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THE ASIA PACIFIC FUND, INC. Virtual Forum 2006 : Outlook for Asia Pacific Markets

THE ASIA PACIFIC FUND, INC. Virtual Forum 2006 : Outlook for Asia Pacific Markets. Khiem Do – Head of Asian Equities April 2006. BAM’s 2006 Key Global Forecasts. G7 economies expected to grow at long-term trend rates, with first half stronger than second half

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THE ASIA PACIFIC FUND, INC. Virtual Forum 2006 : Outlook for Asia Pacific Markets

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  1. THE ASIA PACIFIC FUND, INC.Virtual Forum2006 : Outlook for Asia Pacific Markets Khiem Do – Head of Asian Equities April 2006

  2. BAM’s 2006 Key Global Forecasts • G7 economies expected to grow at long-term trend rates, with first half stronger than second half • G7 core inflation likely to remain below 2% • US Federal Reserve likely to pause when rates reach 5% by June ’06, and ECB / BoJ to tighten gradually • USD likely to reach a peak in H1 ’06 • Oil prices likely to range trade between $US 55-70 /bbl Still a relatively benign global backdrop, but G3 monetary policy direction is key

  3. BAM’S 2006 Key Asia Pacific Forecasts • China expected to continue to grow solidly (9 – 9.5%) and drive the region • Recovery of Japan is an added bonus • Other Asian economies to grow at long-term trend rates • Asia Pacific central banks expected to tighten slightly, but unlikely to strictly follow the US Fed (domestic conditions matter more) • Asia Pacific currencies likely to strengthen modestly vs the USD A favourable economic backdrop for the region

  4. 60 350 300 40 250 20 200 0 150 (20) 100 (40) 50 (60) 0 (80) 01/94 01/95 01/96 01/97 01/98 01/99 01/00 01/01 01/02 01/03 01/04 01/05 01/06 1989 1991 1993 2005 01/88 01/89 01/90 01/91 01/92 01/93 1995 1997 1999 2001 2003 MSCI Asia ex-Japan return differential over MSCI World MSCI Asia ex-Japan relative to MSCI World MSCI Asia ex-Japan return differential over MSCI USA MSCI Asia ex-Japan relative to MSCI USA Out-performance of AsiaA Secular Re-rating Has Started A treacherous history but underperformance ended in 1998 Asia outperformed over the last five years Source : HSBC (3/2006) Asia’s out-performance is set to continue

  5. 30 1.8 MSCI Korea forward P/E (LHS) MSCI AC World forward P/E (LHS) 1.6 Relative P/E (Korea/World) (RHS) 25 1.4 20 1.2 1.0 15 0.8 10 0.6 0.4 5 0.2 0 0.0 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-92 Jan-93 Jan-94 Jan-95 Jan-04 Jan-91 Jan-05 Jan-06 Convergence of Valuation of equity markets Source: Goldman Sachs (1/2006) Koran P/E re-rated, global P/E de-rated

  6. 40 22 35 20 PE 30 18 25 16 20 14 15 PE 12 10 5 10 Jan-05 Jan-06 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-01 Jan-02 Jan-03 Jan-04 Sep-01 Sep-05 Sep-04 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-02 Sep-03 May-05 May-01 May-02 May-03 May-04 May-05 May-04 May-01 May-02 May-03 30 20 18 25 PE 16 20 14 15 12 PE 10 10 5 8 Jan-05 Jan-05 Jan-06 Jan-01 Jan-02 Jan-03 Jan-06 Jan-04 Jan-01 Jan-02 Jan-03 Jan-04 Sep-05 Sep-05 Sep-01 Sep-02 Sep-04 Sep-04 Sep-03 Sep-01 Sep-02 Sep-03 May-01 May-02 May-05 May-05 May-04 May-01 May-02 May-03 May-03 May-04 Far East Asia: Absolute PER remains low MSCI China MSCI India MSCI Korea MSCI EM ex-Asia Source : UBS (3/2006) Far East Asia appears cheap vs India and other Emerging Markets

  7. (index, 1985=100) HoH, % 10 280 Tokyo Metropolitan Wards (Highest priced lots) 260 6 Largest Cities (Highest priced lots) 5 Tokyo Metropolitan Wards (Average) 240 220 0 200 -5 180 160 -10 140 -15 120 100 -20 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Japan: Property Prices are recovering Land prices rising after 14 years And recovering beyond Tokyo Office rents in Tokyo rising Note: Six largest cities include Tokyo, Yokohama, Nagoya, Kyoto, Osaka and Kobe; as at September 2005 Note: Office rents for new buildings in the Tokyo Metropolitan area; half-year basis, as at 1H2005. Source: Japan Real Estate Institute, INDB, compiled by Goldman Sachs Research, as at September 2005 Source: Nikkei, compiled by Goldman Sachs Research,as at June 2005 Positive for Japanese consumers and Asian exports

  8. %YoY %YoY 30 30 25 25 20 20 15 15 10 10 5 5 0 0 -5 05 03 04 02 95 96 97 98 99 00 01 94 95 96 97 98 99 00 01 02 03 04 05 %YoY %YoY 18 25 16 20 14 12 15 10 10 8 6 5 4 2 0 99 00 01 02 03 04 05 0 95 96 97 98 99 00 01 02 03 04 05 China : Overheating has been addressed FAI Growth CPI Growth Industrial Production Output Growth Loan Growth Source: UBS (3/2006) Still in “goldilocks” phase (strong growth, low inflation)

  9. China : Domestic Consumption is under-estimated,under-appreciated GDP Breakdown by Output Revision +1% 15% 13% Agriculture Industrial Construction 53% +2% 46% Service Industry 41% 32% +49% Before revision (2004) After revision (2004) Source: BNP Paribas (02/2006) • China GDP in 2004 was revised up by 16.8% • Service industry is a bigger pie to GDP composition than initially thought

  10. % % 40 40 38 36 34 35 32 30 30 28 26 24 25 22 20 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 20 1990 1993 1996 1999 2005E 2002 % 45 40 35 30 25 20 15 75 77 79 81 83 85 87 89 91 93 95 China is under-going an Industrialisation phase, just like Japan and Korea did FAI as % of GDP - Japan FAI as % of GDP - China FAI as % of GDP - Korea • Both Korea and Japan had FAI as % of GDP in the range of 30 – 40% lasting for one to two decades → China expected to grow solidly over next 5 years Source: Goldman Sachs (02/2006)

  11. (% YoY) (% YoY) 14 14 12 12 Per capita income - rural 10 10 8 8 6 6 4 4 Per capital income - urban 2 2 0 0 2001 2002 2003 2004 2001 2002 2003 2004 China: Rural Income Growth accelerates, finally ! Urban income growth Rural Income Growth Source: CEIC, CLSA (12/2005) • Thanks to supportive policies from the government • Pick up of rural income growth a further boost to domestic consumption • Rural population → 70% of China population

  12. 2.9% 20% 18% 2.8% 16% Net interest margin 14% 2.7% 12% 2.6% 10% 8% 2.5% 6% 2.4% 4% 2% 2.3% 0% 2.2% Jun-04 Feb-04 Oct-05 Oct-04 Jun-05 Apr-04 Feb-05 Apr-05 Aug-04 Dec-03 Dec-05 Aug-05 Dec-04 2002 2003 2004 20051H Health of Chinese Banking system has been improving NPL Ratio Trend Net Interest Margin • Improving net interest margin • Falling NPL ratio Source: Lehman (02/2006) “Cleaned-up” Chinese banks: unrecognised growth stocks?

  13. 20% 15% 0.60 0.50 10% 0.40 0.30 5% 0.20 0% 0.10 0.00 -5% -0.10 Aug Nov Feb May Aug Nov Feb 2004 2004 2005 2005 2005 2005 2006 -0.20 Value Growth Size Momentum Aug Nov Feb May Aug Nov Feb 2004 2004 2005 2005 2005 2005 2006 Value Growth Size Momentum Momentum Factor Out-performed significantly since mid-2005 Representative Pacific Portfolio VaR Factor Exposures, last 18 months (as at 28th February 2006) Market Return Cumulative Factor Returns, last 18 months (as at 28th February 2006) Source: Baring Asset Management Investors have been chasing strong and sustainable earnings and price momentum

  14. Global Risk Appetite: In “high zone” currently Source: CSFB (27/2/2006) Investors appear to want to continue to buy high beta growth assets → our research focus is directed towards defensive growth

  15. Concluding Remarks • Asia Pacific economies and markets are expected to continue to out-perform the world in 2006 • As equity risk premium is deemed to be too low, our team continues to build a more defensive growth bias in your portfolio • Favoured Themes include: domestic reflation plays in Korea and China, Taiwanese technology, ASEAN consumption and financials, and materials • Research focus on defensive growth and “un-loved” high-yielding names, in preparation for a potentially more challenging second half

  16. Individual Asian Markets : Outlook & Strategy

  17. Change of Market Leadership from Korea/Taiwan to China from end 2005 Source: Factset (6/3/2006) China’s out-performance is expected to continue

  18. 2.1 19% 5.0 23% 22% 1.9 4.5 17% 21% 1.7 4.0 15% 20% 3.5 1.5 13% 19% ROE PB ROE 3.0 PB 1.3 18% 11% 2.5 1.1 17% 9% 2.0 0.9 16% 7% 1.5 0.7 15% 1.0 14% 0.5 5% 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 01/03 07/04 07/03 01/04 01/05 07/05 01/06 07/02 01/01 07/01 01/02 PB ROE PB ROE Korea and India Re-rated in 2005 on rise of ROE MSCI Korea MSCI India Source : UBS (3/2006) Further re-rating in Korea vs India expected

  19. Korean Market: Different this time ? KOSPI near all-time high, but current PE is well below historical peaks PE= 10.5x 1,600 Now 1,400 PE= 9.5x PE= 17.2x PE= 18.8x PE= 14.1x 1,200 1,000 800 600 400 200 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 KOSPI Weekly Source: UBS (3/2006) Valuations still not stretched

  20. 3.5 18% 17% 3.0 16% 15% 2.5 14% ROE 13% PB 2.0 12% 11% 1.5 10% 9% 1.0 8% Jan-03 Jan-04 Jan-05 Jan-01 Jan-02 Jan-06 Sep-02 Sep-03 Sep-04 Sep-01 Sep-05 May-03 May-04 May-05 May-02 May-01 PB ROE China Re-rating has just started MSCI China Source : UBS (3/2006) China appears grossly undervalued

  21. overvalued 40% 30% 20% 10% 0% -10% -20% undervalued -30% -40% Phil India Korea China Taiwan Malaysia Thailand Australia Indonesia Singapore Hong Kong Asia Pacific : Relative valuation of markets P/BV less ROE relative to Asia ex Japan currently Source: UBS (3/2006) Underweighting the expensive and overweighting the cheap markets

  22. 80% 60% 40% 20% 0% -20% -40% -60% -80% Tech Telcos Utilities Energy cyclical Basic materials Industrial Financial Con non Con cyclical Asia Pacific : Relative valuation of sectors P/BV relative less ROE relative currently Source: UBS (3/2006) Underweighting the expensive and overweighting the cheap sectors

  23. Hong Kong/China: Overweight • Overweight China and underweight Hong Kong • Solid economic growth in China (9 – 9.5%) expected to continue • HK economy and property sector being negatively impacted by US monetary tightening  mid-cycle correction • HK market expected to perform better when US Fed pauses • Focus on domestic reflation plays (banks, insurance, property), materials and consumer in China

  24. Korea: Slight Overweight • Market still relatively cheap and should be further rerated, but ..... • Interest rates likely to rise further • Earnings likely to be downgraded due to strong Won • Looking to add exposure at lower levels

  25. Taiwan: Slight Underweight • Still no new development on the Cross-Straits link issue • Low participation of retail investors does not bode well for the market • Technology still the key driver of stock market • Market valuation is moderately cheap

  26. Singapore: Slight Overweight • Steady economic growth expected • Reflationary policy endorsed • Corporate re-structuring trend still unfolding • Market valuation at fair levels

  27. Emerging ASEAN: Underweight • Thailand is the preferred Emerging ASEAN market (low valuation, poor sentiment) • Look to add to Indonesia on weakness • Specific stock opportunities in Malaysia and Philippines, as macro environment is deemed uninspiring

  28. India: Look to build up a larger exposure on weakness • Growth is strong, but rise in inflation, interest rates and current account trends is causing concerns, and ……… • Valuations are expensive (2005 P/E = 17.6X earnings vs Asia of 13.3X; P/B = 3.6X vs 1.9X respectively) Source: Morgan Stanley, 3/2006 • On weakness, we look to add to build a larger exposure

  29. Important Information This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its investment adviser affiliates in other jurisdictions. The affiliate serving as the Asia Pacific Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial Services and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset Management group companies, their affiliates and/or their directors, officers and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. The contents of this document are based upon sources of information believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. This document may include forward-looking statements, which are based upon our current opinions, expectations and projections as of the date on the cover hereof. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available. Private investors in the Company referred to herein should obtain their own independent financial advise before making investments. This document must not be relied on for purposes of any investment decisions. Before investing in the Company, we recommend that all relevant documents, such as reports and accounts and prospectus should be read, which specify the particular risks associated with investment in the Company, together with any specific restrictions applying and the basis of dealing. The Company may not be available for investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document and other material relating to the Company and accordingly recipients of any such documents are advised to inform themselves about and to observe any such restrictions. Complied (Boston): March 18, 2006 Ensure Complied Date is added at foot of Disclosure

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