�The first quarter was characterisedby continued financial market stress,huge price volatility in certain areas,currency turmoil, corporate damage(Bear Sterns, UBS, SocGen), hedgefund losses and collapses and, untilthe Fed stepped in decisively overBear Sterns, equity market damage.On the one hand, we had risingcredit dislocation and recessionary

fears; on the other, we had boomingoil/agricultural commodity prices,fuelling already evident inflationarypressures. The Fed has at leastallayed fears on the former, althoughthe stagflation threat has by nomeans gone away. Hence thecontinued strength of index-linkedgovernment bonds.

�Equity markets are now workingon the basis that the Fed will dowhat it takes to keep the US ‘ontrack’. We now have a normal yieldcurve and US 10 year government bondyields are back above 4% - asrecessionary fears abate. Negative realinterest rates and a $170 billion fiscalstimulus should see the US beginning tomove away from the recessionary rocksin the second half of the year. This is thethinking underpinning the ConsensusEconomic forecasts below.

�There are doubters, however - theIMF is in the very slow growth camp(forecasting 0.6% GNP growth for the USin 2008 and 2009). HSBC believes the USeconomic turnaround will not be Ushaped, as per consensus, but rather Wshaped, presaging a slow 2009.

�Who is right? The most encouraging chart seenrecently is one showing that annual US

growth of bank credit/commercial paperremains positive at 5% levels (in linewith nominal GNP growth). Thiscompares with zero growth at the timeof the last - shallow - recession in 2001and 10% + levels prevailing between2004 and early 2007, as banks gorgedthemselves on credit opportunities in abooming real estate market. Providedbanks continue to take their medicineand successfully recapitalise, creditdislocation - THE enemy - should beavoided. Credit growth in the emergingworld continues strong and both creditand monetary growth in the Eurozoneare satisfactory. So the banking systemwould seem to be alive and operating;the US segment of it is taking apowerful emetic to disgorge the illscontained within it. While this process isunpleasant (with commercial banksestimated to cut up to 200,000 jobs inthe next 18 months), it should lead to apositive result eventually.

�What has been the cost?It is almost poignant to compare theearly estimates of losses of $100 billionwith the current $280 billion IMFestimate and the $1trillion estimates ofcredit losses, if the IMF ‘worst case’economic scenario comes to pass. Thesefigures compare with the $150 billionlosses arising in the savings and loansdebacle of the late 1980s. What hashappened is not unique. The IMF in 2002

The first quarter of 2008 wascharacterised by financial marketstress, huge price volatility, currencyturmoil and corporate damage.

AllenbridgeEPIC Investment Advisers provides cost-effective solutions to trustees’ investment-related problems.

This document is directed solely at professional, not retail, clients. AllenbridgeEPIC is part of the Allenbridge Group plc, which is authorised and regulated by the Financial Services Authority.

Independent, uncompromised, trusted investment advice Issue No. 6 • May 2008

1

At AllenbridgeEPIC wecharge set fees. Everything isclearly costed before youcommit to our consultancy.You can buy as much or as little as you require. But youcan be very sure you are unlikely to receive such excellent value for moneyfrom any other adviser

A> AFFORDABLECONSULTANCY

At AllenbridgeEPIC you willfind the widest range of expertise on tap and adviserswho have worked both inthe investment fund andpension fund arenas. All have distinguished, enviable track records andyou’ll be hard pushed to getaccess to such expert adviceanywhere else.

E> EXPERTOPINION

At AllenbridgeEPIC we haveaccess to the independent research source within Allenbridge Group plc. This allows our advisers tooffer uncompromised advicebased on their own independent thinking andbacked up by research thatbanks and institutions pay apremium for.

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SpringProfessional PensionsShow 2008- SPECIAL EDITION -

GDP% 2006 2007 2008(e) 2009(e)US 2.9 2.2 1.4 2.3Eurozone 2.9 2.6 1.5 1.8UK 2.9 3.1 1.7 1.9Japan 2.4 2.0 1.3 1.8Asia ex Japan 8.4 9.0 7.7 7.5China 11.1 11.4 9.8 9.3Latin America 5.3 5.0 4.4 4.3Eastern Europe 6.8 6.7 5.9 5.8World 4.0 3.7 2.9 3.2

Forecast Growth rates (source Consensus Economics) (e)=estimate

By John HeskettSenior Adviser AEIAJohn is also Chairman of HeartwoodWealth Group, sits on a number of investment committees and is apension scheme trustee.

john.heskett@allenbridgeepic.com

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had identified 112 systemic bankingcrises in 93 countries since the late 1970s. But this is deeper and morepervasive - and its epicentre is in the US.

�The ‘moral hazard’ question for banks will continue to be debated. ‘Too good to fail’ must replace ‘too bigto fail’. Regulators have the hugelydifficult task of squaring the need for adynamic, competitive financial systemwith the need for a safe one.

�One final thought - markinginstruments to markets in dislocatednon-markets has to have added to theproblem. It may well be that in 3 to 5years’ time , provisions made at the endof 2007 - reflecting a very poor UShousing market , complexity and anabsence of transparency - will be seen asexcessive in the light of subsequentincome flows.

�How will matters develop?In the same way as the NASDAQ equitycrash of 2001-2 has subsequentlyresulted in a steady derating of equities,as investors remained steadfastlycautious, so it may well be that investorswill remain wary of credit and creditinstruments for years to come - indeed,spreads in US BBB corporate bonds -relatively simple and transparentinstruments - have ballooned out to2001/2 recessionary levels. They nowlook attractive. The desire to add risk willre-emerge in some new, undefined area.Securitisation will reduce; investmentbanks are likely to become regulated, inreturn for liquidity access, and this couldextend to hitherto conflicted ratingagencies. US banks will consolidate.Hedge funds will find their ability to gearup and operate further reduced and manywill probably exit. Private equity willreturn to their original focus on

management buyouts - on a muchsmaller scale than recently. The 50% fallin Blackstone’ share price from its originalissue price last year says volumes abouthow the opportunity set has changed. Toquote one industry participant privateequity firms ‘have returned to theobscurity we so richly deserve’.

�The basic US data - leadingindicators, the labour market, consumerconfidence and spending - shows thatthe US may have moved already intorecession. If it has and the outturn is‘normal‘, past experience suggests thatwe should be thinking about putting onrisk. Directors are buying theircompany’s shares in size; maybe weshould too. Certainly, they would seemto offer value but, then, they have forsome time.

�However, the corporate earningstable above is too sanguine, asthe response to the very recentGeneral Electric profits warningwould suggest. There will be furthersetbacks, which means that additions toequity risk have to be made selectivelyand carefully. To buy a UK equitymarket tracker may look sensible, giventhe carnage suffered by UK activemanagers, but it has to be sub-optimal,

given the degree of concentration andinherent stock specific risk. If onecannot bring oneself to buy bankequity, in view of all that has happened,then there has to be a question markover buying equity at all.

�The requirements ofdiversification continues toreduce UK equity positions inportfolios and this process is likely toaccelerate, with the declining momentumof the UK economy and the potential -via house price falls or City layoffs - fornegative shocks. As we said in the lastissue of Perspectives, there are betterplaces to focus on and better things todo - in the emerging world, ininfrastructure funds, commodity relatedfunds, global long or long/short equityfunds, property funds outside the UK. Wedo have significant choice. A recent clientworkshop pointed to a 30-40% UKequity weighting, with the remainder inglobal equities, partially hedged. Asportfolios continue to explorediversification opportunities, it isencouraging to report that the outlookfor the emerging world - at least from abroad macro economic view point -continues to be reasonably stable. This isan emerging world economic expansionand market falls have moved equityvaluations back to more attractive levels.

Contact AEIA

London Office17 Hill StreetMayfairLondonW1J 5NZTel: 020 7409 1111Glasgow Office180 Hope StreetGlasgowG2 2UETel: 0141 564 1638Lancaster OfficePO Box 785LancasterLA1 9DBTel: 01524 389326E-mailinfo@allenbridgeepic.comWebwww.allenbridgeepic.com

Issue No. 6 • May 2008

2

2008 EPS 2008 2008 2008

Growth PER Inflation Current Balance

% (e) (e) % (e) (e)

Mexico 13.3 16.0 4.0 -1.5

Brazil 30.0 11.8 5.0 -0.8

Korea 8.1 11.5 3.8 -1.3

Taiwan 18.1 13.9 2.4 6.2

India 23.9 16.3 6.6 -2.7

South Africa 23.7 11.5 6.5 -6.4

China 38.6 15.5 6.4 8.4

Russia 18.5 9.8 11.3 5.9

Emerging Markets (source HSBC/UBS) (e)=estimate

This document does not constitute a recommendation to buy or sell investments and should not be construed as an offer or solicitation to buy or sell any investment. Clients should seek professional advice specific to their circumstances and requirements.

The value of investments and any income may fluctuate (this may partly be the result of exchange rate fluctuations) and may fall as well as rise. This includes investments in equities, warrants, futures and options, government or corporate bonds or any other designated investment and property whether held directly or in a pooled or collective investment vehicle. Further, investments in emerging markets or private equity may be more volatile and less marketable than in established and quoted markets. Accordingly,investors may not get back the full amount originally invested. Past performance of investments and/or investment managers and simulations based on past performance, is nota guide to future investment returns. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns.

Any information contained in this document has been obtained from sources believed to be reliable but Allenbridge Group Plc does not represent that it is accurateor complete. Where Allenbridge Group Plc has expressed views and opinions, these may change without notice.

2008 EPS 2008 2009 EPS 2009Growth PER Growth PER% (e) (e) % (e) (e)

US 13.3 14.5 15.5 12.6UK 5.3 11.2 9.0 10.3Europe ex UK 10.2 11.3 12.8 10.2Japan 10.2 14.0 9.4 12.8Pacific ex Japan 21.6 14.7 15.0 12.6

Corporate Earnings (source IBES) (e)=estimateIn each issue of Perspectiveswe give a list of 10 questions trustees shouldexplore with their investment managers.Here is our updated list:

1. How much should we rebalanceaway from UK equities to overseas equities - in the overseas segment,how much should we focus onAsia and Emerging Markets?

2. What do we do about currencyoverlay now that sterling has weakened?

3. Commodities/energy/resourcesinfrastructure - should we getinvolved? How and when?

4. Hedge funds - what is the right exposure, given the turbulence inthe traditional asset classes?

5. Commercial property - do weadd now or continue to wait? Do we diversify into overseasproperty markets?

6. Private equity - credit spreadshave widened significantly, towhat extent is the party over?

7. What do we sell if we want toadd to equity risk - reduce cashweightings, or sell property or bonds?

8. Is the time yet right to considerhigh yield bonds?

9. 130 : 30 ‘extension’ portfolios,unconstrained strategies - to whatextent should these form part of apension fund asset allocation?

10. Should we be considering so-called ‘liability-driven investment’approaches (‘LDI’)?

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