECB) trims interest rates later this year, could potentially reverse the upward trend in commodities. As a result, Citi analysts are cautious on the Materials, Capital Goods and Energy Equipment and Energy Services sectors. Meanwhile, the absence of credit availability may also pose a strain on capital expenditure by firms and could potentially put capital driven industries at risk over the next 6 to 8 months. S&P 500: FIXED INCOME: Favour corporate bonds As at Mar 7 vs. Feb 29, 2008: 2-yr Try: 1.52/1.62 5-yr Try: 2.43/2.48 10-yr Try: 3.54/3.51 Treasuries: Current rates appear overvalued, in Citi analysts view. However, for investors desiring exposure, Citi analysts favour the 2- to 5-year part of the yield curve. High-Grade Corporates: Although the high grade market remains vulnerable to a macroeconomic downturn, Citi analysts do not expect defaults to intensify. High-Yield Corporates: While wider spreads have increased the attraction of high yield bonds, Citi analysts remain neutral on this sector as lower quality bonds in this sector could potentially see a pick up in defaults and further spread widening. EMD: Emerging market sovereign debt spreads have moved higher amid concerns about credit market tightening. In the view of Citi analysts, the improvement in emerging market economic fundamentals could potentially lead to outperformance against the developed market sovereign bonds in 2008. US Treasury Yield Curve: Mar 7 vs. Feb 7, 2008 Source: Citi Investment Research Page 2 of 9

Global Currencies USD [USD]: Modest downward trend likely to persist in the coming months With the depth of the near-term deceleration of the US economy still in doubt while financial conditions continue to deteriorate, Citi analysts expect the USD to continue to face modest downward pressure in the coming months. However, aggressive action by the Federal Reserve could potentially help stabilize the prospects for growth and the USD may recover somewhat in the latter half of 2008 as the US economy regains momentum. Citi analysts believe that the current economic backdrop may set the stage for further cuts going forward, potentially taking the funds rate to 2% by end 2008. Euro [Eur]: A pullback likely in 2H08 The euro could likely to drift higher against the dollar in coming months, as short-term interest rate differentials move in favour of the euro. However, a potential slowdown in investment spending and job creation coupled with modest easing by the European Central Bank could see the EUR pullback in the second half of 2008. Meanwhile, Citi analysts now expect policy rates to fall by a total of 50 bps this year, with a first 25 bp cut in 2Q08. Japanese Yen [JPY]: JPY to benefit from risk aversion in the near term The yen appears likely to appreciate relative to the greenback into 1H08 as incoming data suggests a US slowdown. With Japan appearing the least affected by the credit market strains among the large economies, the JPY could likely benefit from heightened risk aversion in the near-term. However, Citi analysts believe that as the global economic and financial risks wane in the second half of 2008, Japanese households may continue diversifying into foreign currency denominated assets, thereby weighing down the yen. British Pound [GBP]: Liquidity strains signal downside risks for GBP The GBP could likely be one of the weaker G10 currencies in 2008 as the UK economy decelerates rapidly due to housing-related spillovers from the credit crunch. It also appears unlikely for the UK to continue attracting the reserve diversification and Merger and Acquisition (M&A) flows that have funded its current account deficit in recent years. Citi analysts expect the Bank of England to embark on further easing and potentially bring rates down to 4.25% by end 2008. Australia Dollar [AUD]: AUD appears supported Interest rate differentials and commodity price fundamentals continue to provide support for the AUD. However, fears of a US recession have undercut risk appetite and have contributed to AUD depreciation. Nevertheless, Citi analysts believe that AUD appears supported but any weakness as a result of the US slowdown could moderate AUD s current momentum. EUR/USD: Sep 7, 2007 Mar 7, 2008 USD/JPY: Sep 7, 2007 Mar 7, 2008 GBP/USD: Sep 7, 2007 Mar 7, 2008 AUD/USD: Sep 7, 2007 Mar 7, 2008 Source: Citi Investment Research Page 3 of 9

Europe ECONOMIC OVERVIEW: Neutral policy stance reaffirmed last week The European Central Bank (ECB) kept interest rates on hold at 4% last week and reaffirmed its neutral policy stance. Recent indicators support the view that although growth remains somewhat below potential, it does not appear to be collapsing. On the other hand, the near-term risks to inflation still appear to the upside, although measures of long-term inflation expectations appear contained. Against this backdrop, Citi analysts are maintaining their expectations for a 50 bp interest rate cut by the ECB this year. EURO 15 Leading Indicators: Jan 2005 Dec 2007 EQUITIES: Markets seem to be pricing in returns lower than current levels Week Ending Mar 7, 2008: CAC: -3.58% DAX: -3.47% DJ Euro STOXX: -3.68% According to Citi analysts, the market appears to be discounting all time high Return on Equities (ROEs) and appears to be pricing in returns that are lower than current levels. In the view of Citi analysts, this appears consistent with the belief that the market may be trying to factor in a US recession but not a global recession. In terms of sectors, Utilities, Consumer Goods, Healthcare and Telecoms appears to be trading above their implied price to book value (P/BV), suggesting expectations of further growth. On the other hand, the market does not appear to be pricing in the current high ROEs in the Financials and Oil & Gas sectors. Dow Jones Stoxx: FIXED INCOME: Remain neutral on Euro government bonds As at Mar 7 vs. Feb 29, 2008: 2-yr Eurobond: 3.27/3.16 5-yr Eurobond: 3.33/3.37 10-yr Eurobond: 3.79/3.89 Citi analysts remain neutral on European government bonds and favour the front portion of the curve with the expectation that the ECB may take on a more aggressive stance in policy easing. Euro Yield Curve: Mar 7 vs. Feb 7, 2008 Source: Citi Investment Research Page 4 of 9

Japan Economic Overview: Slowing US economy likely to have greater impact on the Japanese economy going forward Recent economic developments show that exports appear to be maintaining an upward track despite the US slowdown while consumer spending seems to be holding up better than expected. However, the corporate sector appears to be showing signs of softness with industrial production likely to decrease in the current quarter. Going forward, Citi analysts expect the impact on the Japanese economy from the slowing US economy to heighten steadily as there remains the possibility that the US could experience an extended period of low growth. Equities: Japanese equities to remain volatile in 1H08 Week Ending Mar 7, 2008: Nikkei 225: -6.03% Downward earnings revisions could potentially be an ongoing source of volatility over the next six months, in the view of Citi analysts. However, much of the bad news appears to have been priced into the market and valuations look attractive. Furthermore, Citi analysts also believe that demand from emerging economies could likely partially cushion the impact of a moderate US slowdown. As such, while Citi analysts expect Japanese equities to remain volatile in the first half of 2008, they believe that it could potentially participate in the global equity market recovery in the second half of the year. FIXED INCOME: Remain bearish on Japanese government bonds As at Mar 7 vs. Feb 29, 2008: 2-yr JGB: 0.52/0.57 5-yr JGB: 0.75/0.84 10-yr JGB: 1.36/1.37 Citi analysts expect 10-year bond yields to move higher as the potential for stronger growth in 2008 could put further pressure on bond yields. Citi analysts remain bearish on Japanese government bonds and favour the front portion of the curve. Japan Leading Indicators: Jan 2005 Jan 2008 Nikkei 225: Japan Yield Curve: Mar 7 vs. Feb 7, 2008 Source: Citi Investment Research Page 5 of 9

Asia Pacific Ex Japan ECONOMIC OVERVIEW: Bank Indonesia likely to switch policy rate to overnight market rate Despite policy rates being on hold, Bank Indonesia effectively tightened monetary policy with overnight market rates rising from 4% to about 7-7.5% in early January. In the view of Citi analysts, allowance for the adjustment in the overnight market rates suggests the preparation for the switch to using an overnight policy rate for the policy rate. Citi analysts expect the overnight rate to start at 8% after the transition and for Bank Indonesia to likely allow for stronger currency appreciation to contain inflation pressures. EQUITIES: Equities likely to de-rate during inflation The rise in inflation and fear of monetary tightening could likely result in the widening of Asian credit spreads, further undermining equity valuations. On a more positive note, although corporate earnings growth expectations still appear too high, Citi s implied earnings growth model continues to indicate declines in implied EPS (earnings per share) growth. Citi analysts continue to remain focused on cash flow and yield and on markets that are under-owned and have low expectations. Within Asia, Citi analysts remain overweight Hong Kong, Korea, Taiwan and Malaysia. In terms of sector, Citi analysts favour telecoms, utilities and consumer. China Business Climate Index: Jan 2005 Dec 2007 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: FIXED INCOME: Cautious on Asia corporate bonds Citi analysts remain cautious on Asian high-grade corporate bonds, as a deteriorating outlook for the US economy and the financial sector could continue to weigh on Asian credit spreads. Hang Seng: Source: Citi Investment Research Page 6 of 9

World Markets at a Glance (Data as at 7 March, 2008) Previous Week's Close 12-Mth Weekly Low 12-Mth Weekly High 10-Year High % Return YTD (LC) % Return YTD (USD) Taiwan Weighted Index 8,531.38 9,631.51 7,568.20 8,506.28 0.30% 5.85% Hang Seng 22,501.33 30,468.34 18,953.50 27,812.65-19.10% -18.95% Kuala Lumpur Composite 1,296.33 1,516.22 1,182.20 1,445.03-10.29% -6.33% JASDAQ Index (Japan) 63.32 86.13 62.03 130.21-12.26% -3.66% Straits Times Industrial 2,866.28 3,857.25 2,866.28 3,482.30-17.69% -14.47% Dow Jones Euro STOXX 343.62 442.87 343.62 416.23-17.18% -12.86% CAC 40 (France) 4,618.96 6,168.15 4,618.96 5,958.32-17.73% -13.43% S&P 500 1,293.37 1,561.80 1,293.37 1,469.25-11.92% -11.92% DAX (Germany) 6,513.99 8,092.77 6,513.99 8,067.32-19.25% -15.78% NASDAQ Composite 2,212.49 2,810.38 2,212.49 4,069.31-16.58% -16.58% All Ordinaries (Australia) 5,368.90 6,760.10 5,368.90 6,421.00-16.39% -11.20% Dow Jones Indus. Avg 11,893.69 14,093.08 11,893.69 13,264.82-10.34% -10.34% NASDAQ 100 1,707.50 2,213.86 1,707.50 3,707.83-18.10% -18.10% FTSE 100 (UK) 5,699.90 6,732.40 5,699.90 6,930.20-11.72% -10.33% Nikkei 225 12,782.80 18,238.95 12,782.80 18,934.34-16.49% -8.30% Mumbai Sensex 30 (India) 15,975.52 20,827.45 12,430.40 20,286.99-21.25% -23.39% Thai Stock Exchange 821.57 894.57 671.05 858.10-4.26% 2.30% Indonesia Stock Market 2,656.46 2,830.26 1,764.58 2,745.83-3.25% 0.26% Philippines Stock Exchange 3,028.73 3,824.20 2,884.34 3,621.60-16.37% -15.19% Korea Composite 1,663.97 2,028.06 1,423.58 1,897.13-12.29% -14.27% Global Currency Forecasts vs. Forwards (date as at 28 February, 2008) Source: CitiFX Views Source: Citi Investment Research Page 7 of 9

Asian Currency Forecasts and Forwards (date as at 7 March, 2008) Source: The Week Ahead Asia Edition Source: Citi Investment Research Page 8 of 9

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