International Equities Checkmate: STRATEGIC ASSET ALLOC. OCT 2008

1. THE FINANCIAL PLAGUE…NO COUNTERPARTY RISK! MARKET PARTICIPANTS DONT WANT TO KNOW WHO IS BEHIND THE MASK DEPRESSION SCENARIO IS UNFOLDING PANIC = OVERSOLD…We raise from UW to Neutral by buying GEMS… International Equities Checkmate:STRATEGIC ASSET ALLOC. OCT 2008 Eric Conrads: 0052-55-9177 1028 eric.conrads@mx.ing.com

2. Banking crisis...not new but plague has come! There has been a while we did not have such a banking crisis but the size of this one might make up for it!

3. SMALL CAPS LEAD, THE BRICS BLEED!

4. YTD: from compression to dispersion... Since July, the apparent beta glue has melt due to the weakness of commodities that has left CRB sensitive regions in the dust…

5. GET ME OUT! Over the past 3 and 12 months, markets have declined in the magnitude of 20%. GEMS have suffered the most over the past 3 months…as it was still a macro paria during crisis! Amazingly, SMALL CAPS is the only segment not in the low left box.

6. VOLATILITY PLAGUE STRIKES... 2/3 of the year with at least 8 days of movements superior at 1% in both directions. S&P 500 in September: nearly half of it with moves superior at +/- 3%!

7. US at mercy? Foreigners are not anymore buying more US treasuries than the size of the deficit...FINANCING ISSUE?

8. Growth dissipating...China acts! Chineese authorities are relaxing reserve requirements and have the amunitions to counter a global slowdown... (fiscal boost, reserves...) 10 years after having saved Asia by not devaluating and as a consequence gain political clout, China is in the position to play the same geopolital cards but this time by boosting growth to smooth the global crisis and shine... China needs growth and felt at the worst of 98 crisis to 7.8% GDP growth

9. Portfolio STRATEGY ALLOCATION REVIEW GENERALITIES • TOTAL SCORE: • NEUTRAL with beta tilt (GEMS) • PICKER & ALPHA MARKET

10. KEY STRATEGIC FLAGS and our take… • Economic growth will decelerate and expect SUB-PAR growth for next 3 years… • US GDP FALSE IMAGE: WE BELIEVE Q3 AND Q4 are going to be UGLY! • CASH IS KING…till Central Banks act! • Dramatic events unfold in the space of one month • Liquidity is contracting and BANK LENDING WILL COLLAPSE. • CREDIT CRUNCH? THE TAXPAYERS PAY THE BILL via BAIL-OUTS. • PLAY CREDIT SPREAD BEFORE EQUITIES? • Companies are full of CASH…Households are full of DEBT • CHINA POSITIVE: SPEECH FROM INFLATION TO GROWTH CONCERNS • ELECTIONS IN THE US: RISK OF PROTECTIONISM • STAY ON THE SIDELINES… • UPGRADE GEMS TO OW In a bear market, spreadsheets matter the most / in a bull market, themes rule the roost

11. A DRAMATIC MONTH FULL OF EVENTS! • US BIGGEST BANKRUPTCY EVER (Lehman) • US BIGGEST BANK FAILURE-SEIZURE EVER (Washington Mutual) • US BIGGEST NATIONALIZATION EVER (Freddie & Fannie) – (AIG) • US BIGGEST BAIL-OUT PLAN SINCE THE 30´s (TARP) • US forced merger-wedding (ML-BOFA) • FED accepts equities as collateral for first time ever • 2nd time in history that money market funds break the 1$ PAR value • RUN on deposits at banks and money markets at mutual funds Co. • People queuing to get gold coins (no counterparty risk) • SAFE 3 months US paper reached 0.15%...the lowest since 1941! • European governments are bailing-out their banks • Short-selling banned all over the world • CHINA cut reserve requirements and allow short-selling

12. MAIN ISSUES / STRATEGIC CALLS • FRONT END OF THE CURVE – MONEY MARKET • PANIC AND DISLOCATION • DEVELOPED ECONOMIES IN RECESSION • GEMS TOO CHEAP TO IGNORE • WE REPEAT…ALPHA YEAR AFTER 5 YEARS OF BETA RUN!

13. STRATEGY VIEWS OUR CALL: NEUTRAL WITH GEMS TILT • Challenges & Opportunities for 2008: • RISK of PROTECTIONISM as GLOBAL TRADE has been the main growth engine for the past 10 years. • RISK of EXCESS REGULATIONS • RISK OF CENTRAL BANKS MISMANAGEMENT! • EPS COLLAPSE • FISCAL HOLES… • SMILE as EQUITIES are cheap for long-term investors. • SMILE AS CHINA HAS A PRO-GROWTH POLICY • SMILE as FISCAL BOOSTERS will be used

14. GLOBAL ECO MARKETS MARKETS & THE ECONOMY: impact on style, size and allocation TOTAL SCORE: -1 MACRO SCORE: -1 for DVM and 0 / -1 for GEMS. SIZE SCORE: +1 BIG CAP -1 SMALL CAP STYLE SCORE: 0 GROWTH 0 VALUE DVM: DEVELOPED MARKETS

15. Any good news around!? GLOBAL MACRO SURPRISE index has spent the whole year in the doldrums so far.

16. CDS spread have not stabilized… This issue is latent and has not yet been resolved as spreads are rising again…POST $500BN WRITE-OFFS. CREDIT RISK is still all over the place.

17. FX SWAP market gripped too... To get USD, investors are ready to forfeit interest rate income from other currencies!

18. TED SPREAD...ignoring the rscue plans! This is the GAP between lending to the government for short-term paper and lending to banks… We are at a record differential…banks dont know who has the plague or not and are hoarding cash.

19. SHORT-TERM STRUCTURE RISKY! The capitalism arteries are totally clogged...the problem is global and not local.

20. BAIL-OUTS and SEIZURES... FDIC will need additional capital from the government if the situation lasts longer...

21. BI-POLAR OUTCOME: DE&IN...FLATION! Yield curve keeps steepening but mainly due to the 2 years bond…a consequence of the current counter-party plague. TIPS had a violent move on both sides…the jury is still out on the binary outcome: debt-led deflation or medium-term inflation due to fiscal cost. Since June we called for deflation. Short-term still valid but medium-term there are too many variables (politics, demography, debt consequences, fiscal deficits…) to measure the true outcome. GOLD should be a winner

22. HOUSING: Another plague? This is not only US that suffer from the housing correction…UK mortgages approvals and prices are declining sharply. European countries are following the trend.

23. US HOUSING: VOLUME more than PRICE! You need more a supply adjustment than a price adjustment which is normal for an illiquid market… SO IT TAKES TIME YES! Price decline has not et impacted the excess supply still at twice the normal level. We probably at 50% or 2/3 of the correction…more pain = more problems for banks.

24. Commodities are deflationg too... Fear of a demand collapse combined with investigations on speculative prctices have taken the shine out of commodities Oil correction seems to have run its course...we see 85$ as a max bottom that would be good for monetary easing and sufficient for not hurting too much emerging markets books.

25. LABOUR MARKET...the trend matters! • US Unemployment trend is at a recession level with already 150bps added to the indicator! • We are now at the levels of 1980, 1991 and 2001…the proof is in the pudding right!

26. Unemployed cruising at recession levels The absolute increase of people unemployed over 12 months confirms the previous graph (+3M people!) This is the trend that matters and not the absolute point you starting from.

27. WAGES: inflation and consumption at bay! Combined with falling property markets and stock markets, it is difficult to envision a boom in consumption. Clearly not inflationary…good for monetary easing

28. GLOOMY INDICATOR… OECD LEI is still in a free-fall…but is Japan fulfilling its leading indicator of leading indicator role? False start or dawn of hope?

29. OECD LI has implications on asset allocation Equities are a leverage play relative to bonds on economic growth. BONDS rally is totally justified and conform to expectations And equities have a second derivative: Emerging Markets! GEMS are now finally back on earth and syncronized with the global reality… Source: Bloomberg

30. OECD LEI is falling off a cliff! The OECD LEI is already at RECESSION levels…look for it to bottom-out…

31. OECD LEI...look out for bottom... OECD LEI is declining but from a high level…we barely back to historical trend and we expect it go below trend.

32. DEVELOPED MARKETS: AVERAGE DATA On average, DEVELOPED ECONOMIES are now decelerating fast if not plunging already to the tune of 2001… Inflation has peaked and tht should trigger more monetary easing.

33. GEMS: will it last? Decelerating GDP GOWTH but at a decent level Inflation is peaking… Exports growth is still amazingly strong

34. DEV: LOWER GROWTH HIGHER INFLATION

35. GEMS: Lower growth and peaking inflation!

36. CENTRAL BANKS MOVES…BI POLAR too! CENTRAL BANKS ARE ACTING FAST… In fact over the past 12 months, a simple average tell us that the rate of change is going down for developed and rising for GEMS. GEMS CB will soon start eqsing process as well

37. GLOBAL RATES TREND : CONVERGENCE! GLOBALLY CENTRAL BANKS ARE IN FACT STILL TIGHTENING…

38. STM SIGNAL SENTIMENT INDICATORSTECHNICALSMOMENTUM & FLOWS SCORE TOTAL: +1 / +2 SENTIMENT INDICATOR: +1 / +2 TECHNICALS: +1 / +2 MOMENTUM: +1 FLOWS: NEGATIVE

39. SENTIMENT MODEL: AGGREGATE SCORE BUY Getting into good buy zone but still not capitulation

40. FX RISK INDICATOR: extreme risk aversion As well a good entry point

41. THAT ONE TOO IN THE EXPECTATION… Stocks quite oversold and breadth at a historical low…

42. And macro risk at elevated level...

43. Gems oversold relative to World BUY SIGNAL!

44. GEMS oversold... HISTORICALLY STILL AT EXTREME LEVELS versus 200d MA Gems on a y-o-y basis at an oversold level

45. Momentum: oversold...

46. TECHNICALS: not that pretty... Descending corridor with a dead cross in the offing. 1060 the ultimate test before the rebound?

47. VALUATION CORNER VALUATIONS CHEAP with NO catalyst. SCORE: 0

48. PROFITS: TURNING SOUR? No miracles! High correlation between G7 yield evolution and EPS. It indicates EPS deceleration…in line with the economic outlook BUT not a dramatic fall…so far.

49. BOND / EQUITY RELATIVE VALUE. A shy BUY signal…

50. REVERSION TO THE MEAN?