Liam final slides 03.05.12

SUB-PRIME - WHAT WILLFUTURE HISTORIANS SAY?

LIAM HALLIGANChief Economist

CITYWIRE CONFERENCEMONTREUX, SWITZERLAND

MAY 2012

1

WHAT THE IMF SAID PRE-LEHMAN

“The improved resilience may be seen in fewer bank failures and more consistent credit provisions. Consequently, the commercial banks may be LESS VULNERABLE today to credit or economic shocks …”

“There is a growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors … has helped make the banking system, and the overall financial system MORE RESILIENT …”

INTERNATIONAL MONETARY FUNDGlobal Stability Report, April 2006

2

The “establishment view” of securitization was completely wrong

WHAT THE CHINESE SAID PRE-LEHMAN

“There is money everywhere ….. You can get liquidity from the market every second, for anything you want ...

… That means people are investing in assets with no idea of the risks they are taking … ”

ZHU MIN, Peoples’ Bank of ChinaDAVOS, Jan 2007

3

This was obvious to those who were willing to see

WHAT OUR “LEADERS” SAID …

“Today’s decisions won’t solve the crisis immediately … but we’ve begun the process by which it will be solved”

“There is no disagreement that we need action by our government, a recovery plan that will help jumpstart the economy”

GORDON BROWNLondon G-20 Summit, April 2009

BARACK OBAMAPresident-Elect, January 2009

REALLY …?

4

There was NOT a consensus that big spending and QE was the correct response

LESSONS WE THOUGHT WE KNEW - FISCAL POLICY

“We used to think you could spend your way out of recession and increase employment by boosting government spending. I tell you, in all candour, that that option no longer exists ….

JIM CALLAGHAN, UK Prime MinisterLabour party conference 1976

… and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step ...”

Western “dismal scientists” seem to have their heads down a Keynesian “worm-hole”5

6QE is a historic turning-point - big impact on global investment landscape

BERNANKE’S “SUPPORTIVE MEASURES”

• Responding to sub-prime, US has TRIPLED monetary base in less than 3 years, as has UK - totally unprecedented

• Designed to “tackle deflation”, QE is a back-door bank bail-out - and more to come

• QE has alarmed international investors and creditor governments - and the resulting “flight to tangibles” has bid-up soft and hard commodities

• Now a given that QE is designed to devalue Western currencies while debasing Western debts

“To think output and income can be raised by increasing the quantity of money is rather like trying to get fat by buying a larger belt …”

“It is a most misleading thing to stress the quantity of money, which is only a limiting factor, not the operative factor.”

JM Keynes, Letter to FDR, 1933

HISTORIC LESSONS IGNORED

LESSONS WE THOUGHT WE KNEW - MONETARY POLICY

6

THE BIG PICTURE

7

8

WORLD ECONOMY SHIFTING - WE’VE BEEN HERE BEFORE

Smart investors go with “the tide of history” - but most Westerners are still in denial

• The “Rise of the East” is not a new phenomenon - so we shouldn’t be surprised by it

• In many ways, Western hegemony, which is now ending, was the historic exception – and we are now reverting to long-run normality

Top world economies, 1820-2040E (% of global GDP)

1820 1870

 1950

 2005

 2040E

China 33.0% China 17.2% US 27.3% US 20.3% China 28.1%

India 16.0% India 12.2% USSR 9.6% China 14.6% US 21.9%

France 5.5% UK 9.1% UK 6.7% Japan 6.6% India 17.2%

Russia 5.4% US 8.9% Germ 6.5% India 5.9% Russia 6.8%

UK 5.2% Russia 7.6%

China 5.0%

Germ 4.1%

Japan 4.4%

• “In the long-run, productivity isn’t everything, but it is almost everything” - and as EM productivity rises, and population share grows, these economies will naturally dominate.

• Mainstream investors “talk the talk” on EM, but they are not “walking the walk”

8

WEST-TO-EAST MOVE - THE FUTURE IS NOW

SHARE OF GLOBAL GDP STOCK• As EMs outpace West, they are accounting for fast-growing share of global economy

• … this trend accelerated and accentuated by impact of sub-prime on Western growth …

CONTRIBUTION TO GLOBAL GDP GROWTH (%, $ PPP)

• BRICs have already eclipsed EU/US in terms of PPP-adjusted share of world GDP ….

• During 1990s, G7 drove world economy - home to more than 40% of global growth

• Between 2000 and 2008, BRICs grabbed the baton, their share of world growth rising to 45% - more than twice the G7

• IMF estimates BRIC growth share will be FIVE TIMES that of G7 during 2008/14

Economic power was anyway shifting eastward - and “sub-prime” has speeded that up9

BRIC - USEFUL CONCEPT OR MARKETING GIMMICK?

The BRICs are as big as the US/UK combined - but there are big differences between them

• BRICs has become a mainstream investment concept, but the stock markets of these massive economies still account for just 6% of total global market capitalization

• While investors are now thinking about EM, even a “totally committed” portfolio manager considers a 10% allocation to be overweight

• But is such “index investing” - which, by its very nature, is backward-looking - really the best way to invest in the face of massive historic change?

• And does it make sense to ask the same London-based or NY-based manager to invest in all of the BRICs at once?

• These markets are very different and being successful in each requires specific expertise, local knowledge and “on-the-ground” presence.

10

EMs HAVE MORE RESERVES AND LOWER DEBTS

SHARE OF GLOBAL EXPORTS ($ TERMS)

• EMs are much, much less indebted than “advanced” Western nations - in terms of both private and public debt

• This reality will widen growth differential and hasten the on-going West-to-East growth shift.

• So they can “lever-up” over next 3-5 years as Westerns firms, consumers and governments will, in general, be forced to “de-lever”

• BRICs’ fast-growing exports mean big external surpluses - these four EMs now boast for 44% of world currency reserves

• EMs have 75% of the world’s currency reserves, while the G7 (minus Japan) has only 7%

• In world of systemic risk, reserves let you stabilize banking systems, defend currencies and boost growth without using more leverage

PUBLIC/PRIVATE DEBT (% SHARE OF GDP)

Debt-related risks are far, far more acute in the West than the East11

12

EM SOVEREIGNS ARE FAR STRONGER

EMs balance sheets stronger - bond-markets have noticed but not equity markets

TOTAL EM EXTERNAL DEBTS (% GDP)

1.10%

0.75%

2.50%

0.40%

0.25%

12

• EM countries external debts have been falling fast - so lower reliance on external funding.

• Some EMs - such as China and Russia - are now important net external creditors

• DM debt totals are hugely under-stated, once pension and other OBS liabilities are included

13

EM CREDIT QUALITY IS BETTER

Index-driven investment, relying on mainstream Western ratings, is a denial of reality

1.10%

0.75%

2.50%

0.40%

0.25%

13

TOTAL EM EXTERNAL DEBTS (% GDP)

• On any objective basis, EM credit quality is better than DM - not least because of future growth trajectory

• Are the Western ratings agencies really objective?

• Relative credit quality has important implications for the price of currencies, equities and other financial assets

“NOUGHTIES” …. BUT NICE

• The “noughties” - 2000-09 - were widely seen as disastrous decade for equities

• During the same period, MSCI EM index of leading emerging markets rose 102% in dollar terms - annual gain of 7.2%.

• China’s Shanghai Composite gained 191% during “noughties” - an 11.2% annual increase - while India’s Sensex 30 rose 226% - 12.4% pa

• Brazil’s Bovespo Index up 314% in dollar terms during 2000-2009 - 15.1% a year - while Russian RTS index piled on 724%, an annual 23.3%

• 2009- 2011 - MSCI EM rose 65% in dollars and S&P500 up just 39% - despite QE “sugar-rush”

The EMs beat the West and Russia beat all the other EMs …

• The S&P500 fell 25%, an average annual 2.4% loss, while the FTSE lost 24%

14

15

EM UNDER-WEIGHT IS UNSUSTAINABLE

… but still, EMs are hugely under-represented in MSCI WORLD indices15

World GDP 

($)World GDP (PPP)

Global Bond Index

Global Equity Index

Developed Markets (DM)

66% 47% 96% 85%

Emerging Markets (EM)

33% 53% 4% 15%

DM V EM GPD/Market share, 2011

EM Equities as % of World Equity Market Cap.• Despite this equity market growth and out-performance, EM accounts for just 15% of global market cap, with BRICs only 6%

• This is tiny compared to EM in the world economy - on both a USD and PPP basis

• EM market cap will grow partly due to West-to-East capital flows

• But “intermediation” of EM domestic savings and wealth into local markets will be a much more important driver

• EM global bond under-weight is even starker than EM equity under-weight.

• Bond underweight despite recent popularity of EM sovereigns - reflects seriously under-bought EM corporate bond markets.

• This, in turn, reflects lack of “bottom-up” company analysis by Western investors in EMs

16

EM V DM PERFORMANCE & VALUATIONS

EMs suffered in 2011, given contagion from the West, but well ahead over 3-years

EM Valuations vs. DM

2010 Valuation

Aggregate Equities DM EM

Price/Book Value 2.2x 1.7x

P/E 13.9x 11.1x

2011 Valuation

Aggregate Equities DM EM

Price/Book Value 2.0x 1.5x

P/E 12.4x 10.0x

2005 - 2010 CAGR

Aggregate Equities DM EM

Revenues 3.9% 10.8%

EBITDA 4.4% 8.2%

Net Income 4.2% 8.7%

16

EM performance V DM

• EMs equities suffered in 2011, due to contagion from DM sovereign/bank debt melt-down

• But over 3-year and 10-year EM shares have hugely out-performed DM shares.

• But not all EM are the same. Some have out-performed more than others, but still sporting lower valuations due to on-going earnings growth

Equity Index YTD  Q1 2012 2011 2010 3-yr  10-yr P/E 12

Russia RTS 16% 19% -22% 23% 97% 337% 5.57

Brazil Bovespa 9% 14% -18% 1% 36% 360% 14.79 China Shan Com 5% 3% -22% -14% -6% 37% 12.37 India Sensex 12% 13% -25% 17% 60% 396% 15.66

MSCI EM 11% 14% -20% 16% 60% 190% 11.73 MSCI World 6% 11% -8% 10% 46% 27% 14.53 S&P500 8% 12% 0% 13% 59% 20% 14.05

• EMs account for ever growing share of global economy• Accounted for ALL global growth in 2009/10 - and big share in 2011/15• “Productivity gap” rapidly closing, so wealth differences also narrower

… from“indebted-to- unimpaired”

FIRMS

• West issuing debts and de-basing currencies• Inflation now looming - sky-high gold price• Many EMs have abundance of real, tangible assets• These offer returns and inflation hedge

… from“deficit-to-surplus”

COUNTRIES

… from“intangible

-to-tangible”ASSETS

Investorsfollowing

“West-to-East”GROWTH …

… amidston-going

“SEARCH FORYIELD”

LONG-TERM EM-INVESTMENT CASE IS UNANSWERABLE

• Post sub-prime, advanced nations far more indebted• BRICs have half of total global reserves• EMs have trade surpluses and strong fiscal position• Less exposed than West to systemic risk

• Western firms now weighed-down by debt-service and deleveraging• Global investors will seek firms able to win share of expanding markets• BRIC firms have far fewer aged-related liabilities

• As Western societies age, “search for yield” gets more desperate• Post sub-prime regulation will limit high-return strategies• EMs offer more growth/better margins• Anti-EM prejudices now starting to fade

• EMs have 2/3rds of world population, more than 1/2 of stock of PPP GDP, lion’s share of growth - yet account for less than 1/5th of global portfolio investment

• As EM capital markets deepen, and funds migrate from West “post sub-prime”, this share could rapidly rise - from 1/5th to 1/3rd

EM share of portfolio investment will rise - but nothing happens in a straight line

• DMs will grow 1.4% average 2012/13, says IMF

• EMs will expand at 5.7% a year 2012/13

• DM GDP growth 3.2% in 2010, 1.6% in 2011

• EM GDP growth 7.3% in 2010, 6.4% in 2011

17

18

SMALL/MID CAPS - HOW TO ACCESS EM “DOMESTIC” STORY

EM “domestic story” can be bought via equities, but you must “go beyond the index” 18

Retail sales, $bn, 2011

• EM domestic demand up 7% pa 2000-2010, nearly 5x as fast as DM domestic demand.

• EM retail markets now very substantial - which has driven FDI but not much portfolio investment

• 2010-2013 - EM domestic demand is expected to average 7.8%, compared to 2.7% in DM

Small Cap are Underrepresented in MSCI EM Index • EM small/mid caps comprise 77% of all EM stocks that trade more than $1m per day. So such companies are available on public markets

• But such small/mid caps are just 19% of standard MSCI EM index - so you must “get beyond the index”

• MSCI EM is heavily skewed towards commodity plays, but even in Russia oil/gas just 17% of GDP

19

INTRA-EM TRADE MEANS LESS DEPENDENCY ON WEST

Economic decoupling and financial decoupling are different19

2010 2016 Increase

China 5,878 11,220 91%

RUSSIA 1,465 3,237 121%

India 1,538 2,777 81%Brazil 2,090 3,303 58%

US 14,658 18,808 28%G7 31,891 40,259 26%EU 12,193 14,804 21%

GDP outcomes and IMF forecasts, ($bn)

• More than 2bn new consumer have joined the global economy in last 15 years, with rising disposable incomes and spending desires

• Rising intra-EM trade means these countries are become less dependent on the West

• Genuine economic “decoupling” - which is on-going - is different to “financial decoupling”

• Sino-Russia trade links are particularly fast-growing, yet largely unnoticed in the West.

• Latest IMF WEO growth projections starkly illustrate the extent to which we now have a “two-speed world” - even if, during a crisis, asset price correlations tend towards ONE

• EM companies still creating value even if share prices temporarily hit by Western “contagion”

20

DM V EM CURRENCY OVERLAY - “SMELL THE COFFEE”

QE/debt situation raises big currency overlay issues for Western investors

Country GDP $bn PPP $bn GDP % of PPP

US 15,060 15,060 100.00UK 2,481 2,254 110.07Germany 3,629 3,089 117.48Canada 1,759 1,391 126.46Japan 5,855 4,396 133.19Sweden 572 380 150.53Australia 1,507 920 163.80Denmark 349 209 166.99Switzerland 666 341 195.31

Country GDP $bn PPP $bn GDP % of PPP

India 1,843 4,470 41.23

China 6,988 11,316 61.75

Poland 532 767 69.36

South Africa 422 555 76.04

Mexico 1,185 1,659 71.43

Korea 1,164 1,556 74.81

Turkey 763 1,055 72.32

Russia 1,885 2,376 79.34

Brazil 2,518 2,309 109.05

Developed Markets - DM

Emerging Markets - EM

• Investments in DM equity and bonds are denominated in DM currencies - this is obvious, but absolutely shouldn’t be ignored

• DM trade flows, debts and fiscal policy suggest such currencies will DEPRECIATE over 3-5 years

• In addition, QE is a deliberate depreciation ploy - which will ultimately debase all financial assets denominated in DM currencies.

• Many EM currencies are likely to APPRECIATE over the next 3-5 years.

• As well as better trade and budget balances, superior reserves and more attractive investment opportunities, EMs are NOT doing QE

• This is currency overlay reality which professional investors ignore at their peril ….

20

INVESTING IN RUSSIA - VALUE V. RISK

21

RUSSIA RANKS WELL AMONG BRICS

22

BRIC countries compared, 2010/11

• Some argue Russia shouldn’t be included among BRIC group of leading EMs

• Yet Russia has highest BRIC GDP/capita, 2nd biggest reserves and lowest debts

• Odd to exclude Russia but not surprising, given lingering “iron curtain of the mind”

• EMs are widely perceived to be more risky - but they are systemically much stronger than the West

• As the US, UK and now the Eurozone go for wholesale currency debasement, investors need to consider the impact on their asset allocation

• Most big EMs have currencies that are likely to rise over an institutional investment horizon

China and India have mass,

cheap labour forces …

Brazil and (especially) Russia have resources …

Intra-BRIC growth

synergies are enormous …

… biggest synergy could be CHINA & RUSSIA …

Russia remains “out of favour” – but that’s part of the investment opportunity

RUSSIA Brazil India China

GDP ($bn) 1,688 1,511 1,367 5,365GDP/cap ($) 13,578 12,210 1,124 3,999

Public debt (% GDP) 10.1 42.7 78.4 15.7

Budget Balance (% GDP) 0.5 + 1.1 - 6.5 - 3.1

Current Acc Bal (% GDP) + 6.0 - 2.9 - 2.2 + 6.2FX Reserves ($bn) 520 260 287 2,454

Reserves/Imports ratio 2.0 1.2 0.7 2.3

Equity Index YTD  1Q 2012 2011 2010 3-yr  10-yr P/E 12

Russia RTS 16% 19% -22% 23% 97% 337% 5.57

Brazil Bovespa 9% 14% -18% 1% 36% 360% 14.79 China Shan Com 5% 3% -22% -14% -6% 37% 12.37 India Sensex 12% 13% -25% 17% 60% 396% 15.66

MSCI EM 11% 14% -20% 16% 60% 190% 11.73 MSCI World 6% 11% -8% 10% 46% 27% 14.53 S&P500 8% 12% 0% 13% 59% 20% 14.05

23Recent pull-back needs to be seen in context - which news wires rarely provide

• RTS has previously been “cut loose” during periods of prolonged “risk off” - but not this time

• RTS down 22% in 2011, similar to other EMs, after deterioration in global investor sentiment, and with DM shares propped-up by “printed money”

• Russia earnings CAGR 2011-2013 still up at 27%, even after recent downgrades

Russia V other EMs

“Eyes on the horizon”

• The Russian market has been volatile and lack of domestic institutional investors has added to this volatility - so levering OEFs is unwise

• But volatility and risk are different. Over a longer-term investment period, tremendous value being created in Russia - 3-year and 10-year returns

• By focusing on and helping to catalyze such value-creation, PCM funds have gained disproportionately …

RUSSIAN MARKET - “HELD ITS OWN” DURING 2011

23

Source: Bloomberg

24

• Ruble now “hard currency within its own borders”• Lack of “dollar flight” helped re-boot credit markets• Ruble up V $ in 2011 on average annual basis

HEADLINE NUMBERS - pointing North

• GDP growth 4.3% in 2011 - world’s third-best• Inflation fell to 6.1% - post-Soviet low• Industrial production up 4.7% - fourth-best in world

CREDIT EXPANSION - Pro-growth

• Retail/corporate loans up 36%/26% in 2011• But from low base - personal credit below 5% of GDP

CURRENCY - Much more secure

FISCAL STRENGTH - Russia well-placed

• Budget surplus 0.8% of GDP 2011• Total gross sovereign debts only 10% of GDP• Russia now a net creditor - and with big reserves

Economy has kept expanding despite sluggish demand in US and Western Europe

• Fixed capital investment up 6.2% in 2011• Retail sales grew 7.2%, despite global slowdown

VIRTUOUS CIRCLE - Investment & Consumption

24

Russian Economy, 2010-2012

ECONOMY WAS ROBUST IN 2011 - AND INFLATION FELL

2010 2011 2012F

Real GDP (% growth) 4.0 4.2 4.3

CPI inflation (% growth) 8.8 6.1 6.6

Gov revenues (% GDP) 18.7 21.1 20.8Gov expenditures (% GDP) 22.7 20.6 22.3

Budget balance (% GDP) - 4.0 + 0.8 - 1.5

Exports (goods $bn) 398 512 462

Imports (goods $bn) 249 318 329Current account (% GDP) 5.1 6 3.0

Ruble (USD, average) 30.4 29.4 29.6Reserves ($bn, year end) 480 510 500

Industrial prod (% growth) 8.2 4.7 5.0

Retail sales (% growth) 6.3 7.2 6.9Fixed investment (% growth) 6.0 6.2 6.0Oil price ($/barrel, annual av) 78 111 105

25

• Many low-levered firms, robust during crisis• Acceleration of consolidation/restructuring gains• Best returns often from non-energy names

4) ECONOMY - Recovering well

• Strong GDP growth so far in 2012• Inflation still subdued• Budget back in surplus, despite election

2) TECHNICAL - RTS set to gain

• GEM weighting remains low - upgrades to come• Russia still to benefit from post sub-prime EM shift

1) COMPANIES - Getting better

3) STRATEGIC - Russia well-placed

• On-going demand - commodities, metals, minerals• Very large yet fast-growing consumer market• Symbiotic relationship - Russia & China• Investors increasingly seeking “tangible assets”

Main value drivers in place - and economy has made a good start to 2012

ECONOMY LOOKING GOOD – Q1 2012

• GDP rose 4.8% year-on-year in Feb

• Industrial production up 6.5%

• CPI inflation averaged 3.8% during Q1 - now compares favorably with Brazil (5.8%), India (6.9%) and China (3.2%%)

• Real wages up 13% and retail sales 7.7% higher

• Q1 current account surplus $42.3bn - 37% up on Q1 2011, while oil price was just 17% higher

• Ruble up 9% against the dollar during Q1 2012

• Budget back in surplus in March after pre-election spending - combined 0.9% of GDP deficit in Q1 2012

• Russia issued $7bn Eurobond in March - three-times over-subscribed.

MARKET OUTLOOK - FUNDAMENTALLY STRONG

RUSSIA IN 1999

• Russia now totally different place to 1999 - but valuations similar after “forced selling” of 2008, subsequent earnings growth and recent pull-back

• Economy now far better – not least fiscal and external balances, forex reserves, wages and inflation

• Corporate governance still tough, but also much improved since 1999 - and now no danger of Communist revaunchism

• Best firms will gain from on-going restructuring of Soviet-era assets and general consolidation - a process targeted by PCM

• In addition, higher incomes mean that Russia now among Europe’s very largest retail markets, leading to robust FDI as savvy investors compete for market share

RUSSIA IN 2012

VALUATIONS SAME AS 1999, BUT ECONOMY FAR BETTER

Valuations back at “transition era” levels despite massive progress Russia has made

GDP $196bn

GDP per capita $1,346

Average wage $64/month

Sovereign debt 162% of GDP

Foreign exchange reserves (ex. gold) $7bn

Average oil price $17/bbl

Annual inflation 86%

RTS (year-end 1999) 59 points

RTS P/E Ratio (1999) 6.0x

GDP $1,892bn

GDP per capita $14,173

Average wage $867/month

Sovereign debt 10% of GDP

Foreign exchange reserves (ex. gold) $500bn

Average oil price $119/bbl

Annual inflation 6.6%

RTS (year-end 2011) 1,381 points

RTS P/E Ratio (Current) 5.5x

26

Source: IMF, PCM

Russian Prosperity Fund EPS now much higher than pre-crisis levels

RPF $ EPS (LHS) and RPF P/E multiples (RHS)

EPS RISING FAST - NOT LEAST IN PCM FUNDS

• EPS in Russian Prosperity Fund are soaring, even though Fund valuation remains very low

• Based on current portfolio structure, RPF EPS set to rise further based on PCM team profit forecasts

Source: Bloomberg, PCM. EPS for both RTS and RPF based on end-of-year index/fund composition and 12-month trailing earnings

RPF P/E has fallen

But RPF EPS growing fast

• Russian earnings volatility generally much lower than share price volatility

• Across the Russian economy, earnings are now rising fast - around 27% CAGR 2011-13F.

27

Retail sector offers significant growth upside and consolidation opportunities

RUSSIA’S RETAIL SECTOR - GROWTH AND CONSOLIDATION

28

• Strong GDP growth (6% pa 2000-2011) driven not by higher leverage but productivity gains - up 10%+ pa since 1999 and related wage rises

• Since 1999, retail turnover up 20% CAGR, to $621bn in 2011 - Russia now 2nd biggest retail market in Europe and world’s 5th biggest.

• Significant upside left - GDP/head ($13,250) still well below European average and lots of “low hanging fruit” as modernisation continues

• Selling space/head still low, not least for food. Modern trading formats just 35% of food market

• Top-10 have 22% of food market - and only 2 international players - so big consolidation gains

• Other major opportunities in electronics, beauty products, clothes etc - reflected in big FDI

Russian retail sales, 1995-2011, $bn

Food Non-food

$309 bn

$340 bn

Comparative retail sales, $bn, 2011

Russia still “out of favor”, but massive earnings are also big cause of low P/Es

Min Econ Privatization List 2012-17

Relative RTS valuation, 2011 • Russian market now displays an interesting combination of low valuations and high earnings.

• Corporate bond issues were R317bn ($11.8bn) during Q1 2012, best quarter in post-Soviet history

• Russian bonds trade at a premium to EM peers, while equities trade at a discount

Source : Goldman Sachs, Bloomberg

EARNINGS ARE STRONG, MORE SHARE SALES IN PIPELINE

Brazil

RUSSIA

India

China BRIC

World

United States 15%

17%

19%

21%

23%

25%

27%

29%

0 2 4 6 8 10 12 14 16

2011

-201

3 C

AG

R E

arnin

gs G

row

th

2012 P/E Ratio

29

Company Sector Stake after sale, % Stake for sale, % Date

Aeroflot Transport 0 51 By 2017Rosagroleasing Financials 0 100 By 2015

Rosselkhozbank Financials 0 100 By 2015Sheremetyevo Transport 0 100 By 2017

Sovkomflot Transport 0 100 By 2015State Leasing Co. Financials 0 100 By 2017

VTB Financials 0 76 By 2017Alrosa Metals & Mining 0 (Golden share) 51 By 2015

NMTP Transport 0 (Golden share) 25 By 2013Rosneft Oil & Gas 0 (Golden share) 75 By 2017

Rushydro Power 0 (Golden share) 58 By 2017United Grain Co. Agro 0 (Golden share) 100 By 2015

Zarubezhneft Oil & Gas 0 (Golden share) 100 By 2015InterRAO Power 50+1 1 By 2015

FSK EES Power 50+1 4 By 2017Sberbank Financials 25+1 35 By 2017

Transneft Transport 75+1 25 By 2015UAC Engineering 50+1 33 After 2014

USC Engineering 50+1 50 By 2015Russian Railways Transport 75+1 25 By 2017

Uralvagonzavod Engineering 75+1 25 By 2015Rosnano High Tech 90 10 By 2017

• Renewed wave of privatization

• Compulsory 25% dividend law soon to be introduced for state-controlled companies

• FAS has just approved Daimler majority-control of Kamaz – Russia’s biggest heavy truck producer

• Renault/Nissan majority-control of Avtovaz - which sell’s half of all cars sold in Russia - also approved

P/E 12 P/E 13Mriya Ord. Agriculture 4.3x 4.0xMHP Ord. Agriculture 4.7x 3.8xCherkizovo Ord. Consumer 4.1x 3.8xDixy Ord. Retail 11.5x 7.8xM.Video Ord. Retail 9.3x 7.1x

Bashneft Pref. Energy 4.4x 4.0xSurgutneftegaz Pref. Energy 6.4x 8.0xTNK-BP Pref. Energy 5.3x 5.7xKMG Ord. Energy 5.2x 5.1xGazprom Ord. Energy 3.6x 3.8xLukoil Ord. Energy 4.4x 5.5x

Bashkirenergo Ord. Power 6.8x 5.4xMRSK Center Ord. Power 6.6x 5.9x

MTS Ord. Telecoms 8.4x 7.4x

Transneft Pref. Transport 2.3x 2.3x

RTS Index 5.6x 5.3x

Russia has an abundance of low-leveraged, un-impaired assets

P/E HISTORICALLY LOW - EVEN BETTER ON 2ND/3RD TIER

30

Some PCM company valuations (Apr 12)BASE-CASE (Oil = $105 2012, $100 2012)

31If there is another “Minsky moment”, the Russian market looks much stronger today

Ruble lost 50% V USD in 4 months before bounce-back. Dollar-flight. Savers foresaw one-off devaluation. Seriously exacerbated 70% RTS drop

Ruble tougher. Russians now using to save. Far fewer foreign corporate liabilities. QE concerns supporting asset-backed currencies

After run-up of 2004/07 and into H12008, RTS full of leveraged “hot money”. Downward spiral of margin calls & “forced selling”

Since sub-prime, Russia has seen less “hot money” than other EMs. Some “ETF-froth” in the market, but leverage largely squeezed out.

Corporate debts, while low by global standards, were sizeable and often short-term and non-ruble. So Western credit-crunch spread to Russia.

Company balance sheets stronger. Short-term corporate debt now 15%, down from 30% in mid-2008. “Capital outflows” actually ruble re-financing.

Oil in speculative bubble. Fell $149 to $39 in 6 months. Markets believed in “demand destruction”. Lots of talk about “return to $10 oil”

World now understands $100 oil is justified on fundamentals. Non-OECD demand at the fore. OPEC politics transformed. “Bears” talk of $60 floor

RUBLE WEAK

RUBLE RESILIENT

RUSSIAN MARKET IN 2008 RUSSIAN MARKET NOW

MARKET LEVERED

LEVERAGEMUCH LESS

FIRMS EXPOSED

FIRMS STRONGER

CRUDE BUBBLE

CRUDE REALISTIC

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THINKING THE UNTHINKABLE: RUSSIA 2008 V TODAY

THE CASE FOR HARD ASSETS

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220%91%71%

72%66%18%10%

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WHAT IS THE WESTERN END-GAME?

QE/debt situation raises big currency overlay issues for Western investors

STATE DEBT (% GDP)

JAPANUSAUK

INDIABRAZILCHINARUSSIA

“DEVELOPED MARKETS” STATE DEBT (% GDP) • After both WWI & WWII, Western debt crises were only resolved by “soft default” of inflation and debasement

• Post-War debts marked a peak, but in current situation, demographics means Western liabilities are set to rocket further

• Inflation and debasement look like the only way out this time too - not least because the problem is worse

Western debts at levels not seen sinceWWI and WWII

• The EMs, in contrast, have far lower debts and far fewer age-related liabilities

• EMs have 75% of the world’s currency reserves, while the G7 (minus Japan) has only 7%

• This suggests EM currencies will rise over the medium-term, while those in DM will fall – should be kept in mind by long-term institutional investors

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34Crude demand realities augur badly for the West, so mainstream opinion tries to deny

• Global oil use, 76 mbpd in 2001, now 89.6mbpd - so 18% up in 10 years. IEA sees 99.1mbpd by 2015, a 12% rise in 5 years, from a higher base.

• Even in 2009, historic slowdown, global oil use fell just 2%, then grew 4% the following year.

• Non-OECD now “makes the weather” - with Chinese demand rising no less than 10% in 2010

RELENTLESS DEMAND GROWTH

Source: Energy Information Agency (US Gov), BP Statistical Review 2011

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THE CRUDE REALITY - DEMAND SIDE

2001 2010 2011 2012F 2015F

World GDP growth (%)

5.2 3.8 3.3 -US GDP growth (%) 3.0 1.8 1.8 -

World oil use(m barrels/day)

76.0 88.3 89.1 89.9 99.1

• In 2011, both US and global growth slowed significantly, but world oil demand still rose sharply

• Oil prices also went up last year, despite this slump, with Brent crude averaging $111/barrel in 2011, the highest annual average in history

• QE means some investors are worrying about inflation and seeking to use tangibles such as crude as an “anti-inflation hedge”.

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COMMODITY DEMAND GOES MUCH BROADER

Population growth, and rising EM incomes, simply cannot be ignored

1.10%

0.75%

2.50%

0.40%

0.25%

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Burgeoning “middle-income” demand

“Super-cycle” set to steepen

• Over the next 10 years, the absolute number of consumers with annual incomes exceeding $6,000 in today’s money will double.

• This means more consumption of power and sanitation, as well as “luxury” goods such as cars, clothes, telephony and a more protein-rich diet

• Big implications for commodity demand

• Hydro-carbon super-cycle actually lots set to accelerate over the next 20 years.

• During that period, even on conservative estimates, the global population will balloon from 7,000m to 9,000m people

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THE CRUDE REALITY - SUPPLY SIDE

Supply-side issue go way beyond terrorism and geo-politics

• Credit-crunch has cut investment in exploration and well-development - long-term implications

• Oil markets showing more interest in problems at Ghawar, Cantarell and other giants fields

• OPEC politics turned upside-down by “Arab Spring” - Saudi budget now balances at $114 average

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• Since the 1960s, the discovery rate and size of new oil and gas fields has declined markedly

• Copper grades have also decreased very sharply since the early 1990s

• There is a lot of “hype” about tar sands and shale fuels - but these technologies often expend more energy than they create, and there are big problems relating to environmental fall-out and water requirements.

Oil/gas discovery rate/size since 1850

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LOSING PRESSURE - OILFIELD DECLINE RATES

Natural oil-field decline rates often over-looked, but now attracting more attention

Oil-field decline rates

1.10%

0.75%

2.50%

0.40%

0.25%

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• Oil fields are maturing, which means the decline rate will accelerate going forward

• More than four-fifths of the world’s major oil fields are beyond peak production

• The EIA says that Saudi will be pumped 22m a day by 2020 - totally impossible

• The world’s largest-580 oil fields are declining at an annual rate of 5.1%

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SOFT COMMODITY DEMAND - GETTING FIRMER

Returns on soft-commodity investment could beat those on hydrocarbons

Agricultural Demand growth 2011-2015

1.10%

0.75%2.50%

0.40%

0.25%

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• FAO says agricultural demand will grow by 2.5% pa 2011-2015

• This will be driven mostly by population growth, but also by changing diets, higher calorific intake and bio-fuels

• EM citizens eat 67% less meat than in US/EU. Meat uses 6x more cultivated land/calorie than grain

• Bio-fuels use also is also escalating

• In real terms, food prices, despite recent falls, remain above their 2008 peak

• QE perceived to have helped drive up food prices and even spark food riots in some EMs

• Soft commodity demand is a major EM investment theme - e.g. Russia and Ukraine have 5-6x more land than needed for self-sufficiency

IMPORTANT LEGAL AND REGULATORY INFORMATION

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The information contained in this presentation is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy or sell any securities to any person in any jurisdiction in which such offer, sale or solicitation is prohibited. In particular, the information herein does not constitute an offer to sell or buy, or the solicitation of an offer to sell or buy, any securities in the United States of America or to or for the benefit of U.S. Persons (within the meaning of Regulation S under the U.S. Securities Act of 1933) and this material may not be distributed in the United States, except to U.S. Persons who are “accredited investors” within the meaning of Regulation D under the Securities Act and satisfy the definition of “qualified purchaser” within the meaning of the U.S. Investment Company Act of 1940.

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