MARKET UPDATE

1. MARKET UPDATE Paul Ord – Investment Manager 26 February 2013

2. 2012 - THE YEAR THAT WAS • Wide GDP divergence between emerging and developed economies • US relative winner, UK stagnant, Europe recession • (No austerity, mild austerity, extreme austerity) • Positive returns from bonds • Higher yield/financial corporate bonds beat ‘safe-haven’ sovereigns • Equities outperformed bonds • Europe beat US, UK lagged • Mid/small beat large • Disappointing year for Commercial Property and Hedge Funds

3. AUSTERITY GAMES - BETTER THAN EXPECTED OUTCOME Source: DataStream, 31/12/11 - 31/12/12

4. BONDS OVERPRICED VERSUS EQUITIES Gilt, Corporate Bond and Equity Yields Source: Bloomberg, 12 Dec 2012

5. CORPORATE BONDS – BOND YIELDS vs. EQUITIES UK dividend yields versus corporate bond yields - example companies Source: Bloomberg, 29 October 2012

6. ECONOMIC GROWTH - MODEST RECOVERY Source: Citi Research Global Economic Outlook & Strategy, 18 January 2012 and 23 January 2013

7. ECONOMIC GROWTH - DEVELOPED WORLD Percent % Source: Citi Global Economic Outlook and Strategy 23 January 2013

8. US FISCAL CLIFF • What did happen • Bush-era tax cuts extended for families with income under $450k • Extended unemployment benefits to continue • Spending cuts mandated by Budget Control Act put off two months • Overall package equates to 1% drag on GDP • What didn’t happen • No meaningful structural reform • Debt ceiling • Public debt remains on an unsustainable trajectory • What this means for markets • Deep GDP recession was avoided = risk asset relief rally • More volatility to come

9. US - ECONOMIC GROWTH IMPROVING • ‘Going for growth’ • ‘Fiscal cliff’ avoided • Low interest rates • Strong profit upturn • Employment now turning the corner • Low inflation • Dollar strength making imports cheaper

10. EQUITIES - UK MARKET OUTLOOK • Market is pricing continued recession and earnings contraction • Global policy support and cheap money • Strong balance sheets, access to funding and EM exposure key drivers • Equity valuation attractive on all but doomsday scenario Source: Thomson Reuters Datastream 25/10/2011 Source: Thomson Reuters Datastream, 11/11/2011 Source: Citi European Portfolio Strategist, 7 February 2013

11. EQUITIES - UK QUOTED MARKET IS GLOBAL NOT LOCAL Source: Morgan Stanley Global Exposure Guide 2011, Estimated 2012 Revenues, 21 May 2012

12. EQUITIES - EMERGING MARKET OUTLOOK • Highest global GDP growth, highest EPS • EM est. share nominal global GDP 45% • Low household/corporate credit as % GDP • BRIC consumption exceeds US Source: Morgan Stanley Global Emerging Markets Strategy, Factset Consensus Estimates, 29 November 2012

13. INDIA - GROWTH POISED TO OUTPACE CHINA • GDP to accelerate to 10% pa over next 5 years outpacing China • GDP per capita to match China over next 10 years • Structural rise in domestic savings - India has youngest and increasingly well educated workforce • Demographics - age dependency trough in China but not until 2030 in India • Productivity - reforms on state subsidies, taxes and accelerating infrastructure spending

14. EQUITIES – INVESTMENT THEMES 2013 • Global diversification • Stock markets often different to economies • Many global businesses with Emerging Markets exposure • Quality companies • Earnings momentum, stable growth, strong franchise, strong balance sheet • Developed vs. Emerging Markets • Emerging Markets = industrialisation/urbanisation long-term growth trend • Developed Markets = unsustainable promises e.g. healthcare, pensions • Sustainable/reliable income • Well covered and growing dividends attractive vs. rising bond yields

15. STRATEGY - FEBRUARY 2013 • Equities - overweight • Growth expectations to improve H2 • Central banks to continue reflation policies • Still the best return vs. risk option • Valuations fair for long-term investors • Global • Income from dividends higher than bonds • Gilts - underweight • Yields ‘fundamentally too low’, but • ‘Financial repression’ could keep rates lower, for longer • Global, corporate or EM bonds may make sense but involve different risks • Hedge funds - neutral • Commercial property - neutral • Income attractions • Cash – underweight • Negative real return may still make sense for some risk averse investors

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