NORTH AMERICA

EUROPE

JAPAN STANDPOINT LATIN AMERICA GLOBAGLOBALL MARKETMARKET ANALYSISANALYSI S FROMFROM INTERNATIONALINTERNATIONAL PERSONALPERSONAL BANKINGBANKIN G ASIA PACIFIC

Q4 08 The American Paradox

Considering that it was US mortgage-lending about the consequences of this. For starters, that initially triggered the major crisis in the more restricted mortgage lending may further global financial system, the US economy and damage the already-depressed US housing financial markets have been surprisingly market and consumer spending. Also resilient compared to other markets so far this businesses may struggle to invest or even pay year. In the second quarter, US GDP expanded their operating expenses without readily by 3.3% compared to contractions of -0.8% available credit, thereby diminishing labour and -3.0% in the Euro Area and Japan, market prospects (see chart). respectively. In equity markets, the S&P500 Let there be little doubt regarding the global of US stocks has fallen -20.6% year to nature of these challenges. Many financial date, as of September 30, compared to the institutions worldwide are similarly in a larger -28.3% drop in the MSCI World Free weaker position to offer loans. Citi analysts ex-US index in local currency terms over the actually forecast that Euro Area, UK and same period. Compounding this effect, the US Japanese GDP growth may continue to be dollar staged a sharp rebound in the late weaker than in the US in 2009. Such a summer against a broad array of currencies. It prognosis also has significant negative seems contrary to many commentators’ earlier GLOBAL INVESTMENT STRATEGY implications for the Asia-Pacific region and expectations that the US financial assets have the emerging economies, even if the banking not suffered the most from the credit crunch in sectors in these regions have managed to 2008. But what does the outlook hold for avoid most of the sub prime mortgage fallout 2009? Can this American paradox continue? according to data compiled by Bloomberg. Downside economic risks have America provides solutions too intensified The events that unfolded in September, when In the US, the Federal Reserve has a major US investment bank was allowed to orchestrated a coordinated plan with other fail and the US Treasury came to the rescue of central banks to inject liquidity into the two mortgage giants and the world’s largest global banking system. In addition, the US insurance company, will likely have a Treasury and US Federal Reserve have put meaningful impact on US economic growth Opinions, forecasts, and weightings expressed by Citigroup together the most aggressive plan yet to Global Consumer Group Investments may not be attained or over the coming year. As a result, asset values counteract weakness in the global financial suitable for all investors. Past performance is no guarantee on banks’ balance sheets have likely of future results. There are additional risks associated system in the form of the Troubled Asset with international investments, including foreign, political, deteriorated, further constraining the ability of currency and economic factors to consider. Please contact Relief Program (TARP). Although details are your financial professional to determine what is suitable for global banks to make new loans to individuals your individual situation. and businesses. Citi analysts are quite clear sketchy at the time of writing, it is envisaged

PAGE 2: GCG Outlook PAGE 3: Regional Analyses PAGE 9: Behind the Numbers 1 PAGE 10: Asset Allocations gcg outlook GLOBAL INVESTMENT STRATEGY

» A snapshot of the Global Consumer Group’s (GCG) global market views across that a US$700bn government-controlled analysts forecast the US government a select group of asset classes, regions fund could be established to purchase borrowing requirement reaching 6.5% of US and currencies over the next six to illiquid bank assets. In doing so, it is GDP in 2009, from 3% this year. With this in twelve months. intended to unburden bank balance sheets, mind, some commentators have questioned Our Market Outlook reflects our assessment thus enabling banks to resume lending whether US Treasury paper may continue to be a haven of safety and whether the US of each asset class independently of other activities. Citi analysts firmly believe that dollar may weaken. asset classes. Our Portfolio Allocation reflects such action is required in order to help the our relative assessment of each asset class in US economy to avoid a more severe As Citi analysts point out, however, the the context of a portfolio. Overall, we recession. consequences of financial stress are unlikely overweight global equities and underweight to fall on US assets alone. Citi analysts global bonds. Based largely on our outlook for The measures taken by the US authorities actually forecast the US dollar strengthening US dollar appreciation over the coming year, contrast with the more muted policy over the coming 12 months as foreign exchange markets factor in the deteriorating we now favour US and responses elsewhere. Although the economic outlook outside the US and the equities over European and Japanese European Central Bank and Bank of equities. Further insights on regional potential for lower interest rates, particularly England have actively participated in in Europe. The perception of rising financial prospects can be found within. coordinated liquidity provisions along with risks may also continue to feed investors’ the US Federal Reserve, they embarked on GLOBAL EQUITIES appetites for the safety of US Treasury paper, interest rate easing only recently in in their view. Indeed, US Treasury yields MARKET MARKET PORTFOLIO conjunction with four other central banks. OUTLOOK ALLOCATION across all maturities fell in September, suggesting higher demand for this asset class POSITIVE OVERWEIGHT Before then, their interest rate policies had US Positive Overweight appeared slanted towards concerns amid higher volatility. Although the risks to Europe Neutral Neutral regarding lingering inflation rather than the global corporate profit outlook are piled Japan Neutral Neutral high, Citi analysts are still forecasting a Latin America Positive Overweight addressing intensifying economic and rebound in global stock markets over the Asia Pacific Positive Overweight financial weaknesses. As global inflationary next year. Given their 12-month currency Eastern Europe Positive Overweight pressures continue to subside, Citi analysts markets outlook, Citi analysts believe that believe that this may provide greater room GLOBAL FIXED INCOME US and emerging market equities may for them to cut interest rates. MARKET MARKET PORTFOLIO deliver higher total returns than European OUTLOOK ALLOCATION and Japanese equities. So what does this mean for NEGATIVE UNDERWEIGHT US Investment Grade Negative Underweight financial markets? Euro Investment Grade Neutral Underweight Japan Investment Grade Negative Underweight The establishment of the TARP is likely to High Yield Negative Underweight increase significantly the US government Latin America EM Negative Underweight budget deficit over the coming years. Citi Asia Pacific EM Negative Underweight

ALTERNATIVE INVESTMENTS -30% 5000 MARKET PORTFOLIO -20% OUTLOOK ALLOCATION -10% 4000 N/A NEUTRAL Hedge Funds Neutral Neutral 0% 3000 10% 2000 GLOBAL CURRENCIES 20% 1000 CURRENCY OUTLOOK OUTLOOK 30% 0 vs USD vs EUR 40%

Euro Negative 50% -1000 Yen Negative Positive Sterling Negative Negative 60% -2000 70% US Dollar Positive -3000 1990 1995 2000 2005 Data Source: Citi Global Markets Inc. Weightings provided Net Percentage of Senior Loan Officers Reporting Tigher Standards for Large by Citi Global Wealth Management Investment Strategy and Medium Sized Businesses (left scale, inverted) Committee and Citi Global Consumer Investments as of Change in US Non-farm Payrolls from Year Earlier, 000s (right scale) September 2008. Source: EM Equities - MSCI EM Index; EM Bonds - Citi GEMS Index; Devel. Equities - MSCI World Index; Devel. Bonds Citi WorldBIG Govt. Index, hedged into USD

Banking Lending and Jobs, 1990 - 2008 Data Source: Bloomberg as of September 30, 2008

Q3 Forecasts may not be attained. Past performance is no 2 STANDPOINT guarantee of future results. There are additional risks 08 associated with foreign investments. EUROPE

FIXED INCOME 400

membership. So far the German government Interest rate cuts expected 340 has been reluctant to opt for a fiscal stimulus The Euro Area economy, as expected by the package. Bloomberg consensus of analysts, contracted 280 by 0.8% annualised rate in the second Until recently, the European Central Bank quarter. This partly reflected a rebound from appeared to be chiefly concerned about 220 strong growth in the first quarter but also the potential second-round effects on inflation underlying deterioration in economic and wage growth from high commodity 160 fundamentals. Citi analysts have reduced prices. Nonetheless, Citi analysts assume their forecast of Euro Area economic activity that the Bank may revise down its growth 100 for the second half of the year and 2009 amid outlook further over time and that the Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Mar-08 poor sentiment and poor manufacturing headline inflation rate may drop sharply. May-08 order readings. Based on this, they forecast the Bank ‘‘‘‘‘ ‘‘‘‘‘‘‘ incrementally lowering its policy interest While some fiscal easing may cushion the rate to 2.00% by the end of next year. On this CITI EURO BIG (EUR) Data Source: Bloomberg as of September 30, 2008 economic slowdown in the Euro Area, basis, Citi analysts expect a slight reduction France and Italy may be constrained in this in German 10-year government bond yields respect since their government deficits are over the coming year, which would result in already close to the 3%-of-GDP limit, which coupon-like total returns for investors. is laid down by the rules of Euro Area

EQUITIES 400 Attractive equity market values Stoxx were to fall by a further 20-30%, this provide some support would raise the price earnings ratio to around 365 13x, which would still be somewhat cheaper Slowing European economic growth and than the average of the last 20 years. rising costs have taken their toll on the According to Citi analysts, this suggests that 330 corporate sector. Although the consensus of much (if not all) of the bad news is already equity analysts has been downgrading its priced into European equity markets thus 295 expectations for European profit growth for giving them some support against further some months, Citi analysts believe that downward moves. However, given Citi expectations are still set too high and may analysts’ outlook of the depreciating Euro 260 therefore be vulnerable to disappoint going over the coming year, they believe that this Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08 forward. may weigh on the performance of European May-08 In favour of the outlook for equity markets, equities in comparison to other international however, Citi analysts believe that European equity markets. DJ STOXX 600 Data Source: Bloomberg as of September 30, 2008 equity markets offer attractive value for Given the high global market volatility and investors. At the end of September the stocks slowing economic growth in Europe, Citi in the DJ Stoxx index traded at values around analysts remain selective and favour the 10 times higher than their expected profit outlook for defensive sectors such as health levels for the coming year (price-earnings care, food & beverage and telecoms over the ratio), according to data from Bloomberg. outlook for banks, autos, construction and Even if the profits of companies in the DJ retail stocks.

Forecasts may not be attained. Past performance is no Q3 guarantee of future results. There are additional risks STANDPOINT 3 associated with foreign investments. 08 NORTH AMERICA

FIXED INCOME

1500ëëëëëëë Focus on high quality, investment on financial institutions’ exposure to ëëëëëëë grade bonds counterparties that may be at risk of failing. ëëëëëëë In the long term, Citi analysts’ primary area 1400ëëëëëëë Citi analysts believe that there is a large ëëëëëëë of concern is the implication of financial ëëëëëëë possibility that the US Federal Reserve may institutions deleveraging their exposure to 1300ëëëëëëë cut its policy interest rate by another 0.50% ëëëëëëë risky assets. In their view, financial ëëëëëëë before year-end, given deteriorating financial 1200 institutions may want to raise long term debt ëëëëëëë conditions. In addition, the policy makers and as such, they believe that heavy bond ëëëëëëë ëëëëëëë remain focused on liquidity injections into issuance may weigh on the value of existing 1100 the interbank lending market and the plans to ëëëëëëë bonds issued by the sector. ëëëëëëë establish a government controlled fund to 1000ëëëëëëë ë ë ë

Given ongoing uncertainty, Citi analysts ëë ëë

buy up illiquid assets that are weighing on ë ë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëëë ëëëëë ëëëëë ëëëëë ëëëë ëëëëë ëëëëë ëëëëë ëëëëëë ëë ëë ë ëëëëë ëë ë ë ëë ëë ë ë ëëëëëë ëëëëëë ëë ë ëëë ëëë ëëëëëë ë ëë ëëëëëë ëë ë ë ëëëëëë ëëëëëë

continue to favour high quality corporate Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 banks’ balance sheets in an attempt to loosen Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08 May-08 bank lending. Under the assumption that this issuers with strong liquidity. They believe CITI US BIG plan works successfully, Citi analysts investment grade bonds continue to offer Data Source: Bloomberg as of September 30, 2008 forecast 10-year Treasury yields rising more compelling rewards in relation to their gradually over the coming year as risk expected lower risks than high yield bonds. aversion diminishes. Meanwhile, they believe preferred securities within the primary market are providing With respect to credit markets, Citi analysts select opportunities over the long term believe recent default of a major US despite recent volatility. investment bank may place a larger spotlight

EQUITIES 1700 ëëëëëëë Positioning for a recovery equity performance going forward. 1600 In anticipation of a recovery, Citi analysts ëëëëëëë Despite unprecedented volatility and 1500 favour the outlook for small and mid cap ongoing concerns over the credit ëëëëëë environment, Citi analysts believe US stocks over large cap stocks given their 1400 equities may be close to their trough and historical pattern of outperforming large-cap ëëëëëë may be poised to rebound over the next 12 stocks during recovery phases. Furthermore, 1300 Citi analysts note that US small and mid-cap ëëëëë months. They note that S&P500 stocks have 1200 on average rallied several months prior to the stocks derive a smaller percentage of their actual economic trough during previous US revenues from overseas than large cap stocks 1100ëëëë ëë ë ë ë ë ë ë ë ë ëë ëë ë ë

and may therefore be more sheltered from ëëëë ëëëë ë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë ëëëë recessions since 1960. Citi analysts warn, ëëëë ëëëë ëëëë ëëëë ëëëë ëëëëë ëë ëë ëë ë ëë ëë ë ëë ëë ëë ëë ëëëëë ëë ëëëëë ëë ë ëëë ëë ëëëëë ë ëë ëë ëë ëëëëë ëë ëë ëëëëë Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08 however, that many investors may be the impact of the recent US dollar May-08 disappointed by lower than expected or even appreciation. Indeed, they may even benefit negative profit growth among S&P500 from the lower cost of imported materials. S&P 500 INDEX companies in 2009. According to data from Citi analysts also continue to hold a neutral Data Source: Bloomberg as of September 30, 2008 Bloomberg as of September 26, the view between value and growth stocks. consensus of Wall Street equity analysts Regarding the financials sector, Citi analysts Their main areas of concern include expected S&P500 companies’ profits to remains cautious and believe weakening counterparty exposure, declining value of grow by almost 25% next year. With fundamentals and the potential for additional illiquid mortgage assets, liquidity shortages, expectations set too high, in the view of Citi events may keep the sector under pressure. analysts, this may pose a challenge to US capital raising constraints and regulatory issues.

Q3 Forecasts may not be attained. Past performance is no 4 STANDPOINT guarantee of future results. There are additional risks 08 associated with foreign investments. JAPAN AND ASIA PACIFIC

JAPAN EQUITIES 18000

Political instability hampers growth and call a general election in November. 17000 prospects Regardless of who wins the general election, Citi analysts cannot foresee Japanese politics 16000 Citi analysts expect Japan to have the lowest stabilizing in the near term and thus see little economic growth rate among the major prospect for the implementation of effective 15000 developed economies over the coming year. economic measures. As a result, they foresee Japanese companies 14000 Over the longer term, Citi analysts expect the revising down their profit outlooks at the 13000 time of announcing third quarter results. Japanese equity market to recover in tandem They note that conditions among small and with other global equity markets but lagging 12000 medium-sized enterprises are worsening in terms of strength, given the lack of Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08 conspicuously, particularly in the consumer flexibility that Japanese policymakers have May-08 finance, real estate and construction sectors. to address the economic situation. They ÎÎÎÎÎÎÎÎÎÎÎÎÎÎÎÎÎ Citi analysts also expect concerns regarding believe that future economic policy measures may only be stopgaps that will do little to halt JAPAN NIKKEI 225 INDEX exposures to bad debt to again become a Data Source: Bloomberg as of September 30, 2008 prominent issue in the Japanese equity the downward trend in domestic-demand. In market. short, Citi analysts think the political environment will be negative for the Given the recent change in Prime Minister, Japanese equity market over the longer term. Citi analysts believe that the government may dissolve the Lower House in October

ASIAN PACIFIC EQUITIES 600

for the region’s equity markets. Firstly, they Potential for a strong recovery 540 see the consensus of analyst expectations for While financial conditions do not appear Asian corporate profit growth in 2009 as 480 supportive for stronger economic growth in being excessive and vulnerable to Asia, Citi analysts believe that the current disappointment as these expectations have to 420 global slowdown may at least be less painful be trimmed back. Secondly, they believe that for emerging markets than previous Asian markets may be vulnerable to an 360 economic downturns. This is because outflow of investors’ money as global risk emerging markets appear to have less excess aversion rises. Thirdly, they do not see 300 leverage in their financial sectors than in valuations in the region’s equity markets as developed markets, according to Citi being particularly supportive of strong gains Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08 analysts. Moreover, even as economic ahead. May-08 growth moderates in the region, Citi analysts forecast the region’s overall GDP growth In the current environment, Citi analysts MSCI F ASIA PACIFIC EX-JAPAN rate remaining well above that of the US, favour the outlook for country equity Data Source: Bloomberg as of September 30, 2008 Europe and Japan, which also bodes well for markets and sectors in Asia that offer Asian corporate profitability. attractive valuations, strong cash flows and high dividends (value investing). Within the over small and mid-caps given their better Citi analysts believe that Asian equities may region, they have a preference for Hong fundamental outlook, higher free cash flow perform strongly over the anticipated Kong, Korean and Taiwanese stocks. They and profit margins. recovery phase of global equity markets. also prefer the outlook for large cap stocks That said, they also warn of potential risks

Forecasts may not be attained. Past performance is no Q3 guarantee of future results. There are additional risks STANDPOINT 5 associated with foreign investments. 08 CEEMEA AND LATIN AMERICA

CEEMEA EQUITIES 500

Sensitivity to European slowdown The region’s equity markets are currently 450 valued at around 9 times the coming year’s Citi analysts believe that the Central and expected profit levels, which is lower than 400 Eastern European economy may soon start other regional equity markets. Citi analysts to suffer from the rapidly deteriorating Euro also expect the region’s corporate profits to 350 Area economy. They now forecast GDP in grow by over 20% this year, which compares the CEEMEA region slowing to 5.1% in favourably to the more subdued profit 300 2009, from 5.7% this year. On the positive growth expected elsewhere around the side, Citi analysts note that the global world. CEEMEA equities therefore offer an 250 economic slowdown and sharp correction in attractive combination of good value and commodity prices should alleviate potential growth. Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08 inflationary pressures and the need for May-08 higher interest rates. In this context, they will Citi analysts have a mixed outlook for equity favour the outlook for equity markets in the market performances in the region. They MSCI EM EMEA region with greater policy flexibility, more have a positive view of Russian, Middle Data Source: Bloomberg as of September 30, 2008 resilient financial systems and healthier Eastern and Polish equity markets but they current accounts. remain cautious in their outlook for Turkish analysts consider that the local equity market stocks, where the large current account has overreacted to the impact of financial The region’s equity market valuations deficit may weigh on the currency and on appear very attractive, in terms of the price- instability on the economy. However, monetary policy. In Russia, although substantial risks remain. earnings ratio, compared to other regions. political uncertainties have resurfaced, Citi

LATIN AMERICAN EQUITIES 5500 Brazilian equities may lead the potential for this market to sharply rebound region’s markets higher with the MSCI Brazil index having 5100 underperformed the MSCI EM Latin Despite recent underperformance, Citi America index over the third quarter of this 4700 analysts remain optimistic on the long term year. With regard to Brazil’s economy, they prospects of Latin American equities given note that second quarter GDP growth 4300 attractive valuations as a result of the recent exceeded expectations, that inflation appears sell-off and their expectations for higher to have peaked and that the cost of capital 3900 economic growth rates among the emerging remains relatively low. Citi analysts also markets. Whilst the region’s commodity have a favourable outlook for Mexican 3500 producers may suffer from the recent pull equities despite the slowdown that they back in commodity prices, Citi analysts Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 anticipate in the local economy. Mar-08 believe that the region’s equity markets may May-08 benefit from lower inflation. They warn, Overall, Citi analysts offer several potential however, that these equity markets could catalysts that may lead to a new and MSCI EM LATIN AMERICA continue to be extremely volatile in the sustainable rally within the region’s equity Data Source: Bloomberg as of September 30, 2008 coming months. markets including, a steady US dollar exchange rate, a stabilisation in commodity Within Latin America, Citi analysts favour prices, better than expected US economic the outlook for Brazilian equities based on data, as well as reduced worries over global an improved domestic economic situation inflation. and strong profit growth momentum and the

Q3 Forecasts may not be attained. Past performance is no 6 STANDPOINT guarantee of future results. There are additional risks 08 associated with foreign investments. GLOBAL REITS AND COMMODITIES

GLOBAL REAL ESTATE INVESTMENT TRUSTS 2800 2800 Global REITs, represented by the EPRA/ financing markets are still largely NAREIT Global REIT total return index, unavailable to real estate investors in a 2550 2550 slipped by -22.7% year-to-date, as of meaningful way, according to Citi analysts. September 30, 2008, in US dollar terms. This means that it is harder for commercial 2800 2300 According to the EPRA indices, most real estate transactions to take place, thus 2300 regional and country REIT markets are in weighing on commercial real estate values. 2550 negative territory over the same period, with That said, Citi analysts do not expect 2050 2050 the Hong Kong/ China index down most by commercial real estate prices to undergo a 2300 –53.0%, followed by Singapore (-44.8%) and large correction. They prefer the outlook for Australia (-38.5%). US REITs over those in Japan, Continental 1800 1800 Europe, the UK, Hong Kong and Australia, 2050 Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08

With the economic outlook remaining May-08 based on their view that US REITs are more strained, Citi analysts believe the attractively valued for investors. fundamental outlook for commercial real 1800 EPRA/NAREIT GLOBAL INDEX estate may continue to deteriorate in 2009, Citi analysts remain cautious in their outlook Data Source: Bloomberg as of September 30, 2008 especially given the typical time lag between for emerging market REITs even after the economic slowdowns and their impact on recent sell-off, which was triggered by profit in export-dependant emerging economies rents and building occupancy. Citi analysts taking and uncertainty over future and moderate the demand for new homes believe that the turmoil in the global financial profitability. Citi analysts believe the given the decelerating growth in urbanization sector may diminish the demand for office slowdown in developed economies may and the middle class. space in developed economies. Furthermore, increasingly impact real estate performance

5000

COMMODITIES 4400 5000 38005000 Mixed outlook for commodity markets In the oil market, Citi analysts believe that 4400 going forward softening demand for oil products may 32004400 loosen demand and supply constraints, The third quarter saw sharp falls in 3800 resulting in a rising level of spare oil 26003800 commodity prices, as these markets began to production capacity in OPEC countries. This take account of the likely impact of slower 3200 may cause the price of crude oil to fall 20003200 global economic activity on the demand for further, in their view. They have 2600 commodities. The DJ AIG Commodity consequently reduced their West Texas 2600 Index, a composite of energy, metal and Intermediate (WTI) crude oil price forecast agricultural futures, slumped by -28.1% over 2000 2000 ‘ to $105.9/bbl in 2008, $90/bbl in 2009 and ‘ ‘ ‘‘ ‘ ‘ ‘‘‘‘ ‘‘‘‘ ‘ ‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ ‘‘‘‘ the quarter in US dollar terms, according to ‘‘‘‘ ‘‘‘‘ ‘ ‘‘‘‘ ‘‘‘‘‘ ‘‘‘‘‘

2010 and $95/bbl in 2011. Beyond that, they ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘ ‘‘ ‘‘ ‘‘ ‘ ‘‘ ‘ ‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ ‘‘ Jul-08 Oct-07 Oct-07 Oct-08 Oct-08 Feb-08 Apr-08 Dec-07 Jan-08 Nov-07 Jun-08 Sep-08 Aug-08 Aug-08 Mar-08 data from Bloomberg. Citi analysts note that forecast higher oil prices, with the oil market ‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘ ‘‘May-08 ‘‘‘‘‘‘‘‘ a certain amount of froth (speculative returning to another supply tightening cycle demand) has been removed from commodity by then. LONDON METAL EXCHANGE LMEX INDEX markets, which has weighed on prices. Data Source: Bloomberg as of September 30, 2008 However, as the global economic picture In the copper market, there appears to be a deteriorates, they expect further major falls shortage of supply, according to Citi analysts, in commodity markets. Those commodity despite slower demand growth for the metal. their forecasts of Chinese demand, owing to markets where production is less flexible, This, in their view, should help to make the lower expected steel production. This may such as coal and iron ore, may be particularly metal resilient in the face of the global bring about a supply surplus, in their view, hard hit in their view. economic slowdown. In the iron ore market, thus significantly weighing on iron ore on the other hand, Citi analysts have reduced prices.

Forecasts may not be attained. Past performance is no Q3 guarantee of future results. There are additional risks STANDPOINT 7 associated with foreign investments. 08 CURRENCIES

EURO VS US DOLLAR YEN VS US DOLLAR GBP VS US DOLLAR

Citi analysts forecast that the US dollar Citi analysts expect the Japanese Yen to Citi analysts believe that the British Pound strength that we saw during the late summer remain fairly stable against the US dollar may find itself driven by woes similar to may resume going forward. Whilst the Euro over the next six months. In their view, the those afflicting the Euro over the coming may gain ground over the short term as the Japanese financial sector should remain year. Although Citi analysts expect a sharp success of US policy responses to address the relatively insulated from the turmoil in the improvement in the UK current account crisis in the financial sector remains US financial system and so the Yen may deficit, they do not believe that it may bring uncertain, Citi analysts point out that the profit from the process of financial support to the currency given their view of impact of current financial stresses is not deleveraging and volatile financial markets. the poor prospects of the UK economy in limited to the US but may be felt to an equal, That said, Citi analysts do not expect to see 2009. So far this year, the Bank of England if not greater extent, in other parts of the the Bank of Japan increase rates in the has been restrained from lowering interest world. They have consequently revised down foreseeable future since economic activity rates as a result of higher headline inflation their expectations for the European economic continues to be subdued and downside risks numbers. However, given Citi analysts’ growth and inflation going into 2009. After still dominate. In the view of Citi analysts, expectations of falling inflation, plunging the co-ordinated interest rate cuts of global greater stability in financial markets in 2009 house prices and weakness in consumer central banks in early October, including the may encourage a shift of Japanese spending, they expect the Bank of England European Central Bank, Citi analysts now households’ portfolios into foreign currency to cut rates to 3.00% by the end of 2009. In expect the Bank to cut interest rates to 2.00% denominated assets thus generating a modest their view, this may drive the British Pound by the end of 2009. Given the narrowing decline in the yen. They forecast an down to US$1.57/£ towards the middle of interest rate differential that they expect exchange rate of ¥110/USD by the end of the next year. between US and Euro Area interest rates, Citi second quarter of 2009. analysts forecast the Euro to fall to US$1.30/$ by mid 2009.

1.50 150 2.20

2.10 1.40 140

2.00 1.30 130 1.80 1.20 120 1.70

1.10 110 1.60

1.00 100 1.50 Jul-08 Oct-07 Oct-07 Jul-08 Oct-08 Oct-08 Jul-08 Feb-08 Oct-07 Oct-07 Apr-08 Oct-07 Oct-07 Dec-07 Nov-07 Jan-08 Jun-08 Sep-08 Oct-08 Oct-08 Oct-08 Oct-08 Feb-08 Aug-08 Aug-08 Mar-08 Feb-08 Apr-08 Apr-08 Dec-07 Dec-07 Nov-07 Jan-08 Nov-07 Jan-08 Jun-08 Sep-08 Jun-08 Sep-08 May-08 Aug-08 Aug-08 Mar-08 Aug-08 Mar-08 May-08 May-08 ëëëëëëëëëëëëëë ë ë ëë ë ë ë ëëëëëëëëëëëëëëë ë ë ëë ë ë ë ëëëëë ëëëëëëëë ë ë ëë ë ë ë EURO-DOLLAR (USD/EUR) DOLLAR-YEN (JPY/USD) POUND-DOLLAR (USD/GBP) Data Source: Bloomberg as of September 30, 2008 Data Source: Bloomberg as of September 30, 2008 Data Source: Bloomberg as of September 30, 2008

Q3 Forecasts may not be attained. Past performance is no 8 STANDPOINT guarantee of future results. There are additional risks 08 associated with foreign investments. BEHIND THE NUMBERS

Libor Rates 8 Overnight US Libor rates are an important metrics that economists use to measure the cost 7 of interbank financing which is key for the 6 fluidity of the financial system. Overnight US 5 Libor rates give us an indication of the rates that banks pay to each other for lending short 4 term liquidities. For the US markets, those 3 rates are based on the Target Fed Funds plus a US Fed Funds spread whose height will depend on the risk 2 Overnight US Libor aversion. When banks loose confidence or fear 1 that other banks will not be able to payback, 0 those spreads widen and Libor rates increase versus the Fed Funds. In periods during which 2 Dec 07 2 Mar 07 2 Dec 06 2 Dec 05 2 Mar 06 2 Mar 08 2 Sept 07 2 Sept 2 Sept 06 2 Sept 2 Sept 05 2 Sept 2 Sept 08 2 Sept 2 June 07 2 June 07 2 June 06 the financial system works fine, those spreads 2 June 08 are very low and Overnight Libor rates are OVERNIGHT US LIBOR VS FED FUNDS very close to the Target Fed Funds. Source: Moody’s, Citi

The chart below shows that since the beginning aversion to other economy participants and limited. The implementation of the Secretary of the credit crisis, those spreads have been financial conditions have significantly Paulson’s TARP-plan should help to bring extremely volatile and have reached record tightened for companies and consumers, back confidence in the financial sector and to levels. Uncertainties concerning banks despite low Target Fed Funds. lower interbank rates. In turn, lower interbank exposure to the subprime crisis have generated financing cost should reflect in the broad Our analysts consider that the tightening of the mistrust among the sector. Banks are less financial conditions. However, they estimate financial conditions will have a significant willing to lend money to each and the cost of that it should take some time before that the impact on the economic growth and on those lending has increased proportionally. In positive consequences are felt in the broad companies’ earnings as consumption should consequence, banks have transposed this risk economy. recede further and investments should be

US Economic Surprises 12 -120.00 The US economy is slowing; it is even the common thinking that the US economy will be 10 -80.00 in recession in H2/08. Real economic data 8 releases seem to be pointing in this direction: 6 Unemployment rate is on the rise. Retail sales -40.00 are deteriorating. Furthermore, the decline in 4 house prices is still not coming to and end in 2 spite of the fact that construction activity is 0.00 0 still in a downward spiral. -2 40.00 31 Dec 93 Dec 93 31 31 Mar 93 Mar 93 31 31 Dec 96 Dec 96 31 31 Dec 99 31 31 Mar 96 Mar 96 31 31 Mar 99 31 31 Dec 02 Dec 02 31 31 Mar 02 Mar 02 31 31 Dec 05 31 31 Dec 08 31 31 Mar 05 31 31 Mar 08 31 30 June07 June07 30 30 Sept 97 30 June 01 30 30 Sept 94 Where do Citi-analysts take their optimism 30 Sept 03 30 Sept 06 Sept 30 30 Sept 00 Sept 30 30 June 95 30 30 Jnne 98 Jnne 98 30 -4 June 04 30 from to expect no prolonged recession? No US leading indicator -6 doubt, there are currently not too much hard US surprise index (inverse right scale 80.00 facts around to assume that economic activity could pick up in roughly 3 months. Even so called leading indicators are currently at THE US ECONOMIC SURPRISE depressed levels. However, the message they Source: Bloomberg, MSCI are transporting is not too bad. The reason is when the US economy fell into recession in releases have on balance been beating that many of them seem to stabilize or are just 2001. Currently, the picture could turn out to consensus estimates. An increase in the index in the process to reverse recent trends. The be similar. The year-over-year change of the thus implies that economists seem to signals are still not very strong, but its leading indicator may have reached a turning underestimate the strength - albeit very soft messages seem to be indicative: US-economic point; since two months data is not of the US economy. activity will not continue to falter in 2009 but deteriorating any further any more, whereas It is, amongst others, this sort of data, which is to improve on the margin. This message production data still continues to fall make Citi-analysts believe that economic holds true for the US-leading indicator, significantly. Also the ISM, the US purchasing activity could pick up next year again. probably the most prominent US-indicator. manager index, which is closely watched by However, as signals are not too strong, they The charts shows that the leading indicator the US Fed, seems to be stabilising at a level, expect below average growth and need to and US industrial production, a classical which indicates very soft, but nonetheless admit that risks continue to be tilted strongly concurrent indicator. It can be seen from the positive growth rates. Furthermore, the Citi to the downside. picture that US-production tends to lag the surprise index or the US economy is on the leading indicator. This holds especially true, rise. Positive readings suggest that economic

Forecasts may not be attained. Past performance is no Q3 guarantee of future results. There are additional risks STANDPOINT 9 associated with foreign investments. 08 STANDPOINT FINAL WORD Asset Allocations

EURO TACTICAL MODEL PORTFOLIOS

INCOME EUR Cash 20% EUR Corporate Bonds 20% Seeking primarily capital preservation over time and EUR Government Bonds 45% only willing to accept very minor portfolio value European Equities 7% fluctuations from month to month. Global Equities 8%

CONSERVATIVE EUR High Yield Bonds 4% EUR Corporate Bonds 25% Seeking growth of wealth over time but unwilling to EUR Government Bonds 35% accept significant fluctuations in the value of portfolio European Equities 17% from month to month. Global Equities 14% Global REITs 5%

BALANCED Emerging Market Debt 3% EUR Corporate Bonds 18% Seeking long-term capital growth foremost but unwilling EUR Government Bonds 20% to accept significant losses on value of portfolio over EUR High Yield Bonds 3% the medium term. European Equities 26% US Equities 13% Pacific Equities 4% Emerging Markets Equities 5% Global REITs 8% GROWTH EUR Corporate Bonds 13% EUR Government Bonds 7% Seeking long-term capital appreciation and willing to EUR High Yield Bonds 4% tolerate measured medium-term volatility in order to Emerging Market Debt 5% enhance longer-term performance. European Equities 33% US Equities 15% Pacific Equities 6% Emerging Markets Equities 7% Global REITs 10%

OPPORTUNITY EUR Corporate Bonds 4% EUR Government Bonds 1% Seeking long-term capital appreciation and can EUR High Yield Bonds 4% accept potentially large losses on portfolio over the Emerging Market Debt 5% near-to-medium term in order to maximize long- European Equities 42% term performance. US Equities 16% Pacific Equities 9% Emerging Markets Equities 9% Global REITs 10%

Q3 Forecasts may not be attained. Past performance is no 10 STANDPOINT guarantee of future results. There are additional risks 08 associated with foreign investments. Spotlight on

The suggested allocations are intended to be general in nature and are not to be allocations construed as specific investment advice. Investors are encouraged to consult with their Financial Professional to determine their allocation needs based on their risk About the Citi Investment Strategy Committee tolerance, suitability and goals. [Note that there are additional risks associated with Our model portfolio asset allocations are based on the work of the hedge funds, as such funds are speculative. Please refer to page 12 for important Global Investment Committee (GIC). The GIC is a group of seasoned information about hedge funds.] professionals from Citi that helps guide investment allocation decisions through the creation and maintenance of model portfolios. Data Source: Citi Global Consumer Group Investments as of September 2008 These represent the committee’s best thinking and serve as the foundation for ’s investment advisory process. The GIC, which meets monthly, makes changes from time to time to its tactical USD TACTICAL MODEL PORTFOLIOS model portfolios.

Allocation to bond & equity markets · We have maintained our preference for global equities relative to global bonds. USD Cash 20% The GIC continues to see global equities outperforming global 20% US Corporate Bonds bonds over the coming year. In their opinion, global equity markets US Government Bonds 45% are very attractively valued in comparison to profit levels for the US Equities 8% coming year, thus providing a firm base for a global stock market Global Equities 9% recovery in anticipation of a stabilisation of credit conditions and an actual recovery in the global economy. However, the GIC notes that consensus analyst expectations for corporate profit growth in 2009 have been set too high and consequently global equity markets may be vulnerable to some disappointments over coming months. US High Yield Bonds 4% US Corporate Bonds 25% Allocation to regional equity markets 35% US Government Bonds • We have lowered our allocation to European equities to neutral US Equities 19% and have raised our allocation to US equities to overweight. We Global Equities 12% maintain our overweight position in emerging market equities. Global REITs 5% The GIC has made some major changes to their outlook for relative performance between the regional equity markets, mostly reflecting their views on currency movements. Whilst the GIC believes that European equities remain attractively valued in comparison to other markets, they are concerned that Euro depreciation may lower the Emerging Market Debt 3% total return for investors. The GIC continues to favour emerging US Corporate Bonds 18% market equities based on the rationale that emerging economies US Government Bonds 20% may continue to offer more generous growth prospects over the US High Yield Bonds 3% coming year as developed markets struggle. Regarding their US Equities 28% underweight position in Japanese equities, the GIC is concerned that Japanese policy makers have less room for manoeuvre in order to European Equities 11% address softening economic conditions than policy makers in the US 4% Pacific Equities and Europe and that this may drag on the performance of the local Emerging Markets Equities 5% equity market. Global REITs 8% Allocation to government and credit markets 13% US Corporate Bonds • We have maintained an underweight position in the government US Government Bonds 7% bonds, a neutral position in corporate bonds and our underweight US High Yield Bonds 4% position in high yield bonds and emerging market debt. Emerging Market Debt 5% With government bonds having rallied in the flight to safety in US Equities 33% recent weeks, the GIC believes that developed government long- European Equities 13% term bond yields may rebound upwards over coming months, Pacific Equities 6% resulting in mediocre performance for this asset class. The GIC believes that there are risks to the downside in the high yield bond Emerging Markets Equities 7% and emerging market debt markets and that spreads may widen 10% Global REITs further amid the global slowdown and greater economic uncertainty. The GIC therefore favours higher-quality, investment grade corporate bonds. US Corporate Bonds 4% US Government Bonds 1% Allocation to alternative investments US High Yield Bonds 4% • We maintain our neutral position on alternative investments. Emerging Market Debt 5% The ISC has divergent views regarding the outlook for different US Equities 42% alternative strategies. Uncertain and volatile equity markets may European Equities 16% benefit equity long/ short strategies whilst the continuation of Pacific Equities 9% financial market disruptions may challenge event driven and relative value strategies. Emerging Markets Equities 9% Global REITs 10% Data Source: Citi Global Consumer Group Investments and Citi Global Wealth Management Investment Strategy Committee as of September 2008

Forecasts may not be attained. Past performance is no Q3 guarantee of future results. There are additional risks STANDPOINT 11 associated with foreign investments. 08 Important Disclosure

“Citi analysts” refers to investment professionals within Citi Investment Research, Citi Global Markets and voting members of the GWM Global Investment Committee and Global Portfolio Committee.

“We” refers to Citi Global Consumer Group Investments.

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