Sarasin & Partners LLP

Source: IMF, Bank of England, 2011

Global GDP Growth & Inflation

45 50 55 60

Spain

UK

Italy

France

US

Germany

Switzerland

Manufacturing PMI

January 2011 Latest

Source: Readers EcoWin & Datastream

Tight currency pegs have allowed emerging markets to import low interest rates from advanced economies, allowing them to grow without „speed-limits‟ and

leading to the „bifurcation‟ in global growth.

Source: Thomson Reuters Datastream

0

100

200

300

400

2000 2002 2004 2006 2008 2010

Housing starts (2000, 100 in January)

Hunan

China

Hong-Kong

Australia

Singapore

Canada

US

Argentina

Australia

Brazil

Canada

China

France

Germany

India

Indonesia

Italy

Japan

Mexico

Russia

Saudi Arabia

South Africa

Korea

Turkey

UKUS

0

2

4

6

8

10

12

14

0 2 4 6 8 10 12 14

Restrictive monetary

policy

Loose monetary

policy

Zero real interest rates

Central bank key rates

Source: Bloomberg & Ecowin

Source: Latest available information – Datastream, CIA Factbook, Bloomberg, September 2011; Photo sources: Flikr, Jonathan Rashad, Rais67, Wikimedia Commons, September 2011

0 10 20

Syria

Egypt

Tunisia

Turkey

Algeria

Morocco

Saudi Arabia

Bahrain

0 20 40

Latvia

Poland

Russia

Hungary

Bulgaria

Belarus

Czech Rep

0 10 20

Argentina

Uruguay

Brazil

Peru

Mexico

0 5 10 15

UK

Canada

US

Others 4%

The Misery Index: Unemployment plus inflation

0 10 20

PakistanIndonesia

PhilippinesAustralia

China

M alaysiaTaiwan

JapanThailand

Above 20From 15 to 20From 10 to 15Below 10

Egypt January 2011

Syria July 2011

Tunisia January 2011

Monthly Data 1/31/1967 - 7/31/2011

(E0107C)

Not On Temporary Layoff / Total Unemployed 7/31/2011 = 50.3%

24

27

30

33

36

39

42

45

48

51

54

24

27

30

33

36

39

42

45

48

51

54

Long-Term Unemployed (27+ weeks)/ Total Unemployed 7/31/2011 = 44.4%

8

12

16

20

24

28

32

36

40

44

48

8

12

16

20

24

28

32

36

40

44

48

Unemployment Rate 7/31/2011 = 9.09%

Shaded areas represent

National Bureau of

Economic Research recessions4

5

6

7

8

9

10

11

4

5

6

7

8

9

10

11

1970 1975 1980 1985 1990 1995 2000 2005 2010

Permanent Job Losers and Long-Term Unemployed

Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

10

15

20

25

30

35

40

45

50

1970 1976 1982 1988 1994 2000 2006 2012 2018 2024 2030 2036 2042

INVESTMENT TO GDP (%)

China

Korea (+30 years)

Japan (+35 years)

Asian crisis20pp increase (similar to Korea in the

Japanese Lost Decade

The Qinqdao – Hainan Seabridge 26m long (wider than the Channel) $8bn cost Saves commuters 20 minutes per trip

Numerous „Ghost Towns‟

6m apartments lie empty Commercial vacancy rates exceed 20%

in many areas

Sources: Jones Lang Lasalle, FT China Confidential, Daily Telegraph, World Bank, Business Insider, Datastream, 2011

-10

-5

0

5

10

15

20

25

30

35

40

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

CHINA - Contribution to GDP Growth

Exports Capital Formation Consumption

Source: Ecowin, Bank of England, 2011

93

94

95

96

97

98

99

100

101

102

-6 -4 -2 0 2 4 6 8 10 12

US - Employment(100 at cycle peak)

Current cycle

Average Post war cycle

Double-dip (1980)

Jobless Recovery (2000)

On average, job losses started to stabilise after 4 quarters and to

rebound after 6

92

94

96

98

100

102

104

106

108

110

112

-10 -8 -6 -4 -2 P 2 4 6 8 10 12 14

US - Gross Domestic Product (100 at cycle peak)

Average Post war cyclePotential GDP (CBO)

Previous estimate

Current cycle

Index of GDP

Economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labour market conditions in recent months, and the

unemployment rate has moved up. FOMC Statement, 9 August 2011

Source: Datastream

Quarterly Data 3/31/1946 - 3/31/2011

(E300)

Government Spending as a % of GDP

(60.0-Year Average = 19.6% of GDP)

3/31/2011 = 25.0% ( )

Taxes as a % of GDP

(60.0-Year Average = 18.0% of GDP)

3/31/2011 = 16.5% ( )

Data Subject To Revisions By

The Federal Reserve Board 13

14

15

16

17

18

19

20

21

22

23

24

25

13

14

15

16

17

18

19

20

21

22

23

24

25

Surplus as a % of GDP

Deficit as a % of GDP

3/31/2011 = -8.6%

(60.0-Year Average = -1.5% of GDP)-9-8-7-6-5-4-3-2-10 1 2 3 4 5

-9-8-7-6-5-4-3-2-10 1 2 3 4 5

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Taxes and Government Spending



Source: Ned Davies, July 2011

Source: Thomson Reuters Datastream

Greece

Portugal

0

100

200

300

400

500

600

700

800

900

Euro periphery - Borrowing requirements vs. bailout fund (EUR bn)

2011-13 Borrowing needs Available financial aid

Ireland

Italy

New bailout only

Spain

IMF

EFSF financing

Countries seeking a EU bailout can no longer guarantee the EFSF, increasing other countries‟ burden

AAA countries (Germany, France, Austria, Netherland, Luxembourg and Finland) guarantee 120% of their own share in euro GDP

Source: EU Commission, EFSF, Bloomberg, 2011

Source: EU Commission, July 2011

Persistently high unit labour

costs… with no

devaluation

Implies an inevitable build up in

debt… and

default risk

=

Source: http://www.iif.com/press/press+198.php, Dantadd, Avala, Manzana, Knyaz-1988: Wikimedia Commons, www.kremlin.ru, EU Commission, July 2011

Disorderly default Haircuts Muddle

through Soft restructuring

Full-blown restructuring

UK 1976 Mexico 1982, Brazil 1983, etc. Argentina 2001 Russia 1998

Chaotic default and principal write down

Principal write-down

Maturity extension and/or coupon reduction

No market agreement

Voluntary, agreed

Uruguay 2002

IMF provided loans, time & austerity

Permanent fiscal transfers

A fiscal union

US

Greece 2011

What the latest from the EU Summit on July 21, 2011 means for:

Greece: • A new €159bn:

• €109 from IMF/EFSF

• €50 from Private Sector

Involvement (PSI).

• 21% net debt relief, average

maturity of debt will rise from 6 to

11 years.

• Temporary selective default.

The European Commission • The EFSF will reduce interest rates on loans to Greece,

Ireland and Portugal to about 3.5%

• Increase maturities to a minimum of 15 years.

• Allowed pre-emptive lending to states “on the basis of a

precautionary programme”.

• Ability to finance banks recapitalisation

• EFSF takes over the ECB’s bond buyback programme.

Banks and insurance companies • A Private Sector Involvement (PSI) plan

that includes a voluntary program of

debt exchange through a combination of

par and discount bonds.

• Direct EFSF debt buyback

We are buying time but we cannot intervene on a long-term basis using the argument that the monetary policy transmission mechanism has been disrupted.

Jürgen Stark (on the reactivation of the ECB bond buying programme)

I regard the massive acquisition of the bonds of individual states via the European Central Bank as legally questionable.

German President Christian Wulff, August 24th, 2011

Sep-7: German Constitutional Court to rule on whether the first Greek bailout is constitutional* Sep-9: Greek bondholders deadline to decide how they participate to the PSI “haircut” Sep-16: Ecofin meeting (meeting of the EU Finance Ministers) Sep-18: Berlin State election Sep-23: German Parliament to vote on EFSF extension* By end-Sep: Finland Parliament expected to do the same* By end-October: Dutch Parliament likely to be the latest of all EU Members to vote on the EFSF* By end-October.: IMF Fifth Review of the Greek bailout* October 17-18: EU Council Summit (Meeting of all head of States) November 20: Spanish elections.

Key Events in Europe‘s political Calendar, September 2011 – November 2011

http://www.independent.co.uk/multimedia/archive/00240/pg-16-merkel-ap_240162t.jpg

EM dollar pegs have developed a long tail. As a China-centric EM holds on tightly to the RMB, dislocations from importing low US interest rates are getting more pervasive.

The greatest of these dislocations are taking place in China, where high investment to GDP ratio is reminiscent of past experience of boom-bust. The government‟s efforts to tighten credit is creating stress in the funding model for

investments. As a surplus nation, China should be able to cope with the investment slowdown –

though this will lead to slower growth and pockets of hard landing.

In the core, recovery from the crisis is weak, monetary policy appears to be approaching its limits and fiscal policy is in a political stalemate.

Global growth numbers will be softer and more volatile. Persistent policy uncertainty is jeopardizing the recovery in the core. Overheating across the EM and potential risks of a hard landing in Chinese commercial and residential real estate and infrastructure related assets.

Source: Ned Davis, July 2011

(S658)

Quarterly Data 9/30/1954 - 3/31/2011 (Log Scale)

3/31/2011 = 1743.5

S&P Gain/Annum When:

9/30/1954 - 12/31/2010

Gain/ %

Profit Margin: Annum of Time

* Above 6.2 -0. 3 21. 3

Between 5.4 and 6.2 6. 1 28. 4

Between 3.3 and 5.4 13. 4 44. 0

3.3 and Below -3. 3 6. 2

38

47

58

72

89

110

136

169

209

259

320

396

490

607

751

930

1151

1425

1764

38

47

58

72

89

110

136

169

209

259

320

396

490

607

751

930

1151

1425

1764

12/31/2010 Est. = 8.0%Earnings & Sales Based on Four-Quarter Totals

2.27

2.43

2.60

2.78

2.98

3.18

3.41

3.65

3.91

4.18

4.47

4.79

5.13

5.49

5.87

6.29

6.73

7.20

7.71

2.27

2.43

2.60

2.78

2.98

3.18

3.41

3.65

3.91

4.18

4.47

4.79

5.13

5.49

5.87

6.29

6.73

7.20

7.71

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Standard & Poor's Industrial Average

Standard & Poor's Industrial Average Profit Margin (Earnings/Sales) Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.


Quarterly Data 3/31/1952 - 12/31/2010

(E617)

Short-Term Debt / Credit Market Debt 12/31/2010 = 25.5%

Mean = 36.4%

28

30

32

34

36

38

40

42

44

46

48

28

30

32

34

36

38

40

42

44

46

48

Quick Ratio (Liquid Assets / Short-Term Liabilities) 12/31/2010 = 50.7%

Mean = 33.3%

20

24

28

32

36

40

44

48

52

56

60

64

20

24

28

32

36

40

44

48

52

56

60

64

Total Liquid Assets as a % of Net Worth 12/31/2010 = 14.3%

Mean = 9.0%

6

7

8

9

10

11

12

13

14

15

6

7

8

9

10

11

12

13

14

15

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Nonfarm, Nonfinancial Corporate Liquidity



(S0674)

Quarterly Data 3/31/1948 - 3/31/2011 (Log Scale)

Earnings based on estimate for latest

quarter until actual earnings released.

Latest Four-Quarter Earnings 12/31/2010 = $77.35

S&P 500 Earnings Gain/Annum When:

PPI-Manfacturing Gain/ %

Unit LaborCosts: Annum of Time

* Above 1.2 7. 5 31. 9

Between -1.5 and 1.2 6. 3 40. 3

-1.5 and Below 4. 7 27. 9

2

3

4

5

6

8

11

14

19

24

32

43

56

74

2

3

4

5

6

8

11

14

19

24

32

43

56

74

PPI Outpacing Manufacturing Unit Labor Costs

Good For Profit Margins and Profits

Manufacturing Unit Labor Costs Outpacing PPI

Bad For Profit Margins and Profits

3/31/2011 = 5.0%

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Standard & Poor's 500 GAAP Earnings

PPI for Finished Goods Minus Manufacturing Unit Labor Costs (Year-to-Year Changes) Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.


Quarterly Data 3/31/1947 - 3/31/2011

Source: Bureau of Labor Statistics

Shaded areas represent

National Bureau of Economic

Research recessions

In

de

x 2

00

5 =

1

00

3/31/2011 = 94.90

(HOT2011

07121_C)

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Nonfarm Business Sector: Labor Share



Source: Ned Davis, July 2011

Source: BCG Group, Datatsream, BLS, 2011

Source: MSCI, Thomson Datastream, UBS

Theme Rationale Characteristics

Security of Supply

Emerging market growth is stretching demand for strategic assets, making security of supply of critical interest. Unique products & inputs of strategic necessity can justify a scarcity premium.

Companies operating in these areas should own the strategic asset, control access to the strategic asset or aid the process of exploiting the asset.

Corporate Restructuring Underperforming company with a new credible plan to improve shareholder returns unappreciated by the market.

Management change, profitability, balance sheet or working capital improvements, shareholder pressure.

Pricing Power Value creation through ability to raise prices and effective control of input costs. Corporate, cyclical or secular.

High profitability and returns, consolidated industry, limited capacity, strong competitive position.

Intellectual Property & Excellence

Value creation through investment in R & D to produce high value-added products. Patent protection. Ability to continually innovate & excel.

Proven ability to translate IP&E into profit. Disruptive technology, improvement to existing product or cost cutting measure.

The Strong Get Stronger The environment of credit rationing will reward companies with superior control over their business ecosystem and ability to self-fund.

A sector gorilla with net cash, some fat to shed, minimal or well funded legacy commitments and not threatened by the regulator.

(S430)

Monthly Data 12/31/1965 - 7/31/2011 (Log Scale)

NDR uses the following ICI categories

to compute the cash/assets ratio:

Aggressive Growth Sector

Growth Income - Equity

Growth & Income

S&P 500 Gain/Annum When:

Gain/ %

Cash/Assets (%): Annum of Time

Above 9.5 20. 1 16. 1

Between 6.9 and 9.5 6. 1 36. 9

* 6.9 and Below 1. 4 47. 0

69

82

97

115

136

161

190

225

267

316

374

443

525

621

736

871

1032

1221

1446

69

82

97

115

136

161

190

225

267

316

374

443

525

621

736

871

1032

1221

1446

Bullish

Bearish

Excessive Cash Extreme Pessimism

Low Cash Extreme Optimism

7/31/2011 = 3.1%

5.9 6.2

5.3

3.8 3.5

Source: Investment Company Institute, www.ici.org 3

4

5

6

7

8

9

10

11

12

3

4

5

6

7

8

9

10

11

12

1970 1975 1980 1985 1990 1995 2000 2005 2010

Standard & Poor's 500 Stock Index

Stock Mutual Funds' Cash/Assets Ratio Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.


(DAVIS265S)

Daily Data 1/03/2006 - 8/11/2011 (Log Scale)

S&P 500 Index

Gain/Annum When:

Signal Dates 12/30/1994 - 8/11/2011

Gain/ %

Bottom Clip is Annum of Time

Above .6 -5. 0 29. 7

Between -.7 and .6 7. 7 45. 1

* Below -.7 16. 3 25. 2

Gain/Annum When:

Signal Dates 1/03/2006 - 8/11/2011

Gain/ %

Bottom Clip is Annum of Time

Above .6 -12. 5 27. 4

Between -.7 and .6 2. 5 48. 8

* Below -.7 4. 6 23. 8 685

728

774

822

874

929

988

1050

1117

1187

1262

1342

1426

1516

685

728

774

822

874

929

988

1050

1117

1187

1262

1342

1426

1516

CBOE Call Volume/(Put + Call Volume) (5-Day Smoothing) with Standard Deviation Brackets

42

44

46

48

50

52

54

56

58

60

42

44

46

48

50

52

54

56

58

60

Extreme Pessimism

Excessive OptimismNumber of Standard Deviations From A Moving Mean (Z-Score)

8/11/2011 = -2.74

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

J 2006

M M J S N J 2007

M M J S N J 2008

M M J S N J 2009

M M J S N J 2010

M M J S N J 2011

M M J

S&P 500 Index vs CBOE Call Volume/(Put + Call Volume)

Source: Chicago Board Options Exchange



Source: Ned Davis, 2011

(BA0540D)

Daily Data 4/20/1972 - 8/12/2011

8/12/2011=0.84

Me

an

+1

SD

+

2 S

D

+3

SD

-1

SD

-2

SD

Shaded Periods are NDR-defined Bear Markets 0.16

0.18

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.16

0.18

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

1977

1982

1987

1992

1997

2002

2007

Median 63-Day Correlation of S&P 500 Stocks to the S&P 500 Index



Source: Ned Davis, 2011

Source: BofA Merrill Lynch Global Equity Strategy, Thomson Reuters; BofA Merrill Lynch Global Equity Strategy, Bloomberg, Datastream

Source: Bank of England,January 2011

Relative change in labour costs to the US

-2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

Korea

UK

Taiw an

Mexico

Canada

Germany

Hungary

Singapore

Philippines

Brazil

Argentina

China

In US$ (wage growthand currency move)

In local currency (dueto wage growth only)

Source: Ned Davis, IMF, 2011 and IMF staff estimates and projections

Weekly Data 1/05/1990 - 7/08/2011

(B480)

Real Bond Yields 7/08/2011

Country Yields (%)

Japan 0.88 ( )

Germany 0.53 ( )

U.S. -0.57 ( )

Canada -0.73 ( )

U.K. -1.31 ( )

-1.5

-1.2

-0.9

-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.7

3.0

3.3

3.6

3.9

4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3

6.6

6.9

7.2

7.5

7.8

8.1

8.4

8.7

9.0

9.3

-1.5

-1.2

-0.9

-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

2.7

3.0

3.3

3.6

3.9

4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3

6.6

6.9

7.2

7.5

7.8

8.1

8.4

8.7

9.0

9.3

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

10-Year Government Bellwether Real Bond Yields



Source: IMF, Bank of England, July 2011

Recent dividend growth announcements from portfolio companies:

Fanuc + 129%

MTN + 80%

Novozymes + 40%

IBM: + 17%

Pfizer + 11%

Source: Sarasin & Partners LLP; Datastream, Haver Analytics, Goldman Sachs Global ECS Research

Investment Implications

Key Opportunities

Bond yields after last month‟s collapse will likely rise again in the face of unprecedented funding requirements in the developed world and rising inflation issues across emerging economies. Note poor 30 years auction…

Equity volatility has soared in recent sell-off - expect higher tracking error and leadership changes as managers adjust to income based, non-cyclical assets

Developed world blue chips our „Global Nifty Fifty‟ still offer powerful risk-adjusted exposure to EM growth.

Bond markets – our focus remains shorter-dated credit, emerging world currencies and inflation-linked issues.

Equity income continues to offer a strong alternative to traditional bond portfolios AND remains the investment of choice…

Global real estate – offers similar earnings yields to global equities but with resilient rental growth streams…

Investment Implications

Key Opportunities

When economies shift from the early-cycle phase to the mid-cycle phase, equity investors typically get nervous about double-dips and earnings expectations.

Repairing Japan post-crisis should eventually be inflationary, and will tend to stimulate capital spending on rebuilding and energy saving/security across Asia.

Such nervousness is evident in range-bound markets and trough valuations. Political risk and lower growth does justify lower multiples, but after recent declines defensive equities have room to rally

Government bond markets offer little real value at today‟s yields, combined with funding and real yield risks. UK bonds still remain vulnerable to a deteriorating funding and rising political risks.

Company liquidity, dividend yields in excess of government bonds and low Western cost bases may mean returns from the equity of thematic Western companies will exceed bonds, and may be delivered with lower volatility and potentially higher yields…

Governance and transparency issues are increasing in the emerging world, growth alone does not justify premiums relative to Western equity markets

Sarasin & Partners LLP

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