Capital Update - Third Quarter 2011 by Marketing & Media

Capital Update

Third Quarter 2011 Volume: 9

Issue: 3

Global Equities - Euro Zone crisis triggers sharp declines We were certainly correct in our conclusion in the last report, that we were moving into the ‘next phase of the equity cycle’. The last quarter has seen sharp falls across all global equity markets as the escalating crisis in the Euro Zone has unnerved investors and risk aversion has grown. Once again the fragmented political structure and the single currency have delivered a lack of urgency and most critically a lack of speed. Concerns over a Greek default and the ramifications that would have on the financial system, have been further augmented by fears over the finances of nations such as Italy and Spain. Investors have correctly identified that the ECB has had insufficient resources to ‘bail out’ these major nations. Banks would need recapitalisation and there have been signs of a credit ‘freeze’ once again.

ww.capital-iom.com at w ite - Daily News bs ad we pre

V l International M isit o a t i p orn ur Ca in

This has led the major European indices to sell off heavily. In Italy the MIB Index has fallen by 30%, in Spain the IBEX 35 has lost 22% and even the DAX Index in Germany has fallen by an alarming 28%. Whilst the prior quarter was typified by a lack of volatility, the last three months have seen huge intraday swings and any successful short term trading has proved virtually impossible.

The other concern is that a recession in Europe now seems more likely, austerity measures are widespread and confidence levels are being eroded. 7000 6000 5000 4000

Winner 2010 Company of the Year

Capital International Group Isle of Man Newspapers

awards for

excellence

FTSE 100 Index 3000 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Continued on page 2

Source: Bloomberg - data as at 30/09/11

This document has been prepared for information purposes only and does not constitute an offer or an invitation, by or on behalf of Capital International Limited, to buy or sell any security. The information contained herein is believed to be correct, but its accuracy cannot be guaranteed. Any reference to past performance is not necessarily a guide to the future. Opinions constitute our judgement as of this date and are subject to change. The company, its clients and officers may have a position in, or engage in transactions in any of the securities mentioned. The information contained in this document is provided solely to enable the customer to make their own investment decisions. The price of a security may go down as well as up and its value may be adversely affected by currency fluctuations.

September 2011

Volume: 9

Issue: 3

Fixed Income Review

Continue from page 1

US equity markets have also suffered, not only on the European concerns but also on fears that the US economy is also stagnating. Indeed it is likely that US GDP figures could flat line for at least three quarters. There is a distinct possibility that the Federal Reserve will start to focus on the unemployment rate as well as the inflation target. Recent comments that there was ‘significant downside risks’ to the economic outlook were the main reason for some of the most recent equity market declines. The S&P 500 Index is now down 15% on the quarter and the Dow Jones has declined 13%. Global consensus GDP growth forecasts have been revised downwards for both 2011 and 2012 to 3.5% in each year. It is mainly the ‘developed’ part which is suffering and the emerging markets have remained resilient. Such markets in 2012 look likely to still deliver over 5.5% GDP growth. Japan remains mired in structural and demographic issues and 2012 GDP will only grow by 0.9%. Over the quarter the Nikkei 225 Index is down 15%, in Brazil the Index is also down 15% and in Russia the main Index is down 20%. Looking forwards it is fair to say that, technically, markets are oversold and may enjoy a relief rally on the back of any firm plans to bolster the Euro Zone. The FTSE All Share in the UK is currently trading on 10.5x P/E ratio and offers a 3.77% dividend yield. Relative to other asset classes this is attractive. Many blue chip companies continue to enjoy strong balance sheets and with slowing top line revenues, we think merger and acquisition activity could accelerate. The concern is that with a lack of confidence, the capital expenditure cycle will be delayed but we are certainly getting to equity market levels now which offer longer term value.

for further details call us on +44 (0) 1624 654200

As financial ‘panic’ hit the global equity markets, so investors retreated to Sovereign bonds during the quarter, pushing yields inexorably lower. This has meant the 10 year Swiss yield has fallen below 1%, the US equivalent has fallen below 2% and in the UK yields have fallen below 2.5%. Add in some elevated levels of inflation in many economies and investors are facing negative real yields. The key question is, are things so bad in the global economy to make such yields palatable? Clearly the current phase of the Euro Zone crisis is highly dangerous and the independent, financial viability of many financial institutions has been called into question. The UK, given its position outside the Euro has enjoyed a safe haven rally; yields at the start of this quarter were still 3.5%.

“...our view is that despite the extensive financial austerity steps being taken by the coalition Government that the AAA credit rating is far from assured in the medium term. We admit we have underestimated Gilts in the past but to us yields are simply not attractive at these levels...”

Over the quarter the European Central Bank purchased sovereign debt in the secondary market to try to bring yields down in nations such as Italy and Spain to ‘sustainable’ levels. As ever, as soon as this was completed yields moved out again! Essentially an open ended commitment is needed to purchase the bonds but this comes unstuck in the face of German opposition and is likely to have been the main reason behind the resignation from the ECB of Jurgen Stark. It will also be interesting in the coming weeks to whether the ECB, which is typically hawkish, give in to the politicians and reverse the interest rate cut of earlier in the year. In the US, the Federal Reserve has recently unveiled ‘Operation Twist’, in an attempt to keep long term interest rates at lower levels. There is no net new money added in the operation, simply an extension of durations. The policy was used before in the early 1960’s when the Fed was also concerned about economic growth. We already know that interest rates are likely to be unchanged until at least the third quarter of 2013 and it is our view that as well as the explicit inflation target, that an unemployment level may also be set. This could unnerve the bond markets as potentially the Federal Reserve will allow higher levels of inflation, until for example, unemployment falls below 8%.

5.5 5.0 4.5 4.0 3.5 3.0

www.capital-iom.com

10-15 Year UK Gilt Yields

2.5 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Source: Bloomberg - data as at 30/09/11

Capital International

Given the ‘risk off’ conditions it has been unsurprising that corporate bonds have seen yields rise and spreads widen. This has particularly affected financial issuers with longer durations. The level of credit spreads is now suggesting at least a mild recession. With generally strong balance sheets, we would not be surprised if corporate default rates are less than the market is pricing in.

Also in this issue: • Sector Focus: Hotels & Leisure • Europe: The Future Path • Economy in Focus: Norway

Economy in Focus: South Africa South African equity markets reflected global investor anxiety during the third quarter of 2011 with financials and industrials struggling while gold miners enjoyed strong gains as the precious metal gained 9.7% over the quarter, having surged by more than 26% at its peak during August. Gold has been a consistent theme over the last 12 months as the precious metal has risen 39% in Rand terms over the period. Smaller producers with flexible or zero production hedging policies have been favoured during the bull market in gold while the larger players have been more cautious and have been playing catch up to a large extent during the third quarter. AngloGold Ashanti Plc and Gold Fields Ltd (South Africa’s fourth and seventh largest companies by market capitalisation) both gained by more than 20% over the quarter having largely missed out on much of the earlier gains. Retailers also fared well as analysts considered the sector as better placed than many of its peers to pass on inflationary costs to consumers. Woolworths Holdings Ltd, the upscale retailer of food and clothing increased profits by 8.5%, raising hopes that surplus cash would result in a share buyback, pushing its share price up by 22.6%. South Africa’s largest retailer, Shoprite Holdings Group also rose following a solid performance and a confident investor presentation. It proposed opening over 100 new stores across South Africa to counter the threat from Wal-Mart’s entry into the South African market thus preserving the incumbent’s dominant position. With GDP growth anticipated at 3.3% for 2011 and rising by a further 1% over the next two years, investors are buying into the retail sector in the belief that growth will fuel demand without leading to the high inflation seen prior to the 2008 crisis and precipitating significant Reserve Bank activity to stave off the inflationary threat. Another beneficiary of this effect is Tiger Brands Limited, a major manufacturer of food products and pharmaceuticals with a robust product line and defensive attributes. The last 12 months have seen Shoprite and Tiger Brands rise 22.7% and 16.8% respectively.

Increased data usage by subscribers was key to MTN’s rival Vodacom, growing revenues by 8.1%. Vodacom, which is majority-owned by Vodafone, is a pure mobile telecommunications story and has dominant positions in South Africa, Tanzania and Malawi. Confidence was less visible in the banking and financials sector; the dual-listed Investec lost 18% as concerns over contagion from the Eurozone crisis continued to persist with banking stocks suffering globally. The same macro concerns dominated the performance of the diversified miners such as BHP Billiton and Anglo American which both fell 18% as the prospect of global recession emerged once more. Their core businesses of base metals and coal were seen as highly exposed to any potential setback due to their heavy reliance on Asia and China in particular. The Rand itself had a particularly poor month, even by its volatile standards, and indicative of the extremely high volatility in the currency markets. The Rand weakened against virtually every global currency bar the Polish Zloty and the Brazilian Real. It weakened over 15% against the US Dollar as investors sought refuge in the global reserve currency and the Japanese Yen against which it saw an even more dramatic movement, falling by over 20% as the Yen is perceived as less reliant on external sources of funding and therefore carries more of a ‘safe haven’ premium. Rapid unwinding of carry trades was also a factor in the speed of the decline as speculative trades in the higher yielding Rand were sold to close out short US Dollar and Yen positions. Whilst unemployment in South Africa remains stubbornly high at 25%, its combination of a rich blend of natural resources and its geographic positioning as the gateway to the natural wealth of sub-Saharan Africa provide opportunities to investors leaning toward an export-led and commodity-driven global recovery.

Promising results from two of South Africa’s telecoms companies also lifted the broader market; MTN, South Africa’s largest company by free float and its biggest fixed line and mobile operator showed significantly improved performance after a torrid 12 months. Its investments in Nigeria are now starting to deliver, making its decision to pay $285 million for a GSM licence in 2001 now reaping rewards. Company estimates suggest that data usage will play a greater role in revenue growth to rise towards 20% to 30% of total group revenue. The company is active on 22 African and Middle Eastern markets with an average mobile penetration rate of approximately 40%, leaving ample capacity to continue its trend of growing profits faster than revenues. © Capital International Limited 2011

September 2011

Volume: 9

Issue: 3

www.capital-iom.com

Economy in Focus: Norway The Norwegian economy has been particularly resilient during the financial crisis with a relatively shallow recession and moderate increase in unemployment. As Norway moves into what is projected to be a strong recovery, the authorities need to plan how to unwind the extraordinary measures that were taken to confront the crisis. Interest rates have already been raised, the special liquidity measures have been progressively withdrawn and monetary policy will need to tighten further over the next two years. The appropriate pace of tightening will primarily depend on developments of the Norwegian economy and the outlook for inflation. Policymakers should also continue to pay attention to developments in the property market, which are fuelled by low interest rates, and trends in the foreign-exchange market, which could react to widening interest-rate differentials. An early consolidation of fiscal policy would reduce the need for monetary tightening and the related risk of exchange-rate appreciation. It is essential to maintain the basic fiscal framework, built round the “4% rule”, and soon start the process of bringing down the non-oil structural deficit to a level consistent with the rule. The Norwegian financial sector came through the financial crisis without serious damage. In the aftermath of the crisis it is important to strengthen the macro-prudential approach, in coordination with European and other international initiatives. Despite substantial income from petroleum wealth, Norway is nevertheless confronted with fiscal challenges in the long term. The number of older persons (aged 67 and above) is projected to almost double by 2060, making this age group as large as 40% of the working-age population. Because the bulk of net public transfers go to older people, government expenditures will increase sharply in the absence of reform. On this basis, the Norwegian authorities currently estimate a long-term fiscal gap, defined as the difference between the structural non-oil deficit and the expected return on the Government Pension Fund Global, of about 6% of mainland GDP in 2060.

In other words, by 2060, fiscal measures to increase revenues or reduce expenditures in the amount of 6% of GDP are needed to secure the sustainability of public finances. These estimates are surrounded with uncertainty and rely on a number of stylised assumptions, but taken at face value they imply that major policy changes are required, so as to avoid an undesirable increase in the tax pressure. Completing the pension reform and reforming the disability and sickness leave schemes, which are both crucial for achieving strong labour participation in the future, would make important contributions.

“...sustainable development is a key theme in policy making in Norway. Although it owes a considerable part of its wealth to the carbon-based economy...”

Norway gives priority to the objectives embodied in the OECD Green Growth Strategy and sees itself as a pioneer in some areas. The sustainable development strategy, an integral part of the documentation for the budget, spelt out the key principles that were intended to guide policymaking and a set of quantitative indicators that are intended to give an indication of progress. Its focus on preserving natural capital and the precautionary principle can indeed be seen to be reflected in Norway’s policy aims on climate change and on fisheries, two otherwise rather different problems. Another principle is the use of cost-efficient means to achieve these policy objectives. In many ways Norway has pioneered the use of such measures, introducing a CO2 tax early on and adopting individual quotas in fisheries. But in other ways policy prevents them from playing their full role, exempting significant sectors from the CO2 tax and now from the emission trading system, and restricting the tradability of quotas in fishing. Some potential conflicts between sustainable development objectives could be given fuller recognition, and that Norway can and should follow through more strongly the logic of its pioneering use of economic incentives to further sustainability goals.

Retail Distribution Review: Getting Ready The Retail Distribution Review (RDR) is a key part of the consumer protection strategy by the UK Financial Services Authority. It is establishing a resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning.

The Isle of Man Financial Supervision Commission has maintained a watching brief on developments of the RDR and has been assessing the potential impact of this initiative on its licenceholders and the Isle of Man’s financial services industry generally. Earlier this year, the Commission confirmed its intention to introduce principle elements of the UK’s RDR into the Isle of Man’s regulatory framework with added responsibilities being placed on those individuals who provide investment advice to retail clients.

“...the Capital International Group of companies will be one such organisation that ensures that it will be compliant in good time for the RDR deadline....”

Yara International is the world’s leading chemical company that converts energy, natural minerals and nitrogen into essential products for farmers and industrial customers. Their industrial product portfolio includes environmental protection agents that prevent air pollution. Yara is headquartered in Oslo with operations in more than 50 countries and sales to about 150 countries. Yara’s global activities range from phosphate mining and ammonia production, through commodity trade and energy arbitrage, to building local market knowledge and developing customer relationships. The backbone of the company’s operations was large scale ammonia and fertiliser production in Europe, but in recent years new capacity has been added in region’s with low cost gas supplies, the Middle East and North Africa, Trinidad and Australia, today representing about 35% of Yara’s production volumes. Yara is a company with a strong balance sheet, high earnings opportunities and a solid market position. The current market and expectations for a solid market moving forward, lay the framework for a buying opportunity at the current share price of NOK 250. The stock market seems to place too much emphasis on changing trends in the likes of corn and wheat prices rather than focusing on the actual price level, and the implications for fertiliser economics. The need to discount intermediate trends is recognised, but not with Yara shares prices below NOK 300. Yara has an approximate two month lag effect on market prices, which means that the quarterly running rate should work as a six to twelve month benchmark adjusted for a negative or positive valuation factor. Looking at the latest revenue figures there is a positive 10% growth factor. A key feature is the strong balance sheet that reduces market and industry risk. The P/E for 2012 has been reduced by 43%, and hence, risk evaluation has accordingly been reduced. Due to commodity pricing volatility most analysts have refrained from adjusting their target prices. With more stable markets analysts are expected to raise their target price, and there are few isolated reasons why the Yara share should participate in the current sell off. In our view we see Yara to be a blue chip share that consistently will outperform the Oslo Bors index, with very low company downside risk for the share.

Statoil has grown up along with the emergence of the Norwegian oil and gas industry, dating back to the late 60’s. Today, the company is one of the world’s largest suppliers of oil and gas. In 1972, the Norwegian State Oil Company, Statoil, was formed, and two years later the Statfjord field was discovered in the North Sea. In 1979, the Statfjord field commenced production, and in 1981 Statoil was the first Norwegian company to be given operator responsibility for a field, at Gullfaks in the North Sea. Statoil merged with Norsk Hydro’s oil and gas division on the 1st of October 2007. The new company was given the temporary name of StatoilHydro, and the new company reached a size and strength for considerable international expansion. The company changed its name back to Statoil on 1st November 2009. The Statoil share has demonstrated defensive qualities, from peak to trough in 2008; the OBX was down more than 70% while Statoil was down approximately 50%. The company also has a strong balance sheet, with the equity ratio increasing quarter on quarter, despite conservative oil prices. Statoil also has an impressive cash flow quarter on quarter, and in uncertain times high cash should be valued highly. Statoil has indicated that NOK 6 per share will be used as a floor for future dividend, for 2011 analysts estimate a dividend of NOK 7.25 per share, corresponding to a dividend yield above 6%. The company has not benefited from the soaring oil price with upside to NAV above historical average. Statoil is cheap, relative and absolute, FS 2011 P/E of 7.5x, historical average 12 month forwards of close to 10x. The key risk factors to the share price are future oil and gas prices, production ramp up and production guidance, as well as the increasing gas portion of the overall production. Over the next few years the company is expected to increase its gas production from 40% to 45%. An increased portion of gas contract based on spot prices could have a negative impact on Statoil’s future earnings and relative position to less gas intensive peer companies. Recommendation: BUY

Recommendation: BUY

In the context of the Isle of Man Financial Services Act, it is intended that RDR will transmit directly to Class 2 (3)(7) licenceholders and therefore should not apply to all companies within the financial services industry on the Island.

So while RDR will affect a relatively small percentage of the industry, companies have taken this opportunity to raise the bar of professional competence for their entire management and control structure.

RDR has particular aims of ensuring that those who are providing advice to the retail market are professionally qualified to a higher level than ever before and that their knowledge is maintained by comprehensive, relevant and annually audited Continuing Professional Development (CPD).

By compelling directors, senior managers, manager and aspiring managers to become professionally qualified, it is envisaged that on the required implementation date of RDR that not only will the required financial advisers be RDR compliant, but the entire management structure of financial service companies will also be able to tangibly demonstrate integrity and excellence both internally and externally.

It is an unfortunate reality that knowledge and experience are no longer enough to perform at certain levels within the financial services industry and as a result, competence may only be established by professional qualification.

September 2011

Volume: 9

Issue: 3

www.capital-iom.com

Telenor is the leading provider of mobile telecommunications and fixed line communication services in Norway and the leading provider of television and broadcasting services to customers and enterprises in the Nordic region. Telenor is also a significant provider of mobile telecommunication services internationally. Telenor currently has a total of over 120 million consolidated mobile subscriptions. In addition, Telenor has 94 million mobile subscriptions through its minority ownership interest in VimpelCom Limited. No only does Telenor have mobile and fixed operations in Norway, Sweden and Denmark but it also has mobile operations in Hungary, Serbia, Montenegro, Thailand, Malaysia, Bangladesh, Pakistan and India. Telenor’s mobile business includes voice, data, internet, content services, customer equipment and electronic commerce. Within the Nordic region, Telenor Broadcast Holding is the leading provider of direct to home television, measured by subscribers and revenues. Telenor Braidcast also provides cable TV in Sweden and Denmark, terrestrial transmission services, satellite services and content security solutions. Other units of the Telenor Group consist of the activities of several companies that separately are significant enough to be reported as individual segments, such as maritime communications, aircraft communications and companies exploring machine to machine opportunities, and includes activities that support the core business as well as some financial investment. Telenor’s current operations fall within three geographic clusters: Nordic (Norway, Sweden and Denmark), Central Eastern Europe (Hungary, Serbia and Montenegro) and Asia (Pakistan, Bangladesh, Thailand, Malaysia and India). Telenor has a total of 31,698 employees in its fully consolidated operations, of which 24,837 employees resided outside Norway. The telecom sector has historically performed well in challenging macro conditions, and Telenor only saw a very modest downturn in the last recession. Notably, Telenor’s Eastern European assets came through the last downturn in a decent fashion. Telenor is attractively valued, both from an absolute and relative perspective. Record low debt level could enable the company to significantly increase dividends from current levels (7-7.5% total yield). Adjusted for costs related to the India expansion, the share is attractively valued at about P/E 9x on the latest 2011 EPS estimate. Recommendation: BUY

Capital International

The long sustained rise in the relative value of the Swiss currency has certainly augmented its position as one of the world’s leading reserve currencies Indeed it was only as recently as 2000 that the legal requirement for 40% reserve backing in Gold was removed by a national referendum. The neutrality of the country, the healthy current account surplus, political stability and strong Government finances have long been supportive factors. The rises in the Franc however, have caused pain for the domestic economy and only recently have economic growth expectations been further downgraded. The Federal Government now believe that GDP growth in 2011 will be as low as 1.9% and for 2012 growth is seen as low as 0.9%. The previous growth forecasts were 2.1% and 1.5% respectively. The export sector has been a clear loser in recent months. The extent of the rise in the Franc was highlighted in the unexpected move by the Swiss National Bank of an imposition of a ceiling on the exchange rate against the Euro. This was the first such move in over 30 years and the authorities stated that they would defend the target with the ‘utmost determination’. This move prompted a record fall in the currency and could have been a major contributory factor in the recent ‘rogue trader’ losses announced by, rather ironically, UBS. The Bank has also reduced the Libor rate to zero from 0.25% to further lessen the attractions. Essentially the Central Bank will create unlimited amounts of Francs and sell them against the Euro to contain the level. Clearly the costs of such an exercise will be difficult to ascertain but they are likely to be very large figures indeed. The phrase ‘endless’ has been used. Investors will remember the huge sums that the UK Government lost in the 1990’s trying to defend the Pound and equally the vast sums that speculators such as George Soros made on the other side of the trade, particularly on ‘Black Wednesday’. Over the summer months when Euro Zone fears hit their highest, the exchange rate of the Franc against the Euro hit parity, making a 16% rise for the year. On the global purchasing power index as measured by the OECD, the Franc was approximately 40% overvalued. Swiss corporate earnings have thus far been remarkably resilient in the face of the currency strength, but recently Nestle highlighted the problems, reporting a 13% fall in sales and focussing on productivity gains to rebuild margins. Other companies to struggle have included the watchmaker Swatch and the industrial conglomerate, ABB. It is fair to say that the major exporters have all been lobbying hard. There have been other countries that have also been forced to take action over currency valuations, notably Japan. On August 4th the Bank of Japan achieved an unenviable one day record of $58 billion spent in one day on currency intervention. Unfortunately such measures have done little to weaken the Yen. Brazil also made an aggressive interest rate cut during August, which has seen the Real fall by over 7% in recent weeks against the US Dollar.

Innovation • Integrity • Excellence

Swiss Franc Insight

“...there are now real concerns that the debt crisis is now affecting the ‘real’ economy. ...”

Europe: The Future Path It is unfortunate that we are still focussing on the travails of the Euro Zone. It should have been sorted to a large degree many months ago, but the further compromise deals and lack of fiscal agreement has meant Europe has dominated recent weeks and led to increased investor risk aversion. Indeed on a Citigroup volatility measure we are now back to the elevated levels last seen during the Lehman crisis. At the time of writing the broad Euro Stoxx equity index is down 24% year to date in local currency and sovereign bond yields in many countries remain at elevated levels. There are now real concerns that the debt crisis is now affecting the ‘real’ economy. Germany has just registered the lowest investor confidence figure since December 2008 and persistently weak business and consumer confidence could lead to further downside across the region. On a positive note, the renewed weakness in the Euro as a currency, after a bewildering period of relative strength, is good news for the exporting side of the economy. One thing that is certain is that the Greek people should be prepared for even more austerity measures. We are still in the midst of the nation trying to secure the next tranche of bailout monies to avoid default. However the very notion of markets rising/falling on the back of a mooted conference call, demonstrates that a swift resolution is vital. Fundamentally, the least painful option would be for Greece to leave the Euro, having undertaken some form of orderly default. At least the devaluation of the ‘drachma’ would create economic growth, although there could be short term elevated investor fears on the peripheral banks. Contagion is the word investor’s fear the most and the inability to solve the Greek crisis and quite frankly the lack of funds available makes the consequences of an Italian or Spanish bailout totally unacceptable. As an aside the thought of a leveraged European Financial Stability Fund as suggested by US Treasury Secretary Geithner makes us shudder! The French banking sector has very much been in focus, given not only the large holding of Greek bonds but also the rather optimistic provisioning. We would be in favour of some form of Government backed recapitalisation of the sector. There have already been stories that industrial companies, such as Siemens, have pulled large deposits from BNP Paribas and Societe Generale.

Given the lack of political unity in the monetary union it could potentially be time for the dismantling of the Euro and the creation of a new currency regime. Another solution to the current crisis would be for the ECB to make an open ended commitment to purchase troubled sovereign debt for a period until yields fall into a pre determined range. It seems that the previous favoured route of issuing Europe wide bonds has been shuffled down the agenda, particularly since S&P stated they would not be guaranteed an AAA credit rating. In fact the estimated Government debt to GDP ratio under this scenario would be 95%.

“for more information visit www.capital-iom.com

“

September 2011

Volume: 9

Issue: 3

www.capital-iom.com

Product Focus: Capital Liquidity Account Introduction

During any period of relentless turbulence in global financial markets, it is worth reminding ourselves of the real and perhaps less obvious benefits that Capital Treasury Services Limited and the Capital Liquidity Account brings to hard pressed cash managers and investors. The Capital Liquidity Account is an international cash investment solution managed by Capital Treasury Services, available in Sterling, US Dollars and Euros and tracks the UK Base Rate, US Federal Funds Rate and European Central Bank Rate respectively, ensuring your money and your client’s money is always earning a market leading rate. Additional features of the Capital Liquidity Account include:

Security

• AAAf rated by Standard & Poor’s • Instant Diversification

Liquidity

• Pro-active liquidity management • Late dealing times with two-day settlement

Yield

• Stable/consistent returns - institutional purchasing power/access to markets • Highly competitive track record

Convenience • Outsourcing cash management

• Focus on client service • Frees up time for higher value-added activities

The Capital Liquidity Account is a unique cash-only management service delivering the diversification, protection and liquidity of a money market fund, with the yield and consistency of a high interest cash deposit.

Capital Liquidity Account International cash investment solution

Two Day Liquidity

A unique feature of the Capital Liquidity Account is that it offers institutional fixed-term rates of interest coupled with two day liquidity, meaning you have easier access to your investment capital at any stage. Account holders can withdraw their money at any time and we will make the transfer within two business days of receiving your instruction. Although there is no penalty or loss of interest incurred on withdrawal, there may be transfer fees to take into account.

Structure

The Capital Liquidity Account is not a bank account, so you are not lending money to Capital Treasury Services or any company within the Capital International Group; as a result any cash investments are not exposed to Capital Treasury Services or any other company within the Capital International Group in any way. The cash investments are placed into a ring-fenced custody account to which a high rate of interest is applied on a monthly basis.

Asset Allocation

The asset allocation strategy is to invest in high quality bank and building society deposit accounts which have been rated A to AAA, A1+ or A1 by Standard & Poor’s rating agency. The strategy is to maintain asset quality and diversity of the portfolio in accordance with Capital Treasury Services’ asset quality guidelines. • Income Potential - Low to Medium* • Volatility / Risk Level - Very Low • Investment Time Frame - No minimum

Cash is seen as an important asset class by Capital Treasury Services and as such the Capital Liquidity Account has a diversified pool of cash deposits with different banks and building societies. Diversification reduces the level of risk on a portfolio - it does not necessarily reduce the returns, this is why diversification is referred to as the only free lunch in finance. * This is subject to change due to changes in base rates

Risk Exposure

In order to generate the high yields payable to Capital Liquidity Account holders, the underlying treasury pool is managed so as to utilise a diversified range of high quality bank and building society deposits. • Credit Risk is managed through a list of approved banks

Capital Treasury Services

and building societies. Every issuer on the list is monitored on an ongoing basis by our experienced team.

Capital Treasury Services

• Liquidity Risk is managed by limiting the Capital Liquidity

Account’s underlying cash assets weighted average final maturity and adjusting those cash assets to better match the Capital Liquidity Account investment profile.

Capital Liquidity Account International cash investment solution

Bridge

Terms of Business

™

International Cash & Payment Management Capital Treasury Services - Web Usage & Payment Services

Capital Treasury Services

Standard & Poor’s Ratings Services assigned for the fifth year running its ‘AAAf’ fund credit quality rating and ‘S1+’ volatility rating to the three underlying portfolios of the Capital Liquidity Managed Accounts in Sterling, Euros and US Dollars.

• Interest Rate Risk is managed by monitoring the forward

yield curve and limiting the Capital Liquidity Account’s weighted average maturity.

Capital Treasury Services Limited is a Member of the Capital International Group Capital Treasury Services Limited is licensed by the Isle of Man Financial Supervision Commission Registered Office: Capital House, Circular Road, Douglas, Isle of Man, IM1 1AG

“...agricultural commodities have been more robust in the last quarter, with a broad based increase of just over 4%...”

Commodity Outlook Investors are currently struggling in assessing the short and medium term prospects for the commodity sector. There are a wide range of views which seem to be finely poised between optimism and mild despair, influenced heavily by the Euro Zone crisis and a potential recession in the US. In the third quarter, base metals look set to experience a fall of around 6-7% and have been resilient in the face of the increased investor risk aversion. Although, there are now some signs that this is beginning to break down, in part created by the recent strength of the US Dollar and downgraded GDP growth forecasts. Copper has been very volatile recently and despite having some of the best supply/demand fundamentals, is probably the most exposed to weak economic sentiment. This is primarily because the selling price is still so far above the costs of production. The industry has been suffering from falling grades, although production levels are forecast to pick up in 2012. A supportive factor will be that the Chinese destocking cycle appears to be coming to an end and so imports could start to pick up. However the broad message for Copper will be one of volatility. Crude oil has been weak in the current quarter falling by over 15%, primarily on downgrades to global GDP forecasts and the prospects for renewed production from Libya. There are grounds for thinking that demand from non OECD nations will continue to be robust and act as a major support to the price. It would take a relatively severe double dip recession to take the price per barrel down towards the $70 level. The third quarter of 2011 will after all register the strongest level of oil demand ever. The risks to further disruptions in Middle East supply remain high, notably Iraq where the local situation remains very dangerous and Algeria, which controls a vital hub. We therefore remain positive on the Energy sector. Precious metals offer a mixed picture, although Gold should continue to benefit from its ‘safe haven’ status, investors should however keep a close eye on the US Dollar. Over the quarter the metal is currently up 16%, boosted by the Fed declaration that interest rates would be on hold until at least mid 2013. The technical uptrend has also remained in place and it looks like the average price for 2011 will now be over $1,600 per ounce. Given the large net inflows into the metal, notably in ETF’s, it will be interesting to see how long the current turbulence will last.

Agricultural commodities have been more robust in the last quarter, with a broad based increase of just over 4%. Historically the sector has moved independently to other asset classes and the long term global demographics remain highly supportive. However there has been a growing level of criticism at the scale of financial speculation in the sector, which is contributing to growing food price inflation. It is estimated that speculators now account for 60% of the agriculture futures market. Of the specific underlying commodities, we believe that Wheat is starting to look interesting, supported by some poor US weather conditions.

for our Morning Spread market news visit www.capital-iom.com © Capital International Limited 2011

September 2011

Volume: 9

Issue: 3

www.capital-iom.com

Sector Focus: Hotels & Leisure Hotels have delivered somewhat volatile trading data so far this year. In January and February London demand dipped, but a strong March, a sparkling April and a spectacular May and June suggest London’s juggernaut run isn’t ready to stop just yet. Outside London, hoteliers managed to keep revenue per available room (RevPAR) growth positive in the six months to June. Regional average daily room rate (ARR) still fell by 1.9% in April and a further 0.5% in May, despite easier comparables.

Overseas visits to the UK are estimated by the Office of National Statistics to have increased by 4% in Q1 2011 to 7.5 million visitors compared to Q1 2010, with business visits continuing to strengthen, up by 9% to 1.74 million visitors. Holiday visits were up by 2% to 1.95 million.

To understand these latest trends and what’s powering certain hotel demand segments faster than others and why some may be stalled or at best idling we need to look to a range of issues including the constituent strands of GDP growth. This shows that although the economy experienced 0.5% growth in Q1 and 0.2% in Q2, consumer spending and investment in the UK contracted.

Despite some easy comparables with 2010, hoteliers overall managed to lift rates by only 0.8% in Q1 2011, compared with a decline of 4.5% in 2010.

Both are expected to bounce back again which is better news for hotels. However, in the current environment it’s anything but easy to know what many corporates and consumers are planning. The super rich may be alive and well and spending in London but many UK consumers are struggling. London’s hotel market continues to perform considerably better than the UK regional market. But in the first two months of 2011 the capital saw a reversal of recent demand growth with unexpected occupancy declines in January and February of 2% and 3.8% respectively, taking occupancies to 69.2% and 75% respectively. Demand picked up again in both March and April, but was flat in May and June. Surprisingly, the Royal Wedding in April doesn’t appear to have attracted the bonanza some observers hoped for. Nevertheless, despite the impact to corporate business from the protracted Easter shutdown, it was a very good result as occupancy in April recovered to grow by 3% to 79.9% and ARR saw further strong growth of almost 12% driving a 15% gain in RevPAR to £100. In May it was all about rates as a 19.3% leap drove RevPAR up by 20%. Inbound travel, especially for business appears to be picking up. With consumers under pressure, despite their enthusiasm for holidays, continued business confidence and travel is essential to support the hotel sector recovery.

Capital International Group

The provinces continued to recover from recession slowly in Q1, but growth has been fairly lack lustre and conditions are likely to become more challenging as the region’s higher susceptibility to weaker domestic demand continues. Consumers face testing times and consumer spending remains under pressure. Improving business volumes triggered the recovery of the domestic hotel market, with business room nights up by two million nights in 2010 and continued recovery will depend on business confidence holding up.

In April regional hotels managed a 2.6% occupancy gain but rates saw their first fall of the year, with a 1.9% decline to £57.38. In May rates fell a further 0.5% to £59.56 and occupancy only managed a 0.9% rally. Of course the Provinces are a large area and, as ever, performance varies considerably by city, product and brand. All regions experienced a moderate rise in output in 2010 and the same is expected in 2011. The South East may tend to lead the recovery to some degree, while Northern Ireland, the North East, Scotland and Wales are likely to be worst hit by public sector spending and could lag behind. In addition, there remain plenty of more headwinds to confront and much to worry about that could derail the sector’s progress to date. Consumer confidence remains fragile, there is further possible fallout from the “Arab Spring” and much uncertainty and potential unrest around global commodity prices including oil, supply too may dampen hotel performance pre and post Olympics. So looking ahead hoteliers could have their work cut out. The Olympics should mean a very successful year for UK hotels in 2012, but clearly it is not only Olympic visitor levels that impact travel and hotel demand. Considerable uncertainty focuses on the economy, the public sector cuts, unemployment and weak household income.

CELEBRATING

BUSINESS 15 YEARS SUCCESSFUL IN THE ISLE OF MAN August 1996 - 2011

Capital International

“...the Olympics should mean a very successful year for UK hotels in 2012, but clearly it is not only Olympic visitor levels that impact travel and hotel demand...”

InterContinental Hotels & Resorts Clearly the markets major concern is the uncertain macroeconomic environment and fears that the sovereign debt crisis will have real economy effects. In its outlook, InterContinental Hotels suggested that it had seen no sign of bookings slowing, or cancellations increasing, during the latest period of market instability. This was apparent in their recent statement in which they said they were looking forward with confidence. Furthermore in the medium term Intercontinental Hotels believes that RevPAR will be supported by low industry supply growth and record demand levels. InterContinental Hotels trades on a 2012E price earnings ratio of 12.3x, EV/EBITDA of 7.5x and dividend yield of 3.3%. This compares to the US peer group’s average PER of 17.4x (30% discount), and EV/EBITDA of 8.7% (15% discount). The stock has declined by 17% year to date and is 29% below its 52 week high. However with low industry supply growth, RevPAR momentum can be maintained in the likely case of lack lustre GDP growth. Clearly, this would not be the case in a double dip recession as the demand correlation with GDP would be likely to cause a fall in RevPAR, industry demand fell by 6.1% in 2009 vs a 2.6% GDP fall. Aside from the direct cyclical question, the following positives were noted when reviewing the investment case: • The demand for underlying assets remains strong; • The sale of the InterContinental New York is expected to be sold at a premium to book value. InterContinental Hotels pipeline of 189,000 rooms is the largest in the industry and with 70,000 rooms under construction should support 3% to 5% system growth from 2012. The balance is arguably under-geared (0.9x EBITDA) even prior to InterContinental Hotels realising an expected $350 million from InterContinental New York. While it is recognised that the hotels sub-sector will remain highly dependent on macroeconomic concerns, it is easy to see a strong investment case at InterContinental. Recommendation: BUY

Shorts: Euro High Yield European investors who pumped billions into high-yield bonds in first half of 2011 could see the asset class faced with rising default rates. In the first half of 2011, high-yield bonds attracted significant attention from institutional and retail holders alike. According to analysts, €2.7 billion made its way into high-yield bond funds across Europe in May alone as investors chased the higher coupons on offer. However, the sector now faces two major headwinds: performance has been relatively weak compared to other fixed income asset classes and the declining economic climate is likely to raise the default rate, which typically signals deteriorating performance.

At the start of the year, high-yield bonds were seen as the one fixed income asset class still offering some value, However, following the recent sell-off, which sparked a flight to safety, high yield investors have been caught out. Over the past six months, the high yield sector has dipped 2.2%, while the UK Gilt sector has risen 11.5% and the Sterling Corporate Bond sector 5.6%. For those who have been invested for the longer term, the picture is more positive, with three-year numbers ahead of other fixed income asset classes.

September 2011

Volume: 9

Issue: 3

www.capital-iom.com

Despite ongoing macroeconomic concerns both domestically and abroad, Carnival’s earnings and forward commentary provided further evidence to suggest that consumers will continue to take cruise vacations, even as discretionary budget pressures persist.

Whitbread is the power behind some of the UK’s most successful and popular hospitality brands.

While yields remain well below peak levels, recent results when viewed in conjunction with management’s forward looking commentary have served to ease investors near term concerns, sending shares higher. The uncertain macroeconomic environment and lingering effects of the MENA disruptions aside, Carnival shares look attractive for the following reasons • Demand should remain stable, even as macro pressures persist, as consumers search for high value vacation alternatives. • Management has shown it can navigate through challenging economic periods. • Recently implemented cost cutting measures should accelerate the flow through of incremental revenue to the bottom line. • Carnival is well positioned to generate significant growth as the pace of industry wide capacity additions begins to slow towards the latter part of 2012 and into 2013. While management’s outlook through the first half of 2012 is not what you would call robust, it is encouraging to hear cumulative fleet wide bookings placed since June for the balance of FY11 through to F1H12 are running ahead of last year’s levels at slightly higher prices. At this point last year, cruise operators were generally feeling more comfortable with their outlook for the industry, as expectations for continued recovery through FY11 began to build momentum. Given the recent narrowing of the booking window, particularly further out on the booking curve, it is difficult to see that Carnival will be able to hold pricing for an extended period of time and moderate discounting in order to help stimulate demand is expected, particularly if macro pressures intensify. Recommendation: HOLD

They employ over 40,000 people worldwide and serve more than 11 million customers every month in the UK alone. Their brands include Premier Inn, Beefeater Grill, Brewers Fayre, Table Table, Taybarns and Costa Coffee. They have set their sights on a rather ambitious programme of fast paced growth. In 2011/12 they plan to grow Premier Inn by approximately 9%, by adding 4,000 rooms and 14 new restaurants. And at Costa they are looking to add around 300 new stores. They have recently set out new five year growth milestones, Premier Inn to accelerate growth and increase its UK capacity by 50% to at least 65,000 rooms, Costa to double to 3,500 stores worldwide and £1.3 billion system sales and Costa Express to be expanded to 3,000 units. At the time of writing, Whitbread had underperformed the FTSE All-Share by 7% YTD, held back by concerns on the UK consumer and the slowdown in RevPAR evident in Q1. It now trades on a FY12 PER of 14.4x, EV/EBITDA of 6.3x and dividend yield of 3.3%. Whitbread is refinancing $156 million, around 33% of total debt, with a private placement with institutions, repayable 2019-22, at an average rate of 4.8%. The re-emergence of characteristic strong trading at Premier and clear independent strength at Costa does show Whitbread’s clearly differentiated strategy, as does its move to refinance 33% of its debt via a private placement. Premier Inn like for like sales have bounced back from their +3% Q1 level to +9.1% for the last 13 weeks. Q1 had been depressed by the effect of multiple Bank Holidays around the Royal Wedding, and this strong second quarter is consistent with the renewed stronger trends that were being reported towards the end of that period. Occupancy was up 0.7 points with room rate +3.4%. Costa Coffee is trading very strongly at like for like sales +9.7% after +4% in the first quarter. That is supported by LFL sales up 6.6% in UK equity stores, plus international sales. And Costa Express has launched strongly. The acceleration in Premier Inn and Costa in Q2 is likely to be well received. The stock is differentiated from its hotel peers by more robust performance in the last downturn and the potential roll out of Premier Inn and Costa units. Recommendation: BUY

“...emerging market assets have fallen recently as investors have moved out of local emerging market currencies and back into the relative ‘shelter’ of the US Dollar...”

Emerging Markets Debt - Focus Emerging market assets have fallen recently as investors have moved out of local emerging market currencies and back into the relative ‘shelter’ of the US Dollar. Much of the recent movement was triggered by the US Federal Reserve which stated that the downside risks to the US economy were now ‘significant’. This is the reverse of the flows which we have seen over the last couple of years, where investors had almost considered local emerging market debt as a safe haven away from the Euro Zone debt markets. There has been a long held view that returns on such debt would surpass UK inflation for instance, as the currencies would enjoy a long term, structural strengthening against Sterling. A study of UK pensions funds found that the average allocation to emerging market debt was less than 1% of the overall assets, compared to the emerging countries share of global GDP up around the 30% level. Despite improving liquidity and falling credit spreads, some are fearful that such bonds have become over-owned by foreign investors and that a wave of redemptions could lead to another crisis. For instance, the Indonesian Government revealed recently that foreign investor holdings of its debt had fallen by nearly 6% in just one week.

The economic prospects for the Emerging markets remain far brighter than for many Western economies and it strikes us that the recent falls are somewhat over exaggerated and it could be an interesting period to build positions in Emerging credit. One of the biggest challenges remains inflation, which in Brazil is currently running at over 7% per annum and crucially is now affecting ‘inflation expectations’. The minimum wage is due to increase by 15% in 2012 and many private sector wage settlements are now running at 10% per annum increases. Current redemption yields are approaching 12% on Government debt, so compared to the UK, the net yields could still look interesting. Currently corporate bonds only make up 20% of the benchmark but this is likely to grow in time. There will be an increasing transition of issuers moving from the high yield area into high grade and eventually investment grade as they develop. There will also be a trend towards both Government and Corporates issuing inflation linked bonds. This could be a particularly interesting area for credit investors as you are essentially getting insurance cover, although they do tend to incur a longer duration. One thing that is certain is that the Emerging currencies are likely to remain volatile, although some weakness will act as a support to the export sector. With the recent sharp falls in commodity prices there will be some weakness in the likes of the commodity currencies such as the South African Rand and the Mexican Peso. In a surprise move recently, the South Korean Central Bank stepped in to support the Won with a $4 billion measure and in Brazil, the Central Bank has spent nearly $3 billion to try to stop the rapid decline in the Real.

Shorts: Property

Shorts: Gold

In 2009 and 2010 European property fund managers and their underlying investors encountered storming times. The downturn affected their assets at all levels: tenant defaults caused income to drop; loan covenants were breached and buyers dissipated leading to valuation falls. However, the experience gained for those managers and funds that survived (and many did not) was considerable.

Market reports are now saying that gold is being sold by investors because of fears interest rates will have to rise higher than expected. The gold price tumbled sharply during September, as investors started a huge sell-off which sent the precious metal down around 15%, picking up pace after the Fed opted against further quantitative easing in favour of a debt swap which will see short-term bonds swapped for longer-dated treasuries.

At the start of 2011, the storm clouds started to break and blue sky appeared on the horizon. Cautious optimism returned. Unfortunately, this did not last and by mid-year new storm warnings were being announced.

The move dashed hopes of further quantitative easing, causing the dollar to rally and gold to drop. Experts are saying that there was a chance there would be a sustained round of interest rate rises further down the line as central banks are forced to take action in the wake of deflation.

But on this occasion, fund managers and their teams had already reacted. Defensive measures were immediately implemented in key areas across their portfolios. Importantly, increased communication to underlying investors formed part of these measures. If good judgment comes from experience then property fund managers should face the new challenges that lie ahead with a degree of cautious confidence.

Instead of gold, experts said investors looking for a safe haven should currently be holding the most liquid asset going - cash. Investment strategists agree that the falls in the gold price suggested fears over liquidity had been hurting the precious metals status. This suggests broad financial de-leveraging and/or liquidity pressures rather than traditional recession fears as the culprit. © Capital International Limited 2011

September 2011

Volume: 9

Issue: 3

www.capital-iom.com

Events: China Offshore Summit - Shanghai The Isle of Man will be promoted as an international business centre at an event in Shanghai in October. Representatives from the Capital International Group, Department of Economic Development and the ILS Group will attend the China Offshore Summit event on October 26 and 27. They will take part in a half day seminar event called “The International Tool Kit: Achieve your wealth management goals through international offshore structures and investments.”

Capital International Group

The seminar will address the benefits of using effective investment management, offshore fund structures with a global fiduciary services provider and will use Isle of Man case studies and solutions to show individuals how to achieve their wealth management goals. There will be a dedicated audience of more than two-hundred and fifty business leaders and entrepreneurs from around the globe and everyone will certainly ensure that they take the Manx message home with them.

• Trading & Stockbroking • • Fund Services • • Business Support • • Custody & Administration • • Cash & Investment Management

Anthony Long, CEO of the Capital International Group of companies stated that the Group’s presence at this summit is further evidence of how far they have come in such a short space of time - something definitely worth celebrating on the anniversary of our fifteenth year in the financial services. The China Offshore Summit has been designed to explain to China’s top financial intermediaries how they can benefit from the unique asset management and corporate product offerings available in the world’s international offshore financial centres. The Isle of Man is an established platform where business success and prosperity are commonplace and are delighted that we will be promoting the Island’s unique offering to our Chinese delegates. More than two-hundred and fifty Chinese professionals, entrepreneurs and financial intermediaries will attend the China Offshore Summit which will include presentations, workshops and panel discussions addressing issues in China’s outbound offshore investments.

Capital House Circular Road Douglas Isle of Man IM1 1AG

Tel: +44 (0) 1624 654200 Web: www.capital-iom.com e-Mail: info@capital-iom.com

Innovation • Integrity • Excellence

The regulated activities detailed above are provided by Capital International Limited, Capital Treasury Services Limited, Capital Financial Markets Limited or Capital Fund Services Limited who are all Members of the Capital International Group of Companies and are all licensed by the Isle of Man Financial Supervision Commission

Anthony went on to say “this is a momentous occasion for the Group. We are looking forward to our involvement at this prestigious event showcasing the Isle of Man alongside the Isle of Man Government and the ILS Group, as well as being able to promote our comprehensive range of investment services.” To further support the Island’s presence in the Far East both the Department of Economic Development and the ILS Group will exhibit at the Society of Trust and Estate Practitioners (STEP) Asia conference in Singapore at the beginning of November.

excel in excellence Innovation • Integrity • Excellence

Also in this issue: • Product Focus: Capital Liquidity Account • Commodity Outlook • Treasury Services: Euro Zone Exposure

Product Focus: Fusion Managed Portfolio The Fusion Managed Portfolio Service is an offshore discretionary investment management service designed to deliver: • Exceptional performance • Absolute return targets • Strict risk controls • Highly personalised service

Discretionary Service

Fusion is a full discretionary portfolio management service, providing investors with their own bespoke portfolio and a highly personalised service. Fusion is available as three distinct strategies, to meet your specific needs; Income, Alpha and Plus. Portfolios are also denominated in the three major currencies; Sterling, US Dollars and Euros.

Dynamically Managed

Fusion uses a highly flexible approach to asset allocation, designed to exploit macro trends by significantly tilting the exposure of a portfolio to each asset class, region, sector or theme throughout the investment cycle to maximise potential returns and protect from market volatility.

Seeking Absolute Returns

Above all Fusion seeks to achieve absolute returns and the management of absolute portfolio risk. Relative performance comparisons are of little importance to us and indeed, we believe often lead to irrational decision making.

Investment Approach

Fusion’s investment objective is, as already outlined, to achieve absolute returns within defined risk parameters and investment horizons set by the Investment Team. The Fusion strategies are constructed around a managed portfolio of collective investment vehicles, both on and offshore, delivering a unique combination of diversification, flexibility and efficiency, in a broad range of asset classes designed to maximise its ability to deliver returns, whilst minimising the associated risk. Each Fusion strategy delivers a highly diversified investment exposure and is designed as a complete investment solution and core strategy.

Efficient Strategic Allocations

The Fusion strategies have been engineered through the process of efficient portfolio optimisation to achieve their respective target returns, for the lowest possible risk. The efficient strategic allocations are available on request or via the online brochure at www.capital-iom.com.

Tactical Allocations

Fusion is a ‘dynamic strategy’ and while the allocations detailed highlight the long-term strategic targets, day-to-day tactical allocations may vary significantly from these levels in accordance with the ‘Swing Factor’ employed.

Swing Factors

Swing factors enable Fusion to respond meaningfully to the economic climate, reducing risk during periods of turbulence and weakness and increasing it during periods of growth. Fusion Income and Fusion Alpha strategies utilise a swing factor of 30% either side of their strategic allocations, while the Fusion Plus has a wider swing factor of 50% giving a more dynamic and flexible investment strategy.

September 2011

Volume: 9

Issue: 3

Treasury Services: Euro Zone Exposure It’s fair to say that “the Euro Zone is intensive care”, but that the real problem is getting consensus on how to cure it of its recurring solvency ills and allow it to once more assume its important role on the global economic stage. With French banks, according to some sources, leveraged more than four times France’s GDP, and banks in other Euro Zone countries potentially in a similar situation, it is little wonder market volatility has shot up dramatically in recent weeks as European politicians show little sign of being able to resolve the problems definitively as opposed to simply just doing enough to somehow muddle through each crisis as it develops. Several potential solutions have of course been suggested including allowing the ECB to support solvent governments with unconditional and unlimited liquidity, but so far the ECB and Germany among others appear reluctant to go down this road fearing that purchasing government bonds is tantamount to monetising sovereign deficits. In its final analysis ‘The Economist’ contemplates the likely cost and impact of some countries such as Greece exiting the Euro and warns that while there could undoubtedly be advantages longer term, the short term cost both financially and in terms of potential civil unrest could be very high.

Capital International Group

CELEBRATING

BUSINESS 15 YEARS SUCCESSFUL IN THE ISLE OF MAN

In conclusion “the real worry for investors and European leaders alike is that a Greek departure could trigger panic elsewhere, with runs on banks in Portugal and Ireland and maybe Italy and Spain. Though the euro area may have proved a disappointment in economic integration, financial integration has gone apace – which now proves the opposite of a consolation. The Euro Zone offers scope for contagion and confusion on an epic scale. That is what makes its crisis so troubling and so hard to treat.” All this gloom is not a surprise and we therefore have to take steps to balance this. For the moment however until the Euro Zone crisis is resolved, Capital Treasury Services will recommend the following: ‘continue to underweight those countries within the Euro Zone and focus on areas/banks and financial institutions that might be more insulated’. We have not held any peripheral bank names in the portfolios for several years, especially in Greece or Italy and more recently we have reduced our exposure to French names. Otherwise the CLMA portfolios are very conservatively positioned and continue to be so. Our investment philosophy for the funds under management is capital preservation first and foremost, liquidity, and thirdly a competitive yield, but not at the expense of the first two objectives.

Rates & Commodities

30-Sep-11

Price at 30-Jun-11

30-Sep-10

% Chg Quarterly

% Chg 1 Year

GBP/USD

1.5648

1.6067

1.5728

-2.61%

-0.51%

FTSE -100

5,128.48

GBP/EUR

1.1634

1.1071

1.1548

5.09%

0.74%

Dow Jones

10,913.38

GBP/JPY

120.7

129.433

131.25

-6.75%

-8.04%

NASDAQ

2,415.40

SILVER

1222.160

1510.010

1432.480

-19.06%

-14.68%

S&P 500

World Indices

Price at 30-Jun-11

30-Sep-10

% Chg Quarterly

% Chg 1 Year

5,945.71

5,548.62

-13.74%

-7.57%

12,414.34

10,788.05

-12.09%

1.16%

2,773.52

2,368.62

-12.91%

1.97%

1,131.42

1,320.64

1,141.20

-14.33%

-0.86%

30-Sep-11

GOLD

1629.00

1508.00

1311.00

8.02%

24.26%

DAX

5,502.02

7,376.24

6,229.02

-25.41%

-11.67%

EUR Crude Oil

104.26

111.68

81.42

-6.64%

28.05%

CAC 40

2,981.96

3,982.21

3,715.18

-25.12%

-19.74%

US Fed Funds

0.25

0.00%

Nikkei 225

8,700.29

9,816.09

9,369.35

-11.37%

-7.14%

UK Base Rate

0.50

0.00%

Hang Seng

17,592.41

22,398.10

22,358.17

-21.46%

-21.32%

ECB Base Rate

1.50

1.25

1.00

20.00%

50.00%

FT All Gilts

166.46

155.68

161.09

6.92%

3.33%

Capital International

+44 (0) 1624 654200 info@capital-iom.com Capital House Circular Road Douglas Isle of Man IM1 1AG Capital International Limited is a Member of the Capital International Group Capital International Limited is a Member of the London Stock Exchange Capital International Limited is licensed by the Isle of Man Financial Supervision Commission Registered Office: Capital House, Circular Road, Douglas, Isle of Man, IM1 1AG

CIL - Capital Update - V1.02-10.11

August 1996 - 2011