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Asia's Rich History and Vast Potential: A Comprehensive Overview Since Marco Polo

Dive into the extensive historical journey of Asia ex-Japan, examining pivotal events, influential figures, and economic transformations. Explore the region's cultural tapestry, trade routes, and modern infrastructure developments shaping its future growth.

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Asia's Rich History and Vast Potential: A Comprehensive Overview Since Marco Polo

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  1. Rexiter Capital Management Limited Asia ex-Japan – A Perspective July 2009 Adrian Cowell www.rexiter.com

  2. “I have only told the half of what I saw” Epitaph of Marco Polo Kublai Khan 1215-1294 The Mongol Empire The First Asia ex-Japan Marco Polo 1254-1324 “For ye shall find therein all kinds of wonderful things, and the divers histories of the Great Hermenia, and of Persia, and of the land of the Tartars, and of India….” Marco Polo

  3. Ibn Battuta, 1304-1368(9) Moroccan scholar and traveler “Rihla” or Voyage 1325-1354, 75k miles, 44 countries, the Muslim world

  4. Which is why Christopher Columbus tried to short cut the other way round … … with this result … Christopher Columbus, 1451-1506 …but…

  5. Wu Bei Zhi chart West India, Ceylon and East Africa Admiral Zheng He 1371-1433 Seven huge expeditions 1405-1433 Kangido Map 1402 Fra Mauro Map 1420 Zheng He’s Treasure Ships China’s first blue water capability Giraffe, 1414

  6. The Silk Road Cloves and Nutmeg The Spice Trade

  7. In the first millennium, India accounted for 30% of global GDP • By 1500 China had surpassed India • Until 1850, China and India alternated as No1 and No2 by GDP • source Wikipedia • In 2008, nominal World GDP was US$60.689tr • In 2008 nominal Asia Pacific GDP was US$16.774tr • World ranking; China 3rd US$4.4tr, India 12th US$1.2tr, Korea 15th US$947bn, Indonesia 19th US$511bn • 2009 estimates are World US$54.863tr and Asia Pacific US$16.437tr • source IMF

  8. Asia Today

  9. “Demography is Destiny” Auguste Comte, 1798-1857 French philosopher, mathematician and sociologist

  10. From the Great Wall … to Shanghai … and Beijing 2008 The Han River, Korean War … the 2002 Seoul World Cup Stadium … and Pyongyang, DPRK

  11. Asia Market Capitalisation by Index

  12. Asia– In Context Asia • A land mass of 44.579 million kmsq (17.212million sq miles), the world’s largest, and most populous continent • A population of 4.162bn or 60% of the world with 7 of the world’s 10 most populous countries; China, India, Indonesia, Russia, Pakistan, Bangledesh and Japan • UNDP estimates the population increased by a factor of 2.5 from 1950-2000, an absolute 2.2 bn or 1.8% annually • 47 countries in distinct regional groupings; East Asia, Central Asia, South East Asia, South Asia, and West Asia • In 2000; • East Asia had a population of 1.4bn, a growth rate of 0.67% annually and life expectancy of 72.1 years • South East Asia had 520m, 1.4% annual growth rate and expectancy of 66.7 years • South Central Asia had 1.4bn, growth of 1.66% and expectancy of 63.2 years • Dramatic improvements in life expectancy drove the population explosion, and are being followed by a dramatic drop in the fertility rate led by China which will both age and suffer a shortage of brides • UNPD forecasts 1975-2025; China 930m to 1.4bn (median age 39), India 620m to 1.3bn, Vietnam 48m to 105m, Korea 35m to 50m (median 44) or a unified 75m, Pakistan 70m to 250m which compare to the United States at 385m and Japan at 123m (median 50) • Slum dwelling urban population (World Bank/UN 2005); East Asia 33%, South Asia 59%, West and South East Asia 27% Population, per capita GDP and potential Consumption, Low level of Public and Private Debt, growing Foreign Reserves

  13. Asia– In Context Asia Infrastructure • The ADB estimates that less than 1% of US$1tr Euro-Asia trade is land transported through Central Asia (12 land locked countries) • China and seven Central Asian countries have agreed to invest US$19.2bn in the 21st century equivalent of the Silk Road (supported by ADB, EBRD, Islamic DB, IMF, UNDP, World Bank). • Additional to UN and EU projects to build 140k km roads and 14k km of railways • Central Asian GDP estimated to double by connection to the Trans Siberian Railway and to deep water ports • The Asian Highway – AH1 from Tokyo to Bulgaria; US$25bn in commitments. China is building 12 highways to link Xingjiang with Central Asia • The Iron Silk Road – four corridors; Northern (Trans Siberian to Korea), ASEAN (Kunming-Singapore etc), Southern (CPIT - Yunan to Turkey), Europe to the Persian Gulf. Trans Asian Railway Network – 17 Asian nations to serve 13 of the top 20 container ports with 81k km network • Container Ports; Asia has 18 of the world’s top 20 container ports by ‘000 TEU (Singapore, Shanghai, Hong Kong, Shenzen, Pusan) • Oil and Gas Pipelines; China sources most of its crude from the Middle east but is diversifying into central Asia – Kazakh-China pipeline. Transneft is building the East Siberian pipeline to China, and phase 2 will deliver to the Pacific coast. Turkmenistan (via Uzbekistan and kazakhstan) to China gas pipeline under construction Japan became rich before it became old, Chinese may become old before they become rich

  14. India – In Context Indian Infrastructure • India - The Infrastructure Opportunity • Government is targeting US$1.5tr of investment by 2017 versus actual spend of US$200bn in last five years • 11th Five Year Plan • Power generation; Capex in 10th Plan (‘03-’07) of US$48bn (vs target US$70.5bn) could rise in 11th Plan (’08-’12) to US$108bn (vs target US$150.4bn) and in 12th Plan (’13-’17) to US$171bn • Roads in 11th US$57bn (up 60% PoP vs target US$76.1bn) – six lane, four lane, expressways, highways and rural roads • Railways in 11th US$50bn (70% PoP vs target of US$62.2bn) – dedicated freight corridor, 10,300km new track etc • Four large airports (320% PoP for target US$8.5bn), 35 small airports • Port growth of 13 times; add 493million mt in major ports, and 345million in minor ports for target of US$18bn Build it and Growth will Come

  15. India – In Context India • A land mass of 3.3 million kmsq, the 7th largest country in the world, and the 2nd largest in Asia, after China • Land boundary of 14,103km with a coastline of 7,517km; 48% of land is arable, 20.6% under forest • As of 2001, population of 1.03bn, 17% of the world population and 2nd largest in the world after China, but growing at 1.45%pa. 1991-2001 population grew by an absolute 21.5% (1.9% CAGR), or 181million over the period. • 166million in state of Uttar Pradesh - (6th largest in the world after Brazil) • 97million in state of Maharashtra • 83million in state of Bihar – (bigger than Germany) • Current assumptions suggest a population of 1.3billion by 2026 (ie adding another “United States”), and by 2050 India could be the most populous country in the world • Life expectancy is 65.4 years, up from 54.4 in 1981, and literacy rate is 64%, up from 43.6% in 1981 • 59% of the population is younger than 30 years, 50% is under 25 years, and the labour force will grow at an estimated 1.7-1.8% to 2015. Working population estimated to peak at 60% by 2020 (China peak to be reached around 2010) • 36 cities greater than 1m (China has 150 such cities), top 3 cities have a population of 42 million, and the largest, Mumbai, has a population of 16 million; urban population increased from 23% in 1981 to 28% in 2001 (China 39%) • In 2005 an estimated 300million or 27% of the population still lives below the poverty line (55% in 1974) Population 17% of World ; LOW DEPENDENCY, Expanding Workforce

  16. India – In Context India The world’s largest democracy, independent since 15th August 1947, founded on socialist, democratic and secular principles • Lok Sabha - Lower House of 543 elected members plus 2 appointed by the President • Rajya Sabha - Upper House of no more than 250 members chosen by elected members of the State Assemblies • The President is the head of State, and the Prime Minister heads the government • Since 1990 the country has been governed by coalition, previously governed by Indian National Congress Party • 6 national political parties (criterion is recognition in four or more states), and 47 state parties • In 2004 election, Congress, United Progressive Alliance coalition leader, won 150 seats in its own right and leads a coalition of 292 seats, and Bharatiya Janata (BJP), leader of the National Democratic Alliance, won 131 seats in its own right, and led an opposition coalition of 179 seats, with a further 72 seats made up of other parties • Contentious Nuclear Treaty with the United States (civilian nuclear co-operation)/Terrorism • Congress led coalition won the ’09 election winning 206 of 543 seats and its coalition has 262 with others for an effective majority • Predominantly Hindu • 81% Hindu • 13% Muslim (second largest Muslim population after Indonesia), 2% Christian, 2% Sikh, 1% Buddhist • 22 official languages and 500 tribes; Hindi, the official language is spoken by 40%, English is the predominant business language – a bank note has its denomination printed in 16 languages Largest Democracy in the World

  17. India – In Context India • Strong GDP for the past five years; in 2006-7 GDP grew 9.2%. India has joined the US$1trillion GDP club of nations, as of end 2007 similar in size to Russia and Brazil • GDP breakdown is; Agriculture 18.5%, Industry 26.4% and Services 55.1% • Government target for 11th Five Year Plan is an average growth rate of 9% • Infrastructure spending is 4% of GDP vs 10% in China; target is 9% • Education spending is 1% of GDP vs 10% in China; target is 6% • Agriculture is 18.5% of GDP (55% in 1951); self sufficient since 1970, 60% of population dependent, less than 30% of land irrigated so the monsoon is critical (this year officially started 31st May 2008) • The world’s 2nd largest apparel producer after China, 3rd largest cotton grower after US and China; textiles 14% of exports at $14bn • World’s 5th steel producer at 45mtpa with per capita consumption of 44kg vs world average of 150k; huge iron ore reserves, targets 100mt steel production by 2012 • World’s 2nd largest cement producer after China at 160mt (top 2 companies; 40%); adding 90-100mt of capacity over 3 years • In Pharmaceuticals India produces 8% of world bulk, should export US$7bn in ‘08 Huge Resources but Inadequate & Overloaded Infrastructure

  18. India – In Context India • End ’07 recoverable hydrocarbon reserves estimated at 5.5bnbbl and 1,055bcm of gas; import dependence of 75%, net oil imports are a key drag on economy. New discoveries being made off east coast. • Refining capacity of 150mtpa, is in surplus, and will rise to 215mtpa by 2012 • World’s 3rd largest coal producer at 433mtpa after China and US. Estimated reserves of 235bnt • July ’07 installed generating capacity was 135,000MW. Target is to add 160,000MW in ten years. Sources are 66% thermal, 26% hydro, 3% nuclear, 3% renewable • Country has a power deficit of 9-14%. • Losses in transmissions accounted for up to 30% • Self sufficient in aluminium at 1.2mt, copper at 0.7mt and zinc at 0.4mtpa. World 6th in bauxite production, 3rd in chromite, 4th in iron ore Sensitive to Oil, Food Prices ; GOVERNMENT REFORM, Dynamic Private Sector

  19. Jeter Smith Clooney + Woods + = = Sachin Tendulkar Cricket Superstar Shahrukh Khan Bollywood A List Film Star

  20. China – In Context China • A land mass of 9.5 million kmsq, the largest in Asia • Land boundary of 22,117kmwith 14 countries (Afganistan, Bhutan, Burma, India, Kazakhstan, DPRK, Kyrgyzstan, Laos, Mongolia, Nepal, Pakistan, Russia, Tajikistan, Vietnam) with a coastline of 14,500km; 15% of land is arable (but threatened by erosion and economic development) • As of 2007, estimated population of 1.33bn, the world’s most populous country, but growing at 0.6%pa; labour force is 798mk;43% in agriculture, 25% industry and 32% services • 91.9% Han Chinese • Minorities; Zhung, Uygur, Hui, Yi, Tibet, Miao, Manchu, Mongol, Buyi, Korean • Atheist, but historically Taoist and Buddhist; Christian 3-4%, Muslim 1-2% • Mandarin (Putonghwa), Cantonese, Shanghainese, Fuzhou, Hokkien, Xiang, Gan, Hakka, and minority languages • Life expectancy is 73.47 years (m 71.61, f 75.52), and literacy rate is 90.9%, median age 34.1 years • 19.8% younger than 15 years, 72.1% between 15-64 years, and 8.1% 65 years and above • 150 cities greater than 1m, top 3 cities have a population of 33m; Shanghai 12.7 m, Beijing 10.8m and Tianjin 9.3m; urban population 43% • Urbanisation, rural poverty (8% below poverty line), aging population and sex imbalances (at birth 1.1 male to female) are issues Rapidly Aging Population with Limited Social Welfare Safety Net

  21. China – In Context China • The world’s largest country, communist, established People’s Republic of China 1st October 1947 • 23 provinces (Taiwan is classified as the 23rd), 5 Autonomous Regions, 4 Municipalities and 2 Special Administrative Regions • President Hu Jintao (since March 2003) and Vice President Xi Jinping (March 2008) elected by National People’s Congress, Prime Minister Wen Jiabao and 4 Vice Prime Ministers and State Council appointed by National People’s Congress • National People’s Congress elected ’07/’08, next election ’12/’13; only Communist Party members and allies may stand • Since 1978 transformation from a centrally planned economy to a more market oriented economy, diversified banking system, private sector and stock market • Currency pegged to the US dollar until July 2005 when revalued by 2.1%; appreciated by 20% to late 2008 • Economy has grown ten fold since 1978 • By Purchasing Power Parity 2nd largest in the world US$7.8tr (2007 US$7.1tr, 2006 US$6.5tr) • At official exchange rates, real GDP was US$4.2tr in 2008 with GDP growth of 9.8% (2007 13%, 2006 11.6%), estimated 2008 per capita GDP US$6,000 • 2008e GDP is 10.6% agriculture, 49.2% industry, 40.2% services; military expenditure is 4.3% of GDP • Public sector debt is estimated 2008 at 15.7% of GDP, CPI at 5%, market capitalisation US$6.226tr (no 3) 800m Work Force ; ENORMOUS ADDRESSABLE MARKET/Subsidy Programmes

  22. China – In Context China • Exports/Imports • Exports US$1.465tr fob world no 3; Imports US$1.156tr fob; trade balance US$296bn, current account surplus US$271bn • Exports (2007); US 19.1%, HK 15.1%, Japan 8.4%, Korea 4.6%, Germany 4% • Imports (2007); Japan 14%, Korea 10.9%, Taiwan 10.5%, US 7.3%, Germany 4.7% • Trade balance US$296bn, current account surplus US$271bn or 8.4% of P • Foreign exchange reserves; US2.033tr end 2008 (a positive and a negative), external debt US$420.8bn • Power generation and consumption best economic indicators • Per capita income (2007) US$5,420 • Challenges • Coastal economic development has prompted 200m relocation • Job creation; new members of work force, and former employees of state enterprises • High savings rate and low levels of consumption (rural/national subsidy) • Minorities • Liberalising command economy • Infrastructure Correlation? ; Who Dances to Whose Tune … Economically?

  23. + Jordan Gong Li Michael = = Yao Ming Superstar Gong Li Film Star

  24. Political Challenges in Asia

  25. North Korea – Missile & Fissile Encounters The Democratic Peoples’ Republic of Korea (DPRK) Dear Leader health and succession concerns, desperately seeking attention! Propensity to test bombs and missiles Version 2007 vs 2009 Kim Jong-Il’s “Rodong 1” Missiles … outgoing …. vs ….. President Obama’s incoming “Rodham 1”! • DPRK Missile Arsenal “as reported”; • 600 Scud Missiles with a range of 320-500kms • 200 Rodong 1 Missiles with a range of 1,300kms • Taepodong 2 under development with a range of 6,700kms Euna Lee//Laura Ling incarceration for 12 years hard labour … and now virtual cyber attacks?

  26. Asian Politics Generally Positively Inclined • China and Hong Kong • Taiwan, but… • Sustainability of a capitalist economy and the current political system/Tibet and other minorities, and • Frontiers with inter alia; India, Bhutan, Spratly Islands, Paracel Islands, • India • Successful democratic election in 2009 won by a Congress led coalition • Malaysia • Repeal of Malay protection law • Indonesia • Likely first round winner re-elected as President • Singapore • Stable • Thailand • Dependent upon the health of the King, but influence of Thaksin could be declining • Philippines • Incumbent President trying to change the constitution

  27. Politics Of More Concern • Pakistan • Security • Sri Lanka • Reconciliation/reconstruction • Iran • Aftermath of Presidential election/proliferation • Burma • Human rights • Central Asia – the Stans • Russia • Middle East • Security

  28. Comments on Recent Performanceof the Rexiter Asia ex-Japan Strategy

  29. Asia ex Japan Performance (USD) – Q2 2009 April – Composite +17.1% (Benchmark +16.8%). • Positive Contributors: Stocks in India, HK and Singapore • Negative contributors: Stocks in Korea, O/W China and The Philippines May – Composite +17.0% (Benchmark +16.1%). • Positive contributors: Stocks in HK, India and Taiwan. U/W Korea, Malaysia, O/W India • Negative contributors: Stocks in Korea, China, Singapore. U/W Singapore June (Prelim) – Portfolio +0.3% (Benchmark -0.5%) • Positive contributors: Stocks in India and Korea. O/W Thailand, China, U/W Taiwan • Negative contributors: Stocks in China, Hong Kong Relative performance has improved with the recovery in markets. The portfolio was positioned for recovery from the end of 2008.

  30. Asia ex Japan Performance (USD) – Q2 2009 • Markets turned decisively higher in March and rose by 54% in March to May • Our decision to position the portfolio for recovery (starting in November 2008) has proved to be correct. Markets are up nearly 50% since then. • We further reduced defensive exposure at the end of Q1, after January /February’s weakness. • We managed to recapture our underperformance of March (Resorts World, Public Bank, PLDT) in April-May • India – a strong positive driver of relative performance in the quarter • Positive election surprise – the new government is better placed to drive economic reform forward • Relatively low exposure to international economy; positively leveraged to an improvement in the availability of funds • We started the quarter 1% overweight, with a portfolio positioned for recovery (O/W financials, consumer durables, infrastructure/capital goods) • We remain positive in the medium to long run, but are now cutting back relative exposure towards neutral. • Property – another positive driver • Beneficiary of low interest rates and improving sentiment • Our preference is for HK/China over Singapore, as the supply/demand balance is more supportive • Taiwan fertiliser is an indirect property play on hopes for improving liquidity flows/cross-straits relations • As with India, we have reduced our O/W to the sector a little (Wharf) after recent outperformance At quarter end, we are starting to take some profits in areas that have done particularly well (India, financials, real estate).

  31. Comments on Recent Activity and Positioning

  32. Portfolio Activity – Summary (Q2 2009) We have selectively added a little more to industrial cyclical exposure, continuing a policy that started in Q4 2008 • Purchases of Techtronic (April), POSCO (May), Sesa Goa (June). Aggregate U/W to industrials has dropped from 4.5% to 2% IT has moved back to being slightly underweight following profit taking in Hon Hai (June) • Contact with sector management suggests the short term trend is positive. Longer term visibility is low. We have taken some profits in financials and real estate, capitalising on recent strength • Reductions in IDFC (India), Bank Rakyat (Indonesia, though partly rolled into Mandiri on valuation grounds), China Merchants Bank, Singapore Exchange and Public Bank. We are now slightly underweight financials for the first time in a while. • Profit-taking in Wharf (80% above the purchase price in March). We remain 2.5% O/W real estate – with a focus on HK and China. Our overweighting to telecoms has increased slightly, reflecting strong underperformance YTD • Purchase of SingTel out of Singapore Exchange. Outperformance in India has resulted in an increase in our O/W to 3.5% at quarter end, which we are now reducing Our O/W to China has reduced by 3% to 1%. This has been one of the best performing markets in the last year • Profit taking in China Merchants Bank, New World Department Store, China South Locomotive Country and sector bets have fallen, reflecting profit-taking in areas where we have been overweight and which have done particularly well.

  33. Rexiter Asia ex Japan – Country Exposures (Relative) – June 2009 • Exposure to China has fallen by 3% this quarter. The O/W has fallen from 4.5% to 1% • Profit-taking. China has been one of the best performing markets in the last year and is a consensus O/W. • Sale of China South Locomotive. Reductions in China Merchants Bank, New World Department Store. • Exposure to India has risen by 4% (O/W +2%), principally as a result of market action and positive stock selection. • Purchase of Sesa Goa (iron ore) • Exposure to Malaysia has fallen by 1%; exposure to Korea has risen by 1% • Reduction to Public Bank. Purchase of POSCO (steel) • In other countries, absolute exposure is little changed. Changes to relative exposure reflect relative performance. Changes in weighting determined principally by bottom up considerations We have started reducing exposure to India in July.

  34. Rexiter Asia ex Japan – Sector Exposures (Relative) – June 2009 • c. 3% has been added to non-oil commodities. In aggregate neutral, but still U/W internationally traded commodities • Purchases of POSCO (steel) and Sesa Goa (iron ore) • We have limited exposure to chemicals and none to agri-commodities or metals other than steel. Our three Taiwanese holdings are held mostly for local/regional considerations (Chinese cement demand, Taiwanese real estate exposure). • We have taken profits in financials/real estate. The combined O/W has fallen by 6%, from 7% to 1% • This has been driven less by macro considerations than a desire to book profits in stocks that had done well and are looking less compelling value • Sale of Singapore Exchange. Profit taking in China Merchants Bank, IDFC, Wharf. Reduction in Public Bank. • Telecom valuations looking most attractive amongst the traditionally defensive sectors • In July, we have added further to SingTel, raising the sector O/W to 2.5% Overall sector aggression has eased slightly in the quarter. Changes in weighting determined principally by bottom up considerations

  35. Rexiter Asia ex Japan Portfolio – Country/Sector Matrix

  36. New Additions to the Portfolio – Q2 2009 Techtronic (HK) • A leading supplier of power tools, outdoor equipment and home care appliances (brands include Ryobi, Milwaukee, Hoover, Dirt Devil and Vax). Techtronic is also a contract manufacturer for Bosch, Philips and Colgate. Strong relationship with Home Depot of the USA. Now returning to a free cash flow positive position, following its Hoover acquisition (2007). Net debt to equity is 60%, but falling, and financing risks are abating. • Acquired at an expected cycle bottom on an estimated 7.5x 2009 PER (6.5x 2010), 0.9x P/BV (RoE 12%), 15% free cash flow yield, 2% dividend yield. Hengan international (China) • One of China’s top 3 producers of tissues, sanitary napkins and children’s nappies. The company has successfully competed with MNCs such as P&G and Kimberley Clark for 20 years and continues to gain share in a still fragmented market. Strong position in second and third tier cities. Improving product quality has the scope to raise average selling prices and margins. A recent visit with management suggests scope for upside surprise on consensus earnings in the short term. • Acquired on an estimated 21x 2010 PER, 5.4x P/BV (RoE 23%). Net cash. Free cash flow yield of 3%. Earnings growth 30%-40% for 2009/10. The purchase was funded with part of the position in New World Department Store (China) which had recently outperformed other China consumer peers. Bank Mandiri (Indonesia) • One of the leading banks in Indonesia and a beneficiary of continued buoyant credit market. Formed from a merger of four state-owned banks in 1998, Mandiri has seen steady improvements in the structure of its assets/funding and profitability – a trend that has scope to continue further. We expect RoE to converge with its more expensively rated peers over time. In the shorter term, we believe assets quality concerns are probably overdone and we think there is more upside potential to consensus than for the other leading banks. • The acquisition was funded by profit taking in Bank Rakyat, with a view in part to improving portfolio liquidity. The shares were acquired on an estimated PER for 2009 of 11.5x (9.5x 2010), 2.1x 2009 P/BV (RoE 20%) and a dividend yield of 4.4%. Tier one capital 12.5%, total CAR 15%, 120% loan loss reserves/NPLs (7% gross loans). Singapore Telecom (Singapore) • SingTel offers diversified exposure to regional telecoms, through its investments in Bharti (India), Telkomsel (Indonesia), Optus (Australia) and AIS (Thailand). This, and an improving performance in Singapore, is expected to drive (10%+) earnings growth for the next two years, which is solid by sector standards. Recent strength in the Australian Dollar/Indonesian Rupiah will also assist in the short term. Earnings expectations are currently low, but have started to improve more than for the sector at large. • Acquired at the lower end of its 12m trading range against the market, the shares are priced on an estimated PER of 11x for March 2010, 2.1x P/BV (RoE 18%) a dividend yield of 5% and a free cash flow yield of 6.5%. Stripping out the value of its listed associates, the implied value of the Singapore and Australian operations is about 1SD below the long term average.

  37. Comments on the Investment Outlook

  38. Investment Outlook • Consensus earnings estimates have been rising for the first time in a while • At the end of March, the expectation was for a cumulative decline in Asia X Japan earnings of 39% in 2008/09, with a 31% rise in 2010. • At the end of June, the consensus was for a cumulative decline of 31.5% in 2008/09 earnings, with a rise of 30% in 2010. • Based on consensus, the region trades on 17.6x 2009 PER, 1.7x P/BV with RoE expected to be c.10%. 13.5x 2010 PER, 1.6x P/BV, RoE 11.8% • Investment Positives • Earnings upgrades have been continuing in June (2009E +2.3% after a 1.9% rise in May). The upgrades seem to be broad-based. • The leading indicators are generally sending a positive signal. China’s PMI survey in June rose slightly from May’s level to 53.2. • In the trade-exposed economies, the sequential growth in production in Q2 may well surprise positively. Inventories are still down YoY, but are up QoQ. • Asia is importing the West’s very low level of interest rates, but is not in the same economic mess. This should be positive for asset prices. • Positive political developments in India, Thailand, Malaysia and Indonesia. • Valuations have recovered to “average” territory. The markets are not yet “obviously expensive”– monetary policy settings could send them higher. • Reasons for Caution • The West is still in the mire. Deflation remains a real threat and exports are likely to remain difficult. • Continuing risk of financial default/contagion – leverage and the stock of derivative exposure remains very high. • The speed of the markets’ recovery has been unusually fast. • The cyclical rally is looking somewhat extended vs defensives. The markets have anticipated the inventory cycle – the degree of follow through is important. • The markets are certainly no longer “cheap” We have taken a little risk off the table in recent weeks.

  39. Asia ex Japan Equities – Earnings in Previous Global Downturns • In the 82 (Volcker) recession, USD GDP fell by 2.7%. In 90/91, it contracted by 1%. In the 00/01 recession, USD GDP growth remained positive. • The current consensus for Asia ex Japan is forecasting earnings to decline by 39% over 2008/09. This is enough to take RoE down to c.9% from end 2007’s 14.5%. On current consensus, earnings in 2010 will be 13% below 2007’s level. EPS is eepected to rise by 17% in 2011 • In 1990/91, RoE troughed at c.9.3%. In 2000/01 (the tech wreck) trailing RoE troughed at 7.5% (May 02) – to get there, earnings would have to decline by about 50% from end January 07 reported levels on the same assumption for the payout. (RoE in 1983 troughed at 8.2% - although the composition of the index then was very different). • The duration of earnings recessions may be under-estimated. It is true that, in 1990/91, it took only a little over 1 year for earnings to trough and about 2 years for them to recover to their previous levels. However, in the tech wreck, earnings took almost 2 years to bottom and 4 years to regain their prior level and, from 1982, they took about 3 ½ years to trough and 5 ½ years to regain their previous peak. • IBES has become much more realistic; however a prediction that earnings would recover their previous peak (August 2008) in c.28 months (ie by end 2011) would make this one of the shorter earnings cycles in a global downturn. Source for Charts: MSCI/Citi (Earnings derived from the reciprocal of the trailing PER)

  40. Investment Outlook • Consensus earnings estimates have been rising for the first time in a while • At the end of March, the expectation was for a cumulative decline in Asia X Japan earnings of 39% in 2008/09, with a 31% rise in 2010. • At the end of June, the consensus was for a cumulative decline of 31.5% in 2008/09 earnings, with a rise of 30% in 2010. • Based on consensus, the region trades on 17.6x 2009 PER, 1.7x P/BV with RoE expected to be c.10%. 13.5x 2010 PER, 1.6x P/BV, RoE 11.8% • Investment Positives • Earnings upgrades have been continuing in June (2009E +2.3% after a 1.9% rise in May). The upgrades seem to be broad-based. • The leading indicators are generally sending a positive signal. China’s PMI survey in June rose slightly from May’s level to 53.2. • In the trade exposed economies, the sequential growth in production in Q2 may well surprise positively. Inventories are still down YoY, but are up QoQ. • Asia is importing the West’s very low level of interest rates, but is not in the same economic mess. This should be positive for asset prices. • Positive political developments in India, Thailand and (probably) Indonesia. • Valuations have recovered to “average” territory. The markets are not yet “obviously expensive”– monetary policy settings could send them higher. • Reasons for Caution • The West is still in the mire. Deflation remains a real threat and exports are likely to remain difficult. • Continuing risk of financial default/contagion – leverage and the stock of derivative exposure remains very high. • The speed of the markets’ recovery has been unusually fast. • The cyclical rally is looking somewhat extended vs defensives. The markets have anticipated the inventory cycle – the degree of follow through is important. • The markets are certainly now longer “cheap” We have taken a little risk off the table in recent weeks.

  41. Themes to Watch For • The shape of the de-leveraging curve in the West. • The leading indicators have troughed, but the recovery will be long and drawn out. • US Quantitative Easing has arguably not yet started • Whither the US Dollar ? • Capital flows to repay liabilities vs the money press. What happens to US treasuries eventually ? • Historically, Asian equities have done better in periods of USD weakness. Repatriation of assets could delay this. • How will Asian governments respond to external weakness ? • Risks to the Asian export model when the West is as leveraged as it is • We assume currencies will not appreciate, but also that competitive devaluation is not likely. This is potentially very positive for asset prices. • Protectionism pressures to build the longer recovery is delayed • Preference for countries with the resources to combat external weakness • China. India less exposed to external demand, but fiscally constrained. Indonesia. • Korea challenged by high levels of household debt • Cash Flow, Working Capital, Leverage • Evidence of being better managed so far, but risks remain • Quality of management will probably still get the benefit of the doubt. The US is not able to rescue the world economy this time around. Asia needs to stimulate domestic demand. How effective will its policies be ?

  42. The US is Still in the Mire (and so is Europe) Source for Charts: Nomura Int’l. The money multiplier is still not functioning. The banks are unwilling to lend. No improvement in yield spreads in Q2. Inflation expectations falling.

  43. A Couple of Positives - Inventories and Liquidity • There was a huge inventory shock in H2 2008 and Q1 2009 • Sequentially, production has been rising in Q2 as inventories had been so depleted. Annualised sequential growth rates could easily surprise positively when company results/economic data for Q2 is published • BUT inventories are still falling YoY, which is positive looking forward • Liquidity in markets such as HK has exploded. The US Fed is expected to keep interest rates low for a long period. It does not regard it as its problem if its policy settings cause an asset bubble in Asia. Asia could (but probably won’t) allow its currencies to appreciate. Source for Charts: UBS China is worried about social stability and will seek to avoid the consequences of an asset bubble bust, but we doubt it will turn hawkish in the short term.

  44. Asia ex Japan – Positive Comparisons with the West The balance sheets of the commercial banks are much stronger …………. ………….. the banking system is working…..... …. Chinese retail sales have decoupled (even if exports have not) ………… ………and exchange rates are attractive (though FX appreciation is likely to be capped) ………government finances are in much better shape (ii) ……. ………government finances are in much better shape (i) ……….. Source for Charts: Credit Suisse/Datastream

  45. Asia ex Japan -Some Possible Negative Risks ………… inflation (and spending power) is sensitive to rising food prices ………. Asia is a consumer of commodities, not an exporter ………………… … exports, Asia’s traditional driver, remain weak ...... Funds flow into Asian (and GEM) equities has been strongly positive. Asian equities tend to do better with the USD is weak. … and, whilst the PMI is positive, Chinese electricity output is still down YoY. Source for Charts: Credit Suisse/Datastream

  46. The Outperformance of Cyclicals in Context • A number of leading indicators are now signalling expansion • ISM New Orders, China PMI, Singapore PMI, Taiwan Business Climate Index • But, historically, cyclicals relative performance has been less pronounced after ISM New Orders reach this stage • There has, however, been no pronounced trend of outperformance or underperformance in the months after this point has been reached. • History also suggests that the largest share of cyclicals’ outperformance is in the first 6 to 7 months after the bottom • Relative valuation: Cyclicals now trading on c.80% of Defensives P/BV – above the average of the last 15 years (c.65%) • Cyclicals tend to do less well when bond yields are declining. Source for Charts: UBS/Credit Suisse/MSCI. Cyclicals comprise IT, Industrials, Materials and Cons. Discretionary. Defensives comprise Cons. Staples, Telecoms, Health Care and Utilities Whereas in the last 2 quarters we have been actively searching for cyclical laggards, now we are more open in our approach to sectors.

  47. Asia ex Japan – Regional Valuations (June 2009) Source for Charts: MSCI/Credit Suisse. Div Yield-US Corp Bond Yield: UBS Valuations back to “average” territory. Earnings progression increasingly important. Monetary policy settings currently supportive.

  48. Asia ex Japan – Relative Valuations (June 2009) Source for Charts: MSCI/Credit Suisse. Asian fundamentals are clearly better, but relative valuations are looking more stretched.

  49. Appendices Rexiter Capital Management www.Rexiter.com

  50. Rexiter Staff 25% SSgA / ABP Joint Venture 75% * Economic interest Rexiter Capital Management - Overview “The Best of Both Worlds” An investment boutique backed with world-class resources • A stable structure. No-one has left the Asian team since Rexiter was formed in 1997. • SSgA provides IT, dealing, back office, compliance and risk management as well as marketing support • Managers concentrate on investment Strong sense of company ownership. Strong support in resources and systems

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