1. Climate change Tristan Hanson Investment Outlook June 2009

2. Investment Briefing June 2009  Uncertainty is unavoidable  “Safe haven” assets offer low or negative prospective real returns  Risk-assets are offering high compensation for risk by historical standards  Important distinction between types of risk: liquidity; volatility; fundamental  Global policy stimulus efforts are unprecedented: $2.5trn fiscal boost  Close to the end-game in the banking crisis? Decent odds “news” perceived as less bad over 2009 and risk-assets rally Strategy Conclusions (Feb 2009)

3. Investment Briefing June 2009 Rollercoaster ride for equities since last briefing 80 85 90 95 100 105 110 115 Ashburton Replica Sterling Asset Management Fund JP Morgan Global GBI MSCI World GBP 02-Feb-09 16-Feb-09 02-Mar-0916-Mar-0930-Mar-09 13-Apr-0927-Apr-09 11-May-0925-May-09

4. Investment Briefing June 2009  Equities – further upside potential  Government bonds (US/Europe) - oversold and no longer overvalued  Sterling preferred currency major Macro views  Global economy poised for recovery  Long-term structural growth concerns remain  Inflation fears overdone Key points

5. Investment Briefing June 2009 The glass is still half empty Source: BCA Research 1880 1900 19201940 1960 19802000

6. Investment Briefing June 2009 The glass is still half empty Source: Bloomberg AAI Investor Survey: % Bulls, 13 week average PESSIMISM EUPHORIA 20% 30% 40% 50% 60% 70% 80% Jun-90Jun-93 Jun-96 Jun-99Jun-02 Jun-05Jun-08

7. Investment Briefing June 2009 The glass is still half empty Source: Ned Davis Research, Bloomberg US Money Market Funds / stock market capitalisation 0% 5% 10% 15% 20% 25% 30% 35% 40% 1989 1990199119921993199419951996199719981999200020012002200320042005200620072008

8. Investment Briefing June 2009 Pessimism reflected in depressed valuations Source: Ashburton, S&P US: cyclically-adjusted PE ratio 5 10 15 20 25 30 35 40 Mar-50Mar-55Mar-60Mar-65 Mar-70Mar-75Mar-80Mar-85Mar-90Mar-95Mar-00 Mar-05

9. Investment Briefing June 2009 S&P 500 PE ratio using 12 month forward EPS Source: Factset US PE ratio (12mf EPS) 10 12 14 16 18 20 22 24 26 28 Jun-89Jun-91Jun-93 Jun-95Jun-97Jun-99Jun-01Jun-03Jun-05 Jun-07

10. Investment Briefing June 2009 Consensus expectation is a weak recovery Source: Macroeconomic Advisers 1948-49 1234 5 6 7 89 1960-61 1969-70 1957-58 2001 1973-75 1980 1953-54 1981-82 1990-91 2007-2009 (MA forecast) 0 1 2 3 4 5 6 7 8 9 10 Strength of recovery versus severity of preceding recession Negative growth in recession (relative to versus trend) Sharper recovery Deeper recession

11. Investment Briefing June 2009 Earnings expectations are very depressed Source: Nomura, IBES Net Earnings Revisions %, (Up -Down) / Total, 3MMA World Earnings Revisions Balance -40 -30 -20 -10 0 10 20 878991939597990103050709

12. Investment Briefing June 2009 Asian outperformance expected to continue Source: Bloomberg Asia ex-Japan relative to MSCI World 90 100 110 120 130 140 150 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08Dec-08 Mar-09

13. Investment Briefing June 2009 Government bonds: oversold US 10yr Treasury Yield - 8 week change -2.3 -1.8 -1.3 -0.8 -0.3 0.2 0.7 1.2 Jan-90Jan-92Jan-94 Jan-96 Jan-98Jan-00Jan-02Jan-04 Jan-06 Jan-08

14. Investment Briefing June 2009 US government bonds: no longer so overvalued US 10yr yield & 10yr average Fed Funds rate 2 3 4 5 6 7 8 9 May-92May-96May-00May-04May-08 % 10yr Treasury yield Fed Funds rate (10yr average)

15. Investment Briefing June 2009 Yield curves are extremely steep US yield curve: 10yr-2yr -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Jan-86Jan-89Jan-92 Jan-95Jan-98Jan-01Jan-04 Jan-07 %

16. Investment Briefing June 2009 German 30yr bunds attractive given macro risks Value opportunity: yields are higher than during a global boom 3.0 3.5 4.0 4.5 5.0 Jan-03Jan-04 Jan-05Jan-06Jan-07 Jan-08Jan-09 %

17. Investment Briefing June 2009 Fear #1: increased government issuance  Like all forecasts, predictions of government finances are subject to bias Effect on Government Bond Prices Growth EffectFiscal EffectNet Effect Growth stronger than forecast -ve+ve?? Growth weaker than forecast +ve-ve??

18. Investment Briefing June 2009 Fear #2: “printing money” & inflation  Central banks are filling the hole left by the private sector First post-WW2 contraction in household borrowing! -400 -200 0 200 400 600 800 1000 1200 1400 Mar-80Mar-85 Mar-90Mar-95Mar-00 Mar-05 US Household Borrowing ($bn annualised quarterly rate)

19. Investment Briefing June 2009 Fear #2: “printing money” & inflation  Central banks are filling the hole left by the private sector Source: Bloomberg US: net change in consumer credit ($bn, 3m avg) -16 -12 -8 -4 0 4 8 12 16 20 Dec-88Dec-93Dec-98Dec-03Dec-08 US$ bn

20. Investment Briefing June 2009 Fear #2: “printing money” & inflation  Central banks are filling the hole left by the private sector 8.5% 0% 20% 40% 60% 80% 100% 120% May-06Nov-06 May-07Nov-07May-08 Nov-08 US M2 (% YoY) US Monetary Base (% YoY)

21. Investment Briefing June 2009 Sterling – positive trend Source: BIS CHEAP EXPENSIVE GBP: real effective exchange rate (100 = 2005) 70 100 130 Jan-64Jan-69Jan-74 Jan-79Jan-84Jan-89Jan-94 Jan-99Jan-04 Jan-09

22. Investment Briefing June 2009 US$ - prone to swings in sentiment, but downward trend Source: Bloomberg US$ vs US equities 600 700 800 900 1000 1100 1200 1300 1400 1500 Jan-08 S&P 500 Index 70 72 74 76 78 80 82 84 86 88 90 US$ Index US equities US$ index

23. Investment Briefing June 2009 Taiwan dollar: long-term valuation case + catalyst Source: Bloomberg Asian FX performance vs US$ (100=Sep 1994) 70 75 80 85 90 95 100 105 Sep-94Sep-99Sep-04 Sep 1994=100 Asian Basket TWD

24. Investment Briefing June 2009 Taiwan dollar: long-term valuation case + catalyst Source: Bloomberg Taiwan: current account -2,000 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Mar-94Mar-99Mar-04Mar-09 TW$ m Taiwan: foreign exchange reserves 0 50 100 150 200 250 300 350 Mar-94Mar-99Mar-04Mar-09 US$ bn

25. Investment Briefing June 2009 Ashburton Investment Strategy

26. Investment Briefing June 2009 Investment Strategy Replica Asset Management Asset Allocation Bonds 54% Govt/Govt Guaranteed24% Supranational13% Inflation-linked bonds13% Corporate4% Equities 39% US13% Pan Europe11% Asia15% Cash/Tbills7% 100% Source: Ashburton - as at 4 June 2009

27. Investment Briefing June 2009 Investment Strategy Replica Asset Management – currency overlay Currency Weightings (%) £€$ GBP8955 EUR-75- USD-482 JPY--- AUD-3- NOK35- TWD555 Other Asia338 Source: Ashburton

28. Investment Briefing June 2009 Two ways to beat the market*: (1)Predict the “news” better  Short-term forecasting is pointless  Focus on understanding medium-term structural trends (2) Predict the reaction to “news” better  Sentiment, positioning, consensus views  Valuations  Technical analysis/trend analysis What is important is not the “news”, but how the “news” differs from what was expected  Diversification: reduce risk but also augment returns *adapted from Woody Brock’s work (www.sedinc.com) Investment Process

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