Economic and Market Perspectives Simon Doyle – Head of Fixed Income and Multi-Asset

1. A world of uncertainty or a world of opportunity? Economic and Market PerspectivesSimon Doyle – Head of Fixed Income and Multi-Asset

2. Why?Seeds sown early this decade Financial engineering Sub-prime Leverage US monetary policy

3. Financial market failures Bring out your dead! Wounded • Re-incarnated Dead!

4. Risky assets have suffered Gross 12 month returns by asset class as at 31 October 2008 Growth Assets Balanced Assets Defensive Assets 1 2 3 4 5 6 7 8 Big losses in equities, REITs and higher yielding credit Source: Schroders/Datastream. 1. S&P ASX 200; 2. MSCI World; 3. S&P ASX300 Property Trusts; 4. Merrill Lynch Global High Yield Index; 5. Schroder Hybrid Securities Fund; 6. UBS Credit Index; 7. UBS Bank Bill Index 8. UBS Treasury Index

5. The pointy end… 2007 AAA structured product and mortgage backed security prices Chinese stock market Indicative market US residential mortgage backed Shanghai SE Composite Index Indicative market CDO Excesses coming home to roost Source: CBA, Schroders

6. US recession is inevitable US GDP and Conference Board Leading Index It will be an extended slump Source: Datastream

7. Recession is also likely in Europe and Japan Eurozone GDP and Whole Economy PM Japanese GDP and Econ Watchers Outlook Eurozone GDP – yoy% Japanese GDP – yoy% Weighted ISM (RHS) Eco Watchers Outlook – Lead 2 months (RHS) Surveys indicate sharp slowdown

8. Inflation is no longer an issue G7 economic activity and change in inflation G7 annual change in inflation G7 GDP – yoy% change, lead 2q (RHS) Inflation follows economic growth down Source: Datastream

9. Terms of Trade are reversing Terms of Trade and Base Metal Prices MG Base Metal Index (RHS) Australian terms of trade Tailwind to headwind Source: UBS, Datastream

10. Australia will flirt with recession Australian non-farm product and leading index % Weak sentiment is flowing through to activity Source: Datastream

11. We have high household debt levels like the US Household sector debt as % of GDP USA UK Australia Aggressive household credit build up across most western economies Source: GSJBW Research Estimates, Goldman Sachs Research Estimates

12. Global Equities are looking attractive Trailing PE MSCI World vs 25 year historical average P/E ratio +1 std deviation average -1 std deviation Global market is cheap Source: Schroders, Datastream

13. BHP Billiton Increased volume offset by increased costs Commodity prices have driven profits Underlying EBIT analysis: FY08 vs FY02 Increased prices This is illustrative only and does not represent Schroders’ recommendation on these stocks Earnings driven by increased prices - volume increase offset by higher costs Source: Merrill Lynch 31 August 2008

14. Something positive from the credit crisis… US high yield % Spread (RHS) Return Credit markets will provide attractive returns Source: Schroders, Datastream

15. Corporate gearing is low US debt as a percentage of GDP Total* Financials Households Corporates Source: Morgan Stanley, * Includes public sector

16. Yields from Hybrids are looking attractive Australian hybrid yield and cash rate Hybrid option adjusted yield Cash rate Hybrids are cheap now! Source: Schroders, Datastream

17. Cash looks good now… Australian cash rate vs US federal funds rate: 1997 - 2008 Australian cash rate ? US federal funds rate …but look what happened in the US Source: Schroders/Datastream

18. Too much cash – too little bonds Returns of Australian Cash, Government Bond High cash rates + fear = poor long term portfolio construction decisions Source: Schroders/Datastream

19. Cycle vs. asset class performance Recovery Slow down Recession Expansion Asia Australia Europe Japan Commodities Cash Property Govt bonds US Equities High Yields Bonds Equities High Yields Bonds Equities Preferred asset class and the economic cycle Source: Schroders

20. Our approach hasn’t changed • We like; • Transparency • Liquidity • Value for money • True economic diversification • Appropriate leverage • Unlisted assets and hedge funds do not provide this!

21. What have we been doing? June 2007 Remove risk in 2007

22. What have we been doing? December 2007 Remove risk in 2007

23. October 2008 What are we doing? Selectively adding risk

24. Conclusions Economic concerns warrant caution “Risky” assets now have a risk premium Its not the time to sell risk Like higher yielding assets - hybrids Cash was king – but being too defensive could be costly A world of uncertainty…but with selective opportunity

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