Global Emerging Markets Outlook
Market Performance from 31.12.1998 to 31.01.2006 360 310 260 210 160 110 60 98 Jun-99 99 Jun-00 00 Jun-01 01 Jun-02 02 Jun-03 03 Jun-04 04 Jun-05 05 MSCI World MSCI EM S&P500 Emerging markets continue to outperform their developed counterparts Source: Datastream, February 2006 Page 1
Global Growth Remains Supportive for Emerging Markets Page 2
Relative Performance of MSCI EM/World and OECD G7 Lead Indicator (year-on-year % change) 10% 0.6 8% 6% 0.4 4% 2% 0.2 0% 0-2% -4% -0.2-6% -8% -0.4-10% -0.6 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 OECD G7 LI yoy % chg (LHS) M SCI EM / M SCI World Free yoy % chg (RHS) Relative performance linked to economic activity Source: Datastream, February 2006 Page 3
World GDP Growth 2005 2006 2007 Consensus % Consensus % Consensus % World 3.3 3.3 3.2 US 3.6 3.4 3.1 Japan 2.5 2.2 2.1 EU 1.6 2.1 2.0 Latin America 4.2 4.0 4.1 North East Asia 7.1 6.9 6.8 South East Asia 4.8 5.4 5.3 Eastern Europe 5.3 5.3 5.3 Emerging markets offer premium growth Source: Consensus Economics January 2006 Page 4
Emerging Market Valuations Remain Attractive Page 5
Forward Price Earnings 22 20 18 16 14 12 2006 EM US WORLD P/E 11.3 15.3 14.9 EPS 17% 12% 12% PE/G 0.7 1.2 1.2 As at February 2006, IBES - 12 month forward 10 8 6 94 95 96 97 98 99 00 01 02 03 04 05 Forward P/E at low historic levels Source: Datastream, February 2006 Page 6
Price Earnings Discount to MSCI World 60% MSCI EM 12month Forward P/E Relative to MSCI World 40% 20% 0% -20% -40% -60% 88 89 90 91 Discount / Premium to World 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Emerging markets still at a discount to developed markets Source: Datastream, IBES, February 2006 Page 7
Liquidity Still Supportive Page 8
Inflows Support Emerging Markets US Mutual Fund flows into Emerging Markets 40000 30000 20000 10000 0-10000 -20000-30000 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Cumulative 12 month flow to GEM Bonds (RHS) Cumulative 12 month flow to GEM Equities (RHS) Source: UBS, January 2006 MSCI ACWI ex US has 12.6% in EM. MSCI ACWI free has 6.4% Anecdotal evidence suggests US investors in particular are underweight emerging markets Page 9
s Regional Outlook Page 10
Asia China Growth remains strong. Currency revaluation to continue Korea Stock market good value, export sector strong, domestic economy recovering India Excellent medium term outlook, current valuations expensive, reforms unlikely Page 11
EMEA Russia Economy strong, political concerns abating, oil price supportive CE3 Convergence theme liquidity, market performance affecting valuations Turkey Economic environment improved, accession process commenced, reflected in prices South Africa Currency overvalued, but strong domestic economy Page 12
Latam Brazil Economy remains stable, exports strong but electoral uncertainty, currency overvalued Mexico Reforms stalled during Presidential election campaign Argentina Growth continues, inflation becoming a concern, populist economic policy Chile Solid domestic economy, but market expensive Page 13
Risks Treasury yields and Fed Funds rates Impact of high oil prices on G7 growth and inflation Profit taking and increase in risk aversion Geo-politics Page 14
Summary The global economic growth outlook remains generally positive in 2006 Interest rates have risen in 2005. Further measured increases are discounted in the markets Earnings growth continues to support equities. Emerging Market valuations remain very attractive both relative to their own history, on a prospective P/E of 10x, and versus developed markets. Liquidity remains high but this could be squeezed short term as interest rates rise or profits are taken Page 15
Performance - Micropal (to December 2005) Awarded Standard & Poor s Period 1yr 2yr 3yr 4yr 5yr Return** 36.7 30.1 40.1 27.8 22.9 Percentile 23 31 22 21 14 Risk Adjusted Rank 51/415 91/391 35/372 18/341 3/310 Percentile 13 24 10 6 1 **Annualised Return% Prizes* S&P European winner over 3 years S&P European winner over 5 years S&P (Switzerland) winner over 5 years S&P (Germany) second over 5 years S&P (Italy) winner over 5 years *to end of March 2005 Source: S&P Micropal December 2005 Page 16
Emerging Market Equities - Competitor Analysis Rel. Return/Rel. Risk vs. MSCI EM Index* (since Inception: 01.01.99) 9.0% Relative Return (in % p.a.) 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% Comp. Global Emg Mkt (1.14) JPMorgan (0.73) Frank Russell (0.47) Merrill Lynch (-0.21) Fidelity (0.53) Capital Int. (0.37) Schroder (-0.33) ABN AMRO (0.65) Alliance Capital (0.47) ING (-0.32) Pictet (0.32) Templeton (0.47) Genesis (0.52) 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Tracking Error (in % p.a.) Date: December 2005 Source: Data Source: Standard & Poors - Micropal Work Station * used S&P IFCI Index up to 31/12/02. Returns above all relative to MSCI EM Page 17
Global Emerging Markets Strategy MSCI EM Target Target 06-Feb-06 09-06 08-Feb-06 Comments Asia: Korea 17.6 21.9 21.0 Domestic recovery in place. Liquidity and valuations and d supportive. China 8.0 11.1 11.4 Attractive valuations. Domestic economy remains strong. Currency appreciation expected. Taiwan 13.9 16.6 17.0 Attractive valuations and improving earnings growth. Domestic economy supportive. Thailand 1.8 4.8 4.9 Attractive valuations and earnings growth. Domestic economy improving. Malaysia 2.8 2.8 2.8 Reasonable valuations. Oil price supportive. Fiscal and growth concerns. Philippines 0.4 0.5 0.4 Attractive valuations, reasonable economic fundamentals. Uninspiring growth. Indonesia 1.5 1.4 1.5 Reasonable valuations. Continuing inflation and interest rate concerns. India 5.8 0.9 1.8 Expensive valuations fully reflect strong earnings growth. Selective bottom-up opportunities. Pakistan 0.2 0.0 0.0 Total: 52.0 60.0 60.8 Latin America: Peru 0.5 1.5 1.5 Commodity prices remain supportive but election uncertainty continues. Argentina 0.6 0.6 2.1 Strong economic growth but inflation and policy concerns. Economic policy uncertainty. Oil price supportive. Brazil 11.2 10.5 11.2 Reasonable valuations and declining interest rates. Expensive currency. Chile 1.6 0.0 0.0 Strong economic fundamentals but expensive valuations. Interest rates rising. Mexico 6.1 1.3 1.1 Unexciting valuations and earnings growth. Election concerns. Colombia 0.4 0.0 0.0 Venezuela 0.1 0.0 0.0 Total: 20.5 13.9 15.9 EM EA: Russia 5.7 8.6 5.7 Valuations no longer supportive following prolonged outperformance. Take profits. Israel 3.2 3.2 3.2 Stable economic environment. Reasonable earnings growth but interest rates rising. Overriding political uncertainty. Egypt 0.9 0.8 0.9 Expensive valuations offset earnings growth. Privatisation process accelerating. Liquidity remains supportive. Hungary 1.2 1.3 1.2 Reasonable valuations but continuing fiscal and currency concerns. Turkey 2.3 2.3 2.3 Good economic growth and earnings outlook. EU convergence process continues. Czech Rep 0.9 0.9 0.0 Reasonable economic fundamentals but expensive valuations offset strong earnings growth. Poland 1.6 0.0 0.0 Unattractive valuations, poor earnings growth. Short term political concerns South Africa 11.2 8.7 9.4 Uninspiring valuations and current account concerns. Currency risk remains. Commodity prices supportive. Jordan 0.2 0.0 0.0 Morocco 0.3 0.0 0.0 Total: 27.5 25.8 22.7 Liquidity: 0.0 0.3 0.6 Grand Total: 100.0 100.0 100.0 Source: Page 18
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