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

A world of uncertainty or a world of opportunity?

Why? Seeds sown early this decade

US monetary

policy

Leverage

Sub-prime

Financial engineering

Financial market failures Bring out your dead!

Re-incarnatedWoundedDead!

Risky assets have suffered

Balanced Assets Defensive Assets

Gross 12 month returns by asset class as at 31 October 2008

Source: Schroders/Datastream. 1. S&P ASX 200; 2. MSCI World; 3. S&P ASX300 Property Trusts; 4. Merrill Lynch Global High Yield Index; 5. Schroder Hybrid Securities Fund; 6. UBS Credit Index; 7. UBS Bank Bill Index 8. UBS Treasury Index

Big losses in equities, REITs and higher yielding credit

Growth Assets

1 2 3 4 5 6 7 8

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

AustralianEquities

InternationalEquities

PropertyTrusts

Global HighYield

Hybrids Credit Cash Government

The pointy end…

0

20

40

60

80

100

120

Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08

Cen

ts

Source: CBA, Schroders

Indicative market CDO

Indicative market US residential mortgage backed

2007 AAA structured product and mortgage backed security prices

0

1000

2000

3000

4000

5000

6000

7000

95 97 99 01 03 05 07

Ind

ex

Shanghai SE Composite Index

Chinese stock market

Excesses coming home to roost

US recession is inevitable

Source: Datastream

US GDP and Conference Board Leading Index

It will be an extended slump

-4

-2

0

2

4

6

8

10

82 84 86 88 90 92 94 96 98 00 02 04 06 08

%

-10

-5

0

5

10

15

20US GDP - yoy% Leading indicator - yoy% - lead 6 months (RHS)

Recession is also likely in Europe and Japan

-1

0

1

2

3

4

5

98 99 00 01 02 03 04 05 06 07 08

%

45

49

53

57

61

Ind

ex

Eurozone GDP and Whole Economy PM

-3

-2

-1

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08

%

25

35

45

55

65

Ind

ex

Japanese GDP and Econ Watchers Outlook

Eurozone GDP – yoy%

Weighted ISM (RHS)

Japanese GDP – yoy%

Eco Watchers Outlook – Lead 2 months (RHS)

Surveys indicate sharp slowdown

Inflation is no longer an issue

Source: Datastream

-6

-4

-2

0

2

4

6

8

73 76 79 82 85 88 91 94 97 00 03 06

%

-2

0

2

4

6

8

%

G7 economic activity and change in inflation

G7 annual change in inflation

G7 GDP – yoy% change, lead 2q (RHS)

Inflation follows economic growth down

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

84 87 90 93 96 99 02 05 08

Ra

tio

0

100

200

300

400

500

Ind

ex

Terms of Trade are reversing

Source: UBS, Datastream

Terms of Trade and Base Metal Prices

Australian terms of trade

MG Base Metal Index (RHS)

Tailwind to headwind

Australia will flirt with recession

Source: Datastream

Weak sentiment is flowing through to activity

Australian non-farm product and leading index

-4

-2

0

2

4

6

8

10

82 84 86 88 90 92 94 96 98 00 02 04 06 08

%

-50

-40

-30

-20

-10

0

10

20

30

40

50Non-Farm Product - yoy% Leading Indicator - lead 6 months (RHS)

%

40

50

60

70

80

90

100

110

120

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

%

We have high household debt levels like the US

Source: GSJBW Research Estimates, Goldman Sachs Research Estimates

Household sector debt as % of GDP

Aggressive household credit build up across most western economies

Australia

UK

USA

Global Equities are looking attractive

Source: Schroders, Datastream

0

10

20

30

40

83 86 89 92 95 98 01 04 07

Ra

tio

P/E ratio

average

+1 std deviation

-1 std deviation

Trailing PE MSCI World vs 25 year historical average

Global market is cheap

Underlying EBIT analysis: FY08 vs FY02

-2,068

-3,7274,159-2,5042,015

4,096

1,7712,752

5,157

1,3682,164

6,767

3,615

3,102

24,282

-2,834-499

-873 -179

0

10,000

20,000

30,000

40,000

FY02

Nick

el p

rice

Copp

er p

rice

Alum

iniu

m/a

lum

ina

price

Oth

er B

ase

Met

als p

rices

Iron

Ore

pric

e

Oth

er p

rices

Ther

mal

coal

pric

e

Petro

leum

pric

es

Met

Coa

l pric

e

Price

linke

d co

sts

Volu

me

Costs

(inc

. non

-cas

h)

Infla

tion

Exch

ange

Asse

ts so

ld

Expl

orat

ion

Oth

er

FY08

US$

m

BHP BillitonCommodity prices have driven profits

Source: Merrill Lynch 31 August 2008

This is illustrative only and does not represent Schroders’ recommendation on these stocks

Earnings driven by increased prices - volume increase offset by higher costs

Increased prices

Increased volume offset by increased costs

Underlying EBIT analysis: FY08 vs FY02

-6

60

26

11

3

10

2

-26

-40

-20

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006 2007 2008

-10

-5

0

5

10

15

20

Return Spread (RHS)

% %

Something positive from the credit crisis…

Source: Schroders, Datastream

US high yield

Return

Spread (RHS)

Credit markets will provide attractive returns

%

Source: Morgan Stanley, * Includes public sector

Corporate gearing is low

0

50

100

150

200

250

300

350

1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008

% o

f GD

P

Corporates

Households

Financials

Total*

US debt as a percentage of GDP

4

6

8

10

12

14

02 03 04 05 06 07 08

%

Yields from Hybrids are looking attractive

Source: Schroders, Datastream

Australian hybrid yield and cash rate

Cash rate

Hybrid option adjusted yield

Hybrids are cheap now!

0

2

4

6

8

1998 2000 2002 2004 2006 2008

%

Cash looks good now…

Source: Schroders/Datastream

Australian cash rate vs US federal funds rate: 1997 - 2008

US federal funds rate

Australian cash rate

?

…but look what happened in the US

Source: Schroders/Datastream

Returns of Australian Cash, Government Bond

Too much cash – too little bonds

High cash rates + fear = poor long term portfolio construction decisions

7%

12.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

YTD October 2008

AUS Cash Return AUS Bond Return

Source: Schroders

Cycle vs. asset class performance

Slow down Recession Recovery Expansion

Cash

Govt bonds

High Yields Bonds

EquitiesHigh Yields Bonds

Equities

Equities

Commodities

Property

Australia

Preferred asset class and the economic cycle

US

Europe Japan

Asia

Our approach hasn’t changed

We like;

• Transparency

• Liquidity

• Value for money

• True economic diversification

• Appropriate leverage

Unlisted assets and hedge funds do not provide this!

-10%

-6%

-2%

2%

6%

10%

14%

Equities Property trusts HigherYieldingassets

Alternatives Cash & FixedIncome

June 2007

What have we been doing?

Remove risk in 2007

-10%

-6%

-2%

2%

6%

10%

14%

Equities Propertytrusts

HigherYieldingassets

Alternatives Cash &Fixed

Income

December 2007

What have we been doing?

Remove risk in 2007

What are we doing?

Selectively adding risk

-10%

-6%

-2%

2%

6%

10%

14%

Equities Propertytrusts

HigherYieldingassets

Alternatives Cash &Fixed

Income

October 2008

Conclusions

• Economic concerns warrant caution

• “Risky” assets now have a risk premium

• Its not the time to sell risk

• Like higher yielding assets - hybrids

• Cash was king – but being too defensive could be costly

A world of uncertainty…but with selective opportunity

Important

General Disclaimer

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