1.50 4.25 4.15 4.30 Index of /enm/images/dokumen

12 Figure 15. Short Rates End of Period, as of Feb 28, 2008 Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 United States 3.00

2.50 2.00

2.00 2.00

2.00 Japan

0.50 0.50 0.50 0.50 0.75 0.75 Euro Area 4.00

4.00 3.75

3.50 3.50 3.50 Canada 4.00 3.50 3.00 3.00 3.00 3.00 Australia 7.00 7.25 7.50 7.50 7.50 7.50 New Zealand 8.25 8.25 8.25 8.25 8.25 8.25 Denmark 4.25 4.25 4.00 3.75 3.75 3.75 Norway 5.25 5.25 5.50 5.50 5.75 5.75 Sweden 4.25 4.25 4.25 4.25

4.00 3.75

Switzerland 2.75 2.75 2.75 2.75 2.75 2.75 United Kingdom 5.25 5.25 4.75 4.50 4.25 4.25 China 7.47 7.74 7.74 7.74 7.74 7.74 Source: Citi. Figure 16. 10-Year Yield Forecasts Period Average, as of Feb 28, 2008 Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 United States

3.71 3.65

3.60 3.75

3.85 4.00

Japan

1.43 1.50

1.70 1.70 1.80 1.80 Euro Area 4.00 4.00 4.00 4.00

4.10 4.25

Canada 3.73 3.90 3.90 4.00

4.05 4.15

Australia 6.44 6.50 6.50 6.35 6.35 6.25 New Zealand 6.40 6.50 6.50 6.25 6.25 6.05 Denmark 4.11 4.10 4.05 4.05

4.15 4.30

Norway 4.40 4.63 4.76 4.90 5.08 5.23 Sweden 4.09 4.10 4.14 4.25 4.50 4.59 Switzerland 3.00 2.80 2.90 2.95 3.15 3.35 United Kingdom 4.60 4.55 4.55 4.55 4.65 4.79 Notes: Bond yields measured on local market basis semi-annual for the United States, United Kingdom, Canada, Australia, and New Zealand; annual for the rest. The 10-year yield for the euro area is the Bund yield. Source: Citi. Figure 17. 10-Year Yield Spreads Period Average, as of Feb 28, 2008 Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 United States NA NA NA NA NA NA -20 bp -21 bp -21 bp -11 bp -21 bp -21 bp Japan -241 bp -229 bp -209 bp -219 bp -209 bp -224 bp -261 -250 -230 -230 -230 -245 Euro Area 20 21 21 11 21 21 NA NA NA NA NA NA Canada -13 bp 15 bp 15 bp 15 bp 20 bp 15 bp -23 bp -6 bp -6 bp 4 bp -1 bp -6 bp Australia 259 275 275 250 250 225 245 261 261 245 235 210 New Zealand 263 275 275 240 240 205 249 261 261 235 225 189 France 32 bp 33 bp 31 bp 20 bp 29 bp 29 bp 12 bp 12 bp 10 bp 9 bp 8 bp 8 bp Italy 61 61 59 46 56 54 41 40 38 35 35 33 Spain 34 36 35 25 33 31 14 15 14 14 12 10 Netherlands 29 30 29 18 27 27 9 9 8 7 6 6 Belgium 47 46 39 27 36 34 27 25 18 16 15 13 Denmark 31 bp 31 bp 26 bp 16 bp 26 bp 26 bp 11 bp 10 bp 5 bp 5 bp 5 bp 5 bp Norway 55 84 97 101 119 119 56 63 76 90 98 98 Sweden 24 31 35 36 61 55 10 10 14 25 40 34 Switzerland -84 -99 -89 -94 -74 -69 -104 -120 -110 -105 -95 -90 United Kingdom 85 80 80 70 80 79 65 60 60 60 60 60 NA Not applicable. Note: Spreads calculated on annual basis except those of the United Kingdom, Canada, Australia and New Zealand over the United States. Source: Citi. Spread vs. US Spread vs. Germany 13 Figure 18. Foreign Exchange Forecasts End of Period, as of Feb 28, 2008 Current Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Current Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 United States NA NA NA NA NA NA 1.51 1.51 1.53 1.51 1.48 1.45 Japan 106 105 105 109 112 112 160 159 161 165 166 162 Euro Area 1.51 1.51 1.53 1.51 1.48 1.45 NA NA NA NA NA NA Canada 0.98 1.01 1.02 1.03 1.04 1.04 1.48 1.53 1.56 1.56 1.54 1.51 Australia 0.94 0.92 0.95 0.92 0.90 0.88 1.60 1.64 1.61 1.64 1.64 1.65 New Zealand 0.81 0.80 0.78 0.76 0.75 0.73 1.86 1.89 1.96 1.99 1.97 1.99 Norway 5.20 5.07 4.84 4.83 4.90 4.97 7.87 7.65 7.40 7.30 7.25 7.20 Sweden 6.20 6.16 5.95 6.03 6.22 6.41 9.37 9.30 9.10 9.10 9.20 9.30 Switzerland 1.06 1.06 1.04 1.03 1.03 1.03 1.60 1.60 1.59 1.56 1.52 1.50 United Kingdom 1.98 1.97 1.96 1.95 1.92 1.93 0.76 0.77 0.78 0.77 0.77 0.75 China 7.11 7.06 7.00 6.90 6.75 6.55 10.8 10.7 10.7 10.7 10.0 9.5 India 39.9 39.0 38.5 38.0 37.5 37.0 60.3 58.9 58.9 57.4 55.5 53.7 Korea 938 960 960 940 920 870 1418 1450 1469 1419 1362 1262 Poland 2.33 2.34 2.42 2.44 2.42 2.43 3.52 3.53 3.70 3.68 3.58 3.52 Russia 24.1 24.2 23.9 24.1 24.3 24.6 36.4 36.5 36.6 36.3 36.0 35.7 South Africa 7.56 7.70 7.90 8.10 8.00 8.10 11.43 11.63 12.09 12.23 11.84 11.75 Turkey 1.18 1.22 1.24 1.27 1.29 1.32 1.79 1.84 1.90 1.92 1.91 1.91 Brazil 1.67 1.79 1.80 1.80 1.80 1.85 2.52 2.70 2.75 2.72 2.66 2.68 Mexico 10.7 10.8 10.9 11.0 11.0 11.0 16.2 16.3 16.7 16.6 16.2 16.0 vs USD vs EUR Source: Citi. Figure 19. Foreign Exchange Forecasts End of Period, as of Feb 28, 2008 Current Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 United States 106 105 105 109 112 112 Japan NA NA NA NA NA NA Euro Area 160 159 161 165 166 162 Canada 108 104 103 106 108 108 Australia 100 97 100 100 101 99 New Zealand 86.1 84.0 81.9 82.8 84.0 81.8 Norway 20.4 20.7 21.7 22.5 22.9 22.6 Sweden 17.1 17.0 17.7 18.1 18.0 17.5 Switzerland 100 99 101 105 109 108 United Kingdom

211 207

206 213 215 216 China 15 15 15 15 17 17 India 2.66 2.69 2.73 2.87 2.99 3.03 Korea 8.84 9.14 9.14 8.62 8.21 7.77 Poland 45.6 44.9 43.4 44.7 46.3 46.1 Russia 4.4 4.3 4.4 4.5 4.6 4.5 South Africa 14.0 13.6 13.3 13.5 14.0 13.8 Turkey 89.6 86.1 84.7 85.8 86.8 84.8 Brazil 63.6 58.7 58.3 60.6 62.2 60.5 Mexico 9.9 9.7 9.6 9.9 10.2 10.2 vs JPY Source: Citi. 14 Currency Outlook With the depth of the near-term deceleration of the U.S. economy still in doubt, and financial conditions continuing to deteriorate, we expect downward pressure on the U.S. dollar to persist in coming months. The dollar downtrend should, however, remain modest. Aggressive action by the Federal Reserve should help to stabilize financial conditions and prospects for growth in coming quarters. In addition, the outlook for growth in the euro area appears to be deteriorating, and this change in cyclical outlooks should eventually turn the tide on USDEUR. The USD will likely depreciate modestly relative to the Japanese yen in the first half of 2008. Japan appears to be the least affected by the money and credit market strains among the major economies and should benefit from any further heightened risk aversion. However, we expect the JPY to start weakening against the USD in the second half of the year. As global economic and financial risks wane, in part thanks to policy actions in major countries, Japanese households are likely to resume diversifying their portfolios into foreign currency denominated assets, weighing down the yen. We continue to expect the British pound to be one of the weakest of the G10 currencies in 2008. While markets currently are discounting an easing cycle, we expect growth is likely to undershoot MPC forecasts, thus opening up scope for an extended easing cycle, even with the short-term inflation worries. Led by the renminbi, emerging Asian currencies continued to gain ground during the past month. A broad pickup in inflation has generated incentives for central banks across the region to tolerate greater exchange rate flexibility — especially for the Taiwanese dollar and Vietnamese dong. We continue to expect emerging Asian currencies to lead the next leg of U.S. dollar weakness. However, we also warn against excessive optimism regarding the outlook of Asian currencies, given that the expected slowing in exports will likely add caution to currency policymaking. We maintain our expectation of 7.5 renminbi appreciation against the USD, which is less aggressive than market expectations. We continue to favor the AUD among commodity currencies. Markets could be surprised by the extent to which the Reserve Bank of Australia RBA tightens monetary policy in coming months. We project a tightening of at least 50 basis points by May. Indeed, further tightening beyond that could be required to ensure inflation returns to the 2-3 target zone. Along with rising interest rates, gains in key Australian commodity prices, as indicated by the recent 65 price rise in iron ore exports to Japan for the coming financial year, should continue to provide the AUD with fundamental support. In the near term, the NZD should remain in a range, as the Reserve Bank of New Zealand RBNZ holds monetary policy steady, balancing the inflation risks from higher dairy prices and a tight labor market against clear signs of a slowdown in the housing sector. The CAD is also likely to remain range-bound in the near term, with some modest retreat from parity amid a slowing Canadian economy, ongoing financial market strains, and tighter credit conditions. While the BoC is now expected to lower policy rates by 100 basis points by midyear, this will only match the expected easing in the United States. As a result, continued commodity price strength and the weak U.S. economic outlook argue against a meaningful depreciation of the CAD. The Swiss franc CHF has been a star performer so far this year, rising about 4 in trade-weighted terms, and it is likely to remain strong. Markets have scaled back the amount of Swiss National Bank SNB easing priced in for the second and third quarters, as the economy holds up better than expected and inflation remains above the Stephen Halmarick 011-612 8225-6043 stephen.halmarick citi.com 15 SNB’s 2 target ceiling. Therefore, the SNB will likely keep rates on hold in coming months, unless the CHF rises more sharply. The outlook for the CHF also should be reinforced by the currency’s longstanding safe-haven status, with a strong and positive correlation between equity market volatility and the trade-weighted CHF. While the Norges Bank has recently expressed concerns about money market strains and heightened global economic uncertainty, we still expect further monetary policy tightening to combat inflation risks amid heightened capacity pressures and accelerating wages. Oil prices are a double-edged sword for the NOK. Recent high prices have supported the NOK, but the sharp rise over the past year also raises the risk of a correction. In Sweden, the Riksbank is expected to keep rates steady near term, following the surprise rate hike in February. The next move is likely to be a cut around yearend to offset the negative effects from the credit crisis and weakening U.S. and global economic growth. But interest rate spreads remain in the SEK’s favor. Also, while periods of financial instability normally do not favor the SEK, the SEK should strengthen again once the dust settles in financial markets. Currencies across CEEMEA continue to feel the effects of conflicting forces. Amid ongoing financing concerns, currencies of external deficit countries such as South Africa and Romania remain under pressure relative to the EUR. Inflationary pressures across the region, however, continue to put upward pressure on domestic interest rates, providing some support to currencies of countries with better economic prospects, including Poland, Israel, and Slovakia. Slovakia is also experiencing capital inflows in anticipation of a revaluation of the koruna’s central parity against the EUR next quarter as part of the euro- adoption process. Hungary, by abandoning its band, reversed much of its January selloff. Latin American currencies have so far shown no vulnerability to deteriorating global prospects. In fact, with the United States cutting rates and commodity prices making new highs, Latin currencies have continued to appreciate. Inflationary challenges in Chile, Peru, and Colombia will likely keep those central banks vigilant, with a bias toward maintaining a hawkish discourse, and possibly even hiking rates. Rate cuts are likely in Mexico, but not until September, given the likelihood that yearly inflation will increase above the top of Banxico’s band during most of the second quarter. Figure 20. Currency Recommendations, as of Feb 28, 2008 Current 3-Month Forecast Annual Return vs FWD Implied Vol. 12-Month Forecast Annual Return vs FWD Implied Vol. United States NA NA NA NA NA NA NA Japan 106 105 1.9 10.7 112 -7.2 9.6 Euro Area 1.51 1.52 4.1 9.1 1.46 -2.1 8.8 Canada 0.98 1.02 -14.4 11.6 1.04 -5.2 10.9 Australia 0.94 0.94 3.5 13.1 0.89 -0.7 12.7 New Zealand 0.81 0.80 -6.3 14.8 0.74 -3.6 14.8 Norway 5.20 4.92 25.3 12.2 4.94 8.2 11.8 Sweden 6.20 6.02 13.0 11.8 6.35 -0.5 11.3 Switzerland 1.06 1.05 4.7 10.0 1.03 2.7 9.0 United Kingdom 1.98 1.96 -1.7 8.6 1.93 -0.4 8.5 China 7.11 7.02 -5.2 3.4 6.62 -2.2 4.9 India 39.9 38.7 12.7 6.0 37.2 7.7 6.4 Korea 938 960 -8.8 5.3 887 6.0 4.9 Poland 2.33 2.39 -7.6 11.0 2.43 -0.7 10.5 Russia 24.1 24.0 3.7 5.9 24.5 1.4 6.7 South Africa 7.56 7.83 -5.5 19.6 8.07 2.2 19.3 Turkey 1.18 1.23 -3.9 14.1 1.31 1.9 16.2 Brazil 1.67 1.80 -23.7 13.6 1.83 -2.6 14.6 Mexico 10.7 10.9 -2.3 5.3 11.0 1.6 6.6 Source: Citi. 16 Global Equity Strategy Our economics colleagues now forecast recessionary conditions in the United States. What have previous U.S. recessions meant for global corporate earnings and stock prices and what are the implications for the current situation? Earnings Impact Figure 21 plots U.S. and world ex-U.S. trailing earnings growth for the listed corporate sector, with shaded regions denoting U.S. recessions. Given reporting delays, earnings will tend to lag the economic data, so this series does not yet reflect the recent earnings collapse among financials. Earnings are much more volatile than real GDP given the impact of financial and operational leverage. For example, annual U.S. earnings growth has ranged from -40 to +40 over a period when real U.S. GDP growth has ranged between -3 and +8. Although GDP seems to have become less volatile, corporate earnings have become more volatile. There is no sign of the “great moderation” here. Figure 21 also shows that world ex-U.S. earnings growth tracks U.S. earnings closely but with even greater volatility recently. The key message is clear. U.S. recessions have been bad news for the United States and world earnings. In the past, U.S. recessions have been associated with contractions of at least 20 in both U.S. and world ex-U.S. earnings. To put this into context, the IBES consensus expects U.S. and global earnings growth of 14 and 13, respectively, in 2008. So, investors should prepare themselves for a period of earnings downgrades. U.S. Recessions and Global Equities If the United States is heading into recession, the outlook for global corporate earnings looks bleak. What does that mean for share prices? Figure 22 shows that, on average, global earnings have fallen by 31 around U.S. recessions. Share prices have fallen by slightly more 36. As for the current situation, the 15 share price decline from last July’s high suggests that, even though earnings are only just starting to roll over, global equities are already halfway through Figure 21. U.S. and World Ex-U.S. Earnings Growth Percent, 1990-2007 Figure 22. World Market Price and Earnings Decline in U.S. Recessions Percent, 1973-2007 -60 -40 -20 20 40 60 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 -60 -40 -20 20 40 60 US World ex-US -60 -50 -40 -30 -20 -10 Mid 70s Early 80s Early 90s Early 00s Average Now -60 -50 -40 -30 -20 -10 Price Earnings Note: Shaded regions denote recession. Sources: MSCI and Datastream. Sources: MSCI and Datastream. Robert Buckland 011-44-20-7986-3947 robert.buckland citi.com 17 the selloff associated with a typical U.S. recession and are rapidly approaching the mild correction seen in the early 1980s 19. Valuations Could it be that the recent fall in prices has already priced a U.S. recession into global equities? It seems that the bear market associated with the last U.S. recession was as severe as it was because global equities traded at a record 35 times PE heading into the worst earnings slump in 40 years. Now, global equities trade on a much more reasonable 15 times trailing PE, similar to valuations at the bottom of the early 1990s correction. Even if earnings do fall significantly, current valuations look reasonable. We also point out that global equities entered each of the last two recessions with a major valuation bubble. In 1990, Japan traded on a PE of 52 times. In 2000, global Technology TMT traded on a PE of 65 times. Both accounted for around 40 of the total global market cap and then bore the brunt of the subsequent selloff. This spared the rest of the global equity market from the worst of the pain. It is difficult to point to any such obvious major valuation anomalies this time round. Emerging markets have performed strongly, but they are hardly in bubble territory. Interest Rates Thus, the current valuation case in favor of global equities is better than it was during the last recession but still probably not enough to counter the impact of major earnings downgrades. Perhaps it is still too early to buy back into equities — stick with defensive cash and government bonds instead. But there is a problem with this defensive strategy — interest rates are already low. U.S. real rates have gone negative much earlier than in the early 1980s, 1990s, or 2000s downturns. Not only do negative real rates help to reduce the severity of the U.S. recession, but they also undermine the attractiveness of cash as an asset class. The other obvious place to take refuge is government bonds. But value here also looks poor. Market Timing How do global equities perform around a U.S. recession? Previously, the worst performance through the whole period has been in the first half. The best performance has been during the second half. What about now? We start the clock ticking from January of this year. History suggests that the recession will last around a year. It also suggests that investors should not be in too much of a hurry to buy. Falling rates and increasingly attractive valuations are not enough to counter the rising wave of bad economic and earnings news in the first half of the recession. At least the selloff this year is already approaching the average selloff for the first half, although it is still far from the worst. This supports our general suspicion that, despite aggressive Fed cuts and cheap valuations against government bonds, global equities may struggle to find a floor in the first half of this year as the barrage of poor economic and earnings news builds. Later in the year, the economic and earnings data should be just as bad if not worse, but equity market expectations will be more realistic and the Fed’s magic will have had more time to work. This could leave global equities better placed later in the year to enjoy the rally traditionally seen in the second half of a U.S. recession. 18 Figure 23. Long-Term Forecasts Calendar Average, as of Feb 28, 2008 GDP CPI Short-Term Interest Rates 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 United States 1.6

2.1 2.7