Standard life global outlook

Standard Life Investments

3rd Quarter 2010

Market views• Investors face a series of

political and regulatoryhurdles on top of normalfiscal and monetarydecisions

• Stock market cyclesupported by corporateprofits and healthierbalance sheets

• Volatile financial marketsexpected into 2011

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www.standardlifeinvestments.com

Summary

04 Global Overview - Economics and politicsinteractThe House View is more positive on sustainedcorporate profits growth as the economic upturnbecomes more broadly based, geographically andacross sectors. However, there are growing risks forfinancial markets from the degree of political andregulatory interference being seen in more countries.

06 Focus on Change - Casting an eye overconsumer stocksMany investors are wary of consumer stocks as somehousehold incomes will be under considerable pressurein coming years. However, detailed micro level analysisshows very different trends in consumer spendingacross different groups.

08 Global Sectors - Light at the end of thetunnelThe technology sector has emerged as one of thebright lights of the global recovery with LEDs set tobenefit.

09 European ex-UK Equities - Broadeninghorizons Congested capital markets pose a challenge for manyEuropean banks. We are finding the winningcontenders, alongside firms exploiting worldwideeconomic growth

10 US Equities - The price is rightPricing resilience stands several transport-relatedcompanies in good stead, while life insurers are poisedto profit from attractively priced prospects.

11 Japanese Equities - Investing for growthConsolidation in Japan’s non-life insurance sectorallows for better pricing, while takeover activity amongpharmaceutical firms should deliver greater balancesheet efficiency.

12 Emerging Market Equities - India enjoysprevailing windsStrong Indian growth has propelled domesticallyorientated stocks higher, whilst investors are alsoincreasingly focused on income opportunities acrossAsia.

13 UK Equities - Differentials withindefensivesSeveral positive catalysts have prompted us to view thetelecoms sector more positively than other defensivecompanies. Meanwhile, some favoured stocks arereaping the rewards of internal change.

14 Government Bonds - The state ofEuropean sovereignsConcerns about sovereign debt in the Euro-zone havehad substantial and far-reaching effects both inside andoutside the single currency area.

15 Corporate Bonds - By hook or by crookAs sovereign debt levels remain elevated across theEuro-zone, we examine the repercussions for corporatebond investors and consider which companies are bestplaced to deliver value.

16 Treasury - Active fiscal - passive monetaryThe coming period of fiscal austerity will beaccompanied by an extended maintenance of lowinterest rates.

Global Outlook

17 Currency - New world order The global currency pecking order has changedfollowing the recession and the sovereign debt crisis,and may not yet have found a new equilibrium.

18 Property - Opportunities in EuropeThe outlook for European commercial propertyremains positive despite the sovereign debt crisis. Weexpect a steady but slow recovery in occupier markets.

19 Global Absolute Return Strategies -Changing tack on directional tradesThe big move down in interest rate swap yields andthe high valuation of US smaller companies hashighlighted some relative value opportunities.

Keith SkeochChief Executive

Standard Life Investments is adedicated investment company withglobal assets under management ofapproximately €163.5 billion (as at 31March 2010), making us one of the world’s major investmentcompanies. Responsible for investingfunds on behalf of over five millionretail and corporate customersincluding the Standard Life Group, weoffer global coverage of investmentinstruments and markets.

We are active fund managers, whoplace significant emphasis on researchand teamwork. After in-depth analysis,our Global Investment Group forms aview of where to allocate assets, basedon the prevailing market drivers andon forecasts of future economicindicators. The Global InvestmentGroup is made up of seniorinvestment managers from theStrategy and Asset Class teams and is responsible for providing the overall strategic focus to theinvestment process.

The House View delivers a consistentmacro-economic framework to ourinvestment decisions. It generates themarket and thematic opportunities forus to add value to our customers overthe timescales they use to measure oursuccess. It is formulated in such a wayas to make timely investment decisionsbut to also allow all members of theinvestment teams to influence its conclusions.

In a diverse, dynamic world we useour insight and intellect to seek outinvestment opportunities. Our abilityto predict, react and adapt rapidlyhelps us to maintain our position as a leading investment house.

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2 Global Outlook

global agendas start to dominate the debate and it isdifficult to think of a time in the last 30 years when therehave been so many moving parts. For an active investor allthis change and uncertainty makes life difficult but it alsobrings a real opportunity to add value for clients.

So what are the key insights to be gleaned from our Focuson Change philosophy and this latest edition of GlobalOutlook? The first is that macro still matters. The big pictureabout where the world is heading is profoundly importantespecially because so much depends on striking the rightbalance between fiscal austerity and monetary supportthrough devaluation and Quantitative Easing. Our viewremains that while growth will slow we do not expect aslide back into prolonged recession. The world’s corporatesector remains in good shape and will continue to performwell even in a low growth world. The continued availabilityof historically high risk premia reflects a good deal of theuncertainty surrounding the impact of all this change.However, given that risk appetites remain on a macro hairtrigger, the sustainability of the yield support for thesepremia continues to be a key theme for our asset allocation.

Standard Life Investments is avowedly an active investor;our Focus on Change investment philosophy has long beenbuilt on the view that markets are inefficient and the futureis more uncertain than many investors are prepared torecognise. Our investment process is driven by anacceptance that in the face of uncertainty, it is important tohave a strong view on the available return opportunities.Insights into return opportunities that deliver alpha aregenerated by 90% perspiration through systematic,rigorous research and analysis and 10% inspiration.

Surveying the investment landscape a year into therecovery in financial markets the one thing that isabundantly clear is the continued high level of uncertaintyon so many fronts, which leaves risk appetites in such afragile state. The pace of economic recovery, the worldmonetary system and its impact on currencies, the policyprescription for sustained growth, the regulatoryenvironment especially for banks and the role of corporateengagement are all areas of active debate and sources ofpossible significant change in the return environment. Addinto this mix a political agenda, which during the first halfof the year has seen national and regional rather than

Global Outlook 3

IntroductionThe good news for investors is that the world economy ismaking continued progress in recovering from the aftereffects of the major financial crisis of 2007-09. The badnews for investors is that the process is by no means over,hence we expect to see volatile financial markets for someyears as investors try to price in correctly some of the long-term implications. Investment processes need to includenot only analysis of economic cycles but also political andregulatory developments. While valuation signals will behelpful in some markets, more often behavioural signals willmatter.

Steady as she goesIn most respects our House View economic forecasts havenot changed markedly in the past year. As we expected theworld economy has exited from its deep recession, andindeed the recovery is broadening out across geographiesand sectors. The key driver in this respect remains thecorporate sector; having re-built profits and strengthenedbalance sheets, firms are starting to engage in some capitalspending and new hiring. Consumer income growth ismoderate but it is sufficient to support spending, albeit thisremains below levels usually seen in a recovery as manyhouseholds are unable to access credit. While these factorsmean a slow growth recovery by past standards in mostOECD economies many of the Global Emerging Markets(GEM) are showing strong growth driven by long-termstructural trends. All in all, global GDP growth looks set for4-5% a year in 2010-11.

What could bring this uptrend to an end? One risk is theerror of tightening fiscal policy too quickly. After all,countries equal to about 40% of global GDP are in theprocess of cutting spending and raising taxes. The mostobvious concerns are amongst many of the Euro-zone

countries, forced to make some extreme changes in recentmonths. However, the details of the packages do need tobe examined carefully. While individual nations such asGreece or Portugal have implemented programmes worth2-4% of GDP in a single year, such nations are only a smallpart of the Euro-zone. On balance, the fiscal tighteningacross the region is only about 1% of GDP, by no meansunimportant but manageable in the absence of furthermajor shocks. In reality, there is no definitive conclusionamongst economists to this key question about the impactof a major fiscal tightening. While some commentatorsargue that the reduction in public sector demand willinevitably push fragile economies into a further recession,historians can show successful examples across a range ofcountries where the process resulted, at worst, in slowgrowth.

Certain aspects require careful analysis. One is the efficacyof past public sector spending; can productivity be raised,so that services can be provided in a more cost efficientmanner? A second is the time horizons of businesses andhouseholds. If they believe that the fiscal tightening iscredible and public sector finances will be brought onto asustainable path, then they should be prepared to rundown their savings and wealth to cushion the blow. A thirdissue is the danger of not acting on the fiscal position, andallowing debt levels to build up to unsustainable levels. Thiscould provoke a damaging market reaction such as muchhigher borrowing costs. On balance the House Viewconcludes that the most likely outcome is a slow-growth,low-inflation recovery with interest rates kept lower forlonger. Plan B would include further quantitative easing bycentral banks to deal with unwanted shocks.

The only ‘double dip’ recessions in advanced economies inrecent history have been the US in the early 1980s, whichwas an intentional policy decision to drive inflation out ofthe system, and Japan in the mid 1990s when a consumertax increase accidentally coincided with the Asian debtcrisis. In this respect, it remains very important that theprimary drivers of the world economy, namely the US andthe larger GEM, do not slow markedly. Recent policydecisions are helpful. The US is not following Europe intotighter fiscal policy. Parts of Asia are facing inflationarypressures, either in CPI measures or property markets.However, countries such as Australia and China have takenearly action and it looks likely that they are on top of theissues, even if others such as India look to be lagging alittle. In this respect, the recent Chinese decision to allow

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Business surveys

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Global OverviewEconomics and politics interact

The House View is more positive on sustained corporate profitsgrowth as the economic upturn becomes more broadly based,geographically and across sectors. However, there are growing risksfor financial markets from the increasing degree of political andregulatory interference in many countries.

Andrew MilliganHead of Global Strategy

4 Global Outlook

Global Outlook 5

the RMB more flexibility against a basket of currencies is animportant trigger. It signals that over time the authoritieswish the economy to rebalance towards domesticconsumer spending, eventually a more helpful backdrop forWestern exporters. All in all, global leading indicators reflectthe momentum of future growth is slowing rather than aslide back into prolonged recession (see chart 1).

Sources of volatilityWhile financial markets are underpinned by better profitsgrowth, there remain major uncertainties about the upsideand downside estimates. Some of the concerns relate to theeconomic cycle, but more of them relate to political issuesin one form or another. Most evident in the minds of manyinvestors are the pressures on the Euro-zone. The HouseView assumes that the recent ECB/IMF package has boughttime but Greek debt will eventually see some form ofrestructuring. The unknown factors are the impact of thison the balance sheet of the commercial banks, pensionfunds and other holders of debt, including the damagecaused to the ECB’s balance sheet, as it could make losseson debt bought under its QE programme. Chart 2 showsthe CDS spreads on various European countries, onemeasure of investor concern about these issues.

Another prime example would be future regulation,primarily relating to the financial services sector. A stream ofinternational and domestic proposals are making their waythrough legislative systems and technical committees: Basel3, Solvency 2, the Dodd legislation in the US, the bankingcommission in the UK, as just some examples. We areconcerned that some of the recent discussions have notshown much evidence of politicians listening topractitioners, such as the Alternative Investment FundManagrs (AIFM) directive in Europe. On balance thecomplexity of much of the international discussions, oftenunder G20 auspices, suggests that many of those decisionscould well be delayed into 2011 or even beyond. This willmean an untenacity risk premium hanging over markets forsome time to come. As the financial services sector makesup a significant proportion of total stock market profits inthe major economies, the outcome of these regulatorydiscussions for future profits growth is important.

Other political factors could well cause volatility in comingmonths. One issue to monitor is the result of the US mid-term elections, any losses by the major parties and the riseof politicians calling for smaller government or the degreeof the backlash against big business. A second would be the

recent Australian proposal to impose a tax on miningcompanies, and whether such windfall taxes, say on theutilities sector, become more popular especially in countrieswhere the fiscal position is tight and the corporate sectorprofitable.

On top of this there are various problems relating to afinancial system which in many countries remains reliant oncentral bank support. Wholesale money markets are not yetfunctioning properly, while the lack of capital amongst manyinvestment banks means that trading liquidity can seize up inmarkets remarkably quickly. All in all, it is understandable thatthe time horizons of many investors are understandably shortterm in the face of such an uncertain environment.

House ViewThe House view has not made material changes to its assetallocation in recent months. Our broadly cautious stance hasalready proven correct in this environment. Valuations havebeen a useful trigger on occasion in some areas. Forexample, we decided to reduce our positions in Europeangovernment bonds when yields were considered tooexpensive, moving into relatively more attractive highyielding corporate debt. It does appear to be the case thatequity and bond investors have become more realistic abouttheir return expectations in recent weeks, although a majorchange in the economic or corporate environment would stillwarrant a further adjustment in prices. While most of themajor asset classes are relatively close to fair value on ourmeasures, we consider other factors are currently moresignificant drivers of investor activity. We are paying moreattention to behavioural finance signals in our tool kit; valueon its own is rarely sufficient to spark the correct time torenew interest in an asset class, but investor sentiment andpositioning measures can help with timing.

The House View continues to favour sustainable yield in thecurrent environment. It remains the case that central banksare unlikely to tighten monetary policy in most OECDeconomies until well into 2011 (see chart 3 showing howinterest rate expectations have altered) in the face ofgenerally weak inflationary pressures, fiscal tightening and abanking sector still under pressure. Hence, a diversifiedportfolio of income seeking assets, inclined towards creditbut including commercial property and dividend payingequity, is making attractive returns year to date.

Chart 2

Sovereign stressesChart 3

Interest rates lower for longer

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Added value in luxury goodsFocus on ChangeCasting an eye over consumer stocks

Focusing on the consumer recoveryOur investment process is based on a foundation ofrigorous research, guided by our Focus on Changeinvestment philosophy. Central to this is our CommonInvestment Language, which we use to validate all ourinvestment decisions. In previous editions of GlobalOutlook, we examined how Focus on Change drivesspecific asset allocation and corporate profits growth, aswell as demonstrating our sector picking decisions. In thisedition, we show how detailed analysis is required whenpicking consumer-facing stocks. There are considerableheadwinds to household incomes in many countries, forexample from high current levels of unemployment, agrowing tax burden, public sector spending cuts, theadverse wealth effects from the bear market in stocks, andthe high levels of debt built up in the previous cycle.Looking beyond these headwinds though, it is important tolook at micro level drivers of individual sub-sectors andgroups within each country. Our analysis shows a numberof consumer-related stock opportunities where the long-term drivers are more positive.

We examine the outlook for consumer-related stocks,examining five questions which form our Focus on Changephilosophy:

• What are the key drivers?

• What is changing?

• What expectations are priced into the markets?

• Why will the market change its mind?

• What are the triggers?

What are the drivers of consumer spending?These include:

• income growth – the tax burden is rising asgovernments tackle large public sector deficits, whileemployment growth is low on a historical basis;

• credit growth – certain households are less able toaccess credit due to their financial position or theweakness of the banking sector;

• debt servicing – certain households benefit more thanothers from the significant cuts in interest rates seen inmany countries;

• wealth effects – certain households benefit more thanothers from the recovery in the housing and stockmarkets.

What is changing?There are a number of positive and negative factors affectinghousehold finances in the early stages of the recovery fromthe recession. While unemployment looks to be peaking inmany economies, employment prospects differ considerablyacross sectors. For example, in parts of Europe the publicsector is seeing actual salary reductions, while a pay freezehas been announced for large parts of the UK public sectorand there are prospects of significant job losses to come. Inthe US, the number of workers in part-time employment foreconomic reasons rose from about 4 million at the end of2007 to 9 million currently. This represents a significantchange in those households, with less disposable incomeavailable for consumption. In general terms, real after-taxincomes are currently under pressure from a combination ofhigher inflation and tax increases.

The impact can vary significantly though. For example, lower-paid households usually spend a higher proportion of theirincome on basics such as food and energy. Turning to accessto credit, the availability of mortgages remains more difficultfor first time buyers, who need to raise a larger deposit, thanfor existing home owners with significant equity in theirhouse. There is a marked contrast between home owners andhouseholds who rent; the former have generally benefittedfrom the sharp reductions in interest rates as central bankshave eased policy, while rents have often lagged the cycle.UBS’ analysis suggested that UK household incomes post taxand interest income rose almost 10% in 2009, but the effectwill fade significantly into 2011 even if interest rates remainlow. The recovery in stock markets, led by technologyspending, and also in house prices rising from their lows in2009 has meant a positive wealth effect for certainhouseholds. These include many of those based in Londonand the South East in the UK, or New England and parts ofthe west coast, Marin County and Medina which are home totechnology-related wealth, in the USA.

A stock-specific beneficiary of these trends is Saks. We havewitnessed a close relationship between stock marketmovements and sales at high-end retailers. As financial assetvalues recover, it appears that wealthier households resumetheir spending habits significantly faster than the averageconsumer (chart 1). To the extent that the current stockmarket weakness continues, such customers may becomeskittish but are typically the first to increase spending in theeconomic recovery phase. Similar trends have been seenacross Europe, where a number of luxury goods providers,such as LVMH and Swatch, have reported strong salesgrowth, including high-end demand from parts of Asia, inrecent months.

Thomas Moore Magdalene MillerInvestment Director, UK Larger Cos Investment Director, Asia/Japan

Many investors are wary of consumer stocks as some householdincomes will be under considerable pressure in coming years. However,detailed micro level analysis shows very different trends in consumerspending across different groups.

6 Global Outlook

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Share price performance relative to the Dow Jones global luxury goods index for (01/01/09=100):

Global Outlook 7

Chart 3

Contrasting fortunes in transport

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The consumer staples sector provides further evidence. Inrecent months, several food producers have notedincreased promotional activity by some of the largest fast-moving consumer goods companies. Most recently, UKpersonal care company McBride, which sells its productsmainly through private labels, has signalled weaker-than-expected trading due in part to such heavy discounting.The economic downturn clearly made consumers moreprice sensitive. In this environment, differentiating one'sproduct becomes more crucial than ever. One of ourfavoured holdings in the consumer staples sector is high-end food producer Cranswick, which has managed tocontinue growing throughout the economic downturn byoffering consumer-differentiated premium product at anaffordable price. This is an example where consumers haveshown themselves to be willing to trade up to the highestprice points. We feel the competitive advantage generatedby this differentiation is not properly reflected in thevaluation of the stock.

Another beneficiary of consumers trading up comes from theAsia-Pacific region. CP All operates convenience store chainsin Thailand and China, similar in concept to 7-11 stores. It isexpanding its range and price points in response to anincreasingly health-conscious and growing middle-classconsumer base. Chart 2 shows how these trends are forecastto alter in coming years in various countries.

What is in the price?Given the well-known pressures on household incomes, theshare prices of many consumer-related stocks have beenunder pressure. Hence, the global consumer goods andservices sectors currently have P/E ratios of 18.6x and17.4x, which are not dramatically cheap but lookfavourable against 10 and 20-year average valuations.

Why will the market change its mind? What arethe triggers?Our detailed analysis has concluded that it is necessary forinvestors to adopt a more granular approach rather thansimply examining the broad macro economic factorsaffecting consumer spending, such as analysing the impactof consumer tax increases in various countries, important asthese may be. We expect the market to pay up forcompanies that can generate better revenue growth byfocusing on attractive trends across socio-economic groupsor regions even if the general backdrop is less favourable.

As more Chinese households experience higher wages andsalaries, this feeds through to increases in ‘life-style’ spendingfrom which we have identified winners amongst consumer-facing stocks. Anta Sports Products is a ‘branded’ sportswearcompany catering to the aspirations of increasingly affluentconsumers in second and third-tier cities in China. Wagegrowth here has outpaced that in first-tier cities in recentmonths but for these consumers global sportswear brandssuch as Nike and Adidas are still just out of reach. Anothercompany with an expanding market is internet providerTencent, which benefits from rising internet penetration butalso provides social networking opportunities.

In the UK the differing pace of recovery in consumer well-being is evident from recent comments by bus and railcompanies, including Stagecoach and FirstGroup, on thegeographical trends which they are witnessing (chart 3).Whilst both companies are reporting a relatively robustrecovery in commuter traffic into London, they are alsoreporting weaker conditions in provincial towns, especiallythose in more deprived regions of the UK. This may reflectthe different employment conditions across differentregions, as well as different levels of home ownership andconsequent exposure to cheap floating rate mortgages. Asimilar pattern has also been observed by UK bus and railcompanies with exposure to the US market, with commutertraffic in the relatively affluent New York area recoveringmost rapidly. Stagecoach is our favoured stock in the busand rail sector, as we consider that the improving volumetrends being seen across large parts of the business are notfully reflected in its valuation.

When US fuel prices were very high in 2008 and early 2009,lower-income shoppers in rural areas curtailed their trips toWal-Mart to save on the cost of fuel. Following the reductionin fuel costs, Wal-Mart has not recovered the number of tripsfrom these shoppers. It appears that price competition fromdollar stores and grocery markets has intensified to the pointwhere the need to return to Wal-Mart is not present. This isalso helped by the fact that fewer retail stores are going outof business, because banks are less willing to realise loanlosses and also the ability of retailers to raise funds. Therefore,with the supply of retailers 'artificially higher than normal', theretail environment is becoming a zero sum, market sharegame. Winners in this environment offer products with thebest value to the consumer, which does not always mean theleast expensive.

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Global Sectors Light at the end of the tunnel

The technology sector has emerged as one of the bright lights of theglobal recovery with LEDs set to benefit.

LEDs the way aheadThe technology sector was one of the first to display signsof recovery following the recent global economicdownturn. Although macroeconomic uncertainties continueto linger, the sector appears capable of sustaining itsupward momentum. Our analysis is particularly favourablefor the LED lighting sector which is benefiting from newproducts and technological innovations. This has beendriven in part by the success of LED backlighting for TVs,but is expected to be extended by the increasing use ofLEDs in commercial lighting.

The upturn in the LED lighting cycle presents a compellingopportunity for those firms that have maintained their R&Dinvestments through the crisis. Among these, we wouldhighlight Royal Philips Electronics and Aixtron as keybeneficiaries of the LED upturn. Philips is one of the fewcompanies with a presence across the whole value chain ofLED lighting. However, a recent restructuring of its lightingbusiness means that it is increasingly focusing on thedevelopment and design stage and is likely to emerge as aleader in the lighting architecture and consulting business.This is likely to generate strong revenue opportunitiesparticularly as companies shift commercial facilities to LEDlighting systems.

Swiss firm Aixtron, a company that manufactures machinesfor the production of LEDs, is another set to benefit fromthe LED upturn. The firm has a dominant share of the LEDmanufacturing machinery market and is well-protectedfrom the entry of low-cost rivals. The firm is particularlyexposed to the exponential growth in the use of LEDlighting in LCD TVs. Robust demand for LCD TVs has beena key trend in the last 18 months and is likely to continueas consumers maintain a stay-at-home approach to theirleisure time.

Opportunities in adversityThe recent moratorium on drilling activity in the Gulf ofMexico has halted oil exploration in the region. However,the impact on short-term oil supply is likely to be moderate,with the region accounting for less than 3% of worldproduction. Even so, there are some importantconsequences for the oil services industry. One key aspect isthe change to global supply and demand dynamics for

deepwater oil rigs. Approximately 80% of oil production inthe Gulf of Mexico comes from deepwater production andthe sudden disruption in demand for such rigs is likely toresult in an overhang of supply globally. This in turn willimpose downward pressure on deepwater rig prices, whichgenerally make up nearly 50% of a well’s overall cost. Thosestanding to benefit from the cost reduction are companiesoperating in regions that are unaffected by the drillingmoratorium. In particular, this has positive implications foroil firms BG Group and Tullow Oil, which have significantexposure to deepwater operations in Brazil and Africarespectively.

Another beneficiary of changes within the oil sector is theinsurance industry, which is expected to gain from upwardpressure on insurance costs. Pricing in the specialised oilinsurance segment had previously been forecast to be flat-to-down. However, a renewed focus on safety in the oilsector is expected to push prices higher, with some analystspredicting up to a 30% increase in pricing. Our researchindicates that UK insurer, Lancashire Holdings, is well placedto benefit from improving volumes and pricing in theoffshore energy insurance market.

Our strategy within global sectorsMacro headwinds continue to negatively impact globalequities markets despite improving corporate fundamentals.However, there are still opportunities in high qualitycompanies in which we look to invest. We continue to gainexposure to the high-end consumer segment throughauction house operator Sotheby’s. Ongoing strength in artauction pricing around the world has boosted expectationsfor a faster recovery in profitability. We have also continuedto build our holding in US technology giant Apple. The firmhas benefited from a robust product cycle with both iPhoneand iPad product lines delivering strong revenues.

Our bottom-up approach to stock selection is leading us tocompanies that are likely to be market leaders and marketshare gainers in the next phase of the economic cycle. Ourallocation combines pro-cyclical and defensive elements,with Heavy weightings in consumer discretionary,technology and industrial sectors coinciding with Lightexposure to financials and materials, driven by individualstock ideas.

Chart 1

Beneficiaries from oil industry upheaval

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2009 2010Lancashire Holdings price performance relative to Global Non-Life Insurance sector (01/01/09=100)

Tullow Oil share price performance relative to Global Oil & Gas Producers sector (01/01/09=100)

BG Group price performance relative to Global Oil & Gas Producers sector (01/01/09=100)Source: Thomson DatastreamLance Phillips

Head of Global Equities

8 Global Outlook

European ex-UK EquitiesBroadening horizons

Congested capital markets pose a challenge for many Europeanbanks. We are finding the winning contenders, alongside firmsexploiting worldwide economic growth.

Squeezing out value in European banksThe sovereign debt issues that have dominated marketmovements for the last few months are now triggeringspecific problems for the European banking sector. Theissuance needs of European banks are estimated to bearound €700 billion per annum over the next three years.However, as governments rush to refinance their ownbalance sheets, liquidity is becoming limited within theinterbank markets, ‘crowding out’ the banks which need toobtain term funding.

We are Light in peripheral European banks; we reducedBBVA in April, anticipating that Spain would have to takeeven more stringent fiscal austerity measures that woulddecrease loan demand and hurt credit quality. Instead, weremain focused on finding regional banking franchises builton sustainable models, where funding headwinds are lesslikely to have a detrimental effect. Norway’s largest bank,DnBNOR, falls into this camp. Norway has the lowestdefault risk in the world and its economy is thriving, withlow government debt, house prices above previous peaksand low unemployment. Increased access to capital viasecuritised mortgages following recent regulatory changeenables DnBNOR to benefit from a far more favourableoutlook than its peers elsewhere in Europe.

Staying in Scandinavia, we also continue to prefer Sweden’sSvenska Handelsbanken, whose differentiated businessmodel appears underappreciated. The bank is acceleratingits organic growth drive outside of Sweden, and thesegrowth opportunities, alongside its focus on customerprofitability, should lead to a loan portfolio with lower creditlosses. Svenska has not raised capital or joined the Swedishgovernment’s scheme, and its relative strength signalsongoing margin health. Finally, we are still invested inCredit Suisse, which is the most over-capitalised bank inEurope. The bank is employing its capital to facilitate clientactivity, rather than using it to buy and hold assets fortrading gains.

Masters of the universeWe continue to believe that in times of macroeconomicuncertainty the market overlooks European companies’exposure to global growth. In fact, around 40% ofEuropean firms’ sales are derived from outside western

Europe. We are identifying stocks that offer exposure tosuch global growth prospects at an attractive price (72% ofthe sectors in Europe are on a discount to their US peers).Alongside these relative valuation opportunities comes theadditional advantage of European exporters gaining directlyfrom the currently depressed euro. Given how volatile thecurrency is, we do not expect European businesses to alterpricing in order to drive market share. Instead, we thinkthey will take the currency benefit to the bottom line,expanding margins and profitability.

One of our holdings that exploits these global growthprospects is Prysmian, a worldwide leader in undergroundelectric cable. We foresee growth opportunities in the US,as upgrades of the electricity grid get underway, in China,as investment of electrical and telecommunicationsinfrastructure continues, and in Brazil as the firm developsflexible pipes for offshore oil extraction. However, themarket rates the stock as if revenues will grow at a verypedestrian rate. Elsewhere, we are invested in Danishdiabetes drug company Novo Nordisk, whose biggestmarket is China, and aero engine maker Safran, given itsexposure to US customer Boeing. We also hold severalexporters, such as Daimler, which is set to profit from therecovery in the US truck market and better-than-expecteddemand for Mercedes cars in China.

Our strategy within European equitiesEurope offers the opportunity to invest in companies whichhave not only world-class technology, but have alsomaintained their R&D investments through the crisis, incontrast to many of their global peers. ASML, a worldleader in lithography equipment for the semiconductorindustry, is one such example. The firm’s top line isbenefiting from a catch-up in spend following a period ofsignificant underinvestment by its Asian customer base,which we think will continue for longer than the marketanticipates. Meanwhile, we have added Dutch-baseddredging services group Royal Boskalis Westminster to ourWinners List. In our view, the market underappreciates theprospects for Boskalis’ earnings recovery, which is supportedby a growing project pipeline from both port operators andoil companies. Finally, we have been reducing our funds’weighting in Portugal Telecom; taking some profits post aperiod of strong performance.

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Banking franchises with solid fundamentals

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DnB NOR Credit Suisse

Source: Thomson Datastream

Share price performance relative to the European Banking sector for (01/01/09=100):

Will JamesInvestment Director, Europe

Global Outlook 9

US EquitiesThe price is right

Pricing resilience stands several transport-related companies ingood stead, while life insurers are poised to profit from attractivelypriced prospects.

Tightening transport market on track forpricing gainsWe are positioning our US equities portfolios to takeadvantage of transport firms’ improving pricing power. Inthe railroad sector, where Winners List stock CSX features,and the logistics sector, where we like package delivery firmFedEx, we see signs that rising volumes, pricing gains andsolid cost controls are generating strong operating leverage.This, in turn, should lead to share price appreciation.

After years of pricing pressure, railroads finally began toestablish pricing power in 2004 as demand started tooutstrip supply. Following several years of pricing gains,investors became concerned that pricing discipline wouldfade as the industry faced serious volume declines in 2009.However, industry players remained disciplined in thedownturn and retained their focus on generating earningsfrom capital invested. With volumes now recovering, webelieve pricing gains should accelerate from here. CSX,which operates the largest rail network in the easternUnited States, should be a prime beneficiary. Thecompany’s excellent cost control throughout the downturnnow sets the stage for significant operating leverage asvolumes continue to rise. We are also encouraged by robustpricing for transporting metallurgical coal, while pricing inCSX’s intermodal business should be boosted by atightening in the truckload market.

Our investment in FedEx, the world’s largest expresstransportation provider, reflects our belief that pricing in thesmall package market will also get better. We believe themarket is underestimating the potential for FedEx toexpand its operating margins, and think these will return topeak levels faster than expected on the back of volumegrowth and better pricing. The company’s managementcites improving pricing as a key priority and its most recentquarterly report provided early evidence of thiscommitment.

Acquisitive insurance companies offeropportunitiesA further theme emerging across our US equities portfoliosis that of companies benefiting from M&A activity. Forexample, MetLife, the largest US life insurer, was added toour Winners List in April of this year. The company’spurchase of AIG’s foreign insurance operation Alico is on

course to complete by late 2010. With AIG trying to raisecapital to repay its substantial government bailout, MetLifewas able to secure the overseas business for what appears areasonable price. Alico is attractive to MetLife for severalreasons. Firstly, the acquisition offers MetLife direct accessto Japan, which represents the second-largest life insurancemarket in the world. MetLife’s position in Europe will alsobe enhanced, while various emerging market regions willbecome more accessible, offering a wealth of newdistribution opportunities. We believe the market isunderestimating the future earnings potential of thecombined company as a result of this deal.

We also hold a position in life insurer Prudential Financial(no relation to the UK insurer). Like MetLife, Prudential istaking significant market share, benefiting from the ‘flightto quality’ trend being seen across the industry. The firmhas a fair amount of excess capital at its disposal, and weanticipate that this will be used to make an acquisition overthe next few years. With many financial firms likely to bereviewing their non-core insurance holdings, there shouldbe no shortage of potential opportunities available.

Our strategy within US equitiesCustomers’ growing preference for smaller, more portablemobile devices is a trend that shows no sign of abating.Aiming to capitalise on this, we continue to hold a Heavyposition in Apple. The firm has established a market-leadingposition in anticipating and responding to consumerpreferences, and is seeing initial impressive sales for its iPadtablet computer. We also own chip maker Qualcomm,whose products are used in wireless devices. Qualcomm ismaking strides in the higher end of the cell phones marketwith its Snapdragon platform. We believe the winners in anew world of greater device portability are likely to becompanies such as Qualcomm as opposed to current PCchip incumbents like Intel. Elsewhere, futures exchangeIntercontinentalExchange (ICE) still looks attractive. The firmhas witnessed record volumes in the midst of recent marketvolatility. In the longer-term, it should also gain fromfinancial reform as the government and regulators aim toincrease transparency. The push towards increased over-the-counter (OTC) clearing and ultimately some OTCderivatives becoming exchange traded also bodes well forthe firm.

Chart 1

Sector outperformance

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2009 2010Apple share price performance relative to US Technology sector (01/01/09=100)

Intercontinental Exchange share price performance relative to US Financial sector (01/01/09=100)

Source: Thomson Datasteam Euan SandersonSenior Vice President, US Equities

10 Global Outlook

Japanese EquitiesInvesting for growth

Consolidation in Japan’s non-life insurance sector allows for betterpricing, while takeover activity among pharmaceutical firms shoulddeliver greater balance sheet efficiency.

Improved pricing potential for insurersWith a large number of firms competing for limitedbusiness, Japan’s mature non-life insurance market hassuffered from a slow decline in premiums and dwindlingmargins. However, we have started to see someconsolidation in the industry, with the forthcoming unionbetween Mitsui Sumitomo, Aioi and Nissay Dowa set tocreate a new industry leader. Fewer industry participantsshould result in a better pricing environment for those whoremain, including our preferred holding Tokio Marine.

Meanwhile, better regulation in the sector also creates anopportunity for companies to differentiate their offering andcharge at a more reasonable pricing point. For example,semi-independent industry body Non-Life Insurance RatingOrganization (NLIRO) currently produces only tworeference rates for auto insurance premiums – one fordrivers under 21 and one for those over 21. Therefore, a22-year old driver would pay the same premium as a 45-year old with the same accident history. However, from2011 NILRO will produce eight rate levels covering a rangeof ages. Although there will continue to be nodifferentiation between men and women, the new pricinglevels will at least allow Tokio Marine to charge according toindividual customer risk profiles and target more profitableareas. While the pace of change in the non-life insurancesector is unlikely to be rapid, these improvements representa big shift within the industry which we believe has not yetbeen priced in by investors.

Pharmas put balance sheets to better usePharmaceutical companies are looking to offset threats toprofitability as well as increase balance sheet efficiency byusing surplus capital to make acquisitions and fuel growth(chart 1). We own Astellas, Japan’s second-largestpharmaceutical company by market capitalisation. It hasseveral key drug patents ending, which could lead tomargin erosion. This has already been discounted byinvestors, along with low growth and an idle balance sheet.However, with net cash of around US$2 billion and capacityto raise more debt finance, Astellas has the firepowerrequired to counter these patent cliffs. It has already

acquired OSI Pharmaceuticals, which provides it with afoothold in the US as well as access to an oncology drugportfolio. We believe this takeover is a positive move as itshould deliver an investment yield well in excess of thereturn Astellas was receiving on its cash hoard and shouldprove earnings-accretive over time. Importantly, theprospective drug pipeline on offer should put the companyback on a growth path.

We also hold Daiichi-Sankyo, which does not have the samepatent issues but has sought acquisitions to make moreefficient use of its balance sheet and grow at a faster pace.It bought a majority stake in Indian drugs firm Ranbaxy,which specialises in generic drugs, in 2008. Since then, theintegration has not gone to plan, as two of Ranbaxy’sproduction facilities were subject to a US import banbecause of irregularities in drug storage implementation.Daiichi-Sankyo has taken action to resolve this, engagingdirectly with the FDA and overhauling Ranbaxy’smanagement team. As a result, we are starting to seeevidence of a resolution to the situation, which shouldhopefully be completed by the year end. This would leaveDaiichi-Sankyo with some good products and a decentdrug pipeline, which we consider deserves morerecognition in the share price.

Our strategy within Japanese equitiesWe recently reduced our holding in LCD TV glass makerAsahi Glass. We had previously been optimistic on thepricing outlook for the industry, with an oligopolistic marketmaking for better pricing cohesion. However, we now thinkthis has played out, with two new credible competitorsentering the industry and companies starting to jostle formarket share. We believe the cohesive environment will notlast, with pricing already coming off more aggressively thanthe seasonal average reductions. Elsewhere, we have addedto Denso, a car parts maker affiliated to Toyota, across someof our funds. The share price has been weak followingToyota’s recent recall problems but we have used thisopportunity to raise our position, taking the view that anextremely competitive product portfolio will enable Densoto win share outside of the group in the near future.

Chart 1

Efficient use of balance sheets

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Astellas Daiichi-Sankyo

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Share price performance relative to the Japanese Healthcare sector for (01/01/09=100):

Matthew WilliamsInvestment Director, Asia Pacific

Global Outlook 11

Emerging Market EquitiesIndia enjoys prevailing winds

Strong Indian growth has propelled domestically orientated stockshigher, whilst investors are also increasingly focused on incomeopportunities across Asia.

Global equity markets have been buffeted by macroheadwinds for much of 2010. However, in India, prudentmacroeconomic policymaking and buoyant infrastructureinvestment have remained key drivers of the economy. Thisstrength was evidenced recently, by impressive first-quarterGDP growth of 8.6% per annum. Meanwhile, in nominalterms, GDP growth neared an all-time high of 20% a year.

In this environment, it is the firms that are focuseddomestically that are offering the most attractiveopportunities (chart1). For example, Crompton Greaves,which manufactures a range of infrastructure-relatedequipment, is well-placed to benefit from governmentspending on roads, railways and other infrastructureprojects. Another beneficiary of this trend is C&CConstructions. The firm has exposure to a wide range ofinfrastructure construction services offering good growth.

The strength of the domestic economy is also provingfavourable to the nation’s automakers which look set tobenefit from both rising incomes and government spendingon new roads. Tata Motors has emerged as a winner in theIndian auto sector, which is one of the few which has beenable to sustain demand without the need for the ‘cash forclunkers’ style incentives common in Europe, the US andChina. For Tata’s domestic operations, total volumes in thefirst quarter of 2010 have risen by 55% year-on-year to216,646 vehicles. The firm’s market share is around 60% incommercial vehicles, 15% in passenger cars; with the latterhaving been helped by the launch of the low-cost Nano.

In addition, the firm has successfully turned round its JaguarLand Rover unit which announced a profit after tax of£113m in the January to March quarter, ‘several timeshigher than analysts' forecasts. Tata has been able to makebig savings in the UK-based unit’s cost of production anddepreciation. Land Rover sales have been particularly strongin China and the UK. There is optimism that new productlaunches, an example being the compact Range Rover, willhelp boost volume growth further.

Growing attractiveness of dividend yields inAsiaInvesting in Asia has traditionally been premised on theimpressive growth-style opportunities available in theregion. However, a growing sophistication among

corporate management teams and the rapid developmentof some of the region’s leading businesses has resulted in aheightened focus on dividend income. In particular, we areseeing increasing evidence of Asian firms that are displayingthe capacity to pay out more in dividends whilemaintaining strong growth trajectories.

This is an attractive combination for investors, in a regionthat has emerged from the financial crisis with surprisinglyhealthy corporate balance sheets. Indeed, recent estimatesshowed that the average debt to equity ratio in Asia was aslow as 27%. Clearly, healthy balance sheets areencouraging management teams to take a closer look atthe best ways in which to distribute their profits.

One firm that appears to be a positive example of this trendis Taiwanese chipmaker MediaTek. The firm has steadilyincreased its dividend every year since 2003. Prior to thatdate the firm had never issued a dividend. We believe thatthis points to a changing mindset among Asian corporatemanagement teams, which have previously always beenkeen to maintain a war-chest as part of a ‘just-in-case’mentality. Instead, firms appear increasingly able todistribute cash to investors, whilst still maintaining goodgrowth prospects.

Our strategy within emerging marketsChinese economic growth remains a key driver in the region.Market participants are currently digesting the possibility thatChinese growth in late 2010 into 2011 could be somewhatslower than previously anticipated following a series oftightening measures by policymakers. As China switches froman export-oriented growth model to a more domesticdemand-led approach, helped by RMB revaluation, spendingshould continue to bolster corporate profitability.

Elsewhere in the region, inflationary pressures remainrelatively contained, and central banks are unlikely toradically alter their monetary policy. Asian equity marketsare also supported by the relatively low levels ofindebtedness of both companies and individuals, whilemany Asian countries have further scope to stimulatedomestic consumption, given generally strong governmentbalance sheets. Asian businesses are, hence, underpinnedby resilient domestic demand and also by their lowinventory levels.

Chart 1

Building on infrastructure

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Crompton Greaves C&C ConstructionsSource: Thomson Datastream

Share price performance relative to the Global Emerging Markets industrial goods & services sector for (01/01/09=100):

Ronnie PetrieHead of Asia Pacific Equities

12 Global Outlook

UK EquitiesDifferentials within defensives

Several positive catalysts have prompted us to view the telecomsindustry more positively than other defensive sectors. Meanwhile,some favoured stocks are reaping the rewards of internal change.

Ringing a change in telecomsWidespread scepticism over the sustainability of theeconomic recovery in the UK has been reflected in therecent underperformance of cyclical stocks. Investorscurrently appear to prefer the perceived safety of thosecompanies with more defensive earnings streams such astelecoms, a sector where we have upgraded our view fromNeutral to Heavy.

Telecom companies have demonstrated resilience in theface of the economic slowdown and as growth resumes,mobile spending in particular has the potential to bounceback stronger than expected. This is good news forcompanies like Vodafone. The regulatory environment,meanwhile, appears to have shifted from favouringunbundled providers like Carphone Warehouse and BSkyB,towards the incumbent fixed line operator BT, our favouredtelecom company. BT previously suffered from priceregulation issues, as OFCOM fought to achieve the lowestfixed-line prices in Europe. However, new regulatoryproposals could see fixed-line pricing linked to RPI, as wellas unregulated pricing on fibre optics aimed at encouraginginvestment in this area.

Telecom stocks are massively cash generative and offer thehighest free cashflow yields in the market. Most of themajor UK players have solid balance sheets. BT’s free cash-flow yield is around 13% and we believe this couldstrengthen further over the next few years, given scope forcost cutting and flexibility around capex. Within thetelecoms sector there is also potential for M&A activity. Thisbenefits both potential bid targets and will also besupportive of remaining companies in a more consolidatedindustry, something Vodafone has already acknowledged.Despite these positive drivers, telecom stocks remainattractively valued. There is a significant valuation gapbetween telecoms and other defensives such as food &beverage companies where opportunities foroutperformance appear limited.

Healthier from the inside outSuccessful balance sheet repair and cost cutting duringdistressed times have put many UK companies in a muchstronger position now that economic prospects areimproving. Two companies where we are seeing the fruitsof positive internal change, which we consider is not yetpriced in, are global motor vehicle distributor and importer,Inchcape, and consumer electronics retailer, DSG

International. Both stocks are on our Winners List and wehave taken advantage of recent weakness to increase ourexposure to them.

After seeing volumes dry up at the height of the financialcrisis, Inchcape successfully addressed balance sheet issues,undertaking a rights issue and cutting costs, increasingoperational gearing into the recovery. Subsequently, carsales volumes have recovered faster than expected. Webelieve forecasts from Inchcape’s management are tooconservative, especially on UK margins. Inchcape has agood diversified business model, with a premium focus inthe UK and good exposure to the strongly recovering HongKong market. However, the wider market appears to befocusing on concerns around the Toyota recall(approximately 50% of Inchcape’s new and used carbusiness comes from Toyota), the impact of the end ofscrappage incentive schemes, and the company’s exposureto southern European economies, fears we believe areoverdone.

Following a £300 million capital raising, DSG International,which includes the Dixons, Currys and PC World brands,has implemented a transformation plan, which is deliveringtangible results. Store refits have delivered on average a20% uplift in sales, while a greater focus on customerservice at non-refitted stores has also supported sales. Theturnaround efforts by DSG’s management are credible andclearly working, helped by a slightly more favourablebackground for electricals. Competition in this spaceremains fierce, especially from online retailers, but webelieve DSG is managing this well.

Our strategy within UK equitiesWhile the UK government focuses on debt reduction,corporate sector balance sheets are in good shape withsignificant flexibility over how prodigious cash flows areused. Many of our favoured stocks are in industrial andconsumer sectors of the market which we expect to benefitmost from growth. We also selectively favour somedefensive stocks like telecoms, which may have beenoverlooked by the market. However, we are less positive ondefensives such as food & beverages, where companies areon relatively high ratings. We expect only anaemic revenuegrowth for some time to come from food and drinkscompanies, and firms are still dealing with the impact ofconsumers de-stocking and trading down to cheaperbrands.

Chart 1

Valuation gap

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Price-to-earnings ratio comparison of selected UK sectors:

David CummingHead of UK Equities

Global Outlook 13

Government BondsThe state of European sovereigns

Concerns about sovereign debt in the Euro-zone have hadsubstantial and far-reaching effects both inside and outside thesingle currency area.

The sovereign debt crisis continues to dominate bondmarket movements in Europe. Fears over the debtsustainability of Greece spread throughout peripheralEurope, leading to a blow-out in yields. At the same time,investors have been switching into core Euro-zone bondmarkets, seeing them as safe havens with more modestdebt levels. The result has been a widening of the spreadbetween core and peripheral bond yields.

The fall-out from the crisis, however, has not been confinedto Europe. With heightened concerns about the possible hitto global growth, many central banks round the world havesoftened their monetary stance, with some, such as theReserve Bank of Australia, specifically citing the Europeandebt crisis as the motive force for a pause in theirtightening cycle.

The problem intensified at the end of April when Standard& Poor’s cut Greek bonds to junk status. Quickly, otherhighly indebted economies of the periphery came undercritical scrutiny. The initial responses of the authorities, boththe ECB and the IMF, were less than convincing; withuncertainty about what could and should be done. Whilethe authorities prevaricated, bond yields in the peripherycontinued to climb.

The developing tension eventually prompted a morecomprehensive package. This involved the creation of aEuropean Stabilisation Mechanism, which would provide upto €500 billion of financial help to member states, backedup with additional IMF support of up to €220 billion.However, the key to the stabilisation was theannouncement of an ECB bond buying programme(another form of quantitative easing). It soon becameapparent that the central banks had immediately begunbuying Greek, Portuguese and Irish debt, and yields onperipheral paper fell dramatically. So far, there has beenlittle evidence of a concomitant recovery in confidence withthe broad investor base continuing to either sell or abstainfrom buying peripheral sovereign debt.

A major threat at the moment is the risk of a split within theECB causing the purchase programme to end prematurely,although the most likely outcome is that the buyingprogramme continues. This will artificially underpin pricesand preserve liquidity in the peripheral markets. We

continue to see the transfer of risk from weakerorganisations: that is from funds and banks limited byratings regulations to the central banks.

The circuit breaker for the ongoing confidence crisis insovereign debt is ultimately that countries not only showthe political will to adopt austerity packages but alsodemonstrate an ability to accept them over time. Theproblem is that the real tests for political stability andgrowth will become apparent some years ahead and not atthe point of sign-up.

The markets continue to dictate the pace of fiscal reform inthe Euro-zone. This is a delicate exercise because thebalance between growth and reform has to be right.Currently the market is much more concerned with thereform element. What the ECB buying programme does isbuy time to allow governments to prove their ability tobetter align revenue and spending. The likelihood is thatthe buying will be extended to Spain and Italy, given therequirement for even-handedness. This will have theimmediate impact of a short-term artificial boost to thosespreads, but will also raise further questions about thelongevity of the programme itself.

Our strategy within government bondsOverall, we remain constructive on government bonds andthink that short-dated bonds should remain largelyanchored by low policy rates. However, we continue todifferentiate within the Euro-zone, holding Heavy positionsin those countries with strong fiscal balances such asFinland. Beyond that, we have switched out of Euro-zoneinto a Heavy position in Norway and the UK. Within theperipherals which make up 41% of our EU indices, Italystands out as the most positive. With its stable, albeit high,debt/GDP ratio and a primary surplus, Italy has shown fiscalrestraint in recent years. It abstained from the stimuluspackages seen elsewhere in Europe. Similarly, wedifferentiate within the AAA-rated Euro-zone countries,underweighting France for example, as it has a higher fiscaldeficit than its AAA-rated neighbours.

More broadly we take the view that, while German debtwill continue to get a boost from investors switching fromperipheral debt to core, ultimately this exercise willdissipate. At that point, both the US and the UK bondmarkets will look relatively attractive in comparison to theEuro-zone.

Chart 1

Government bond spread to German Bunds

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14 Global Outlook

Jack Kelly Investment Director, Fixed Interest

Global Outlook 15

Corporate BondsBy hook or by crook

As sovereign debt levels remain elevated across the Euro-zone, weexamine the repercussions for corporate bond investors andconsider which companies are best placed to deliver value.

Contained for now, risks remainThe legacy of the financial crisis was transference of debtfrom the private to the public sector. Banks’ liabilities had tobe guaranteed, government debt to GDP ratios rose sharplyin many countries and government bond yields soared inthose countries. That, in turn, impacted holders of thosebonds, including banks throughout the region and beyond.Fear of the consequences of a further deterioration inconditions persuaded the ECB and IMF to organise asubstantial financial support facility, should it be required.The epicentre of the current troubles is in the peripheralEuropean states, principally Greece, Spain, Portugal andIreland, with the ‘core’ more northerly states less affected.

At present, the situation has been contained, but goingforward several risks to corporate bond markets remain. Ofthese, an outright sovereign default in any particular stateseems to be the least likely eventuality. Within the market,those sectors that are most reliant on government support,banks, and selective utilities and telecoms, remain the mostvulnerable to a further deterioration in governmentfinances. We see the main threat as the possible economicimpact of the various austerity measures which are beingassembled to get debt levels under control. Tax rises andexpenditure cuts are being planned, even for the ‘core’economies where the problem is less intense, and thesemeasures are likely to slow the pace of growth even if theydo not tilt any economy back into recession.

While outright default is unlikely there could be significantsovereign downgrades which are likely to be followed by adowngrade of corporate debt within those countries – asevidenced by Greece, where downgrades to banks followedon the heels of the country’s government debt downgrade.As a result, we recommend a cautious approach to portfolioconstruction, firstly in terms of country exposure, then atthe stock selection level.

Natural selectionWithin our portfolios, we have opted for a variety ofcarefully diversified sovereign exposures including the USand Scandinavia, but also some selective exposures to Spainand Ireland.

In Spain, our main exposure is to specific bank debt:Santander and BBVA. In particular, Santander’s assets in

Spain and Portugal only account for about 34% of netincome. The bank’s other key markets are the US, UK andLatin America, giving it a truly diversified client base. It hasalso demonstrated one of the strongest operatingperformances in the global banking industry in the lastthree years. In contrast, we do not generally hold debt fromany of the Spanish domestic savings banks, known as cajas,which are almost exclusively exposed to the Spanisheconomy.

Elsewhere, we do have some positions in Irish banks on ourview that the country’s government has taken a moreforceful approach to debt management and on fiscalsustainability, and is therefore further along in the processof restructuring. Furthermore, our Irish bank exposure isconcentrated in the strongest part of the capital structure,principally in senior debt. We also hold the debt of certainNorwegian banks including DnbNor, given Norway’s lowgovernment debt and low unemployment, as well as thebank’s healthy balance sheet. Finally, we have no exposureto either Greek or Portuguese banks, as both countries havedeep-rooted structural issues in addition to their sizeablebudget deficits.

Our strategy within corporate bondsThe recent spread widening has again created a valueproposition for credit investors. However, stock selectionremains crucial, as sovereign worries persist and investorsbecome more discerning. The argument for sustainableyield remains valid, as governments are unlikely to raiseinterest rates while sovereign risk dominates sentiment.

Overall, we continue to favour selective high-yield debtover investment-grade bonds as the flight to quality ingovernment bonds makes the relative value even morecompelling in high yield, while the short duration aspect isalso attractive. However, we would only favour the debt ofthose high-yield companies with robust balance sheets andgood access to funding.

Within high yield, we hold Heavy positions in relativelydefensive sectors such as telecoms and media, and have apreference for ‘BB’ rated bonds over riskier debt. We remainconstructive on the high-yield market generally; whileperforming well in a high-growth environment, it is notdependant on it, unlike equities as a whole.

Chart 1

Discrimination in credit

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investment gradestatus

Roger SadewskyInvestment Director, Corporate Bonds

TreasuryActive fiscal - passive monetary

The coming period of fiscal austerity will be accompanied by anextended maintenance of low interest rates.

USUS interest rates have remained close to zero for the pasteighteen months, and the authorities have maintained thejudgment that rates are likely to be held there for an‘extended’ period. However, there is at least one dissentingvoice on the Federal Reserve warning of the dangers ofkeeping rates at such a low level, leading possibly to amisallocation of resources, or even a reawakening ofinflationary pressures. There are also those who areconvinced that the economic recovery is now well-established, and that the authorities should be moving ratesback towards more ‘normal’ levels.

For now, however, rates are on hold. It would be highlyunusual, and ill-advised, for the authorities to tighten policywith unemployment levels close to 10%, and with inflationpressures continuing to dissipate. Indeed, some observershave been so impressed by the potency of the presentdisinflationary forces that they have pushed out theirestimate for the first tightening move to the fourth quarterof 2011. But it is not just the absence of inflationarypressures, and the weakness of the labour market thatmakes an early rate hike unlikely – bank lending continuesto be insipid, as much a function of weak demand as areluctance to expand loan books. In particular, the housingmarket remains moribund. Interest rates are on hold.

UKThe interest rate judgement in the UK is less clear-cutthan in the US, given that inflation has exceeded thetarget range again during 2010. So far, however, theBank of England remains confident that this is merely ablip, associated with past sterling weakness and theeffects of the reinstatement of VAT at the 17.5% rate. Theman in the street seemed to accept this – at least untilMay, when a Bank of England survey revealed thatinflation expectations, one year out, had surged to 3.3%compared to just 2.5% in February.

That should not be a problem as long as inflation falls backas expected, and as long as expectations do not fuel a drivefor higher wages. The latter appears improbable given thatlabour markets remain challenging with a continuingreduction in full-time jobs.

These considerations are important, but are overshadowedby the need to take into account the impact of the

government’s fiscal austerity package. The Governor of theBank of England certainly sees monetary policy as playing aholding role whilst fiscal policy addresses the debt problem.Interest rates are unlikely to move until well into 2011 atthe earliest.

EuropeThe intensification of the sovereign debt problems has putpressure on the ECB to be even more flexible in itsapproach to monetary policy. In the interests of saving thesingle currency, and with it European integration, the ECBwill have to keep interest rates on hold, as individualauthorities get their fiscal houses in order. Anotherconsequence of the sovereign debt crisis has been a seizurein the wholesale lending market within the peripheralmarkets. Consequently, the ECB will have to be careful notto add to the tension. The fact that inflation in the region isbelow the target level provides ample excuse for keepingrates on hold for some time yet.

JapanInterest rate expectations for Japan presage no movementat all over the next twelve months. Although thedeflationary forces appear to be abating, it is still far tooearly for the authorities to be considering raising interestrates. The economy as a whole has recovered, but only anarrow base is prospering, centred around exports andmanufacturing industry. And, finally, the new prime ministerseems committed to getting to grips with the problem ofthe budget deficit, which is the largest in the developedworld, as a percentage of GDP. Even to contain the deficitwill require substantive spending cuts/tax increases, whichsuggests that present interest rate expectations will not befar off the mark.

Regulatory changesIt was inevitable that there would be a regulatory backlashas a direct consequence of the financial market is nearmeltdown over the past two years. Whilst there have beensome attempts to impose a world-wide banking standard(Basel 3), most of the changes towards tighter requirementsregarding capital sufficiency and liquidity levels have beenenforced at the individual country/region level. Generally,this has resulted in money market funds having to hold agreater percentage in short-term cash, with greatly reducedfunds available for longer time periods.

Chart 1

Rates on hold

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Gordon LowsonHead of Money Markets

16 Global Outlook

Global Outlook 17

CurrencyNew World Order

The global currency pecking order has changed following therecession and the sovereign debt crisis, and may not yet have found anew equilibrium.

US DollarThe dollar continued its recovery in Q2 2010, with thetrade-weighted index up 5.5%. During this period generalmarket sentiment turned in the dollar’s favour, as the USeconomy turned in a more consistently firm performancethan the rest of the developed economies. However, theEuropean sovereign debt fears added to the dollar’s appealas the euro was no longer seen as the automatic beneficiaryof reserve manager flows. Moreover, the market still seemsto consider that the US will be the first of the developedeconomies to start to tighten monetary policy, as elsewherefiscal retrenchment and disappointing rates of growth willhold back monetary tightening. However, the dollar’srecovery means that it can no longer be viewed asgenerally undervalued, and the US has similar long-termstructural issues as the rest of the developed economies. Onbalance, though, we expect the dollar to rally further asglobal economy activity picks up.

SterlingThe election uncertainty is now out of the way and the newgovernment has delivered what is accepted to have been asufficiently credible first budget. That should lay thegrounds for a marked recovery in sterling exchange rates.So, having been generally undervalued, under-owned andhaving spent the past two years suffering from poorsentiment, sterling now falls into the cheap and bad-news-already-discounted camp. Interestingly, on a trade weightedbasis, this improvement had already begun last year. Fromits nadir in Q1 2009, sterling is now trading 10% higher,when measured against its major trading partners, althoughthe price action has been volatile. We expect this priceperformance to gather momentum in the followingquarters as the market starts to correct the valuationmisalignment, noting that the pound has already reached30-40 year lows when measured against a number ofcommodity currencies.

EuroThe big change in the foreign exchange market in 2010has been the decline in the euro from acknowledgedovervalued levels. Against the US dollar, the euro has fallenback towards fair value, but there is still scope for further

depreciation against other currencies against which theEuro remains overvalued. European politicians andauthorities are beginning to see the advantage in allowing aperiod of an undervalued currency. This trend will improveEuropean growth prospects, at the least in Germany andthose other economies that are internationally competitive.The headwinds to growth are that developed marketeconomic growth prospects remain modest, coreinflationary pressures are weak and a difficult transition to amore sustainable fiscal position is underway. Moreover, thesovereign debt concerns within the European periphery willcontinue to reduce the euro’s support among the mainmarginal buyers of the past few years – the reservemanagers. Given that the rate of reserve growth is alsoslowing to a standstill, the daily support for the eurodisappeared in Q2. We expect the weaker euro trend tocontinue.

YenTrading in the yen so far this year has been volatile, with nodefining trend. Nevertheless, the currency is up slightly overthe year to date, but much of the currency’s gains seen in thefirst quarter of the year were effectively lost in the second.The drivers for the Japanese currency remain as mixed asthey have been for some time. Poor domestic economicprospects in a world growth environment that prohibitspowerful export led growth should mean a weaker yen.However, the continued battle against domestic deflationarypressures keeps the real yield in Japan relatively attractive.Moreover, a world with low certainty over growth, lower forlonger interest rates almost everywhere, and high currencyvolatility is not a natural positive carry environment. It hadbeen hoped that changes in the political landscape mightlead to a more expansionary monetary policy that couldtrigger a weaker yen, but the new government seems to bemore intent upon tackling its debt mountain. With an agingpopulation, the savings of which are predominantly held inbank accounts and government bonds, it is hard to see howthe government will manage to rein in the debt whilstfostering a robust pick-up in economic activity. Nevertheless,given our positive dollar outlook, we think that the dollar/yencurrency pair will trade in a range on the summer months,but that there may be a more positive yen trade-weightedmove over that timeframe.

Chart 1

Repositioning in uncertain world

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Source: Thomson Datastream

Bank of England trade-weighted currency performance for:

Ken DicksonInvestment Director, Currency

18 Global Outlook March 2007

PropertyOpportunities in Europe

The outlook for European commercial property remains positivedespite the sovereign debt crisis. We expect a steady but slowrecovery in occupier markets.

Divergent trends in EuropeThe sovereign debt crisis highlighted the disparities ingovernment financial balances across continental Europe.The implications for individual property markets need to beexamined. There is a distinct difference, for example,between the property markets of those countries withmoderate debt levels and balanced building constructionduring the last cycle and those countries with high debtlevels and unsustainable construction booms. Certainproperty markets are expected to endure some contagionfrom the sovereign debt crisis.

Our most favoured office market in continental Europe isParis, one of the top five financial centres as measured bythe Global Financial Centre Index. Property drivers arefavourable; for example take-up is buoyant, rents areincreasing modestly and vacancy levels remain in singledigits. The diversity in terms of occupiers, spanning sectorsand companies, is a key success factor for Paris.Government measures to address the fiscal imbalances areexpected to have a modest effect on the occupier markets,given the global nature of many occupiers. Hence weexpect the Paris property market to remain on a steadyrecovery path.

The southern European and Irish property markets, on theother hand, are in a very different part of the cycle. Theyface oversupply and fiscal challenges which are expected todampen the recovery in the occupier markets. Rents are stillfalling and vacancies rising, albeit yields have stabilised. Therecovery of these office markets is expected to be very slowand drawn out as austerity measures take effect. Thelikelihood of weaker occupier markets in peripheralEuropean property markets is already reflected in ourProperty House View.

On the positive side, there is a shortage of new supplysteadily building up across the region due to the lack ofdevelopment finance during the financial crisis. Thisundersupply is expected to peak in 2012 and to drive rentsto new highs. London, Paris and Warsaw are especiallyattractive in this instance. While we expect the pace ofeconomic recovery to remain slow and bumpy, we believeshrinking supply will counteract this. Occupiers faced withshrinking supply will bring forward relocation decisions.

In addition to London, Paris and Warsaw offices, ourProperty House View also favours the higher yieldinglogistics markets. Robust demand for exports, helped by aweaker euro and the revival of global trade, is driving therecovery of the European economy. Germany, the largestEuro-zone economy, along with such countries as Franceand Poland, has benefited from the considerable recoveryin foreign orders. We expect the logistics sector in thesemarkets to gain directly from this trend.

Given currency weakness, we expect continental Europe tobecome increasingly attractive to sovereign wealth fundsand international investors. Indeed, it is likely to overtakethe UK in terms of investor flows and interest. Recently, alarge Korean pension fund acquired an office in Berlin for€570 million, a Korean consortium is in the process ofacquiring a mixed use development near Milan for €405mand an Australian developer is set to invest €400m inlogistics developments in Europe. These transactions aresignificant when compared with the recent averageEuropean deal size of circa €16m. In addition, sale andleaseback transactions by banks and corporates to free upcapital, as well as government property disposals to helpaddress fiscal deficits, are providing the stock necessary tomaintain momentum in investment markets.

Our strategy within propertyWe believe European commercial property markets aremoving further into the recovery, behind the UK but aheadof other regions such as the US. We continue to favour theParis office market, high-yielding European logistics marketsand the Polish retail market. The lower level of the euro ishelpful in terms of making property investment incontinental Europe more attractive to overseas investors. Inthe UK, the central London markets continue to be mostattractive. Globally, we favour core prime locations and wesee most resilience in better quality assets. Across NorthAmerica we see value in under developed industriallocations in Canada while we favour the cyclical officemarkets in the US. In Asian markets, we hold a preferencefor office markets with the tightest supply pipelines, such asSydney, and certain emerging markets benefitting fromtrade and consumer trends, such as Chinese logisticwarehouses.

Chart 1

EU Prime Offices - Net Additions

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1982-85 1986-90 1991-95 1996-00 2001-05 2006-10 2011-140.0

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5.0% of stock

Total net additions Net additions as % of stock

Source: PMA, SLI

R.H. scale:L.H. scale:

18 Global Outlook

Alex WattManaging Director, Property Investment

Global Outlook 19

Global Absolute Return StrategiesChanging tack on directional trades

The big move down in interest rate swap yields and the high valuationof US smaller companies has highlighted some relative valueopportunities.

Absolute return strategiesAt Standard Life Investments, our Global Absolute ReturnStrategies (GARS) approach operates in a multi-assetframework, aiming to deliver returns above UK 6-monthLIBOR cash measured on a rolling 3-year time horizon. Ourabsolute return process combines a broad mix of ideasacross all the major asset classes through positions inmarket returns, or traditional beta, relative value andopportunistic ideas. Two new strategies are classified asrelative value, meaning one of the assets offers measurablevalue relative to the other. The first is a pairing for ourcontinued preference for Australian 2-year interest rateswaps with German 2-year interest rates, which we pay-away as they appear to have fallen to extremely low levels.The second idea is to pair the US S&P 500 large-cap equitymarket with the more expensive smaller capitalisationRussell 2000 Index.

Receive Australian and pay-away Germaninterest ratesInterest rate curves have been steep (i.e. longer-dated bondyields higher than shorter-dated ones) for some time acrossmost OECD bond markets. The trigger to initiate aflattening idea, while yields along the curve continue to fall,has always been the extent to which the shorter-dated partof the interest rate curve was unable to rally further. InGermany’s case, the 2-year government bond has benefitedfrom investors’ concerns about the outlook for the euro andEuro-zone economies. It has behaved as the ultimate risk-free rate and, following a strong rally, is now yielding just60 basis points (bp). In Australia, the 2-year swap ratepriced two years forwards still reflects the fact that themarket believes that Asia is likely to be immune from theeffects of a patchy recovery and global disinflationaryforces. However, with China an important source ofdemand for Australian exports (especially commodities) andthe euro down 17% against the RMB in recent months(Europe is China’s biggest export destination), the impact ofthe euro sovereign crisis will have a negative knock-oneffect on Asian economies and rates. The spread betweenAustralian and German interest rates, at over 500bp, is closeto a record (chart 1), and should narrow either in the mostlikely central scenario - steady state slow growth and lowinflation globally - or if one of a number of quite extremescenarios comes about.

Large cap vs small cap relative valueSince the lows in 2003, US small-cap stocks have re-ratedrelative to US large caps and now price in an unsustainablylarge valuation gap. We anticipate that there will be someunwinding of the excess performance of small cap relativeto large caps as leading indicators of economic growth startto soften, credit conditions remain more constrained forsmall caps, unlike large caps which can access the creditmarkets, and the lagged effect of the decline in the USdollar benefits large caps, which are more export-exposedthan small caps. When large-cap stocks meet the modestexpectations, while mid-cap stocks struggle to deliveragainst their higher hurdle, this idea will perform well. Thisis not a high-risk position; it will probably work best in adeclining equity market but we are convinced it can stilladd value in a rising market, which is our centralexpectation. Potential risks to the trade arise from sectorexposure – the S&P 500 Index has a large technologycomponent relative to the small cap Russell 2000 Index.Also, small companies may be able to exploit nichepositions to outpace their large-cap rivals in the on goingeconomic upswing.

Strategy within absolute return strategiesThe multi-year macro economic view that drives our assetpreferences suggests that the economic recovery will bemuted and uncertain in many parts of the world, interestrates will remain lower for longer and elevated volatility inriskier assets will require a high risk premium ascompensation. Consequently, we still have a preference forgovernment duration, expressed through receiving theperformance from various longer-dated bonds and theshort end of the Australian, UK and Swedish interest ratecurves. Our second most important exposure is to theperformance of a range of equity markets. The third andfourth positions are in corporate bonds including financialcredit, and receiving the volatility on cyclical relative todefensive equity markets. In foreign exchange, we favourhigh interest rate carrying emerging markets, the US dollarand sterling. The risk associated with stock pickingcontributes to the rest of the risk budget.

Chart 1

Relative value in spreads

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Source: BloombergGuy Stern,Head of Multi-Asset Management

20 Global Outlook

Global Outlook teamC

ontr

ibut

ors

The production of Global Outlookdraws on the ideas and insights ofmany of our investmentprofessionals around the worldwithin the framework of our Focuson Change investment philosophy.Below are the contributors to thepublication, in addition to thosementioned within the document.

Editor Frances Hudson

Sub-EditorsRichard BattyAndrew MilliganDouglas RobertsJason Hepner

Chart EditorNeal Caldwell

Additional ContributorsThomas Moore (UK Equities)Stan Pearson (Focus on Change)Ken Murphy (Focus on Change)Simon Kinnie (Property)

CopywritersGovinda FinnLorna MaloneKathryn RobertsonJulie SheridanDavid Turner

Contact Details

For further information on Standard Life Investments visitwww.standardlifeinvestments.comor contact us at one of the followingoffices:

Europe

Standard Life Investments1 George StreetEdinburghUnited KingdomEH2 2LLTelephone: +44 (0)131 225 2345

Standard Life Investments90 St. Stephen’s GreenDublinIrelandTelephone: +353(0) 1 639 7000

Standard Life Investments34th Floor30 St Mary AxeLondonEC3A 8EP.Telephone: +44 (0)207 868 5700

North America

Standard Life Investments Inc.1001 de Maisonneuve Boulevard WestSuite 1000MontréalQuébecCanadaH3A 3C8Telephone: +1 514 499 6844

Standard Life Investments (USA) LtdOne Beacon Street34th FloorBostonMA 02108-3106Telephone: +1 617 720 7900

Asia

Standard Life Investments (Asia) Ltd40/F, Tower 1, Times Square1 Matheson StreetCauseway BayHong KongTelephone: +852 3402 6000Fax: + 852 2169 3885

Standard Life Investments LimitedBeijing Representative OfficeRoom A902-A903, 9th Floor, New Poly PlazaNo.1 Chaoyangmen BeidajieDongcheng District, Beijing 100010People’s Republic of ChinaFax: + 86 10 8419 3399

Standard Life Investments (Asia) LtdLevel 31, RBS Tower88 Philip StreetSydney NSW 2000AustraliaTelephone: +61 2 8211 2758Fax: +61 2 8211 2752

Standard Life Investments (Asia) LtdKorea Representative Office21/F Seoul Finance Center84 Taepyungro 1-ka, Chung-kuSeoul, 100-101KoreaFax: +82 2 3782 4763

Jul 10 House ViewThe following portfolio is based upon a global investor with access to all the major asset classes. For regional versions of the House View, please contact your Standard Life Investments representative.

RiskThe Global Investment Group has concluded that portfolios will take on moderate levels of risk,focusing on assets with high, yet sustainable yield, looking for relative value opportunities, in view ofcontinued economic and market volatility.

Government Bonds

European Bonds Still well-supported by an environment of moderate economic growth and restrained inflation, but safehaven flows about European debt servicing problems have pushed some markets to expensive levels. NEUTRAL

US Treasuries Yields are supported by a backdrop of muted inflation pressures, which will limit any interest rateincreases into 2011, but valuations and fiscal pressures are becoming more of a concern.

MOVED TONEUTRAL

Japanese Bonds Low Japanese government bond yields mean this asset class is increasingly being used as a fundingsource for other investments including other government bond markets. NEUTRAL

UK Gilts Concerns about the economy’s fiscal position and sizeable gilt supply in the years ahead make uscautious, but interest rate increases remain unlikely for some time. NEUTRAL

UK Inflation-Linked Debt

There are inflation risks in the medium term from central bank quantitative easing, but valuations ofinflation-proofed debt need to be examined carefully. NEUTRAL

Corporate Bonds

Investment Grade Spreads over government bonds are still historically wide, although not as attractive as last year.Improving corporate cashflow supports a peak in bond default rates. VERY HEAVY

High-Yield Debt Benefiting from an attractive carry, improving corporate cashflow and a peak in the default cycle as theglobal economy recovers. Investors still need to be aware of selective default risk and periodic risk aversion.

MOVED TO VERY HEAVY

Equities

European Equities Profitability is restrained by less cost-cutting than seen in the US and UK, plus the impact of tight fiscal policyon economic growth, albeit some sectors are supported by their exposure to emerging market economies. LIGHT

US Equities Supported by improving corporate cashflows into 2010 on the back of strict cost control, however, the upside is limited by the consumer debt and housing market overhangs restraining domestic demand. NEUTRAL

Japanese Equities Helpful exposure to the Asian and US economies offset by weak domestic dynamics and tighter fiscalpolicy; government action unsuccessful so far in stimulating consumer spending or ending deflation. LIGHT

Developed AsianEquities

Cautiously selective on Asian economies, benefiting from strong Chinese growth but wary of inflationpressures building in some countries unless central banks take firm action to dampen liquidity. NEUTRAL

Emerging MarketEquities

Some are benefiting from the upturn in commodity demand and upgrades to sovereign debt ratings,others still facing external financing problems awaiting a strong recovery in export growth. NEUTRAL

UK Equities The market can make headway supported by valuations and the benefits of sterling’s depreciation on overseas earnings, but it faces headwinds from weak real income growth and fiscal tightening. NEUTRAL

Property

UKEuropean

Selectively Heavy with a particular focus on supply-constrained office markets, e.g. London & Paris, and higher-yielding Central European logistical property. HEAVY

North America Significant property debt maturities present risks for US commercial property, but Canada's lowerleveraged property markets should fare better. NEUTRAL

Asia Pacific Excessive supply in certain markets in Asia, e.g. China & Singapore, will hold back growth but higher-yielding Australian markets look more attractively priced. LIGHT

Other Assets

Foreign Exchange Interest rate differentials, divergent growth prospects, political and regulatory drivers are becomingimportant differentiators for global capital flows.

Heavy $ and £ vsLight € and ¥

Global Commodities

Strong demand for industrial commodities will be led by infrastructure projects in emerging economies, but oil and soft commodities will eventually see new supply come on stream. NEUTRAL

Cash

Central banks in the major economies will keep monetary policy very loose into 2011 as inflationpressures remain weak due to excess capacity and high levels of unemployment. VERY LIGHT

Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC123321) Registered Office 1 George Street Edinburgh EH2 2LL.The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP.Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited. Standard Life Investments may record and monitortelephone calls to help improve customer service. All companies are authorised and regulated by the Financial Services Authority. ©2010 Standard Life Investments www.standardlifeinvestments.com

Standard Life Investments Limited, a company registered in Ireland (904256) and Scotland (SC123321). Ireland: 90 St Stephen’s Green Dublin 2. Tel: (01) 639 7000 UK: 1 George StreetEdinburgh EH2 2LL. Tel: +44 131 225 2345. Standard Life Investments Limited acts as investment manager for Standard Life Assurance Limited and its subsidiaries. All above companies areauthorised and regulated in the UK by the Financial Services Authority. Standard Life Investments may record and monitor telephone calls to help improve customer service.

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