4q10 standpoint ca

8/8/2019 4Q10 Standpoint CA

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Q2 010

So it seems that the global debt banquet has

progressed onto its next unsavoury course. Onlya year or so ater policymakers came to the aid

o the fnancial sector that had overindulgedduring the boom years, investor anxiety has

switched to an unlikely area o fnancial markets.Government bonds o developed countries, the

saest asset class in many investors minds, arecurrently the principal source o discomort in

fnancial markets.

The key actor behind this is the disruption

that may be caused as certain governmentstackle their unwieldy debt commitments. These

burdensome levels o government debt arelargely a result o the global economic and

fnancial crisis. The chart on the next page showsthe Organisation o Economic Co-operation and

Developments (OECD) estimates o governmentnet fnancial liabilities as a percentage o gross

domestic product in the our largest developedeconomies the US, Euro Area, Japan and the UK

having reached their highest peacetime levelsand orecast to rise higher.

PAGE 3

CITI Outlook

PAGE 9

The Next Thing to WorryAbout: Infation?

PAGE 10Capex Interrupted,Recovery Ahead

PAGE 11Spotlight on Allocations

Debt Indigestion


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rom cover

>>Debt Indigestion

Concerns not misplaced

It is perhaps surprising that most o the recent market attention has centred on the debt o Euro Area member states since the

OECD orecasts that Euro Area total net government debt will be lower than that o the UK, US and Japan by the end o this year(see chart). However, this headline view hides the wide disparities among the member states o the Euro Area in terms o their public

sector fnancial health and the many other actors that determine the ability o governments to honour their debt obligations.

Furthermore, member states o the Euro Area are constrained in their range o policy responses that can be called upon to alleviatesuch pressures. For instance, they cannot allow their exchange rate to depreciate or lower interest rates independently in order to

stimulate economic activity as a means o improving government fnances. By the very nature o the Euro Areas current ramework,problems concerning a member countrys fscal position are likely to come to the ore sooner than similar problems in an economy

with its own currency.

The fscal situations in the US and Japan are less o an immediate concern, according to Citi analysts. With the US dollar continuing toact as the worlds reserve currency, there is still plenty o demand or US Treasuries rom oreign central banks. In Japan, the bountiul

savings o the household sector provides continuing strong demand or Japanese government bonds, despite the worrisome debtlevels. Even without genuine political will to eectively curtail the trajectory o public debt burdens in Washington and Tokyo, Citi

analysts believe that it may be a number o years beore fnancial markets react with the same level o anxiety as they currently arereacting to the peripheral Euro Area government fnances.

Reaching or a cure

Ater weeks o contentious debate, European Union leadersagreed that emergency assistance or Greece should jointly

come rom Euro Area member states and the InternationalMonetary Fund i the countrys debt problems intensiy. Citi

analysts warn that some Euro governments may be orced toimplement very severe austerity measures, which could dent

economic activity in the Euro Area over the coming years. Thegood news is that other larger member economies, particularly

Germany, have much sounder government fnances and thismay help to stabilise the region as a whole.

Perspective in the near term

Given Citi analysts belie that concerns regarding sovereigndebt burdens are already largely baked into current bond

market prices, they see monetary policy expectations as themain driver o sovereign bond yields over the coming year.

They orecast the frst Federal Reserve rate hike to occurlater this year, and the European Central Bank to ollow in

early 2011. With the markets increasingly anticipating higher

interest rates, they expect to see a limited sell-o o major

developed government debt over coming months. In Japan,the continuation o deation and near-zero interest rates islikely to see bond yields range bound over the coming year, in

their view.

Corporate bonds have signifcantly outperormed governmentbonds in developed countries since the height o the credit

crisis as risk aversion has abated. Despite the continued proftimprovements among corporations, Citi analysts believe that

the perormance o investment-grade corporate bonds may beundermined by the weaker perormance o government bonds

going orward. They do see more potential or non-investmentgrade bonds, which oer somewhat higher yields (as measured

by the Citi High Yield Market Index) relative to US Treasuries osimilar maturities. Likewise, given their more optimistic outlook

or emerging markets in terms o economic activity and fscalbalances, Citi analysts maintain their avourable outlook or

emerging market bonds (both sovereign and corporate) overthe coming year.

Source: Organisation o Economic Co-operation and Development Economic Outlook No. 86, November 2009.

Japan Euro Area United States United Kingdom

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F

General Government Net Financial Liabilities As A Percentage o GDP

PercentageofGDP(%)

120

100

80

60

40

20

0


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CITIOutlook

EQUITIES

NORTH AMERICA

US equity market gains likely to be uneven in 2010

US equity market perormance altered early in the frst quarter as sovereign credit ears

sparked concern that massive government defcits could weigh on global growth and havenegative proft implications. Economic growth in the US is likely to be sustained, accordingto Citi analysts, and they project moderate GDP growth o 3.3% in 2010 and 2.9% in 2011.

US equity market gains in 2010 are unlikely to be smooth despite the benefcial impact romthe earnings recovery, stabilising unemployment and increasing consumption rom positivewealth eects. We may see US equities making gains during the frst hal o the year butthen encountering a period o sotness in the second hal as markets increasingly ocus onthe challenges likely to be aced by year-end. Overall or the year, Citi analysts orecast USequities posting positive single-digit returns. Within the US equity market, they do not have apreerence or small-, mid- or large-cap stocks and remain evenly balanced between growthand value stocks.

With corporate profts recovering, corporate cash positions among S&P 500 companiesoutside the fnancial sector are at historically high levels relative to the market value othese companies. As such, companies with strong balance sheets may be in a position toincrease their dividends, a trend that Citi analysts see developing over several years. Indeed,the frst quarter marked the frst signifcant uptick in announced dividend increases or S&P500 companies since the ourth quarter o 2007.

EUROPE

Cautious revenue expectations

Citi analysts detect that the markets expectations or the corporate proft recovery may belosing some momentum as ewer equity analysts have recently been upgrading their proftorecasts or companies in the DJ Stoxx 600 index. According to the Institutional BrokersEstimate System (IBES) consensus o equity analysts, revenue growth is orecast to recoverrom -5% last year to 2% in 2010 and 4% in 2011. Citi analysts believe that there is reasonor more optimism, pointing out that historically, European corporate top-line growth hastracked global nominal GDP growth, which they orecast at 6-7% or 2010 and 2011. While

they expect the European economy to lag the world economy, they point out that around40% o European corporate revenues are derived rom outside Europe.

In terms o proftability, the European corporate sector appear to have done a better job atmaintaining proft margins throughout the recent recession than they did during the 2000-2002 downturn. The corporate sector has cut costs aggressively and pricing in general hasbeen robust. The consensus orecasts o equity analysts is or margins to be back at almostpeak levels at the end o 2010 and even higher at the end o 2011.

With stocks in the DJ Stoxx 600 index trading at values around 12-13 times analysts orecastso the coming years profts, which is somewhat cheaper than the historical average o 13.9times, there is still potential or corporate results to exceed expectations and drive Europeanequities higher.

JAPAN

Japanese stocks to enjoy cyclical rebound

Citi analysts believe that Japanese stocks may enjoy a strong cyclical rally this year, propelledby above-trend domestic economic growth and yen weakening since the beginning o theyear. That said, they are careul to distinguish this type o short-term rally rom any longer-term breakout rom the range-bound cycles that have characterised Japanese stock marketperormance ater the bursting o the bubble in the early 1990s.

Ater exporter stocks in Japan suered badly throughout the recent recession, we seepotential or them to lead the Japanese market rebound i the global economic recoveryand uptrend in global equity prices remains intact. Japanese exports o autos, electroniccomponents, auto parts and materials to Asia have been booming. Japans total exports wereup 40.9% in January 2010 rom a year earlier, according to Ministry o Finance data. Exportsto China were up 79.9%, accounting or 18.8% o all exports.

Citi analysts view global monetary tightening as the biggest risk to the stock market recovery.However, they note that central banks tend to raise interest rates when the economy isperorming well, and that the Tokyo Stock Price Index (TOPIX) o Japanese stocks has tendedto rise during global interest rate tightening phases since 1980. Given Japanese corporationshigh dependency on exports, it is natural that Japanese stocks rise when the outlook isimproving. Among the longer-term investment themes that may drive perormance amongJapanese stocks are Asian currency appreciation, global inrastructure investment andenvironmental technology innovation.

A snapshot of Citis global market views

across a select group of asset classes,

regions and currencies over the next six

to twelve months.

Our Market Outlook relects ourassessment o each asset class

independently o other asset classes. Citi

analysts believe that the global economic

recovery will continue over 2010, led

by Asia and lagged by Europe. This,

in their view, should be supportive o

higher corporate protability and o risky

assets, such as equities and corporate

bonds. However, ater corporate assets

have rallied so strongly in the year

since the depth o the nancial crisis

in March 2009 largely due to receding

risk aversion, gains are expected to be

slower going orward and subject to the

occasional temporary setback. Given

Citis orecasts o a more robust pace

o GDP growth among Asian economies

and other emerging markets, nancial

markets may over the coming year

continue to reward nancial assets

linked to these high growth markets,

such as emerging market equities,

emerging market sovereign bonds

and multinational corporate securities

with signicant revenues sourced rom

emerging economies. Rising market

expectations o the initial interest rate

hikes in the US and Europe may push

government bond yields higher over

coming months and undermine the total

returns in developed sovereign bond

markets. Furthermore, recent upsets

among the peripheral Euro Area bondmarkets highlight the risks associated

with particular sovereign issuers.

GLOBAL EQUITIES

MARKET MARKETOUTLOOK

POSITIVE

US Neutral

Europe Neutral

Japan Neutral

Latin America Positive

Asia Pacic Positive

Eastern Europe Positive

ALTERNATIVE INVESTMENTS


N/A

Hedge Funds Neutral

GLOBAL FIXED INCOME


NEGATIVE

Global Government Negative

Global High Grade Corporates Neutral

High Yield Neutral

Emerging Markets Neutral

Asia Neutral

GLOBAL CURRENCIES

CURRENCY OUTLOOKVS USD

Euro Negative

Yen Neutral

British Pound Negative


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EQUITIES

ASIA PACIFIC

Dividends likely to matter in trending markets

The pace o equity market gains is expected to moderate this year, according to Citi analysts who are anticipating total returns in the

range o 9-14% or the MSCI Asia ex-Japan index, which posted a 72.5% return in 2009. They highlight that Asian equity markets havetypically moved in distinct phases: the recovery; the grind; then the parabolic. Citi analysts believe that fnancial markets have now

passed through the frst phase, the recovery, where all the easy returns are made and that markets are now in the grind phase. Theyassert that this phase typically lasts or two years and is characterised by slower and lower, but still positive returns.

In this type o market environment, stocks paying high dividends could potentially outperorm the rest o the market. Citis analysis shows

that Asian dividend-ocused investment strategies have consistently outperormed investment strategies ocusing on companies in the

region with the highest earnings growth. Furthermore, dividend-ocused strategies have tended to be more stable than the overall marketover the last 20 years. With overall Asian equity market returns likely to be lower in 2010 than in 2009, Citi analysts believe that dividends

will likely be responsible or a greater share o investors total returns on Asian stocks going orward.

Within Asia, we continue to avour the outlook or equities in Hong Kong, Korea and Taiwan; and preer telecoms, banks and technologyat the sector level.

LATIN AMERICALatin American equities to grind higher as earningsoutlook improves

Despite a challenging frst quarter or Latin American equities,

with the MSCI Latin America index correcting by over 15% inJanuary and February, Citi analysts remain constructive on the

regions equities and expect a new high to be reached in thesecond quarter o 2010. While equity market volatility is likely

to be high and urther temporary corrections may occur, Latin

American equities are expected to maintain their long-termrising trend in the second year o what we believe to be a multi-

year bull market.

As is typical o the second year o a bull market, earnings areexpected to grow rapidly but regional stock market prices are

likely to lag, leading to a lower price-to-earnings ratio. Theearnings outlook continues to improve in Latin America and Citi

analysts have recently revised up their regional 2010 earnings-per-share (EPS) growth orecast to 37% in US dollar terms, while

they orecast a moderate 15% appreciation in the MSCI LatinAmerica index over the year.

Within the region, Citi analysts maintain their positive

outlook on Brazil and see potential or urther upside. Theyare also constructive on Mexico based on expectations o

strong economic perormance in the US. Meanwhile, Chilesoutperormance within the region leads them to hold a more

negative outlook. With regard to the North Andean markets,

they are also negative on Peru, while they are neutral in theiroutlook or Colombia.

CEEMEA (Central & Eastern Europe,Middle East and Africa)

Economic recovery gathers pace

In the opinion o Citi analysts, recent economic data releasesindicate a continuing improvement in the economic backdrop in

the CEEMEA region, as seen elsewhere in the world. Followinga surge in industrial production and retail sales growth moving

sharply back into positive territory, they have increased theirGDP growth orecasts or the region to 4.4% in 2010 and 4.0%

or 2011. They also expect 33% earnings growth in 2010 orcompanies in the MSCI CEEMEA index, which is more or less in

line with their expectations or the emerging markets as a whole,

as represented by the MSCI Emerging Markets Free index. Unlike

other emerging markets, ination across the region appearsto have stabilised and Citi analysts do not orecast signifcantpressure in the near term, except in Turkey. As such, they believe

that the potential or interest rates increases is limited and thatinterest rates may even be cut in Russia.

With the MSCI CEEMEA index moving sideways since the

beginning o the year in spite o the improvements to the outlookor corporate earnings, the regional market consequently

appears to oer relatively better value. At the end o March,the index was trading at levels less than 10 times the value o

the analysts orecasts o next years earnings o its underlyingcompanies, making the regions stocks appear more attractive

than other emerging markets in this respect. Within CEEMEA,Citi analysts preer the outlook or Russian and Turkish stocks,

and believe that South Arican stocks may underperorm the

rest o the region.


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FIXED INCOME

NORTH AMERICA

Financial recovery proceeds but remainsincomplete

The US Federal Reserves eorts to loosen credit and improvemarket unctioning have signifcantly slowed fnancial headwinds

standing in the way o the economic recovery, prompting thecentral bank to raise the discount rate, or the rate that it charges

banks or loans, a quarter point to 0.75%. The Federal Reservehas also been gradually retreating rom some o the special

programs that it instigated during the fnancial crisis that aimedto inject liquidity into the fnancial system and ease credit supply.

At the same time, the fnancial recovery is still at a vulnerable

stage and Citi analysts believe that more compelling evidence isrequired that the economic recovery is sel-sustaining beore the

central bank embarks on interest rate tightening. Moreover, theymaintain a benign outlook on ination as substantial economic

slack is l ikely to balance ination pressures rom strengtheningfnal demand. In their assessment, the Federal Reserve is likely

to leave the ederal unds rate at 0-0.25% through the third

quarter o this year and then possibly raising it in the ourthquarter to 1.0%.

Within fxed income markets, Citi analysts retain their bullish

bias on high-yield corporate bonds given their orecast ora sharp decrease in corporate deault rates through 2010 to

levels o between 3-4%. Meanwhile, they remain neutral oninvestment-grade debt as the expected beneft rom improving

undamentals is likely to be largely oset by the gradual upwardshit in government bond yields in the second hal o the year.

EUROPEMounting fscal pressures

Citi analysts have revised down their GDP growth orecasts orthe Euro Area or 2010 and 2011. They now expect economic

activity in the Euro Area to grow by 1.1% in 2010 and by 1.3% in2011. On the positive side, they estimate that the weakening o

the euro, which resulted rom the market concerns about thepublic debt o Greece and other member countries, is likely to

provide support to export growth in the near term.

Meanwhile, Greece unveiled an aggressive plan in early Marchto raise taxes and cut 4.8 billion in government spending. More

recently, national leaders in the European Union agreed on theterms o an emergency loan package that could be oered to

fnancially stretched member states with assistance rom theInternational Monetary Fund. This aimed to bring stability and

reassurance to Euro Area government bond markets. However,strong domestic opposition to fscal containment measures may

mean that uncertainty over Euro Area government fnances is

likely to persist or some time.

Given the ragility o the economic recovery in the Euro Area,Citi analysts expect the European Central Bank to hold interest

rates at 1.0% until the frst quarter o 2011. However, theybelieve that Euro Area government bonds are likely to post

disappointing total returns over the coming year given theirexpectations or higher bond yields and the lingering twin defcit

concerns. They expect modest but positive perormances rom

European investment-grade corporate bonds as earnings growthcontributes to improving balance sheets.

JAPAN

Japanese government bond yields to remain stableor now

The Japanese economy is orecasted by Citi analysts to growat an above-trend annualised rate o between 1.6-2.4% or

the remainder o this year, powered by a combination o acontinued upward trend in exports, the new support measures

or households (such as the child allowance) and a modestpickup in business and housing investment. In terms o the

ination/deation outlook, the narrowing but still-large degreeo economic slack, coupled with an outright all in unit labour

costs, may continue to exert strong downward pressure onination in years to come. As such, Citi analysts orecast core

ination to stay negative and the Bank o Japan to maintain its0.1% interest rate well into 2011.

The fscal situation in Japan is becoming more challenging.

While the government kept to its target o around 44 trilliono new Japanese government bond issuance in the initial

2010 budget, Citi analysts tentatively estimate that new bond

issuance in fscal 2011 could balloon to around 55 trillion.They believe that yen bond markets may remain inuenced

more by domestic concerns, such as deation in 2010 and maybe immune to fscal concerns besetting other markets. They

orecast a very moderate increase in 10-year government bondyields to 1.45% by year-end with the economy returning to an

above-trend growth track. However, they warn that governmentbond issuance may become more the ocus or markets in 2011

and beyond, projecting 10-year government bond yields risingabove 2% in the next 3-4 years.

ASIA PACIFICPotential or Asia to continue to outperorm

The market prices o investment-grade Asian sovereign andcorporate bonds appear close to air value and may struggle

over the coming year, in the view o Citi analysts. In contrast,they believe that high-yield quasi-sovereign, corporate and

fnancial sector bonds still oer attractive yields against globalpeers, although no longer oering compelling value. Given

various noises about regulatory reorm aecting the bondmarkets and the European Unions plan to support struggling

Euro member states burdened with debt, Citi analysts expectAsian bond markets to trade within a range in the near term.

While they do not view the high level o government bond

issuance that will have to be digested by global fnancial marketsin the coming years as an immediate concern, they do not rule

out the possibility o this topic returning at times later this yearand causing ripples.

Beyond the near-term concerns, the undamentals o Asian

credits, sovereign and corporate, continue to improve and thisis leading to positive credit rating moves or the regions issuers.

According to Moodys Investors Service, the bond rating agency,positive credit rating actions outnumbered the negatives

or the frst time in 20 months in the ourth quarter o 2009.Additionally, Standard & Poors has also revised the outlook

on Indonesian and Indian sovereign bonds and some Korean,Indonesian and Indian banking sector issuers rom negative to

stable. Overall, Citi analysts continue to see potential or Asianbonds to post another year o healthy returns.


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CURRENCIES

EURO

Longer term strains onperipheral Europe debt likely to

continue to undermine euroThe euro experienced a sharp trend

reversal since the beginning o the

year as sovereign debt risks among theperipheral members o the Euro Area

weighed heavily on the currency. Thelate-March agreement between the

member states to provide emergencybilateral loans with International

Monetary Fund (IMF) assistance to anyeuro member country acing unding

difculties helped to stabilise thecurrency. However, Citi analysts oresee

renewed weakening o the euro against

the US dollar later this year as they thinkthat the harsh, but necessary, measuresamong some member countries to

trim government defcits may dent

economic activity in the Euro Area. Asa consequence, the European Central

Bank is likely to keep interest rates onhold or longer and the growing interest

rate dierential with the US is likely toturn out supportive to the US dollar.

They orecast the euro weakening to$1.30/ over the next 6-12 months.

YEN

Following broad USD trends

Citi analysts assert that the actors that

have supported the yen over the lastyear remain in place and account orthe resilience o the currency during

the recent bout o market nervousness.They note that the yen has historically

perormed well during previous USeconomic recovery phases. Unlike the

situation over most o the past 15 years,the yen is no longer the sole low interest

currency that speculators can use to

borrow unds cheaply as other centralbanks maintain their interest rates in

the 0% to 1% range. This is anotheryen supportive actor in the opinion

o Citi analysts. They believe that thepersistence o deation in Japan may

continue to buoy the yen exchangerate going orward, without impairing

Japanese export competitiveness, andthey orecast the yen remaining at

around 90/$ over the next 6-12 months.

BRITISH POUND

Policy and political uncertainty

The UKs economic undamentals remain

very challenging: the budget defcit ishigh, debt levels are escalating and theUK still runs a current account defcit.

In addition, political uncertainty remainshigh with polls still pointing to a signifcant

risk o an indecisive election result in May,which may hinder the political process

needed to resolve these problems. On theother hand, Citi analysts note that the

pound appears cheap against their long-

term estimates while the likelihood is thatthe Bank o England may adopt a more

hawkish monetary policy, which wouldimprove the attractiveness o the pound.

They orecast the pound at $1.46/ and0.89/ over the next 6-12 months.

DOLLAR BLOCCommodity units supported on dips

The Australian dollar (AUD) remains supported by export price gains and expectations o urther tightening by the Reserve Banko Australia (RBA). Export price gains to Australia have exceeded expectations with coal and ore price hikes this year likely

to be much greater than earlier expectations in the context o a generally strong commodity market. Short rate dierentialsto other currencies have also widened signifcantly ollowing the RBA rate hikes. With economic activity at robust levels,

the RBA is expected to lit the cash rate to 5.25% by year end. That said, Citi analysts caution that risks or AUD at this

point look greater to the downside than o making new highs. They note that gains in the AUD have outpaced both the S&P 500sgains and gains in Australian interest rates relative to US, and that the currency remains vulnerable to bad news rom China.

Meanwhile, New Zealands lower growth profle to Australia and bigger budget/ current account defcits suggest that theNew Zealand dollar (NZD) is likely to lag AUD. In Canada, upside surprises to Canadian economic data and more upside risks

to growth suggest that the Bank o Canada (BOC) could hike rates in June 2010. Citi analysts year-end 2010 orecasts currentlystands at USD 0.92/AUD, USD 0.71/NZD and USD 1.00/CAD.


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CURRENCIES

ASIA PACIFIC

Asia emerging market currencies likely to continueto appreciate towards longer-term equilibrium

Asia emerging market currencies are anticipated to strengthenurther against the US dollar over the short and medium

term, backed by expectations or the region to commencemonetary policy tightening ahead o the industrialised world,

and the likely resumption o renminbi (RMB) appreciation latein the second quarter o the year. Citi analysts believe that

the Chinese authorities are likely to allow RMB appreciation inorder to (1) lessen the pressure on exporters rom rising wages

that are contributing to higher ination; (2) avert the risk oa protectionist backlash; (3) rebalance the economy towards

domestic consumption; and (4) continue eorts towardsinternationalising the Chinese currency.

The Korean won and Indian rupee are likely to outperorm their

Asian peers in the medium term, supported by robust growthand strong capital inows. The Philippine peso has been one o

the main laggards in the region due to the risks surrounding

the presidential elections on 10 May 2010. Looking ahead, Citianalysts expect a post election relie rally and or the peso to

join the appreciation trends o other Asia emerging marketcurrencies as the economic recovery matures towards end-2010.

Citis year-end 2010 orecasts (against the USD) or the dierent

currencies currently stand at: 6.62 (Chinese Renminbi), 7.75(Hong Kong Dollar), 43.00 (Indian Rupee), 9125 (Indonesian

Rupiah), 3.27 (Malaysian Ringgit), 44.00 (Philippines Peso), 1.37(Singapore Dollar), 1090 (Korean Won), 31.30 (Taiwan Dollar) and

31.70 (Thai Baht).

EMERGING MARKETS

Positive over the short and medium term

The short and medium term outlook or most currencies in

Central & Eastern Europe, Middle East and Arica (CEEMEA)continue to be positive, assuming that the fscal strains in theEuro zone periphery have a limited impact on CEEMEA and

oreign capital continues to ow into the region. Currenciessuch as the South Arican rand (ZAR) and Russian ruble (RUB)

(relative to the USD and EUR basket) are expected to continuebenefting rom commodity prices. ZAR should also beneft rom

capital ows associated with the 2010 World Cup, but may sotenlonger term as the impact o deteriorating external defcits and

a higher real exchange rate kick in. Improvements in the balance

o payments and the fscal outlook should oster RUB demand inthe medium term, while economic improvements, reorms and

de-dollarization may lend additional support urther out. A nearterm risk or the Czech koruna (CZK) is the May election which

could lead to some noise in the FX markets. But, the combinationo rising Czech interest rates and a more coherent political

environment should support CZK later in 2010. In Turkey,refnancing risks and low expected real interest rates (given

higher expected ination) could weigh on the lira (TRY) in themedium term. The outlook or the Israeli shekel (ILS) remains

positive due to Israels strong activity growth and balanceo payments position, as well as the likely need to rely on ILS

appreciation as a disinationary tool.

In Latin America, Citi analysts continue to expect short andmedium term upside to most Latin American currencies versus

the USD. Capital inows are expected to support the Brazilianreal (BRL) near term but wider current account defcits and

the impact rom the upcoming presidential election may

constrain BRL strength urther out. In Mexico, a recovery in thedomestic economy, large capital inows into the local market

and a sustained recovery in oreign direct investment, andan improved perormance o the Mexican oil export price are

positives or the Mexican peso (MXN). But, lower than expectedtourism revenues (the third most important source o USD

revenues) during the current season weighs on the outlook.Meanwhile, risks to the Chilean peso (CLP) may come rom

the use o the stabilisation und (which requires buying CLPwith USD held abroad) to fnance earthquake reconstruction

works. In Colombia, strong perormance o current account andcapital account undamentals may lend near term support to

the peso (COP). Further appreciation may however be limitedby central bank intervention which is likely to occur i the USD/

COP reaches 1900.


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ALTERNATIVES

COMMODITIES

Volatility likely to heighten on the back omacroeconomic risks

The global economic recovery continues to provide a supportivebackdrop or commodity prices in 2010 and 2011, but commodityprices look to have gone a long way already in pricing in the

scenario o robust economic growth and low interest rates.

Going orward, Citi analysts expect less spectacular returns overthe medium term and a more volatile environment or the rest

o 2010 given macroeconomic risks.

Regarding base metals and crude oil, Citi analysts remainconstructive over the medium term based on urther recovery

in global demand and higher investor inows. They avour theoutlook or copper and lead where Chinese demand continues to

account or most o the growth in global demand. Citi analystsorecast the West Texas Intermediate (WTI) crude oil price to

average US$81.90/bbl in 2010. While they see potential orprices to trade mainly sideways at around US$80/bbl over the

short term due to weak seasonal demand, they anticipate a litin the crude oil price over the medium term.

The outlook or gold continues to be robust with investment

demand remaining strong. Although Citi analysts believe goldprices are likely to urther consolidate to around US$1,120/oz

over the near term, they see potential or gold prices to surpass

their medium term orecast o US$1,150/oz i fscal concernsintensiy. They also continue to expect silver to outperorm

gold as it benefts more rom the industrial cycle upswing andorecast silver prices to average US$17.60/oz in 2010.

REAL ESTATE INVESTMENT TRUSTS

REIT dividend yields may need to rise to ueladditional appetite

Global REITs, represented by the FTSE EPRA/NAREIT Global

REIT total return index, gained 4.0% in the frst quarter o 2010in US dollar terms. The index was led by the perormance o US

REITs, with the FTSE EPRA/NAREIT US total return index up by9.8% in the same period.

In their outlook or 2010, Citi analysts believe that the stock

perormance o US REITs may be supported by the economicrecovery at home, the prospects or a bottoming o thecommercial real estate market, increased credit availability, the

maintenance o low interest rates and the possibility o increasedmerger and acquisition activity in the sector. They believe that

these themes may have, to some extent, played out ahead oschedule and may have contributed to the strong year-to-date

perormance. That said, they caution that there obviously remainsome high hurdles on the US macro picture relating to lingering

unemployment and monetary and fscal policy that could weighon US REIT perormance.

The rise in REIT share prices and the cumulative eect o

dividend reductions made by REIT managements have lowered

the average REIT dividend yield to historically low levels thatcompare poorly to other yield-oriented asset classes. The FTSEEPRA/NAREIT Global REIT index had a dividend yield o 3.8%

at the end o March. Citi analysts believe REIT dividend yields

may need to rise to uel additional appetite or REIT securities either through dividend increases, dividend reinstatements or

declining share prices.


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THE NEXT THING TO WORRY ABOUT:INFLATION?

David LubinEmerging Markets Economist,

Citi Investment Researchand Analysis

The response to Chinas monetarytightening in January indicates that

the market can grow unhappy whenit sees the punchbowl being taken

away. Although the January consumerprice index (CPI) was lower thanexpected in China, ination data in

November and December had producedsurprises in the other direction. Those

surprises, combined with evidence omushrooming credit growth at the start

o the year, produced a relatively switpolicy response. Since early January, the

Chinese authorities have twice raisedthe yield on 3-month and 1-year central

bank bills, taking the 1-year bill yield rom1.76% to 1.92%; have twice increased

the required reserve ratio; and have

also introduced loan quotas and specialreserve requirements or individual

institutions. Although the marketresponded calmly to the latest increase

in the reserve requirement, previousannouncements had destabilized asset

prices both in China and globally.

China isnt the only country whereination surprises have emerged. In

Brazil, both consumer and wholesaleprice ination produced negative

surprises in January.

In India, low ination rates in 2009 have

led to some unpleasant surprises: theJanuary wholesale price data came in8.6% above the previous years level

and already exceeds the Reserve Banksorecast or the fscal year-end in March.

In Turkey, headline ination rocketed to

10.1% in February rom a low o 5.1% in

October 2009.

In Mexico, inationary pressures arerising not so much because o demand

pressures, but because o the hikes inVAT, in special taxes on production and

services, in arm prices, and in someadministered and regulated prices.

Our view is that monetary policy needs

to be tightened in several countries. Ocourse, this process o hiking rates has

already started, notably in Israel, Vietnam

and China, to the extent that this yearsrise in CB bill yields can be considered arate hike. Until now, however, most o the

eort to tighten monetary conditionshas relied on quantitative adjustments

in liquidity conditions through changesin reserve requirements, other

administrative measures, or currencyappreciation. This is likely to remain

true or some time. The only countries

that we estimate will be cutting rates in2010 are those in Eastern Europe, whose

monetary policies had to be tightenedpro-cyclically during the crisis in order

to minimize capital ight.

Chinas experience with monetarytightening in early 2010 raises an

important question: how should marketsreact when monetary policy tightens?

The evidence rom early 2010 doesntbode well: the markets reaction to

Chinas tightening was negative, not justin China but globally. Yet this reaction

is likely to have been a blip. Indeed, ourview is that, or the most part, markets

will not be destabilized by rising interest

rates in the emerging markets, largelybecause the interest rate increases

that we orecast will do little more thanto bring the monetary stance towards

neutrality. And since, in many cases,our rate orecasts are below whats

priced into the market, disruptions toconfdence should be minimized.


10/1210

CAPEX INTERRUPTED, RECOVERY AHEAD

Michael GeraghtyGlobal Themes Strategist,Citi Investment Research

and Analysis

In many regions o the world, capex ow

was interrupted by the global fnancialcrisis and subsequent economic downturn.

In the US, private investment in equipment

as a percentage o GDP dropped to levelslast seen in the 1970s, according to Bureauo Economic Analysis fgures. A similar

decline occurred in Europe accordingto Eurostat data. However, a number o

actors suggest a recovery in capex ahead.

Previously, an improving corporate proftsoutlook has been positive or investment.

Our expectation is or profts to recoverin all regions in 2010 and 2011, so we

would expect capex to ollow. That said,

company managements have usually beencautious about adding costs or expanding

the business early in a recovery and havepreviously begun to loosen purse strings

in the second year o a recovery, onceutilization rates have picked up.

Also, through frst quarter 2009,

governments in more than 40 countriesannounced stimulus programs totalling

more than US$2 trillion. The bulk o thisimpact will likely be elt in 2010 and 2011.

Here are some o the principal areas

where Citi analysts expect growth incapex spending:

Economic Inrastructure in Asia: US$700Billion Spending Increments

Capex in Asia will likely ocus heavily oninrastructure. In China, ater the kick-

o o the stimulus in November 2008,

transportation inrastructure investmentbecame the ocus o Chinas economic

growth. Railway investment is still on theup-trend while port and road investment

growth is set to slow down signifcantly, oreven decline, due to overcapacity.

Economic Inrastructure in MENA: US$500

Billion on Hold

It is widely acknowledged that governmentsin the Middle East and North Arica (MENA)

region have underinvested in inrastructureor decades, despite growing populations

and spreading urbanization. While thevalue o construction projects under way

in the Gul region rebounded as the global

credit crunch eased, it remains below peaklevels. Even as oil prices have rebounded,

the percentage o projects on hold in theGul Cooperation Council (GCC) states has

trended upward, with the value o thoseprojects now more than US$500 billion.

Commercial Inrastructure: Telco CapexStagnant at US$250 Billion

Many developing countries are building

inrastructures rom scratch, allowing

them to leaprog to the latest technologies.However, in many developed economies,

signifcant expenditures on commercialinrastructure are being necessitated by

aging networks, over-taxed acilities, andnew demands that are driven, in some

cases, by technological advances.

Telecom carriers were generally proactiveabout cutting capex in 2008 to protect

cash ow despite continued digital trafcgrowth. This capex under-spending cannot

continue indefnitely. Ater growing at an11% compounded annual growth rate in

2005-08, global telecom carrier capex oUS$250 billion in 2010, as orecasted by

Citi analysts, is expected to be 3% below2008 levels.

Commercial Inrastructure: 1 Trillion or

European Utilities?

In the European electric utility sector,

aging networks and power eetsincreasingly require a marked step up

in replacement/reurbishment spend.Citi analysts expect the level o capex

spending to ramp up again in 201213 toa peak o nearly 90 billion per annum

given unprecedented investment requiredto replace existing inrastructure and meet

new environmental targets. They estimatethat utility capex could amount to1 trillion

in the decade 2010 to 2020.

Social Inrastructure: A US$125 BillionHealthcare Plan in China

In China, healthcare expenditures as a

percentage o GDP are signifcantly lowerthan in other developing countries since

many patients do not have insurance

and pay out o their own pockets ormedical expenses. However, this situation

is changing rapidly. The government issignifcantly increasing its spending on

healthcare, both as part o an upgrade othe medical system, as well as its initiative

to boost internal consumption to becomeless dependent on growth in the global

economy.


11/1211

SPOTLIGHT ON ALLOCATIONS

ASSET ALLOCATIONSBelow are the active client asset allocations or Asian clients,which include a bias towards Asian equity. These portolios

reect dierent current market views.

The suggested allocations are intended to be general in natureand are not to be construed as specifc investment advice.

Investors are encouraged to consult with their RelationshipManagers to determine their allocation needs based on their risk

tolerance, suitability and goals.

Active Portolios - USD ($) Denominated

About the Citi Asset Allocation ProcessThe Citibank tactical portolio allocations are based on thework o the Global Investment Strategy Committee (GISC) and

the Global Portolio Committee (GPC) o Citi Private Bank. Themembership o both committees is comprised o experienced

investment specialists rom across Citi. The GISC deliberates onthe macroeconomic and fnancial market environment in order

to ormulate an outlook across multiple asset classes. The GPCis responsible or creating strategic model portolios or Citi

Private Bank and maintaining tactical model portolios, whichare based on the conclusions o the GISC. The tactical weights

that are applied to the Citibank portolios are aligned to thedecisions o the GPC.

Allocation to bond & equity markets We have maintained our preerence or global equities relative to global

bonds.

Although Citi analysts do not orecast a repeat o the robust pace o

appreciation set in global equity markets over the three last quarters o

2009, they nevertheless do expect to see a V-shaped recovery in global

corporate profts, which should see stock markets grind higher over this

year with some bumps along the way. They believe that this impressive

rebound in profts is achievable given the cost discipline o many companies

in their response to the global downturn and the strengthening o the

global economy this year. In contrast, Citi analysts believe that signifcant

components o the global bond market may struggle this year as market

expectations o eventual interest rate tightening around the world intensiy.

In anticipation o interest rate hikes in the US, Euro Area, UK and other

countries, Citi analysts orecast a rise in developed government bond

yields, implying below-average returns in this asset class. Accordingly, they

maintain their preerence or global equities over global bonds.

Allocation to regional equity markets We have maintained our overweight allocation to emerging market

equities and our neutral allocation to European, US and Japanese equities.

Given the mixed and uncertain outlook or economic activity among some

developed countries and the more robust and resilient recovery exhibited

by emerging economies, Citi analysts thereore have a strong preerence

or the outlook o emerging market equities over developed market

equities. From a valuation perspective, they note that certain regional

equity markets, such as the US and Japan, are not trading on particularly

attractive valuations and thereore believe that they may struggle to keep

pace with other regional markets.

Allocation to government and credit markets We have maintained an underweight position in government bonds

and a neutral position in investment-grade corporate bonds, high-yield

corporate bonds and emerging market debt.

Citi analysts believe that the bond market volatility linked to European

sovereign credit worthiness concerns may gradually diminish this year

but that developed government bond markets may come under pressure

as expectations o central bank interest rate hikes in the US, Europe and

elsewhere intensiy. With corporate bonds having perormed very strongly

over the last 12 months to end-March, Citi analysts assert that the yields

on investment-grade corporate bonds may be largely oset by the impact

o rising government bond yields over the coming 6-12 months, resulting

in low total returns in this asset class. However, they continue to believe

that yields among non-investment grade (high-yield) corporate bonds and

emerging market bonds are attractive and that these areas o the bond

market may outperorm in the coming year.

INCOME

Money Market / Short Term Bonds 23%

Global Government Bonds 33%

Global Corporate Bonds 32%Global High Yield & Emerging Market Bonds 12%

CONSERVATIVE


Global Corporate Bonds 26%

Global High Yield & Emerging Market Bonds17%Balanced 15%

Asia Pacic incl. Japan Equity 10%

Alternatives 5%

BALANCED


Global Corporate Bonds 10%

Global High Yield & Emerging Market Bonds22%Balanced 20%

Global Equity14%Asia Pacic incl. Japan Equity 18%

Alternatives 10%

ENHANCED

Global High Yield & Emerging Market Bonds2%Balanced10%Global Equity 42%

Asia Pacic incl. Japan Equity31%Alternatives15%

GROWTH

Global Corporate Bonds3%Global High Yield & Emerging Market Bonds17%Balanced15%Global Equity 27%

Asia Pacic incl. Japan Equity23%Alternatives 15%


12/12

Disclaimer

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within Citi Investment Research and Analysis and

Citi Global Markets (CGM) and voting members othe Global Investment Strategy Committee.

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