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IN THIS ISSUE

1 Highlights

2 Short-term Investment

Outlook

4 Macro Assessment

6 Equity Markets

9 Fixed Income

11 Other Investments

12 Currency

13 Sukuk

HighlightsDuring January, renewed investor risk-appetite sawequities perorm strongly overall, although degreeso perormance varied among regions. In developedmarkets, the eurozone was the standout perormeras news-ow over sovereign debt concerns wasappeased by successul debt auctions in Italy, Portugaland Spain. Eurozone investor sentiment was urtheraided by pledges o assistance rom the EuropeanCentral Bank, Japan and China. Looking aheadhowever, sovereignty debt concerns will remain untilgovernments reach a clear and permanent solution.

On the macroeconomic ront, the US benefted romrising investor confdence as consumer spending,manuacturing fgures and existing home salessoared, supporting positive economic growth. Overall,

the health o the US economy appears to haveimproved rom previous subdued levels and investorexpectations have risen as a result. Within developedcountries, however, high unemployment levels persistamid weak labour markets.

In emerging markets, economic data remains strongand governments continue to tighten monetary policy.In China or instance, the economy grew aster-than-expected in the ourth quarter, with gross domesticproduct up 9.8% rom the year-earlier, and up 10.3%or all o 2010. Meanwhile, consumer ination hit4.6% year-on-year in December. Consequently, thePeople’s Bank o China ordered lenders to increasetheir reserve requirement in an attempt to dry up

liquidity to get ination under control. Alongside China,central banks in Brazil and India ollowed suit.

January Market RecapDuring January, global equity markets, as measuredby the MSCI World index, rose by 2.2% as the globaleconomic recovery gained momentum and sovereigndebt concerns in the eurozone were appeased bysuccessul debt auctions in peripheral countries.

In contrast to preceding months, global equityreturns were particularly robust within developedmarkets, which outpaced their emerging marketcounterparts. Over the month, emerging marketssuered a correction as the MSCI Emerging Marketsindex ell by 2.1% enguled by ination concerns andpossible interest hikes. Similar to developed markets,

the variation in returns rom individual countries inemerging markets was signifcant. Russian stockswere an exception as they bucked the trend by risingduring January. Elsewhere among the BRIC countries,Chinese Brazilian and Indian equities posted hetylosses, with the latter alling by over 10%. In Egypt,stocks spiralled downwards amid the growing politicalunrest though this had limited impact on the wideremerging market index.

While growth within emerging countries remainsrobust, the rate o growth is decelerating. Risingination and the possibility o urther interest hikesremain at the crux o the nervousness amongemerging markets.

February 2011

Global Investment Perspective

Outlook & StrategyWhile the global economic recovery is making progress, conditions remain challenging and growthuncertainties persist. Thereore, our central scenario remains unchanged. Overall, we anticipate positive,albeit moderate, sub-trend economic growth in developed economies in 2011. Furthermore, we alsoexpect ongoing strength in emerging economies. Our main concern here is the prospect o urthermonetary tightening, which would impact global growth prospects, given that emerging economieshave been an important engine behind the global economic recovery to date.

In the developed world, the key risks on the economic horizon remain fscal tightening and weakconsumption. The prospects or labour markets and consumption remain unclear, despite some signs ostabilisation. Unemployment rates are stil l elevated and consumers are still endeavouring to unwind debtpositions, particularly in the US and the UK.

At an asset class level, we started a modest overweight position in both developed and emerging marketequities relative to cash and government bonds. The market remains ushed with liquidity, given not onlycapital injections by central banks but the high levels o cash on corporate balance sheets. This is positiveor equities as it gives companies the exibility to invest, expand and drive earnings growth, or raisedividend payment to increase shareholder returns. Equities are supported by the positive collectivebackdrop o improving economic data particularly in the US, reasonable earnings growth orecasts or2011 and undemanding stock valuations, not least relative to cash and government debt.

At the sector level, while valuations remain attractive or healthcare and telecommunications stocks on anabsolute basis, the valuation gap relative to other sectors is less compelling. Thereore, we no longer havea relative preerence or these two sectors.

Within the context o developed market equities, we maintain a preerence or Japanese equities wherewe maintain a tactical short-term overweight position as valuations and equity undamentals remain sound.Presently, this scenario remains unchanged irrespective o the recent credit rating downgrade o Japanesesovereign debt by Standard & Poor’s. Within the emerging markets, we continue to avour Russia onthe basis o attractive stock valuations on both a relative and absolute basis, and signs o improvingeconomic conditions.

In fxed income, with ination under control in the developed world with the exception o the UK,we believe central banks are likely to keep interest rates low, which is broadly supportive o fxed incomemarkets. Within the fxed income universe, our preerence continues to ocus on developed marketcorporate bonds, particularly high yield which we believe oer value on a total-return basis.

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ASSET CLASS CURRENTVIEW REASONING

EQUITY

Global Developed

Market EquityNeutral

• Equity valuations relative to cash and especially government debt remain

attractive, plus liquidity remains supportive. There continue to be risks to the

economic recovery, but our core scenario is or positive, but sub-trend growth.

US Equity Neutral• Whilst unemployment remains elevated at 9.6%, Fed policy has remained

accommodative and recent economic news-ow has been encouraging.

Europe Equity

(including the UK)Neutral

• Economic conditions remain mixed. UK growth has slowed, austerity

measures are in the process o being rolled out in parts o Europe and the

economic health o peripheral eurozone countries remains uncertain. That said,

interest rates and ination remain generally low (the UK being an outlier), the

Bank o England has agged the possibility o a urther round o quantitative

easing, and recent corporate earnings news in Europe has been encouraging.

Japan Equity Positive

• We have a tactical, short-term preerence or Japanese equities as they lagged

other developed equity markets or much o 2010 and, having recently started

to outperorm, are likely to have positive price momentum. There are also early

signs that ows are becoming more supportive. Japanese stock valuations

look attractive relative to history both in absolute terms and relative to other

developed markets.

Asia ex-Japan

EquityNeutral

• From a macroeconomic perspective, the outlook remains generally positive

with strength in both the manuacturing and consumer sectors. However,

rom a valuation perspective, market prices have largely reected the positive

news-ow.

Hong Kong and

China Equity

Neutral

(3-6 months)

Positive

(6-12 months)

• We turned rom positive to neutral on a 3-6 months view. Though stocks

are not at expensive levels, we are increasingly concerned about monetary

tightening measures to curb ination.

Global Emerging

MarketsNeutral

• Emerging countries are likely to continue to lead the recovery due to robust

domestic consumption and strong intra-regional trade. That said, like developed

markets, emerging market equities are exposed to volatility stemming rom

the question marks around the sustainability o the global economic recovery.

Latin America

EquityNeutral

• The economic perormance o Latin American countries remains strong and

earnings growth estimates or 2011 look reasonable. Having said that, the

good news seems to be well reected in market prices and relative valuation

measures show no strong signals. We, thereore, retain our neutral stance.

Middle East Equity Neutral

• Economic data rom the region has been highly encouraging and 2010-2011

orecasts are positive. In addition, valuations remain reasonable. Key risks include a

slowdown in global demand or oil and the potential deterioration o budget defcits

among some o the countries in the region.

Eastern Europe

EquityNeutral

• Manuacturing data has varied within the dierent countries. Weak labour

markets, high levels o government debt and ongoing concerns about eurozone

debts are weighing on the outlook or the broader region. However, at a

country level, we avour Russian equities. Valuations or Russian equities are

attractive in both absolute and relative terms.

FIXED INCOME

US Government

BondsNegative

• Excess capacity in developed markets and the renewed commitment o key

central banks to remain accommodative are generally supportive or low yields.

However, despite the recent rise in yields, the market is still oering little value

relative to history and, downside risks remain. Within fxed income, we preer to

own corporate debt, where we see greater total return opportunities.

EURO Government

BondsNegative

• We have a negative stance on eurozone government bonds relative to cash. This

is due to uncertainties regarding the economic health o eurozone peripheral

countries. In addition, valuations o these bonds do not look particularly attractive;

they oer very limited protection against negative surprises.

Short-term InvestmentOutlook (6-12 months)

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Summary 

Overall, we have implemented a moderate overweight position in global equities relative to both government bonds and

cash. Within equities, we have closed out our preerence or healthcare, telecommunications and consumer staples stocks as

the valuation gap relative to other sectors has converged making these sectors less attractive on a relative basis. Within the

context o developed markets equity, we remain positive on Japan on a short-term perspective partly due to attractive stock

valuations and positive price momentum and ows. Within emerging markets equity, our avoured market is still Russia.

In fxed income, we have a negative view on government bonds relative to cash, although less so than last month. However,we have a positive stance on corporate debt – both investment grade and high yield. Positives or corporate bonds include

attractive valuations and avourable issuer undamentals. Our central economic scenario is or slow but positive growth in the

major developed markets, a backdrop which is typically positive or credit markets.

With regard to the our major developed market currencies, it is likely that heightened volatility will continue. Valuation

measures are not currently providing strong signals and we thereore, have a neutral stance on currency positions.

FIXED INCOME

Asian GovernmentBonds

Neutral • With the recent rise in US treasury yields and tight spreads in AsiaGovernment USD bonds, we maintain our neutral recommendation.

Investment Grade

CorporatePositive

• Strong corporate earnings results, the view that major central banks will keep

interest rates low and strong demand or yield have boosted investment grade

corporate bonds. With momentum likely to remain positive, we continue to be

positive on the asset class.

High Yield Bonds Positive

• High yield bonds continue to look attractive on a total return basis. We have

retained our positive view on the asset class given better-than-expected

corporate results, declining deault rates and growing expectations that interest

rates could remain anchored at their current low levels due to growing global

economic growth uncertainties.

Sovereign US

dollar denominated

Emerging Markets

Debt

Negative

• Sovereign US dollar-denominated emerging market debt continues to look less

attractive on valuation grounds than developed market corporate debt, and high

yield in particular.

Global Developed

Ination-linked

Bonds

Negative• The sell-o in nominal bonds makes the global ination-linked bond market

more expensive and the nominals less expensive.

OTHER

INVESTMENTS

Oil

Between

the rangeo US$70 to

US$90 per

barrel

• We expect the oil price to uctuate in the US$70-US$90 range, as improved

demand is balanced out by a orecast rise in OPEC production. Fluctuation in

risk-appetite is likely to contribute to oil price volatility.

Gold

Neutral

Betweenthe range o

US$1,250 to

US$1,400 per

troy ounce

• We are neutral on gold now as opposed to having been somewhat negative

in previous months. Moves by the US Federal Reserve to add urther liquidityto markets, combined with ongoing macroeconomic uncertainty, remain

supportive actors or this precious metal. Against this backdrop, we expect

gold will trade in a between a range o US$1,250 to US$1,400 per troy ounce

in the near-term.

Commercial

Real Estate

(unlisted markets)

Neutral

• High unemployment, alling occupancy rates and declining rental values

in the US and Europe warrant a cautious/ negative outlook or these two

markets in general. Our short-term outlook or the UK has deteriorated, with

weaker rental and capital growth projections, although we are not expecting

a signifcant price correction as yields remain above our view o long run air

value. The outlook or Asia Pacifc is improving, although there is wide regional

divergence.

CURRENCYEUR, GBP, JPY

and USDNeutral

• Valuation indicators are not sending any clear signals at present. We see both

event-driven and sentiment-driven risks contributing to ongoing volatility. We thus

continue to have a neutral view on currency exposures.

Short-term Investment

Outlook (6-12 months)

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US

The economic recovery made good progress in the US, despite

some disappointment in labour data.

• GDPgrowthwasparticularlyencouraginginthefourthquarter,

coming in at an annualised rate o 3.2% year-on-year, as personal

consumption grew by 4.4% year-on-year. Manuacturing activity

remained a key as well, with industrial production accelerating to

0.8% month-on-month in December.

• Nevertheless,labourmarketconditionsshowedlacklustre

improvements as non-arm payrolls rose by less-than-

anticipated 36,000 in January. The unemployment rate

declined to 9% but jobless claims still gave mixed signals

throughout the month.

• Theconcernwasreinforcedlaterinthemonth,asadvance

retail sales growth unexpectedly slowed, rom 0.8% m-o-m

in November to 0.6% month-on-month in December and the

University o Michigan Confdence indicator dropped to 72.7.

• Turningtoination,theallitemsConsumerPriceInation

index climbed by 1.5% year-on-year in December, abovethe consensus estimate, driven by a sharp increase in

commodity prices.

Europe ex-UK

While there continued to be signs o an economic recovery or

the eurozone region as a whole, some country level data is still

a concern.

• Industrialactivitywassolid,withtheeurozonePMIindex

coming in above both the consensus and November reading.

Industrial production growth was encouraging as well.

• Nevertheless,thesituationintheservicessector(andretail

in particular) remained difcult. Retail sales disappointed in

November, dropping by 0.8% month-on-month, reecting

the impact o ongoing high unemployment on household

consumption.

• TheEurozoneunemploymentratewasunchangedin

November, at 10.1%, while household consumption grew

less-than-expected by the consensus in the third quarter, at

0.1% quarter-on-quarter.

• Furthermore,thesharpcontrastbetweenthesolid

perormance o the larger economies o France and Germany,

with the peripheral eurozone countries persisted.

• Fiscalissuesremainedthemainareaofconcern,with

Portugal the latest subject o speculation.

The economic recovery is gaining momentum. Global manuacturing activity was robust and emerging

economies continued to impress. However, there are still key risks to watch on the horizon.

UK

While manuacturing activity was positive, the economic news-

ow disappointed in January.

• TheUKPMIroseto58.3inDecember,wellabovethemarket

expectation, while industrial production was also encouraging,

growing by 3.3% month-on-month.

• However,GDPcontractedby0.5%quarter-on-quarterinthe

ourth quarter. While the adverse weather conditions during

the traditionally busy estive season played an important

role in the all in economic activity, fscal tightening and low

consumer spending were other key actors. Indeed, retail

sales were down 0.3% in December.

• Furthermore,unemploymentstayedhigh,at7.9%in

December, overshadowing the mild improvement in jobless

claims. Mortgage approvals remained low in November,

which is indicative o a wider trend o consumer trepidation.

• Turningtoination,year-on-yearConsumerPriceInation

rates increased sharply in December to 2.9% and 3.7% or

the core and all-items indices respectively.

• OfadditionalconcernwasthattheDecemberjumpinination

excludes the eect o the VAT increase which came into

eect on 1 January 2011.

Macro Assessment

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Japan

Economic data was mixed in January, although exports

growth improved.

• Japan’sexport-orientedsectorscontinuedtoshowsome

strength, helped by China’s growth and a stronger recovery

in the US. Industrial production rose by 3.1% month-on-

month in December, and exports posted a 13% year-on-year

increase in the same month.

• Nevertheless,therecontinuestobeweaknessindomestic

demand and labour markets. Consumer confdence declined

in December, while nationwide retail sales ell ater declining

0.5% year-on-year a month earlier. Meanwhile, overall

household spending declined in December.

• Ofadditionalimportance,therewasrenewedconcern

surrounding the level o government debt in Japan.

• Despitethenation’sgovernmentpledgetoturnitsannual

budget defcit into a surplus by 2020, S&P downgraded the

long term sovereign debt rating o Japan, rom ‘AA’ to ‘AA-’,

highlighting its concern over the nation’s growing debt burden

and the difculties it may ace to restore its fscal balance.

• Japan’scoreConsumerPriceInationrateremainedin

negative territory, at -0.7% year-on-year. Such rates continue

to underscore the weakness in Japanese consumer activity

and to show that the ongoing deationary conditions are little

changed. On the positive side, this will allow the Bank o

Japan to retain its accommodative stance.

Macro Assessment

Emerging Markets

Economic activity continued to impress, although combined

with ongoing high ination levels, this could lead to urther

monetary tightening.

• Indicatorsofindustrial/manufacturingactivityshowedrobust

reading across the emerging market region. For instance,

China’s GDP growth beat the consensus orecast, coming

in at 9.8% or the ourth quarter, which was well above the

reading or the third quarter.

• Turningtoconsumeractivity,year-on-yearretailsaleswere

strong, beating the consensus estimates in Brazil, China,

South Korea and India.

• Thegoodreadingswerenotlimitedtothemajoreconomies,

but improvement was also noticeable in wider EM region.

This was particularly true in Latin America, where the

Economic Activity Index rose above the consensus

expectations in Argentina and Chile.

• ThesituationinCentralandEasternEuropehasshown

encouraging signs o improvement, largely driven by the

robust expansion in Germany (the region’s major economic

partner). There were ongoing positive readings in Russia, as

well as in the rest o the region.

• Turningtoination,Chinaremainedthecentreofattention,

with ination coming in at 4.6% in December. China raised

its Reserve Requirement Ratio to the highest level on record.

Inationary pressures generally intensifed in emerging

markets. Food ination continued to be a major driver o

price movements.

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Global Developed Markets

• Liquidityisexpectedtoremainapositivefactorforequity

markets in general given central bank stimulus and

quantitative easing in the US.

• Despitemodestlyhigherlevelsofinationindeveloped

nations, central banks are likely to maintain accommodative

monetary policies in 2011.

• Valuationsinallmajorequitymarketsareatundemanding

levels, and macroeconomic data is improving.

• Therefore,astheimprovingbackdropforequitiesisbecoming

more evident, we have moved to a modest overweight

position in equities against cash and government bonds.

US

• TheUSmacroeconomicpictureimproved,althoughrisk

persists. Overall we reiterate our central scenario o positive

growth in 2011 and 2012 or the US.

• UScompaniescontinuedtoperformgenerallywell,whilethe

earnings growth estimate or 2011 stood at 14.9% in January,

a level in line with the broader developed markets and with

our assessment o the US economic picture.

• Furthermore,astheFedmaintaineditsaccommodative

monetary stance and is perusing its second round oquantitative easing, liquidity is likely to remain a positive actor

or US (and other) equities.

Europe

• AlthoughfourthquarterGDPgrowthintheUKwasnegative,

overall, economic activity has improved in both the UK and the

Eurozone. We continue to expect moderate growth in 2011.

• Fromavaluationperspective,EurozoneandUKequitiesare

trading at reasonably undemanding levels, with their 12-month

orward price to earnings ratios at 10.8x and 10.5x respectively.

• Inaddition,despitemodestlyhigherlevelsofination,centralbanks are likely to maintain accommodative monetary policies

in 2011.

Japan

• TheeconomicoutlookforJapanremainspositive,despite

signs o consolidating ater the strong third quarter GDP

fgures. Overall, the economic backdrop remains encouraging

and in line with our central scenario or positive economic

growth in 2011.

• TheearningsgrowthprospectofJapanesecompaniesfor

2011 stayed reasonably solid, at 12.6%. Furthermore, the

negative impact o the strong JPY on exports has been

diminishing, suggesting a brighter horizon or Japanese

exporters, while the improvement in labour markets could

lead to a rebound in domestic consumption.

• Fromavaluationperspective,Japaneseequitiesweretrading

at a 12-month orward price earnings ratio o 14.0 at the end

o January. This compares to 13.6 a month earlier, which

remains an attractive level relative to history.

• Againstthisbackdropandtheongoingsupportivehigh

liquidity environment or equities in general, we have

increased our allocation to Japanese equities versus cash

and government bonds, as we did in other equity markets,

and retained our preerence or Japanese stocks against the

broader developed equity universe.

Global-Emerging Markets

• Therecentcorrectioninemergingmarketequitiesonan

absolute basis and relative to developed equity markets is, in

our opinion, just that and we do not expect this to continue

or a prolonged period. I the ination picture deteriorates

triggering urther aggressive tightening, this view may change

but in such a scenario, the probability is that all equities and

other risk assets would be vulnerable as global growth could

be threatened.

• WecontinuetolikeRussianequitiescomparedtoother

emerging markets. Macroeconomic data has been

encouraging, the rouble is strengthening and the valuations

remain extremely attractive.

• TheunrestinEgyptclearlyhasamajorimpactonthecountry

and is important to the wider investment world because o

the region’s oil supplies. Political change looks highly likely but

it is hard to make any meaningul comment on the medium

term investment impact while events are still unolding.

Equity Markets

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Equity Markets

Hong Kong and China

• China’sstrong4Q2010GDPgrowthof9.8%andrising

ination risks have increased the pressure or the government

to tighten policies more orceully through both monetary and

administrative tools.

• Thoughstocksarenotatexpensivelevels,weareincreasingly

concerned with the monetary tightening polices to curb

ination.

• Marketscouldstayrangeboundwithdifcultytoachievea

meaningul upside.

• Intheneartermwearealsoseeingfundowsfromemerging

markets moving back to developed markets. We turnedneutral or the China and Hong Kong equity markets.

• Butona6-12monthsview,weremainpositiveastightening

ears are expected to recede.

Asia ex-Japan

• Fromamacroeconomicperspective,Asia-exJapan

continued to show solid perormance and is expected to stay

strong or the remainder o the year. However, the potential

or monetary tightening in key countries could moderate the

pace o improvement.

• Fromavaluationperspective,Asiaex-Japanequitieswere

trading at a 12 month orward price earnings ratio o 12.7x

at the end o January, which was marginally higher than a

month earlier.

• Earningsgrowthforecastsfor2011continuetolook

attractive, at 13.8%, which is, in our view, in line with the

current economic conditions.

• Attheequityassetclasslevelthough,weretainourneutral

stance or Asia ex-Japan markets relative to other equity

markets, as specifc risk surrounding monetary policies

remain and valuation levels show no strong signals.

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Equity Markets

Latin America

• TheeconomicperformanceofLatinAmericancountries

remains strong and earnings growth estimates or 2011 look

more reasonable.

• Havingsaidthat,thegoodnewsseemstobewellreected 

in market prices and relative valuation measures show no

strong signals.

• Ongoingglobalowsfromthedevelopedtotheemerging

world, uelled by continued low interest rates in the developed

world, continue to present a problem to emerging economies.

• Brazil,thelargestmarketinLatinAmerica,hasalreadyraised

the tax on certain investments by oreigners rom 2% to 6%in an eort to stem currency appreciation.

Middle East

• TherehavebeenmacroeconomicimprovementsintheMiddle

EastandNorthAfrica(MENA)region.Qatarhascutits

interest rates while Dubai has stated it does not require the

support o its central bank anymore.

• GrossDomesticProductgrowthexpectationsarepositive

or both 2010 and 2011, although there are downside risks.

Valuations remain undemanding but given the risks to

economic growth and the narrowing valuation discount to

emerging markets, we remain neutral on MENA versus other

equity markets.

• TheunrestinEgyptclearlyhasamajorimpactonthecountry

itsel and is important to the wider investment world because

o the region’s oil supplies.

• PoliticalchangeinEgyptlookshighlylikelybutitishard

to make any meaningul comment on the medium term

investment impact while events are still unolding.

Eastern Europe

• WemaintainourpreferenceforRussianequitieswithinthe

wider emerging markets universe, as we continue to think

valuations are attractive on a relative basis.

• InEasternEurope,ConsumerPriceInationindicesincreased

across the major countries. However, given the outlook or

domestic demand in this part o the emerging markets world,

the risk o policy changes remains lower than in Asia and

Latin America.

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US Government Bonds

• Overall,thegenerallyimprovingmacroeconomicenvironment

continues to support our modestly cautious view on US

treasuries relative to other asset classes.

• TheFederalOpenMarketsCommitteetooknoteofthebetter

news on economic activity in recent weeks, but avoided

sending any signal that it was yet reconsidering the existing

quantitative easing plan or purchases o treasury securities

through to June. The Committee also continued to highlight

that overall conditions are likely to warrant exceptionally low

levels or the ederal unds rate or an extended period.

• Fromavaluationperspective,althoughinationarypressures

and ination expectations remain muted, current yields are

not particularly attractive relative to history.

• However,yieldshaverisensomewhatinrecentmonths

making valuation levels less stretched. We thereore have a

neutral view on US treasuries relative to cash.

• Withinxedincomemarkets,ourpreferenceremainsfor

corporate bonds, both investment grade and particularly

high yield.

Eurozone Government Bonds

• Theoverridingmoodinthenancialmarketsisstillvolatile

and uncertainties regarding the economic health o eurozone

peripheral countries remain, more particularly surrounding the

risk o some orm o sovereign deault.

• Althoughthebondmarketsofperipheraleurozonenationsare

priced to compensate or some risk, the fnal solution to the

debt difculties is not clear making it hard to evaluate whether

the pricing is sufciently attractive.

• Therefore,againstthisbackdrop,wemaintainasomewhat

cautious outlook or eurozone government bonds against

cash although the recent increase in yields has mitigated this

caution to some extent. Overall, within fxed income, our

preerence remains or corporate rather than sovereign debt.

Asian Government Bonds

• RecentheadlineshaveshiftedthefocusawayfromEurope

to Japan and Egypt. Japan sovereign rating was downgraded

by S&P, citing its weak fscal position with high debt levels.

Meanwhile, political unrest in Egypt continued to weigh down

markets. These developments had some spill-over eects on

Asian credit resulting in wider spreads overall.

• FormosteconomiesinAsia,inationnumbershavebeen

higher-than-expected largely driven by the increase in ood

and commodity prices. The ination indicators are generally

expected to remain high over the next ew months.

• WeremainneutralonAsiaGovernmentUSDbondswiththe

recent rise in US treasury yields.

Investment Grade Corporate Bonds

• Therewereencouragingsignsofimprovementineconomic

activity in January, particularly in the US, and a backdrop o

moderate economic growth is broadly positive or corporate

bonds as it should beneft company balance sheets.

• Thisissupportedbytheexpectationsforearnings 

growth in 2011, at 14.9% or the US and 15.3% or the

developed countries.

• However,giventheongoingpressureongovernmentbond

yields, current spread levels, albeit attractive in relation to the

very low ofcial interest rates in developed countries, do not

provide much cushion should government bond yield rise.

• Thereforeagainstthisbackdrop,wehaveretaineda

preerence or investment grade corporate bonds relative to

government bonds, but continue to avour high yield bonds

within developed corporate bonds, as their extra yield oers

more protection should government bond yields rise.

Fixed Income

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Global Ination-Linked Bonds

• Indevelopedeconomies,inationisexpectedtoberelatively

contained in the near-term, as high unemployment and tighter

fscal policies are likely to weigh on growth.

• Thesell-offinnominalbondsmakestheglobalination-linked

bond market more expensive and the nominals less expensive.

• Whileweretainanunderweightstanceonination-linkedbonds,

our view has turned less negative as the relative valuations

versus conventional government bonds have improved.

Fixed Income

High Yield Bonds

• Thegeneralthemeincreditsofarin2011hasbeenthestrong

perormance in high yield corporate bond issues, relative to

investment grade issues.

• Ourtacticalpreferenceforhighyieldcorporatedebthas

thereore continued to prove rewarding.

• Theunderpinningofthehighyieldbondmarketremainsvery

supportive, with declining deault rates, abundant liquidity

conditions, attractive valuations and notable improvements

in corporate balance sheets. Corporate earnings also remain

reasonably strong with ourth quarter results largely beating

expectations in terms o both earnings per share and revenues.

• Overall,weretainourpositiveviewoncorporatebonds.

Within this, we continue to have a preerence or high

yield corporate bonds over investment grade, as valuations

appear more attractive and the asset class is somewhat less

correlated to a rising yield environment which remains a risk in

developed market government bonds.

Sovereign US dollar-denominated Emerging Markets Debt

• Aspolicymakersindevelopedeconomiesarelikelyto

maintain accommodative monetary conditions throughout

2011, the higher yields oered by emerging market debt

should remain appealing.

• However,withinationrisingorstayinghigh,whileeconomic

activity continues to grow at a ast pace in many emerging

economies, the likelihood or central banks to raise interest

rates urther is high.

• Furthermore,giventhateconomicreadinghavebeenbeating

the consensus estimates in several cases, it is possible that

rates will need to rise urther than currently expected (i price

pressures do not recede).

• Overall,ourinvestmentoutlookforthisassetclasshasnot

changed. We continue to preer developed market corporate

debt to US dollar-denominated emerging market sovereign debt.

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11

Other Investments

Oil

• TheoilpriceincreasedslightlyfromUS$91.4perbarrelatthe

end o December to US$92.2 per barrel at the end o January.

Early in the month, the price declined beore moving sharply

upwards at the end o the month as political tensions in Egypt

escalated.

• GlobalcrudeoildemandcontinuedtostrengtheninDecember

while supply ell as non-member o the Organisation o

Petroleum Exporting Countries (OPEC) output was reduced

as a leakage o an Alaskan pipeline disrupted supply.

• TheInternationalEnergyAgencyrevisedupits2011forecasts

or global oil demand, reecting stronger than expected

economic growth and cold northern hemisphere weather.

• OPECcrudeproductionisprojectedtoriseslightlythrough

2011 to accommodate increasing oil consumption.

• However,commercialoilinventoriesheldintheOrganisation

or Economic Co-operation and Development remain high and

are likely to contain signifcant price momentum.

• Balancingononehand,theexpectedpick-upindemandand

on the other, the degree o spare capacity, we maintain our

orecast price range o US$70-90.

Gold

• ActionsbytheUSFederalReservearelikelytocontinueto

provide liquidity and potentially weaken the US dollar urther,

both o which are likely to drive commodity prices, including

gold, higher.

• Inaddition,ongoinguncertaintysurroundingthesustainability

o the economic recovery remains, adding to the

attractiveness o holding the metal.

• However,somefactorsremainunsupportive,likethethreatof

higher interest rates outside the US, as has been the case in

some developing economies.

Commercial Real Estate

• TheUKremainsourpreferredmarketoverthemedium-to-

long-term due to the yield level which, although lower than

last summer, sufciently prices in the weak occupier market.

However, we expect a dip in perormance in the short-term.

• AsiaPacichasthestrongestrentalgrowthprospects,

particularly in the short-term, although recent strong capital

value growth has reduced yields to an unattractive level, with

the potential or a correction in values over the medium-to-

long-term.

• IntheUS,despiteweakoccupiermarkets,pricingforprime

assets in top-tier markets, such as New York and Washington

D.C., has increased rapidly, and cap rates are back to pre-

crisis levels. This has reduced their relative attractiveness.

However, there are signifcant regional dierences, and

pricing or other segments o the market remains subdued.

Selected opportunities may appear as demand broadens rom

its current narrow ocus.

• Intheeurozone,capitalvaluesgenerallyremainexpensive

on a relative basis, and other regions potentially oer better

value. However, there are signifcant country level and local

variations within the region, and we expect stock specifc

opportunities to emerge.

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12

• Alongwithmostcommentators,wedonotbelievethe

resolution to the peripheral European countries’ fscal

difculties has been achieved. The end game is difcult to

predict and is likely to drag out over quite some time probably

with bouts o nervousness or the EUR ollowed by relie

rallies as seen recently.

• OurviewofthelikelypathofofcialUKinterestratesis 

now dierent to the market. We believe the frst rise in

rates will be later than the market expects and possibly not

even until 2012 because o the underlying ragility o the UK

economy coupled with signifcant urther fscal tightening in

the pipeline.

• Wecontinuetorecommendneutralpositionsforthemajorcurrencies as we do not have a high conviction on their

direction over the orecasting time horizon.

Currency

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Sovereign

•Malaysia

A Malaysian government agency will sell RM10 billion

(US$3.3 billion) o sukuk to fnance the construction o police

quarters and acilities. Pembinaan BLT Sdn Bhd, which develops

acilities or the police, will issue the sukuk. Pembinaan BLT Sdn

Bhd, a construction company owned by Malaysia’s Ministry o

Finance, started marketing RM1 billion ($327 million) o sukuk.

The sukuk, which will be the frst under a 25-year, 10 billion

ringgit Islamic Medium Term Note program, are being oered

in six maturities. Proceeds rom sukuk sales will be used to

build police acilities and to pay debt obligation.

• Bahrain

The Central Bank o Bahrain (CBB) announced that the

monthly issue o the short-term Sukuk Al-Ijara has been

oversubscribed by 450%. Subscriptions worth BD45 million

were received or the BD10 million issue, which carries a

maturity o 182 days. The expected return on the issue, which

begins on 20 January 2011 and matures on 21 July 2011, is

0.92%. The Sukuk Al-Ijara are issued by the CBB on behal o

the Government o the Kingdom o Bahrain.

• Kazakhstan

Kazakhstan is set to pass legislation that would allow Kazakh

corporations to sell sukuks. The legislation is expected to bepassed within the next two months.

• Indonesia

Indonesia’s fnance ministry plans to sell 2.25 trillion rupiah

($248.62 million) o sukuk in February to the state-managed

Islamic Haj Fund via a private placement. The und is managed

by the religious ministry, and the sukuk is not tradable on the

secondary market.

Corporate

• UAE

Emaar Properties, the United Arab Emirates’ biggest developer

by market value, may sell a 5.5 year benchmark size dollar-

denominated sukuk.

•Saudi Arabia

Saudi Arabia’s civil aviation authority is eyeing sale o sukuk, in

several tranches to fnance a modernisation o the kingdom’s

airports. The frst tranche o the sukuk would be worth 4.5

billion riyals ($1.20 billion).

•Malaysia

Malaysia’s Sapuracrest Petroleum secured a RM750

million (US$244 million) Islamic fnancing acility to und its

expansion. Maybank Investment signed an agreement with

Sapuracrest unit or the acility that include Malaysian ringgit

and US dollar denominated tranches. The deal, which employs

the Ijarah and Murabahah concepts, attracted strong demand

with a total o six participating fnanciers.

Pengurusan Aset Air, or Water Asset Management Company

(WAMCO) is a wholly owned company under the Minister o

Finance, has sold RM2.7 billion o sukuk in January. It sold

RM1.2 billion in three-year paper at 3.64%, RM1 billion o

5-year paper at 3.92% and RM500 million in 10-year paper at

4.43%. The issuance was part o a RM20 billion government

guaranteed Islamic und-raising programme.

Sukuk Index

• TheHSBC/DIFXUSDollarSukukIndex(SKBI)isdesigned

as a replicable benchmark tracking the return o an emerging

Sukuk portolio. It consists o USD/ GBP/ JPY/ EUR-denominated fxed/ oating rate vanilla Sukuk. The SKBI

average yield stands at 4.882 as at end o January 2011

compared to 4.736 as at end o December 2010.

Sukuk

30/01/10

0

1

2

3

4

5

6

7

8

9

28/02/10

30/03/10

30/04/10

30/05/10

30/06/10

30/07/10

30/08/10

30/09/10

30/10/10

30/11/10

30/12/10

30/01/11

SKBI Average Yield

4.882

Source: Bloomberg as o end o January 2011

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Disclaimer: The inormation in this Global Investment Perspective newsletter

(“GIP newsletter”) has been obtained rom reports (relevant reports) issued

by HSBC Investments (HIS). Whilst every care has been taken in preparing

and issuing this GIP newsletter, HSBC, HIS and the HSBC Group make no

guarantee, representation or warranty and accepts no responsibility or liability

as to its accuracy or completeness. Some o the inormation in this document

is derived rom third party sources as specifed at the relevant places where

such inormation is set out. HIS believes such inormation to be reliable but

it has not independently verifed. All opinions and estimates constitute HIS’

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The inormation contained in this GIP newsletter is not directed at and is not

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The inormation contained in this document has not been reviewed in the light

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and should not be construed as an oer or solicitation, or recommendation,

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In the event o a conict between the English version o this newsletter and

that translated into Chinese, the English version shall prevail.

Every mention o “HSBC” in this disclaimer reers to HSBC Bank Malaysia

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