1st March 2010

Moderate losses.

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LAST WEEKTHIS WEEKANALYSIS and STRATEGYCURRENCIESTECHNICAL CHART READINGSUMMARY

PREFERRED FUNDS

LAST WEEK

S&P500

FTSE100

FTSE Eurofirst 300

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BULLETIN

Markets had an erratic week as data for the first time this year really began to test theresolve of bulls.The US Consumer Confidence number provided the first surprise.It dropped sharply, to its lowest level since April. Whilst I don’t have the data to hand,I remember few such large falls. I do find the figure to be a poor predictor and oftentends to reflect recent events. In this case likely the stock market fall in late January,and the poor weather experienced at the same time.Nonetheless, if nothing else it suggests any belief in an economic recovery remains

fragile.US Home Sales data also disappointed but the next ‘shock’ didn’t come till Thursday,when another poor Weekly Initial Jobless Claims number from the US gave the bullsanother knock.The market opened sharply lower, but highlighting that buyers remain, the marketmoved firmer and closed little changed.Again the rise was blamed on a backlog of claims caused by the weather, but eitherway the indication wasn’t positive.US Q4 GDP data was revised higher and the deflator lower, though this left the marketlargely nonplussed.In between times, Ben Bernanke’s Testimony to Congress contained no surprises, buthis confirmation that interest rates are set to remain low for some time, boostedmarkets.

In the UK Q4 GDP data was also revised higher, as the BoE had surmised, but ‘only’ to+0.3% - a little below the original estimate, implying that without further good newstotal growth for 2010 will not meet official estimates.

In Europe the war of words between Greece and the EU over each ones responsibilityto solve the credit crisis declined into the Greeks bringing up the Nazi’s.It suggests the Germans are putting massive pressure on Greece behind the scenes,and for now it seems a spat could become more serious and hamper any resolution.Moody’s and S&P added their oil to the fire by threatening to downgrade Greece.

In the emerging markets, China conducted ‘stress tests’ to see what would happen ifthey allowed an appreciation of the Yuan. This raised speculation that a move may notbe that far away.

Indian Finance Minister Pranab Mukherjee suggested that a 10% economic growthrate may not be too far away, helping confidence there.

The unsettling economic data helped push demand for Treasuries and all of lastweek’s auctions went well. This suggests that bad news may help these in future, buthow will they cope in the face of positive data, or if banks fail to work down theirpositions before the next round of auctions?

Data Estimate Actual

US Consumer Confidence, Feb 56.5 46.0

US New Home Sales, Jan 325,000 309,000

US Weekly Initial Jobless Claims 20/2 425,000 496,000

US Durable Goods, Jan +1.6% +3.0%

US Q4 GDP revision 5.3% +5.9%

Chicago PMI, Feb 57.5 62.6

US Existing Home Sales, Jan 5.2mln 5.05mln

Mauritius

WEEKLYINVESTMENT

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THIS WEEK

The first week in March means that the US Employment Report will likely dominate the data front this week.A Greek austerity package is due and may be accompanied by a bond issue. The success of both will affect broadercredit sentiment.

Data Due Estimate Last Time Comment

US Personal Consumption Expenditure Prices, Jan 1st +0.1% +0.1%

US ISM Index, Feb 1st 58 58.4

ADP Employment Report, Feb 3rd -10,000 -22,000

Fed’s Beige Book, March 3rd

US Weekly Initial Jobless Claims 27/2 4th 496,000

US Q4 Productivity Revision 4th +6.2% +6.2%

Unit Labour Costs, Q4 4th -4.4% -4.4%

US Factory Orders, Jan 4th +1.2% +1.0%

US Pending Home Sales, Jan 4th +1.7% +1.0%

US Unemployment Rate, Feb 5th 9.8% 9.7%

US Non-Farm Payrolls, Feb 5th -20,000 -20,000

US Hourly Earnings, Feb 5th +0.2% +0.2%

US Average Workweek, Feb 5th 33.7 33.9

US Consumer Credit, Jan 5th -$4.1Bln -$1.7bln

ANALYSIS and STRATEGY

I will keep things brief this week, as not a lot has changed.However, I thought it would be good to consider the impact of any Chinese Yuan revaluation.

There seem two possible routes this could take. The first, and I suspect less likely, is a ‘one-off’ adjustment.Talk (from Goldman Sachs) is of a 5% move.I feel it more likely that the Chinese would re-commence the gentle appreciation seen before the recession – seechart below.

However, as we see there was actually an initial one off adjustment, of 2%, followed by a ‘managed’ 15% fall.So perhaps the ‘combination’ move would be tried again.

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A slower move is more controllable and less of a shock to exporters. Should they start to struggle, a pause couldfollow.A one-off change would not allow that, but at least it delivers a degree more certainty, after any initial impact.

In terms of wider effect, it seems a sharp rise, would be an immediate negative for the dollar, at least againstEuropean currencies.Less initial support for US dollars (Chinese buying) also suggests less demand for Treasuries.That may push up bond rates and make some of the current bond auctions more difficult.The impact of higher bond rates may become dollar supportive, both in terms of fundamental attraction of higherrates, but also the slower recovery it created – meaning perhaps as we have seen recently – a flow into thegreenback as a safe(r) haven.Could the Chinese ‘punish’ the US this way because Barack Obama met the Dalai Lama, despite their protests?The competitive implications for US industry/exports could also be a dollar positive.So after a one off drop, which may last some months, I would see any change as longer term dollar positive.

A Yuan rise would likely be negative for Chinese stocks and a sudden move, although not a surprise in itself, maytake some off guard in its timing, or exact form.

I suspect a stronger Yuan would be positive for those who supply produce to China both in the value of what theyreceive but also in making them more competitive internationally.That seems likely to be good news for the likes of Thailand, Malaysia, Indonesia and their peers, but also forcommodity producers such as Australia, Russia, South Africa and Brazil.I expect their currencies and stock markets to benefit from a stronger Yuan.It could also help the UK heavy commodity index, but a weaker dollar, may offset some of the benefits initially.

Higher commodity prices would raise inflation fears, especially if the Yuan move was pronounced and prolonged.Again that is likely to push up bond yields in the West and in places like India where inflation is beginning to rise.That may act as a weight on Western economic recovery and again after an initial fillip to commodity prices it couldbecome a negative over a medium term time frame.

It makes sense then to have some exposure to companies that are exporting to China, as they should benefit – atleast initially.The downside would be that any slower growth which a stronger currency is intended to deliver could and shouldoffset some of the gains over time.But as we have seen rising interest rates, which are generally used to slow growth, don’t tend to hurt markets in theearly days. It is normally only after they reach a tipping point (when they have gone too far) that markets tend todrop in response.So the slower growth implications may do nothing but slow the rise of the relevant stock prices, until such a time asthe currency had gone too far. That may be some way off.

So a Yuan rise would not come for free, and timing its arrival is not easy. Opinion varies from ‘any day now’ to ‘not atall’, or ‘certainly no time soon’.

But my thoughts are to prepare for it, at least a little, just in case it is sooner rather than later, but not too much incase we spend months waiting for something that doesn’t happen, and a fresh global economic downturn wouldlikely delay a move indefinitely.

My final point this week is some comments Ben Bernanke made, and which appear to have gone largely un-noticed.Several times he mentioned that it was vital the US present a more credible plan to reduce its budget deficit.I.e. the current ‘plan’, which is basically some unfounded long term ‘forecasts’, is inadequate.He said the impact of an unsatisfactory reduction plan was higher than necessary interest rates, so a threat to therecovery.

Reading between the lines, I took this as a warning that the Fed was reluctant to just keep ‘QE-ing’ without thegovernment doing more to reduce borrowing. I don’t believe he would otherwise have made his comments lightly.

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CURRENCIES

The Euro/dollar continued its decline towards $1.25. The oversold RSI has eased further. The Fibonacci level whichcomes in around $1.35 provided further support last week. We may see a Euro recovery off that in the week aheadand it could take the rate as far as $1.40, but for now the trend continues to look like more weakness ahead.

Euro sterling pushed higher as the Pound eased. It tested and broke resistance around £0.885. The next resistancelooks to be around £0.90. Above that the Euro could easily push on to £0.91+

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

The Dollar/Yen chart approached resistance without ever quite getting there, and thereafter dropped quite sharply.It is now near support. Provided that holds, the implication should be a dollar bounce. If support breaks, Y85 orlower would look next.

The Pound, continued to drop against the dollar, and has now broken through the bottom of the downtrend. Unlessit recovers swiftly the implication would be for further weakness. The RSI is oversold. So I wouldn’t be surprised by abounce this week. That needs to head past $1.58 area to change the negative trend.

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

The Dollar Trade Weighted Index has struggled to break 81, and looks to be ‘rolling over’.Only a sharp rally in the next few days, beyond 81 will cast a more positive light.My temptation, based on the chart, is to expect more weakness here. Could that be a Yuan revaluation?

After a good run and a lot of market experts moving to support the Dollar, we may well find weaknessfollows.A Greek rescue package and or Chinese currency moves could trigger that.However, it wouldn’t take much news the other way to push the dollar on through resistance levels andnotable further gains perhaps as far as 87.

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

TECHNICAL ANALYSIS-CHART READING

Despite growing volatility last week we can see the S&P moved in a relatively narrow band.The question is will it break to the upside, above 1,115 or so, or to the downside below 1,100?The chart gives few clues other than to suggest the outcome appears quite important.Below 1,100, support will come from 1,040 near the 200-day MA.Up until last week, the last six weeks were looking a little like the period in June and July – see circled areas forcomparison. The hope was that the previous week’s rally would continue. The comparison seems to be breakingdown, which threatens weakness.The lower rising blue arrow, may prove a better longer term indicator, even if initial support fails.

The NASDAQ spent much of the week bouncing off support from 2,200 whilst trading above and below the 50-dayMA.The good news is the index has closed just above the 50-day. Rising support seems not much lower, should 2,200give way. Below that the recent lows and then the November low could provide help if need be.

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

The 10 year US Treasury moved lower after the weak economic data and solid bond auctions.The yield seems to have dropped below support near 3.6%. The 200-day MA is not much lower, and that couldprevent notable further declines. Were it to give way, 3.4% and 3.2% could easily follow.3.8% then the December high look the upside targets.

US Interest Rates moved lower last week, even mortgage rates.

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The Hang Seng achieved its main target of a move above the 200-day MA.The next aim is a rally beyond the 50-day MA around 21,000.Support is from the recent lows around 19,000. That could be tested if the Chinese do raise the Yuan soon.

The Shanghai Composite Index did see further strength last week as it played catch up after the New Year closure.It closed above 3,000 but remains well within if nearer the lower side of the wider downtrend.Volumes although better remain light. We would expect any currency rise, to push this lower, and possibly as far as2,750.

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

The FTSE100 continued to hold above the long term uptrend.The index has continued to play with the 50-day MA, but managed to close the week above it.The next target would be a rally past 5,500, and whilst just above support the implication is to buy, but be prepared

to sell out if support gives way, as 5,000 would likely then be tested again.

The Eurostoxx All-Share continues to look less positive than the US and UK markets. It remains below the50-day MA,which looks like a good upside target. Some resistance looks to be in the way before it can get there – see thevarious down arrows. The 200-day MA looks like initial support, and though the index closed above it on Friday, itspent some time below it again. A Greek resolution would clearly be a real boost. Failure of talks would likely triggera move as far as the June 2009 highs near 235.

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

The Nikkei is being pressured by the strong Yen. Although a Yuan rise would likely hurt the dollar and strengthen theYen further, we feel it would be a positive for Japanese stocks as it made their exports more competitive with China.The effect may be modest though. The upside target remains the 50-day MA, and support is from the 200-day MA.Some break out looks pretty imminent.

The Bombay Sensex continued to hold onto the 200-day MA. If that breaks, 15,500 will be next. The upside target isthe 50-day MA.

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

The Brazilian Bovespa looks to be playing with downtrend resistance.A Yuan rise would help it break out and push on to 70,000. Without that it needs some good news to trigger a moreassertive rise. Without it the risk is a drop to the low end of the trend near 60,000.

The Russian Index held onto support from 2,000, or just below it. But resistance from the downtrend is a threat.It is important that breaks. So far it hasn’t but some change looks imminent. Which way is not clear. But a broadhead and shoulders pattern would threaten a drop to the July lows, if support gives way. Those are near 1250.

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

The PowerShares DB Commodity Tracking Fund continues to trade between resistance from the 50 day MA andsupport near the 200-day MA.

MODEL PORTFOLIO

No further changes to the core portfolio this week, but for those wanting a ‘punt’ we would take some exposure tothose that would benefit from a Yuan rise.Don’t overplay it unless up for the risks. Those are that no move comes and the forces that delay it would likely bebad news for commodities and emerging market equities, as well as others.

Domestic Fixed Income/Cash 20%Balanced/Alternatives 15%Global Growth Equities 8%Domestic Equities 10%Emerging Markets BRIC 18%Emerging markets non-BRIC 14%Commodities Hard 8%Commodities Soft 7%

3rd Floor, Ebene House, 33 Cybercity, Ebene, Republic of MauritiusTelephone: +230 467 4693 – Fax: +230 467 8443 Brussels Telephone: +32 2808 1298 – Fax: +32 2791 9285email:office@mithrilassetmanagement.comLicense Number: C108007141Code: FS-4.1

SUMMARY

We don’t want to overplay talk of a Chinese move. It is more something that should be kept in mind in thebackground. It could come at any time, or not at all.Like a stock that seems a decent takeover target -you could buy lots of it and do really well, or you could findyourself waiting for years, for something that never happens, and positioned accordingly you miss out or take lossesas other forces/trends play out.

Nonetheless, a Yuan rise could have a significant short term effect and depending on the scale and speed of anadjustment I believe it has the power to have a major impact on markets and economics.

We talked a few years back, and more recently, that a move by China from a trade surplus to trade deficit would bea major psychological and economic event - China exporting rather than importing goods/wealth.For the first time last week I saw others talking about this. But they weren’t forecasting the move years hence; theyraised it as a possibility for 2010!A currency rise would likely speed the change as it devalued imports and re-valued exports.Either way, the potential is that China begins to recycle its dollars.

The impact that could have is major. It could be a positive for the US/West in terms of it becoming morecompetitive. However it would likely raise interest rates as buyers of Treasuries moved away, and the threat ofimported inflation grew. That could be a huge threat to a US and Western recovery, as any long term economicbenefits would be too slow to offset the near term negatives.

Accordingly we don’t think the Chinese would move too quickly. But if wanting to slow their economic growth, wesuspect they would be happier to do so at the expense of exporters over domestic suppliers.

Any move then may have short and long term repercussions. I think it is right that we begin to condition our thoughtprocesses and strategy to that possibility. Make sure we are prepared for a move and know how to best react.

The Yuan aside I think the macroeconomic question that remains is about the sustainability of the recovery we haveseen so far. The answer should dictate strategy over the years ahead. I think the answer is far from clear, with solidarguments both supporting and threatening a continuation of the move.

Equally the potential and power of politics to change markets has grown substantially in the last two years.If those powers were to act logically it would make life easier. We know politicians have a habit of not doing that,and again that means act accordingly – don’t take big risks.

Our advice accordingly remains for a balanced approach, commensurate with an environment where there is noclear valuation argument. That may mean missing out fully on potential gains. It may also mean not participatingfully in nasty losses. Wealth protection comes first for most. Wealth appreciation is important, but secondary.

The Model Portfolio is structured accordingly. If you want to take a more aggressive approach, accepting andunderstanding the risks, then please let us know.

DISCLAIMER: This information used in this newsletter has been prepared from a wide variety of sources that Mithril Asset Management, to the best of itsknowledge and belief, considers accurate. You should make your own enquiries about the investments and we strongly suggest you seek advice before actingupon any recommendation. The opinions expressed in this report are those held by the authors at the time of going to print. The views expressed herein are notto be taken as advice or recommendation to sell or buy shares. This material should not be relied on as including sufficient information to support an investmentdecision. Any forecasts or opinions expressed are Mithril Asset Management’s own at the date of this document and may be subject to change.WARNING: Investing involves risk. The information provided by Mithril Asset Management in this newsletter is for general information only, which means itdoes not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to yourinvestment objectives, financial situation and needs before acting upon it, seeking advice from a financial adviser or stockbroker if necessary.