ISI Far East

Things will never be the same again …

Overview• ISI facts• Important Far Eastern trends• Far Eastern trade• Sound businesses• Characteristics of the Far East and China• Country and industry preferences• Risks• Investment philosophy and investment process• Questions

Urbanisation in Asiacurrent migration

Migration from rural to urban areas a long-term trend contributing to growth and demand for commodities

Rising income in China- also for rural population

Rising income =growing private consumption

Disposable income andhouse price developments in China

Wage rise faster than house prices

Wages

House prices

China an agricultural country?

0

10

20

30

40

50

60

Agriculture Industries Tertiary

share of total labour force share of GDP

%

Too many employed oninefficient farms

Source: GaveKal

Household debt/GDP

Mortgage debt Other debt

Source: GaveKal

Chinese savings motivations

0% 5% 10% 15% 20% 25% 30% 35% 40%

Childen's wedding exp.

Home purchase

Medical care

Retirement

Children's education

Key motivations for saving

Source: HSBC

USD/RMB

USA

Kina

Japan Korea

.

kilde: BCA Research

The only way is …

Exports from Asia to USA declining

USA

Kina

Japan Korea

Result: less dependency ondebt-ridden US consumers

.

Source: BCA Research

Declining debt/equity ratio butROE remains high

Reduced risk at lower global growth

Debt/equityROE

Source: CLSA

Equity yields exceed bond yields

Source: CLSA

Numerous opportunities of findingsecure equities in Far East

Far East• Economic growth is stable and high

– likely to remain so in 10-15 years• Rapidly rising purchasing power among private households

– new consumers appear every day• Positive demographic development• Swelling trade in the Far East

– reduces dependency on USA• Positive development of various balances

– countries capable of countering recession• Sound companies with good earnings

China

• Share markets are liquidity driven– 90,000 new stock accounts every day

• Reduction in corporation tax– from 33% to 25%

• Rising exchange rate• High growth in earnings• Listing of H shares in China

– PetroChina and China Mobile• 2008 Olympics

Country weights

Overweights• China, Hong Kong and Macau• Singapore• Malaysia

Underweights• Korea• Taiwan• Thailand

Industry preferences

• Real property– private homes, office buildings and hotels

• Retail sales• Financials• Infrastructure• Telecommunication• Food• Commodities

– food, metals and oil• Technology – substantial underweight

Risks

• Measures imposed by Chinese authorities to bring booming economy to a halt are too stringent

• US housing market to weaken and USD to plunge

• Growth in global economy triggers rising inflation and interest rates

• Oil price to exceed USD 100 per bbl

Investment philosophy

1) Active management enables us to generate outperformance.

2) We access the market with a top-down approach, focussing on getting countries and sectors right.

3) We believe that investing in long or short themes can add value to the portfolio.

4) Identification of differences between market value and fair value that are not due to fundamental issues can contribute to outperformance.

5) We believe that ability to act fast on new information is crucial for our outperformance.

6) We believe that teamwork and a disciplined investment process is necessary in order to be fast-reacting.

7) We believe that cooperation with external advisors is necessary and value adding.

Sydbank Emerging Markets & Structured Credit aims to offer customized, premium quality investment products as well as active investment management ensuring high, long-term performance. By investing in Emerging Markets we believe that we can generate risk adjusted excess value based on seven fundamental elements:

Global factors and themesInterest ratesCurrencyInflationGrowthGeopoliticsCommoditiesStructural changes

Market analysisRelative pricingRisk aversionSupply/demand

GLOBAL VIEW

Portfolio risk profile and themes

COUNTRY / SECTOR ALLOCATION

Quantitative factorsMacro economyValuation Geographical placementTrading relationsCredit rating

Qualitative factorsPolitical stability/prospectsReform agendaBudget planningFinancial systemInternational relationsCentral bank

Country / sector selection

STOCK SELECTION

Micro researchExternal advisorsValuationManagement qualityTop line growthEarnings growth / qualityCF generationBalance sheet strength

Investment horizon:• Strategic/tactical

Final portfolio

PHASE 1 PHASE 2 PHASE 3

Feedback to the process:Investment guidelines, legislative investment rules, attribution analysis etc.

Investment process