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An interview with Ross WalkerRBS Chief UK Economist, Ross Walker discusses the true implications of the UK election. Page 16
The magazine or the sel-directed investor 01/2010
MARKETS Direct
Politics & Opportunity:A new dawn in Westminster?Page 10
Indices
Emerging Markets on the
fast-track to recovery
Emerging market shares
have risen sharply since 2009
Page 18
Currencies
Currencies - potential
trends for 2010
Will the pound become
the target o speculation?
Page 30
Commodities
After the
gold peak
Whats really driving
the gold price higher?
Page 25
Product inormation
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This document is an advertisement and is not a prospectus for the purposes of EU directive 2003/71/EC (the directive) and/or Part VI of the Financial Services and Markets act 2000. A prospectus has beenprepared and made available to the public in accordance with the directive. Investors should not subscribe for any securities referred to in this document except on the basis of information contained in the
prospectus. Investors may obtain copies of the prospectus from the o ces of the issuer and the paying agents. The Royal Bank of Scotland plc (RBS). This advertisement contains numerous trade marks
belonging to The Royal Bank of Scotland Group plc and other companies in the RBS Group. These trade marks include, but are not limited to, The Royal Bank of Scotland logo, The Royal Bank of Scotland andRBS. If you are in doubt as to whether an item is a trade mark of The Royal Bank of Scotland Group plc or a member of the RBS Group, please contact us for clarifi cation at the registered o ce address The
Royal Bank of Scot land plc, Registered in Scot land No 90312. Registered O ce: 36 St Andrew Square, Edinburgh EH2 2YB. RBS is authorised and regulated in the UK by the Financial Ser vices Authority. RBSis an authorised agent of The Royal Bank of Scotland plc N.V in certain jurisdictions.
www.rbs.co.uk/markets
Easy access to the
worlds hottest markets
Now with the ease of buying a share, you can
gain exposure to new markets, asset classes and
investment strategies at a level of risk that you
choose. You can access a wide range of alternative
savings, investment and trading products through
your share dealing account for the same dealing
costs* and with the same transparency as buying a
share. The markets are now open to all, its time to
take control of your own portfolio.
Free investment reportsTo help in your journey through the hottest equity
markets and commodities, RBS Markets has a
wealth of information and independent reports
available online at www.rbs.co.uk/markets
Risk Warning
In the unlikely event The Royal Bank of Scotland plc
fails or becomes insolvent you may lose some or all
of your investment. Products may not be suitable for
all investors, you should therefore ensure you fully
understand the risks involved.
*Check with your broker for specific fees.
Get access to the worlds
hottest markets today, visit
rbs.co.uk/markets
8/3/2019 RBS Investment Magazine
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Welcome to Markets, a division o The Ro-
yal Bank o Scotland, which ocuses spe-
cically on the needs o the sel directed
private investor. Our aim is to open up in-
vestment markets to give private inves-
tors access to the same opportunities that
our institutional clients enjoy. Our extensi-
ve range o investment products covers
varying risk levels, complexities, regions
and asset classes. RBS listed productshave been created to allow investors to
meet needs which may not necessarily
be met through the standard nancial in-
struments available in the wider markets.
They are oten used as an alternative to
direct investment and as part o an asset
allocation process to help reduce risk and
exposure within a portolio. They are lis-
ted on the London Stock Exchange and
can be bought through a UK stockbro-
ker. Our whole range can be ound on our
website www.rbs.co.uk/markets along
with regular market news, views and pro-
duct guides.
This exciting new business was only laun-
ched in the UK in November 2008, but it is
ounded on a proven model that is well es-
Welcome to Markets rom
The Royal Bank o Scotlandtablished in Germany, Italy, Switzerland,
Netherlands, the Nordics and Asia. RBS
Markets has over 30,000 products glo-
bally and has recently won the prestigious
2009 Euromoney award or Best Structu-
red Products House. In the UK we have
already ollowed in this vain, accumula-
ting three awards and being shortlisted
or a ourth in our rst year o business:
2009 FT Investors Chronicle Investment
Awards Winner - Innovation o the year
award.
2009 Shares Awards Winner - Best Lis-
ted Structured Products provider.
Short-listed for The 2010 FT and IC
Wealth Management Awards 2010 Best
investment / banking website.
MARKETS Directis designed to help you
construct your own view on the markets.
However, you should bear in mind that the
content o this magazine does not con-
stitute inedependent research or analy-
sis. Every edition will ocus on the hot-
test topics rom the markets, new product
ideas and a run down o the events and
seminars that you can attend or ree. This
quarter we look at the likely impact o the
election, todays burning investment the-
mes and Covered Warrants as a means
to gain amplied exposure to both rising
and alling markets.
Enjoy the rst issue o our RBS MARKETSDirect magazine.
Sincerely,
Ben Board
Director, UK Listed Products
Next issue o MARKETS Direct will be published in September 2010.
MARKETS Directis a orm o marketing communication issued by the Royal Bank o Scotland plc
and, among other things, it reers to products and services oered by the RBS group. We would draw
your attention to the legal points set out on page 59. The inormation contained in this magazine
does not constitute independent investment research or analysis.
The products reerred to and/or eatured in MARKETS Directare restricted to those issued by RBS and
listed on the London Stock Exchange. There may be other products available in the wider market that meet
your investment objectives and requirements. I you are unsure o any details relating to the product that
you are considering, consult a nancial adviser prior to undertaking any investment activity.
EditorialMARKETSDirect| 01/2010
3Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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Past perormance is no indication or guarantee o uture perormance.
South Arica
Will the beautiul game bring a beautiul
gain to South Arica? 6
Listed Products
The dawn o a better
structured product? 8
News 6
MARKETS Direct
Indices 18
Commodities 25
Global 30
Emerging Markets on the
fast-track to recovery 18
Index ocus 23
Ater the gold peak 25
Commodities focus 29
Currencies
Potential trends for 2010 30
Are interest rates set to rise
globally? 33
Content MARKETSDirect| 01/2010
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at a Glance | 01/2010
Covered Warrants 44
Trackers 56
Accelerated Trackers 56
Auto calls and Bonds 56/57
Legal inormation 59
Products Service
Ross WalkerWhat a coalition government
could mean or the UK 16
Interview 16
Building a diversied Portolio 37
By David Stevenson
Special
A Beginners Guide to
Covered Warrants
By Andrew McHattie 40
Internet
Introducing the website 58
Education
Cover StoryPolitics & Opportunity
A new dawn for Westminster? 10
Outlook 10
ContentMARKETSDirect| 01/2010
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Past perormance is no indication or guarantee o uture perormance.
News Focus: South Arica
Will the beautiul game bring a beautiul gain to South Arica?
The World Cup comes to South Arica in 2010.
With the World Cup football
tournament taking place in Sou-
th Arica, its not just the Eng-land team that stands to gain
rom the big event. During and
following the previous 4 events,
the host nations main share in-
dex perormed better than both
the MSCI World Index (which
represents shares rom com-
panies across the globe) and
the FTSE 100 Index (represen-
ting UK shares) in the year ol-
lowing the World Cup.
The economic halo o the
World Cup
The last World Cup hosted
in Germany or example saw
the domestic DAX Index rise
by 15.58% from the 1st June
2006 - 29th December 2006*.
It also performed 53.09%
better in the year o the World
Cup and the following year ofthe event than the MSCI World
Index, a air indicator o global
economic growth. As a com-
parison to the historical per-
ormance o the DAX Index
against the MSCI Index, if we
take the 10 year period of Dec
1995 to Dec 2005, the DAX
Index perormed better than
the MSCI Index by 36.81%*,
considerably less than the
period immediately ollowingthe event. With the infux o an
estimated 300-400k tourists1,
mass global media exposu-
re and the investment o big
name sponsors, comes the
potential or a real boost to the
South Arican economy and
its domestic index, the FTSE/
JSE Top40 Index of stocks
listed on the JohannesburgStock Exchange.
The longer-term story or
South Arica
As the main constituents table
shows, big global mining com-
panies such as Anglo Ameri-
can (AAL, AGL:SJ) and BHP
Billiton (BLT, BIL:SJ) are part
of the FTSE/JSE Top40 Index.
This illustrates South Aricas
position as one o the globescore producers o commodi-
ties or manuacturing - the
nation is the worlds largest
producer o platinum, gold
and chromium2. As econo-
mies such as China continue
to rebound rom the global re-
cession the demand or raw
materials has the potential to
rise, providing opportunitiesor South Arican companies
to urther establish themsel-
ves on the world stage.
Moreover, while the FTSE/JSE
Top40 Index has seen returns
of 32% since March 2009*, it
still remains 18%* below its
peak in May 2008. So, with the
potential boost which could re-
sult rom being the next World
Cup host nation, there is still alot o scope or growth in South
Arican shares to rise in value.
*Bloomberg, April 2010
1) Grant Thornton, http://www.gt.co.za/
News/Press-releases/Strategicsolutions/
2010/domestic10.asp, 18 March 2010
2) CIA World Factbook, 1 April 2010
News MARKETSDirect| 01/2010
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News Focus: South Arica
About the FTSE/JSE Top40 Index
The FTSE/JSE Top40 Index
includes the 40 largest com-
panies by market capitalisati-on of the FTSE/JSE All Shares
Index. Market capitalisation is
calculated by multiplying the
number o shares in a compa-
FTSE/JSE Top 40 Index Perormance
35000
30000
25000
20000
15000
10000
06/05 06/06 06/07 06/08 06/09 06/10
ZAR
FTSE/JSE Africa Top 40 Index
Source: Bloomberg; 8 June 2010
Top 10 FTSE/JSE Top40 Index constituents by index weighting
Constituent Bloomberg code Weight
BHP Billiton BIL SJ 16.52%
Anglo American AGL SJ 12.44%
SABMiller SAB SJ 7.91%
MTN Group MTN SJ 6.14%
SASOL SOL SJ 5.67%
Standard Bank SBK SJ 5.23%
Financiere Richemont CFR SJ 4.39%
Impala Platinium Holdings IMP SJ 3.91%
Naspers NPN SJ 3.75%
Anglogold Ashanti ANG SJ 3.01%
Source: Bloomberg, 8 June 2010The table above shows a list of some of the companies included in the FTSE/JSE Top40
Index which is ranked according to the weighting they are given in the Index. Companieswith the highest rating will contribute most to the perormance o the Index.
Companies may benet from additional business and media focus during the World Cup.
ny by its share price.
A word o warningAs with any oreign invest-
ment, we need to consider the
impact o exchange rate fuc-
tuations. Investments linked to
The world cup encourages the development o new inrastructure.
the performance of the FTSE/
JSE Top40 Index will bene-
it i the South Arican Randstrengthens in value when
measured against Sterling,
and lose value i the South A-
rican Rand weakens in value
when measured against Ster-
ling. You also need to consider
the act that South Arica is anemerging market and thereo-
re carries more economic, po-
litical and nancial risks than
developed markets.
NewsMARKETSDirect| 01/2010
7Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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News Focus: Listed Products
Listed Products, the dawn o a better structured product?
Structured Products in the
UK are like the marmite o
the investment communi-ty; you either love them, or
you hate them. They clear-
ly have their advocates as
according to www.structu-
redretailproducts.com, the
UK Structured Product mar-
ket grew 50% between 2008
and 2009 to reach an eye-wa-
tering 13.6bn in sales. The
growth o the industry could
be attributed to the ability o
structured products to provi-de exposure to a given mar-
ket or underlying whilst also
oering some degree o ca-
pital protection something
particularly attractive when
the markets are unsettled.
When Lehman Brothers col-
lapsed in 2008, Structured
Products came under close
scrutiny from the Financial
Services Authority and the
industry as a whole. Issues
such as credit worthiness
and the risk o the issuer go-
ing bust came to the fore. Cri-
ticisms o overly-complica-
ted structures, opaque ees
and even an over reliance
on UK underlyings had to be
addressed by the industry. A
big concern surrounded the
lack o lexibility. Once you
were invested it was hard to
sell back your investment wit-
hout penalty.
Introducing Listed Pro-
ducts, a more exible struc-
tured product
So how much o a dierence
can the word listed really
make. Well more than you
might think. The term Listed
Product in the context o RBS
Listed Products reers to any
nancial instrument issued by
RBS which is in the nature o astructured product and is lis-
ted and traded on a stock ex-
change, typically the London
Stock Exchange and thats
where the big dierence is.
Typically when we think o tra-
ding on exchange, we think o
buying and selling shares but
the same rules apply to Listed
Products. With the same ease
o buying a share, investors
can gain exposure to excitingnew markets, asset classes
and investment strategies. Its
as simple as that to buy, and
i you ever want to get out o
your investment, you can sell
it back at the price quoted on
the LSE between 8.15am and
4.30pm under normal trading
conditions and on a regular
trading day. This makes the
listed products market extre-
mely transparent; you know
rom the start what youre in-
vesting in, what it costs and
how to get in, or out i you
want to. You do need to be
aware that prices will luc-
tuate throughout the invest-
ment term and i you sell your
investment beore the ull in-
vestment term, you may get
back less than your original
investment. Also, whilst RBS
will assist in the stimulation o
a secondary market in these
products you must be awa-
re that market liquidity cannot
be guaranteed and in certain
trading conditions it may be
dicult or impossible to liqui-
date your investment (this is
called liquidity risk).
With ready access to this new
world o investment opportu-
nity, it is now easier than ever
to build and manage your
own portolio. You no longerneed to rely on products that
charge commissions, exten-
sive management ees or in-
fict early redemption penal-
ties. With Listed Products you
will pay an execution ee with
your stockbroker which is ty-
pically around 10 - 18 per
trade. Trackers may also in-
clude an Annual Manage-
ment fee of 0%-1.5%.
So now, you can decide or
yoursel where and how you
want to invest, and or how
long you want to do it. Plus,
you can do it yoursel through
your share dealing account
or the same dealing costs as
buying or selling a share. Just
some o the reasons to try Lis-
ted Products include:
Control you decide whe-
re, how and when you want
to invest and you can decide
exactly when you want to end
your investment, subject to li-
quidity risk.
Simplicity can be bought
and sold through your stock
broker in exactly the same
way that you would buy and
sell shares.
Accessibility just like
shares, they can be bought
or sold at any time during a
regular trading day (08:15
16:30) and do not have to be
held or any minimum period
o time.
Transparent two-way pri-
ces must be quoted throug-
hout the day so you can al-
ways access the current va-
lue o your product.
Low cost just as with sha-
res, the only costs involved in
buying a Listed Product will
be the bid/ask spread (the
dierence between the price
at which you can buy the pro-
duct and the price at which
you can sell the product) and
your standard broker ees.
Trackers may also have an
annual management charge.
Regulated all products lis-
ted on the London Stock Ex-
change must adhere to the ru-
les o the UK Listing Authority.
Risks to be aware o
Listed products are subject
to price fuctuations and in-
vestors may not get back any
o their initial investment;
In the event that RBS ails or be-
comes insolvent you may lose
some or all o your investment.
The RBS Markets team is dedicated tohelping you shape your market view.
News MARKETSDirect| 01/2010
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These products may not be
suitable or all investors, you
should thereore ensure you
ully understand the risks in-
volved, and seek independent
advice where necessary.
Product costs are built into
the structure o the product.
In the case o a Tracker in-
vestment, this may include an
annual management charge
of 0%-1.5%.
Subject to any technical pro-
blems, RBS will endeavour to
oer a secondary market in
line with LSE rules and mar-
ket making obligations. RBSmay be the only market maker
in the Listed Products which
may aect liquidity.
What can you invest in?
A real eature o Listed Pro-
ducts is their inherent lexi-
bility and diversity. Through
Listed Products you can gain
exposure to shares, indices,
currencies or commodities
so the question may not be
what you can invest in, but
how you can do it. The range
is growing continuously but
the main types o product in-
clude:
Listed bonds which provide
a xed annual income but wit-
hout redemption penalties.
Trackers or uncapped ex-
posure to global indices and
commodities.
Accelerated Trackers or
amplied, capped exposure
and the possibility o capital
protection.
Autocalls or the potential to
receive a coupon depending
on the perormance o global
markets or commodities.
Covered Warrants: or gea-
red perormance rom global
indices, shares, commodities
or currencies.
Choosing the right product
or you largely depends on
your own market view and thelevel o risk that you are pre-
pared to take. More inorma-
tion on all our products can
be found on page 44 in the
product lists or online at www.
rbs.co.uk/markets.
Trading Listed Products
One o the great things about
Listed Products is how easily
they can be bought and sold
during normal market condi-
tions, subject to liquidity risk.
As they are listed on the stock
exchange, they can be tra-
ded in exactly the same way
as you would trade a share
through your stockbroker.
As Listed Products are ge-
nerally considered complex,
the rst time you want to buy a
Listed Product your stockbro-
ker will need to assess whe-
ther the product is appropria-
te or you and make sure you
understand the relevant risks.
This will involve the issue o
a risk warning which you will
need to read careully beore
investing. You must consider
whether the investment is ap-
propriate or you and meets
your investment needs and
obtain advice i necessary.
Once you have returned this
orm to your broker and i the
product is deemed suitab-
le or you based on the Risk
Warning orm, you are ready
to invest.
You can trade online or bycalling your broker, quoting
the product code o the pro-
duct you want to purchase
e.g. RB01.
The whole trading process
is roughly as ollows:
1. Open a share dealing ac-
count with a stockbroker (only
needs to be done once!).
2. Complete the Risk War-
ning orm to enable the stock-
broker to asses whether the-
se products are appropriate
or you and read the risk war-
nings careully. Seek inde-
pendent advice i necessary.
3. Decide which product you
want to purchase by visiting
www.rbs.co.uk/markets.
4. Go online or call your bro-
ker.
5. Quote the product code
(TIDM code) you want to
purchase which will be listed
on the relevant product page
o the RBS Markets website.
6. Inorm your broker how
much you want to buy and
they will process your new in-
vestment.
These products may not be
suitable or all investors, you
should thereore ensure you
ully understand the risks in-
volved, and seek indepen-dent advice where necessa-
ry.
The cost o investment
With a Listed Product there
are 3 potential costs to be
aware o:
1. Brokerage fees as with
buying shares, each time you
trade a Listed Product your
stockbroker will charge a ee.
This will usually be approxi-
mately 10 - 18 per trade.
2. Bid/ask spread There is
a bid/ask spread which is the
dierence between the price
at which you can buy and the
price at which you can sell the
product.
3. Annual Management Char-
ge Trackers may have an
annual management charge,
payable each year out o your
initial investment. This will ty-
pically be 0.2%-1.25%.
NewsMARKETSDirect| 01/2010
9Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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Past perormance is no indication or guarantee o uture perormance.
Politics & Opportunity
A new dawn or Westminster?Following the most exciting election night in decades, the UK has a new coalition government in place. So, how did thissituation arise, and what eect will it have on the markets?
Cover Story MARKETSDirect| 01/2010
10
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How is this election going to aect my
portolio? The recent election has pro-
ved to be one o the most exciting and
unpredictable this country has seen or
decades. From the rst ever live televised
leader debates, the rise, all and subse-
quent rise again of Nick Clegg, to the -nal farewell of Gordon Brown the elec-
tion was hugely absorbing or anyone with
even a remote interest in politics.
The nal hours o 6 May raised a sen-
se o surprise rom political commenta-
tors as the initial euphoria around Nick
Cleggs TV performance and groundswell
o Liberal Democrat support had come to
little more. All the exit polls predictions o
a hung parliament proved to be accurate
by the morning news on the 7th May.
With no single party clinching an out-
right majority, the hours o deal making
dragged into days before nally the Ca-
meron-Clegg partnership began and our
political landscape changed signicant-
ly with a Conservative-Liberal Democrat
coalition agreed. Labour, after 13 years
in power, returned to the opposition ben-
ches and started the search or a new lea-
der. The reason or this hung parliament
is simple. The British rst-past-the-post
system means that or a single party to
achieve a majority government they must
secure 326 seats in the Houses o Parlia-
ment. As you can see by the election re-
sults shown below, despite a swing of 5%
from Labour to Conservati-
ve, the Tories could not reach
this target, alling short at 306
seats. So they were acedwith two choices: to either try
to push ahead and rule with a
minority government, or to seek to orm a
coalition with the Liberal Democrats. With
the Lib Dems winning 57 seats (ve less
than they held in the previous parliament)
the coalition would have a comortable
majority with 363 seats in total.
While this political coalition is not one that
had been easily envisaged by most vo-
ters or analysts, the more likely on pa-
per at least centre-left coalition of La-bour and the Lib Dems ell down on the
maths. Even with Labours 258 seats and
the Lib Dems 57 this gave it only 315 in
total which meant it would also have to
rely on the support o smaller parties. A
rainbow coalition as it was dubbed was
not an impossibility, but there was a clear
eeling across all parties that with Labour
only getting a 29% share of the vote, this
was not the mandate o the electorate.
Because o the parlous state o our
economy, trying to govern with a mino-
rity was far from ideal for the Conserva-
tives. Achieving a stable government
was the phrase constantly trotted out du-
ring, and ater, the election with everyone
from the City to the politicians
demanding this was the pri-
ority above all else. The ne-
cessity or this in tumultuoustimes was starkly illustrated
by the riots, and subsequent
deaths, on the streets o Greece as its
government, bailed out by the EU and
International Monetary Fund (IMF) to the
tune of 110 billion, had to slash its public
spending and boost tax revenue to meet
the conditions o the loan.
So, while the political shenanigans
kept the electorate at large enthralled,
how did the markets, which do not nor-
mally like indecision or a political vacu-um, perorm?
Despite ears, the markets proved re-
markably tolerant during the ew days de-
lay required to hammer out the coalition. I
anything, it was the bigger picture actors
such as the Eurozone debt crisis that had
a greater impact than the domestic situ-
ation. Greeces nancial straits also high-
lighted how intolerant the markets were to
countries that did not introduce credible
policies to cut budget decits.
But in the UK there was a sense o cau-
tious optimism surrounding this coalition
and the FTSE 100 remained broadly un-
changed since the election with UK bond
prices rising although sterling weakened
slightly. Some commentators pointed to
the gap narrowing between the yield on
equivalent German and UK government
bonds, suggesting that investors saw
lending to the British government as less
risky than previously.
Short-term gains in sterling imme-
diately ater the coalition was agreed
abated as the bigger issues o econo-
mic recovery took hold and the Bank o
England continued to predict that infa-
tion would remain low despite Aprils -
gure of 3.7% (the highest rate for almost
a year and a hal and above the target
of 2%).
The key issue has been how this
government would tackle reducing
Britains budget decit of 163bn.
There was a
sense o cautious
optimism surround-ing this coalition.
UK - National results at a glance
36,10% Conservative
29,00% Labour
23,00% Liberal Democrat
11,90% Others
Share
Party Seats Gain Loss Net Votes % +/-%
Conservative 306 100 3 97 10.706.647 36,1 3,8
Labour 258 3 94 -91 8.604.358 29 -6,2
Liberal Democrat 57 8 13 -5 6.827.938 23 1
Source: news.bbc.co.uk/1/shared/election2010/results/
Cover StoryMARKETSDirect| 01/2010
11Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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Past perormance is no indication or guarantee o uture perormance.
Perormance o the FTSE 100 Index
7000
6500
6000
5500
5000
4500
4000
3500
3000
05/05 11/05 05/06 11/06 05/07 11/07 05/08 11/08 05/09 11/09 05/10
Points
FTSE 100 Index
Source: Bloomberg, 26 May 2010
Perormance o GBP/EUR
1,6
1,5
1,4
1,3
1,2
1,1
1
05/05 11/05 05/06 11/06 05/07 11/07 05/08 11/08 05/09 11/09 05/10
GBP/EUR
Pound Sterling - Euro
Source: Bloomberg, 26 May 2010
While Labours approach had been to de-
lay drastic cuts arguing this would tip the
country back into recession just as it was
falteringly coming out of it, the Conserva-
tives wanted more immediate action. How
the Lib Dems would all into line was still
unknown but as the details o the coaliti-on came to light it was clear that this was
one area where Tory policy was the victor.
Many the Conservatives among them
felt that the markets would not stand
a delay. As a result, the government an-
nounced that spending cuts worth 6bn
would be implemented in 2010, which was
welcomed by the governor o the Bank o
England, Mervyn King. Full details of how
these cuts will be achieved will be presen-
ted in the emergency budget announced
by Chancellor of the Exchequer, GeorgeOsborne, on 22 June.
But this government will still have to
hope that the markets work to its avour as
there are trends in the underlying econo-
my that can have a signicant impact. A
sterling crisis for instance where inves-
tors sell the pound to buy dollars or euros
would almost certainly be bad news for
the coalition government.
Perhaps the most sensitive indicator
o condence will be the long-term gilt pri-
ces these show how much the market is
willing to pay or government securities or
gilts dated at more than 10 years. So far
they have held relatively steadily.
The election aside, much o the in-
creased conidence is also a result o
positive economic indicators. In parti-
cular, recent macro-economic data and
GDP trends have been surprisingly po-
sitive of late at the very end of March,
or instance, ourth quarter GDP growth
was revised up 0.4% quarter-on-quar-
ter, ahead of City economists forecasts.
The main upward impetus seems to have
come rom companies inventory stocks
which were running down at a signicant-
ly slower rate in the last quarter of 2010
according to RBS analysis this contribu-
ted 0.7 percentage points to last quarter
GDP, almost ully accounting or the rise
in domestic demand.
The data based on the purchasing
decisions and the expectations o ma-
nufacturers and service companies (the-
Cover Story MARKETSDirect| 01/2010
12
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12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
2006 2007 2008 2009
Government defcit as a percentage o GDP, calendar years
70
60
50
40
30
20
10
0
2006 2007 2008 2009
Source: National Statistics www.statistics.gov.uk/cci/nugget.asp?id=277
Government debt as a percentage o GDP, calendar years
Concerns in the city?
Source: National Statistics www.statistics.gov.uk/cci/nugget.asp?id=277
se widely used indicators are something
called the PMI or purchasing manager
indices) also contained some positive
news. Even though the new business
part o the index ell to a level o 52.8 rom
54.6 in April, the purchasing managers
index (PMI) for services rose to a level
of 55.4 from 55.3 in April. A level of more
than 50 is generally considered to be a
rise in activity.
Headline manuacturing PMI stayed
at 58 and the construction PMI even rose.
However, infation made a comeback with
3.7% which is well above the 2% target.
But this new ound optimism ater one
of the toughest 18 to 24 months in living
memory, welcome though it may be, still
needs to be tempered with caveats.
The broad economic data still suggests a
number o worrying issues, not least:
The savings ratio has declined again
this is good news or shops and actories
looking to sell more to ree spending con-
sumers, but is less positive i rebuilding
household nances and cutting down on
high debt levels is seen as an imperative
A defcit is created when a government spends more than it takes in. Government debt is the accumulated borrowing.
Cover StoryMARKETSDirect| 01/2010
13Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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*This document is an advertisement and is not a prospectus for the purposes of EU Directive 2003/71/EU (the Directive) and/or Part VI of the Financial Services and Markets Act 2000. A prospectus has
been prepared and made available to the public in accordance with the Directive. Investors should not subscribe for the securities referred to in this document except on the basis of the information containedin the prospectus. Investors may obtain copies of the prospectus from the oces of the issuer or paying agent. The Royal Bank of Scotland plc is authorised and regulated in the UK by the Financial Services
Authority. The Royal Bank of Scotland plc, registered in Scotland No 90312. Registered Oce: 36 St Andrew Square, Edinburgh EH2 2YB. RBS is authorised and regulated in the UK by the Financial ServicesAuthority. RBS is an authorised agent of The Royal Bank of Scotland N.V. in cer tain jurisdictions.
Accelerated Trackerscould give your
investment a boostGiving exposure to a wide range of global markets
and asset classes, Accelerated Trackers provide
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Accelerated Trackers are certificates issued by the
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or all of their investment.These products may not be
suitable for all investors, you should therefore ensure
you fully understand the risks involved, and seek
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Past perormance is no indication or guarantee o uture perormance.
An interview with Ross WalkerChief UK Economist for The Royal Bank of Scotland plc.
MARKETS Direct: Weve finally got
through this election and now face a
hung parliament with a Con-Lib coa-
lition. Were you surprised by this out-
come?
Ross Walker:Its what the opinion polls
had been signalling so in that sense it pro-
bably shouldnt have been a huge surpri-
se. Because all the projections that come
rom the national opinion polls assume a
uniorm national swing, there was an as-
sumption that the Conservatives would dobetter in some marginal seats. The big pic-
ture in the end was that the Conservatives
tended to win target marginal seats against
Labour, and they won some seats that were
beyond what they needed, but they didnt
quite make the inroads against the Libe-
ral Democrats in some o those marginals.
So, overall the result wasnt really a sur-
prise, we had been quite early in fagging
the risks o a hung parliament. The HIPPO
(Hung Parliament Probability Observer) in-
dicator we developed, which took the opi-
nion poll data and expressed it as a proba-
bility o a hung parliament, showed it was
a higher probability than the markets and
bookmakers were actoring in.
MARKETS Direct:The city has traditi-
onally been more sceptical o the Li-
beral Democrats economic position
and more comortable with the Con-
servative, where does this coalition
leave it?
Ross Walker:Its an evolving picture.
Weve had a major announcement on
scal policy [the establishment o the O-
ce o Budget Responsibility] and this is
one thats been put together by the coali-
tion; in our view its the most radical scal
policy development since the IMF rolled
into town back in 1976. There are some
early signs that maybe this will be a new
politics, at least in some areas. The city
will continue to judge as events unold.
But there are signs that things have mo-
ved more quickly and more decisively
in some areas than people might have
thought.
MARKETS Direct:Can such opposing
ideas be easily married?
Ross Walker:As Cameron and Clegg
have made clear their parties do not ag-
ree on everything and there are a sizeab-
le number o areas where there are die-
rences. What they are ocusing on is the
areas o agreement. I think the surpriseso ar has been in terms o the big pic-
ture economic and scal situation the
Conservatives have largely got their way.
Theyve given ground on some o the in-
dividual policies such as the inheritance
tax threshold rise whereas the Liberal po-
licy o liting some o the lowest earners
out o tax altogether, looks like it will be a
higher priority. So some o the micro eco-
nomics have gone the Lib Dems way but
the big picture, macro economics that our
business cares about currency markets
and xed income, the scal tightening this
year not next year its Conservative poli-
cy thats getting implemented.
MARKETS Direct:How have the city
and markets responded so ar to this
new government?
Ross Walker:Its been reasonably po-
sitive there have been other big issu-
es happening and Greece is the ob-
vious one. What Greece has done is
bring into ocus concerns about is-
cal deicit and downgrades and that
ocus could have been detrimental to
the UK. In act, UK government bonds
have beneted, weve seen some sort
o fight to saety moves so gilt yields
have been driting down a little. Weve
also seen our UK sovereign CDS (credit
deault swap) prices come down relati-
ve to other similar economies. So there
are signs that are cautiously positive,
but its early days.
MARKETS Direct:The great concern
is that this coalition will all apart in
a way similar to 1974, how would the
markets react i the country was aced
with another election in a year or 18
months?
Ross Walker:Its very dicult at this sta-
ge to say how durable this is going to be.
Beore the election the eeling was that a
hung parliament would bring an election
within a year. I think the act that one o
the agreements between the two partieswas xed parliamentary terms indicates
they would like this coalition to run or se-
veral years, i not or a ull ve. Against
that you have the ringes o both parties
saying that its not going to last. The real
test will be a year rom now when we ex-
About Ross Walker
Ross Walker, Chief UK Economist for
The Royal Bank o Scotland plc, pro-vides an inside view on what a coaliti-
on government could mean to the UK
recovery prospects
Ross Walker
Interview MARKETSDirect| 01/2010
16
8/3/2019 RBS Investment Magazine
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pect therell be urther tax rises taking e-
ect and when spending cuts are starting
to bite, and then well get a better idea o
just how robust this coalition is.
MARKETS Direct:Do you think peop-
le are ready or a more austere Bri-tain and what do you think o propo-
sals so ar?
Ross Walker:I think with the public nan-
ces eaturing so prominently during the
election there is clearly some public awa-
reness o this issue and the implications
to their own nancial positions. Personally
Im still sceptical that people have rea-
lised just how dicult this is going to be to
correct in terms o the scale o the spen-
ding cuts and tax rises required and the
prolonged period o time over that thoseausterity measures will be in place.
MARKETS Direct:How will the short-
term impact o a coalition government
compare to the longer-term impact?
Ross Walker:Its very dicult to say. The
early announcements on the scal side
have been quite positive. The real test
will be when the unpopular decisions like
spending cuts and tax rises take eect.
So ar the tax increases have been large-
ly about hitting higher earners so at this
stage its not the average person in the
street having to ork out a lot more tax.
MARKETS Direct:While some indica-
tors point to Britain coming out o re-
cession many commentators continue
to highlight the risk o a double dip re-
cession. How do you see the economy
developing over the next year?
Ross Walker:I think although the scal
tightening measures that have been an-
nounced will have some short-term net
dampening eect, overall they should
support growth. Because there are a
number o risks o not taking this action:
one would be that the markets would
demand a much higher rate o interest
on government debt so governments
own nancing cost would rise more ra-
pidly. Secondly that some o that extra
cost o those higher gilt yields would get
passed onto companies so higher borro-
wing would deter some investment and
uture growth. The big risk then is market
panic and an aggressive sell o o ster-
ling. All o those things would really un-
dermine growth, certainly over the me-
dium term. Short term there are risks o
dampening growth but I dont think its
going to be enough to tip us into reces-sion, certainly thats the Bank o England
view, and seemingly the advice o tre-
asury ocials to the new government is
the same. For me the bigger risk was not
tightening enough.
MARKETS Direct:This government
has said it will introduce ixed-term
parliaments, is this something that the
market will react well to?
Ross Walker:Im not sure it makes a
huge amount o dierence. I, as a politi-cian, you know when an election is going
to be then you have less fexibility, but in
reality it was always a relatively constrai-
ned choice. Did you go to the country a-
ter our years or did you wait or the ull
ve? So there was never that much ree-
dom. It was almost impossible to micro
manage the economy in a way that would
ensure you had buoyant growth and low
unemployment during an election. From
a scal credibility point o view the inde-
pendent Oce or Budget Responsibility,
which will produce the growth and scal
orecasts, is the biggest bulwark against
political intererence in terms o trying to
align the political and economic cycles.
So or me the xed parliament issue is
very much a secondary one.
MARKETS Direct:In light o the out-
come to the election, do you have any
tips or investors as to where they
should be looking now?
Ross Walker:Economists are the worst
people in the world to listen to in terms
o investment advice. But the big ques-
tion is still the basic one o how sturdy is
risk appetite? And youd never look at just
one indicator, when you do that things
start to go badly wrong either or eco-
nomic policy or investing. I think the key
gauge is do you think the economic reco-
very is sustainable? Look at the risk indi-
cators stock markets, CDS levels, cor-
porate bond yields are we on track for
what the markets think will be a relatively
healthy recovery or are things going to
alter? Im somewhere between the two
in terms o our own orecasts, theres al-
ways a risk the markets have got ahead
o themselves and the gains weve seen
in stock markets, in particular or the pastsix or nine months, may indicate that.
But were not in the double dip recession
camp, we think that can be avoided and
theres enough momentum in the econo-
my, but its going to be a slow and drawn
out recovery and rom an investors point
of view guess what? There arent any
quick easy bucks to be made!
Big Ben
InterviewMARKETSDirect| 01/2010
17Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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Past perormance is no indication or guarantee o uture perormance.
Despite the global crisis optimism prevails in the emerging markets.
Emerging Markets
on the ast-track to recoveryThe higher growth rates in many emerging markets are uelling share price rises. However, some independentcommentators are warning that a speculative bubble is now orming in Asia and Brazil. We look at the case or
and against investing in Emerging countries.
.
Indices MARKETSDirect| 01/2010
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Those who have been watching on the
stock markets o some o the worlds de-
veloped countries could be orgiven or
eeling somewhat bafed. Since 2003,
shares listed on the stock markets o
emerging countries have risen sharply,
while the more developed countriesstocks have climbed only moderately in
comparison1. The nancial and economic
crisis has done nothing to change this si-
tuation. Ater dropping sharply, emerging
market stocks again outperormed their
counterparts in developed nations1.
However, the equity markets are
only refecting the global economic situ-
ation: The bulk o the worlds economic
growth is concentrated in emerging mar-
kets, since developed nations are having
to deal with high unemployment, enor-mous government debt and a weakened
banking system. The recent nancial cri-
sis has scarred developed nations more
deeply than the emerging markets. While
the largest economic regions, the USA,
the Eurozone and Japan, have registered
negative growth over the last three ye-
ars, the major emerging market countries
have proved robust, maintaining impres-
sive levels o economic expansion1.
Emerging market growth remained
unabated
The economic recovery over the last ew
months means the 2010 economic out-
look or developed nations is now brigh-
ter. Nevertheless, emerging market
growth will remain stronger. The beating
heart of this growth will be Asia. Central
and Eastern Europe has greater structu-
ral problems than Asia, so we orecast
lower growth there, says Emerging Mar-
kets economist rom the German Deka-
Bank, Janis Hbner.
A key actor in the growth potential o
emerging markets is the rising domestic
consumer spending that comes hand in
hand with the increasing wealth o many
people. Booming China alone, with its
population of 1.3 billion, is signicantly
bolstering demand or many industrial
goods. And auto sales in emerging mar-
kets are higher than in the USA, Euro-
pe and Japan2. Experts believe that by
2020 the Chinese will have replaced the
Americans as the worlds largest consu-
mers. And, while consumers in develo-
ped countries are saving, some experts
expect the BRIC countries to lead the glo-
bal recovery in consumer spending.
Consumer-based industries set tothrive
The sectors likely to fourish in emerging
Asian countries over the coming years
are thereore those that are largely con-
sumer-driven. According to Union Invest-
ment und manager Hans Hlzl, the con-
sumer and inrastructure sectors will ex-
perience the strongest growth in Asia,
ollowed by the energy sector, including
alternative energy and energy supply. Mr
Hlzl, who has managed Unions SouthEast Asia und since 2002, believes that
the pensions and healthcare, and tourism
segments will be a central theme. From
experience, these consumer-ocused
All Markets vs. Emerging Markets
250
225
200
175
150
125
100
75
50
Points
06/05 06/06 06/07 06/08 06/09 06/10
MSCI Emerging Markets Index
MSCI World Index
Rebased: June 2005 = 100 points
Sharp price gains
New capital markets arose in these countries (the emerging markets), which perormed extremel y well. The MSCI
Emerging Markets Index, a barometer o Emerging Markets stock markets, has signifcantly outperormed the MSCI
World Index rom 1988 to the present day. However, these eme rging markets also experience higher levels o volati-
lity.
Jakarta The centre o growth or Indonesia.
1) Bloomberg, 21 April 20102) http://globaleconstats.com/wp/2010/01/01/scotia-economics-emerging-market-
auto-sales-to-climb-higher-in-2010/, 1 January 2010
Source: Bloomberg; 8 June 2010
IndicesMARKETSDirect| 01/2010
19Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
8/3/2019 RBS Investment Magazine
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Past perormance is no indication or guarantee o uture perormance.
market segments trend upwards when
the per capita annual income reaches
around USD 3,000. Below this, it makes
little dierence to consumption whether
per capita GDP rises from USD 1,000 to
2,000 or stagnates.
Equities set to keep rising
The healthy growth outlook is heightening
equity market expectations in the emer-
ging markets. While industrial countries
are likely to continue suering the con-
sequences o the crisis, experts belie-
ve that the emerging markets prospects
are better.
Carry trades benefting the emerging
markets
The emerging market boom is viewed cri-tically by some. Some market commenta-
tors warn that a speculative bubble could
emerge owing to the hot money on the
markets. The background to this is the
interest rate dierential between deve-
loped and emerging market countries:
Risk tolerant investors (carry traders) take
on debt in low-interest currencies such
as the US Dollar and invest their capi-
tal in other, higher-interest currencies or
in the equity, real estate or commodities
markets o the booming emerging mar-
kets. This increases the risk o a bubb-
le orming.
This is the case today. Capital inows
rom developed countries have contribut-
ed to the stock markets o emerging mar-
kets outperorming those o developed
countries. In the past, when interest rates
rose in the USA and Europe, unds fowed
back out o the emerging markets. Such
return fows o money, also reerred to as
repatriation, led to the appreciation o de-
veloped nations currencies, particularly
the US Dollar. It also gave rise to oreign
currency shortages in emerging markets.
The high level o oreign debt could then
not be repaid. A credit squeeze and the
fight o oreign capital has in many cases
then caused share prices to crash in the
respective emerging markets.
Increased economic stability
The US Dollar has regained a certain de-
gree o stability recently, but it is probably
Price/Earnings (P/E) ratio o the MSCI World and MSCI Emerging Markets
90
80
70
60
50
40
30
20
10
0
P/E Ratio
06/95 06/97 06/99 06/01 06/03 06/05 06/07 06/09 06/10
MSCI Emerging Markets IndexMSCI World Index
No over valuation based on P/E ratios
When comparing the P/E ratio o the MSCI Emerging Markets Index to the P/E ratio o the MSCI World Index, we can
see that emerging markets seem cheaper when valued with their P/E ratio.
Source: Bloomberg, 8 June 2010
Emerging Markets are booming
Indices MARKETSDirect| 01/2010
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Comparison o economic growth
20
15
10
5
0
-5
-10
Change in real Gross Domestic Product (GDP) compared to
the previous year in %
1990 1994 1998 2002 2006 20101992 1996 2000 2004 2008
China Germany India Japan USA
Source: International Monetary Fund; 28 January, 2010
Long-term stronger growth
Major emerging markets such as China and India showed stronger GDP grow th
than established markets such as the US, Japan and Germany.
Comparison o per capita annual income
9.000
8.000
7.000
6.000
5.000
4.000
3.000
2.000
1.000
0
USD
India Vietnam Philippines I ndonesia China Mala ysia
2009
Source: IMF; February 2010
Consumer spending threshold reached
According to Jim ONeill, Goldman Sachs Economist and inventor o the term
BRICs, emerging markets economies start to gr ow once per capita GDP rises above
USD 3,000 per year. With its population o 1.3 billion, China has already crossed
this threshold. Indonesia is set to ollow in the next ew years. The aver age per ca-
pita GDP o all emerging countries is already more than USD 9,400.
Major inrastructure projects are driving emerging market growth.
IndicesMARKETSDirect| 01/2010
21Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
8/3/2019 RBS Investment Magazine
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Past perormance is no indication or guarantee o uture perormance.
RBS Listed products linked to the perormance o the Emerging Markets
Covered Warrants oer leveraged exposure and Tracker Certicates track the underlying index.
Name Underlying ISIN TIDM (Product code) Expiry Strike Currency
Emerging Market Tracker (cer tifcate) MSCI Emerging Market EUR Price Index GB00B 436S J76 RB08 20/11/19 EUR
Emerging Market Tracker GBP (cer tifcate) MSCI Emerging Market Index GB00B 4X TW837 RB15 16/12 /19 975,01 GBP
Fron tier Marke ts Tracker (cer tifcate) MSCI Fron tier Marke ts Net TR USD Index GB00B5VDGW64 RB18 20/01/20 548 ,441 GBP
South Arica Accelerated Tracker (certifcate) FTSE/JSE TOP 40 GB00B59SRD16 RB42 08/04/13 26.045,83 GBP
China Accelerated Tracker (certifcate) HSCEI GB00B54W1D61 RB03 17/06/13 10.700,15 GBP
China Bear Super Tracker (cer tifcate) iShares FTSE/Xinhua China 25 Index Fund GB00B61FBF70 RB94 05/02 /16 GBP
Covered Warrants (certifcate) Bovespa Index Various n/a Various Various GBP
Covered Warrants (certifcate) Nikkei 225 Index Various n/a Various Various GBP
Covered Warrants (certifcate) HSCEI Index Various n/a Various Various GBP
Covered Warrants (certifcate) FTSE/JSE TOP 40 Index Various n/a Various Various GBPInvesting in Emerging markets involves certain risks and special considerations not typically associated with investing in more established economies.Please see www.rbs.co.uk/markets for more information. Source: RBS; 3 June 2010
still too early to say whether the trend has
reversed, and developed nations central
banks are still holding o raising inte-
rest rates. The upturn ollowing the se-
vere nancial and economic crisis o
the two preceding years is, quite sim-
ply, still too ragile.In addition, the overall economic
stability in many emerging markets has
improved considerably in recent years.
The export success o these countries
has been used to build currency re-
serves and, at the same time, oreign
debt has been reduced. Consequently
the sensitivity o servicing
debt against exchange
rate fuctuations has been
reduced. Scenarios likethe 1997/98 nancial cri-
sis in Asia, when the high level o or-
eign currency-denominated debt and
low currency reserves triggered a a-
tal chain reaction, are much less likely
to happen now. Moreover, the growth
in domestic demand in these countries
has also had the eect
o stabilising the over-
all economy. This means
that the economy can beless reliant on exports
to industrial countries. There is a very
good chance that the economic ascent
o the emerging markets will continue.
Emerging markets
have become more
economically stable.
The agricultural sector is losing economic signifcance, even in Asia.
Indices
For more inormation, educational material and expert views, please visit rbs.co.uk/marketsReerences to particular share indices do not indicate any association between RBS and the third party Index provider, or endorsement o any products by the Index provider. The productsare not in any way sponsored, sold or promoted by any relevant stock market, relevant Index, related exchange, index sponsor or investment und provider, and they make no warranty orrepresentation whatsoever, express or implied, either as to the results to be obtained rom the use o the relevant stock market and/or the gure at which the relevant stock market, relevant In-dex, related exchange or investment fund level stands at any particular time on any particular day or otherwise. They shall not be liable (whether in negligence or otherwise) to any person forany error in the relevant stock market, relevant index, related exchange, or relevant investment und and shall not be under any obligation to advise any person o any error therein.
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This document is an advertisement and is not a prospectus for the purposes of EU directive 2003/71/EC (the directive) and/or Part VI of the Financial Services and Markets act 2000. A prospectus has beenprepared and made available to the public in accordance with the directive. Investors should not subscribe for any securities referred to in this document except on the basis of information contained in theprospectus. Investors may obtain copies of the prospectus from the o ces of the issuer and the paying agents. The Royal Bank of Scotland plc (RBS). This advertisement contains numerous trade marks
belonging to The Royal Bank of Scot land Group plc and other companies in the RBS Group. These trade marks include, but are not limi ted to, The Royal Bank of Scotland logo, The Royal Bank of Scot land andRBS. If you are in doubt as to whether an item is a trade mark of The Royal Bank of Scotland Group plc or a member of the RBS Group, please contact us for clarification at the registered o ce address The
Royal Bank of Scot land plc, Registered in Scotland No 90312. Registered O ce: 36 St Andrew Square, Edinburgh EH2 2YB. RBS is authorised and regulated in the UK by the Financial Serv ices Authority. RBSis an authorised agent of The Royal Bank of Scotland N.V in cer tain jurisdictions.
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The Gold Bullion Tracker is a certificate linked to
the performance of the market price of gold. Itis listed on the London Stock Exchange and can
be traded like a share at any point during market
hours through your normal stock broker account
using the TIDM code RB81.
Risk Warning
The value of your investment may fall as well as
rise, you may receive less than you originally
invested and it is possible to lose your entire
investment. These products may not be suitable
for all investors, you should therefore ensure you
fully understand the risks involved, and seekindependent advice where necessary. You are
investing in a redeemable certificate and not
physical gold. If RBS fails or becomes insolvent,
you may lose some or all of your investment.
For a detailed product factsheet
on RB81, visit rbs.co.uk/gold
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Ater the gold peakExperts believe that gold production hit its peak in 2001. Resources that can be minedinexpensively are now depleted, which is likely to push up gold prices in the long term.
The gold price has increased ve-old
since 2002. One ounce of ne gold (1
troy ounce = 31.103481 grams) now
costs more than USD 1,200. The recent
surge in the price o gold can be largely
attributed to the widespread volatility that
weve seen across asset classes and the
enormous infows o investment into gold
Exchange Traded Funds. However, dig
below the surace and you could also
nd that the gold price is being driven
higher by the gradual depletion o our
global reserves.
Until 2008, global gold production
had allen or eight consecutive years.
According to the World Gold Council
(WGC), annual production in 2008 was
2,400 tonnes. In 2009, production rose
by 150 tonnes, which the WGC attribu-
tes to an increase in gold recycling. De-
spite the brie uptick last year, market
commentators believe that production
is set to sink over the long term. This is
because existing gold reserves are de-
pleted and new reserves are not being
discovered quickly enough to oset the
decline. Owing to the long lead time o
Gold in its purest orm.
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25Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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High production costs
The WGC estimate that the average
global production cost is approximate-
ly USD 400 per ounce. The signicant
exploration costs also push down gold
companies margins. When the gold pri-
ce experienced a 20-year downwardtrend, between 1980 and 1999, many
small gold mines closed.
A ew years ago, between USD 300
and 500 million was needed to open up
a mine, said Jamie Sokalsky, Chief Fi-
nancial Officer of Canadas Barrick
Gold, at an investor conerence in Ge-
neva. Now, you need between USD 3
and 5 billion, he continued. At the same
conference, Barrick CEO Aron Regent
revealed that Barrick, together with its
competitors Goldcorp Newmont Mi-ning and Kinross Gold, invested a to-
tal of USD 4 billion in gold exploration in
2009. However, hardly any new deposits
were ound.
As in the oil sector, resources that
are easy and inexpensive to mine are
largely depleted. Extracting poor or very
deep ore oten comes up against tech-
nical and economic hurdles. In open-pit
mining, an average o one tonne o stone
has to be processed or our grams o
gold, says gold expert and Erste Bank
analyst Ronald-Peter Sterle in an in-
terview with Rohsto-Spiegel earlier this
year. Mr Sterle points out that gold pro-
duction is stagnating or sinking in eight
o the twelve most signicant gold pro-
ducing nations, which together account
for more than 50% of the primary supply.
This includes the big our gold mining
regions, Canada, Australia, the US and
South Arica.
The gold peak
The comparison with depleting oil re-
sources has been increasingly drawn
over the last ew years. However, the si-
tuation is not exactly the same, as gold
is not consumed ater it is produced. But
there is talk o a gold peak, as experts
believe that production peaked in 2001
with annual production o 2,600 tonnes.
The worlds largest producer, Barrick
Gold, also holds this view. The Canadi-
an group anticipates a long-term decline
Gold demand per annum
Global gold mining costs
4.500
4.000
3.500
3.000
2.500
2.000
1.500
1.000
500
0
-500
Others Bar & coin retail investment
Jewellery
ETF (Exchange Traded Funds)
tons
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Industrial & dental
500
400
300
200
100
0
2003 2004 2005 2006 2007 2008
USD/ounce
Global gold supply per annum
4.500
4.000
3.500
3.000
2.500
2.000
1.500
1.000
500
0
-500
Net producer hedging (This means that producers store gold to hedge themselves against inflation.)Official sector salesTotal mine supply
tons
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Old gold scrap
Gold supply and demand
The bulk o the worlds gold demand o around 3,500 tonnes per year is attributable to the jewellery industry. Demand or gold
in major emerging markets, such as China and India is increasing in line with the grow th in the populations wealth. Gold is
also used in the electronics industry and dentistr y. Added to this, investors interest in gold has spiked in recent years and
contributed signicantly to the price rises. According to Barclays Capital, investment demand amounted to 1,400 tonnes o
gold last year, which corresponds to a 40% share o global gold production. Today, annual gold production is roughly 2,500
tonnes. Demand is thereore outstr ipping mine production by more than one third. Additional supply is generated through
recycling and the gold reserves o central banks, which have been consistently reduced since the end o the 1990s. However,
there seems to be a change o thinking in this regard, demonstrated in particular by the gold purchases o Asian central banks.
Surging costs
Over the last 7 years, gold production cost s have more than doubled. This upward trend r efects the act that gold de -
posits that can be easily exploited are already largely exhausted.
Source: GFMS, June 2010
Source: U.S. Geological Survey; March 2010
Source: GFMS, June 2010
CommoditiesMARKETSDirect| 01/2010
27Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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Past perormance is no indication or guarantee o uture perormance.
RBS Listed products linked to the perormance o Gold.
Covered Warrants provide leveraged exposure to the underlying and Tracker Certicates track the perormance o the Underlying.
Name Underlying ISIN TIDM (Product code) Expiry Strike Currency
Gold Bullion Tracker Certifcate, GBP Hedged Gold GB00B59N1890 RB81 17/06/19 937,25 GBP
Gold Bugs Tracker (Certifcate) Gold Bugs Index GB00B4LZCF09 RB11 02/12/19 500,55 GBP
Gold Super Tracker (Certifcate) Gold GB00B67JNK20 RB92 25/11/14 GBP
Covered Warrants Gold Various n/a Various Various GBP
Source: RBS; 3 June 2010
From gold rush to industrial production
When James Marshall checked
his water mill on Californias Ame-
rican River on 24 January 1848,
something was glinting in the wa-
ter. Marshall bent down, grabbeda handul o grit and mud and
held it up to the light. Then he re-
alised what was shining: Gold!
Thousands o gold prospectors
were subsequently attracted by
the dream o getting rich quick.
Between January 1848 and De-
cember 1949, San Franciscos population grew from 1,000 to 25,000. The Californi-
an gold rush also marked the start o industrial gold production.
In Australia, gold fever took hold in the 1850s, when immigration swelled. The dis-
covery o gold also had signicant ramications on South Aricas industry. The dis-
covery of the worlds largest gold deposit in 1886 in Witwatersrand transformed the
economic and social structure o the previously remote and agriculturally-dominated
Boer Republic. The American gold rush in 1896 also brought signicant change.
Hundreds o thousands o gold prospectors came to the Klondike River near Daw-
son City. This led to the establishment of the Canadian Yukon Territory and the dra -
wing of the border between Alaska and Canada. Most of the gold produced through
mining today comes from China, Australia, the USA, South Africa, Canada and Rus-
sia. Annual production is now roughly 2,500 tonnes, some one hundred times the
production in the nineteenth century. We now produce more gold in two years than
documented in the thousand years o the middle ages.
Westward Ho! Gold prospectors on the way to Caliornia.Only a ew were able to realise their dreams.
Photo:wiki.histnet.ch
Difcult mining conditions.
in production o one million ounces per
year. 2009 was a statistical anomaly in
terms o gold production, according to
the second largest gold mining compa-
ny, Newmont Mining (USA).
Since gold production began, an
estimated 160,000 tonnes of gold has
been extracted rom the earth. It is be-
lieved that there are reserves o a urther
100,000 tonnes. The expected decli-
ne in gold production is an indicator o
long-term gold price rises. While supply
shrinks, many experts consider that de-
mand will rise in the uture, particular-
ly rom burgeoning emerging markets
and investors who are banking on ano-
ther gold rally.
Gold ever.
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Past perormance is no indication or guarantee o uture perormance.
Currencies Potential trends for 20102010 promises to be an interesting year for the currency markets. Will the Pound
become the target o speculation?
The capital markets were marked by three
major developments in 2009: The unex-
pectedly rapid exit rom the global reces-
sion, the increased risk appetite o priva-
te investors and the break away o emer-
ging markets rom developed nations. In
the currency markets, the most signicant
o these was investors return to riskier as-
sets. Given the extremely low interest ra-tes in most developed nations, investors
sought out currencies oering interest
rate advantages. A resurgence o carry
trades, where investors take out credit in
low-interest currencies and invest the mo-
ney in higher-interest currencies, began
as early as the start o 2009.
Structural problems
Overall, the structural problems in many
countries were tackled in 2009 by massi-
vely expanding government debt and IMF
lending, in order to stop the nancial cri-
sis spreading like an international wild-
re. However, this year will likely see some
severe adjustments. Countries in nanci-
al diculties may be able to help them-
selves but i not, more bailouts may be on
the cards. This will require painul, even
excruciating, cost cutting measures and
structural reorms that not all countries are
prepared or. We have already seen ex-
amples o this in Greece, Iceland, Portu-
gal, Mexico and Dubai. A similar situation
is brewing in the Baltic States and other
Eastern European countries. It is thereore
highly likely that, despite the general cal-
ming o the global credit market, there will
be urther local nancial crises and the po-
tential or signicant turbulence or some
currencies. A lot depends on whether the
economic recovery gathers pace, as this
would allow many o the structural prob-
lems to be eradicated. However, many are
sceptical as to whether this type o blan-A new world oopportunity.
Currencies MARKETSDirect| 01/2010
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ket recovery is possible in the timescale
that it is needed. This puts particular pres-
sure on the currencies o countries which
have high decits and debt ratios.
Despite the scepticism surrounding
the Euro in recent months, a ree-alling
US Dollar is the biggest threat to the glo-bal economy that could emerge rom the
currency market in the long term. Cer-
tainly China and many other countries in
Asia, which own billions o US Dollars,
could ace signicant economic allout
i this was to occur. This uncontrolled de-
valuation o the currency would occur i
the market lost condence in Americas
ability to service its huge debt position.
Such a scenario is too grim to contemp-
late and, in actual act, an entirely die-
rent story has played out over the past ewmonths: The US Dollar has been in de-
mand again, as many investors are spe-
culating that the US economy will recover
more quickly than the European or Japa-
nese economies, or example. In addition,
the events in Greece cast doubts over the
stability o the European Monetary Union
which cast downward pressure on the va-
lue o the Euro.
Nevertheless, speculation about an
early interest rate hike by the US central
bank is exaggerated. The Fed is not like-
ly to raise its key rate beo-
re the ECB, so interest inthe Eurozone will remain
higher than in the USA or
an extended period. This
should boost the EUR/USD rate in the me-
dium term. The Yen, on the other hand,
could again come under selling pressu-
re, as it has already done in recent weeks.
Chronic deation in Japan means that the
Bank of Japan will likely keep its key rate
at zero throughout 2010 and beyond. It is
possible that over the long term, the Yen
could replace the Dollar as the borrowingcurrency or carry trades once more and
start losing ground again. From the se-
cond hal o the year, the issue o a rever-
sal o interest rates will become increasin-
gly important in the USA and Eurozone. In
particular, the downward pressure on the
Dollar will increase again i the US econo-
my starts to lose pace.
Like the Euro, the Pound could be-
come the target o speculative attacks
in the coming months, as Britains bud-
get decit is running at more than 12% of
GDP, a similar level to that o
Greece. Furthermore, thenew coalition government
in Westminster has yet to
explain how it intends to
put its budget in order. It aces an unple-
asant task o consolidating the UK bud-
get, which will be likely to require dras-
tic government spending cuts and, in all
likelihood, tax increases. Should an an-
nouncement on the new budget conso-
lidation measures be urther delayed, ra-
ting agencies could strip UK government
bonds o their top-level credit rating. Thiscould put signicant downward pressure
on the British currency.
Summary
The stability o the US economy may be
overstated. The present strength o the
Dollar is unlikely to be long-lasting. The Yen
The strength othe US economy
is unknown.
The greatest threat is orUSD depreciation.
CurrenciesMARKETSDirect| 01/2010
31Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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Are interest rates
set to rise globally?Australia was the rst major developed country to raise its interest rates. I this is the rst sign o a globalinterest rate snap back, investors will have to get used to the idea o alling bond prices.
Are interest rates set to soar?
Government bonds at a glance
This table shows a list o leading government bonds and their perormance over dierent time periods.
Name Future contract Future price Perormance YTD % Perormance 1 year % Per. 5 years % Yield %
German governmen t bond BUND uture 128 ,28 5 ,85 7,05 4,57 2 ,72
UK government bond Gilt uture 119,66 4,55 32,28 5,22 3,62
Swiss government bond Swiss ederal bond 142,15 3,99 15,27 5,44 1,50
US gover nment bond T- not e uture 119,8 3 3,79 1,70 6,0 6 3,41
US gover nment bond T- bond ut ure 12 2,0 9 5,82 3,76 3,63 4, 30
Japan government bond JGB uture 140,37 0,48 2,50 -0,46 1,29
Source: Bloomberg, 3 June, 2010
BondsMARKETSDirect| 01/2010
33Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.
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Past perormance is no indication or guarantee o uture perormance.
Israel, Australia and Norway have all
raised their key interest rates over the
last year. These countries are not usu-
ally the central ocus o international mo-
netary policy, but this time the nancial
world is tracking their interest rate deci-
sions very closely, as Australia was the
irst major developed country to raise
its interest rates ater the economic and
nancial crisis. Almost all o the worlds
central banks reacted to the crisis with
swingeing interest rate cuts. Investors
are now concerned that the rate hikes
in these countries could trigger a globalturnaround in interest rates. However, ta-
king a closer look, it is clear that the inte-
rest rate rise in Australia is largely attribu-
table to the brightening economic envi-
ronment in the Asia-Pacic
region. With its commodity-
driven economy, the count-
ry is reaping the rewards o
the still high growth rates o
China and its neighbours.
No whisper o rate hikes in the USAt the heart of the world economy
which is still the US the situation is com-
pletely dierent, however. During the -
nancial crisis, the Federal Reserve cut
its key rate to a historic low of 0 to 0.25%.
At the same time, it pumped enormous
amounts o cash into the economy, infa-
ting its balance sheet by USD 2 trillion,
Household consumption and GDP (nominal) in the US
16
14
12
10
8
6
4
2
0
-2
-4
Change compared to previous year in %
01/55 01/61 01/67 01/73 01/79 01/85 01/91 01/97 01/03 01/09
Household consumption
Gross domestic product
Source: Bloomberg, February 2010
Massive decline
Both gross domestic product and household consumption have declined consi-
derably in US Dollar terms (nominal). A crisis o this scale was last seen in 1958.
This means that company revenues are trending downward.
as a reaction to the contracting GDP a
situation last seen in early 1958. Com-
panies saw their potential revenues shri-
vel and reacted by making redundan-
cies, which in turn put a brake on con-
sumer spending, exacerbating the US
economic slowdown over the ollowingquarters. As well as the central bank, the
US government also mounted a charge
against the declining nominal GDP. Ba-
rack Obamas government decided to
tackle the economic crisis
with substantial economic
stimulus packages, which
also caused the budget
decit during the last scal
year (to 30 September 2009) to climb to
an immense USD 1.417 trillion its high-
est level since the Second World War.However, US exports were avoured by
the weaker US Dollar. These eorts paid
off: according to the Department of Com-
merce, during the ourth quarter, the US
economy registered 5.7% growth on an
annualised basis. The Fed is nonethe-
less sticking to its zero interest rate po-
licy. The deteriorating situation in the la-
The Fed is still
holding its key rates
extremely low.
Australia is leading the way.
Its hard to calculate where interest rates go next
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bour market is causing the central bank
concern. Fed Chairman Ben Bernanke
has stated that the low interest rate will
likely be maintained or an extended pe-
riod, but that the US central bank is pre-
pared to rein in monetary policy when the
situation has improved suciently.
ECB and Bank o England maintain
low interest rates
A similar approach has been adopted
in Europe. During the nancial crisis, in-
terest rates were cut to unprecedented
lows the ECB headline rate is now at
a historic low of 1.0%, while the Bank of
England rate is 0.50%. Banks can now
borrow unlimited funds from the ECB for
a period o up to one year, which has
pumped more liquidity into the marketthan ever beore. The respective heads
of the ECB and BoE believe the current
monetary policy to be appropriate. Des-
pite signs o the economy stabilising, the
outlook is still uncertain and a bumpy
landing is expected. Many experts be-
lieve that it is still too early to tighten m