Emerging markets defy the pessimists by nyut545e2


									                                                                                                                              4 November 2010

                           17th November

Emerging markets defy the pessimists
After strong relative performance and massive fund in-flows in 2009,      few doubt that economic growth in emerging economies will continue
many experts predicted that emerging market equities would have a         to significantly out-pace that in developed economies while they
poor year in 2010. We were more sanguine, expecting modest out-           were much less impacted by the credit crisis and their national
performance as a result of valuations, earnings growth and economic       finances are better. This means that growth in corporate earnings is
fundamentals that were still attractive relative to developed markets.    likely to significantly out-pace that in developed markets in the
                                                                          medium and long term.
That forecast is working well with the MSCI World index returning
5.6% in Sterling to the end of September while the Emerging markets
index returned 13.8% but markets have rewarded shrewd rather              Over the three years, earnings growth is expected
than indiscriminate investors. The major markets are struggling, with     to be 74%, well above that of the global index.
China down and India the only BRIC country that is out-performing.
Instead, the best performances have come from South-East Asia,            However, they are not without problems. Competitive devaluation and
Chile and Colombia. The Frontier index, dominated by the Middle           ultra-low interest rates in developed economies mean that currencies
East, has been disappointing overall but it contains some outstanding     are often stronger than is comfortable (notably in Brazil and South
performances: Sri Lanka (following the end of the civil war), Ukraine     Africa) and high interest rates to fight inflation, notably in India,
(despite the drought) and Mongolia have all more than doubled while       threaten to worsen the problem. As is normal in emerging economies,
uninvestable Iran has also soared.                                        current accounts and government finances are often in deficit, but
                                                                          these deficits are worryingly high in some of Eastern Europe.
Large and mega-capitalisation stocks,
                                                                          Corporate governance, though improving, is variable, with companies
especially those listed overseas, have performed                          like Gazprom more focused on the economic agenda of its majority
disappointingly but small and mid caps have                               shareholder, the Russian government, than on investment returns to
                                                                          the minority. From Iran to Burma and Venezuela, there are many
done much better.                                                         basket cases; these are of tiny significance to emerging market
                                                                          investors but there is notable political and social deterioration in
Large and mega-capitalisation stocks, especially those listed             Mexico and South Africa (though Thailand is improving) which are
overseas, have performed disappointingly but small and mid caps           much more significant.
have done much better. The Brazilian investor who avoided giants
Vale and Petrobras has done well, as have investors everywhere            Both corporate and government bond yields are
who focused on consumer goods and services companies. This
means that while the performance of some emerging funds has               still very attractive relative to developed markets
been pedestrian, others have beaten their country, regional or global     while most currencies remain under-valued
benchmarks by huge margins.
This trend is likely to continue, with emerging markets doing well but    Fund flows continue to be strong into emerging markets but that
followers of the herd being trounced by careful stock-pickers, those      reflects their demand for capital to finance growth and high returns
prepared to be contrarian in their country selection and those            rather than an investor mania, though a mania which pushes
committed to careful research rather than buying the obvious.             valuations to absurd levels could develop. Investors have also started
Emerging markets now account for 12.6% of the MSCI global index           to focus on corporate bonds and local currency government bonds
and nearly 14% if Hong Kong and Singapore are included, compared          (as we have been urging for two years) where there is also a risk of
with below 9% for the UK and Japan. Very few private or professional      an avalanche of cash creating a bubble. At present, both corporate
investors have weightings this high so are likely to be buyers on any     and government bond yields are still very attractive relative to
setback. Such a setback was provided in 2008 when emerging                developed markets while most currencies remain under-valued but,
markets fell by 30% relative to developed markets but, of course, most    as for equities, the upward path of returns could be volatile. There
investors missed it and emerging markets made back the lost ground        are also individual opportunities to unearth value in an investment
in 2009. Since 2001, emerging markets have more than trebled              field where most investors are still wary of even calculated risk.
relative to developed markets and this shows no sign of reversing.        The outlook from emerging market equities is for more of the same.
The fundamentals show why. Emerging market indices trade on 12.9          Returns between sectors, countries and companies are likely to vary
times 2010 earnings and 11.1 times 2011, a 7% discount to the             enormously so equity investors should seek a broad spread via
MSCI global index. Forecast earnings growth in 2010 is, at 34%, less      funds, mostly global or regional ones rather than single country ones.
than for the global index but for 2011, at 17%, is similar and earnings   Investing in developed market stocks with high emerging market
rose over 10% in 2009. Over the three years, earnings growth is           exposure has proved to be no substitute for the real thing and this is
expected to be 74%, well above that of the global index. Moreover,        unlikely to change.

www.edenfinancial.com                                                                                                                          1
Economic Outlook
The market chatter in October was focused on the growing expectation        The announcement that the UK economy grew by 0.8% in the third
of further quantitative easing by the US Federal Reserve, to be             quarter surprised everyone except ourselves (we think the signs of a
announced in early November, while evidence of an improving global          robust recovery are clear). This gives a respectable 2.8% year on
economy was brushed aside. The Dollar has been under continual              year rate with no likelihood of a slow-down for some time. This
pressure (see chart) as investors and traders assume that most of           news led to Standard & Poors removing the UK from negative watch
the greenbacks printed by Mr Bernanke’s team will continue to               and placing a stable outlook on the economy. Inflation expectations,
devalue the Dollar. This has piled pressure on the Euro and on the          however, have risen markedly since mid summer: 10yr breakeven
currencies of emerging economies. Brazil has responded by doubling          inflation expectations have risen from 2.5% to 2.8% while the 10
their withholding tax to 4% and Thailand by raising a 15% withholding       year rate of inflation discounted by bond markets in the US has risen
tax on foreign bond holders in order to relieve pressure on their           from 1.5% to 2.17%. Sentiment on the US Dollar is uniformly bearish
appreciating currencies at a time when they are striving to remain          but current US monetary policy makes it hard to disagree: this
competitive in global trade. Singapore and China are the only               means that the US will face some key pricing pressure if demand
countries condoning the appreciation of their currencies, though US         picks up.
politicians are not appeased. China raised rates in the face of an
inflation rate of 3.6% and a renewed rise in property prices.               Sentiment on the US Dollar is uniformly
                                                                            bearish but current US monetary policy
The announcement that the US economy
                                                                            makes it hard to disagree.
grew at an annual rate of 2% appears not to
have deflected the Federal Reserve from its                                 The threat of an imminent Euro crisis has receded again, though for
intention to purchase up to $1 trillion of                                  how long is not so clear. The main driver of better sentiment has
                                                                            been that China and Norway, for political reasons, are using their
Treasury and Mortgage backed securities.                                    Sovereign Wealth Funds to buy the higher yielding debt of Greece
                                                                            and Portugal but the Irish have also shown impressive resilience to
Foreign investor fund flows into both Emerging market equity and            the latest deterioration in their finances. The ECB has been
debt funds continue at a high pace, with weekly data showing                withdrawing liquidity from the banking systems of the stronger
returns to early 2008 levels. The long term growth potential of these       economies while continuing to provide life support to the weaker
markets makes them attractive destinations for investment but we            ones but there is no suggestion of following the US and Japan in
are becoming concerned that this has become a consensus trade,              creating money. The reason for this is clear: the German economy
making a pullback more likely. Fund flows into commodities space            according to all measures is booming: unemployment has just hit an
are also back to record highs, according to Barclays Capital.               18 year low. The evident need for higher interest rates in Germany
The announcement that the US economy grew at an annual rate of              has raised money market rates and pushed up the value of the Euro.
2% appears not to have deflected the Federal Reserve from its               The effect of this on the peripheral economies of the Euro-zone is
intention to purchase up to $1 trillion of Treasury and Mortgage            highly unwelcome and forewarns of another chapter in the crisis.
backed securities. The run up in risk assets in the past six weeks is
widely attributed to this single premise though we see a broader set        The reason for this is clear: the German
of causes. The Federal Reserve is not united on the need for action         economy according to all measures is
and we live in hope that the package will be more modest, will be
better targeted and will be linked to tighter fiscal policy but this hope
                                                                            booming: unemployment has just hit an
is probably forlorn. Economic data has been flat in recent weeks, but       18 year low.
there has been a rebound in some of the manufacturing surveys.
With 10yr US Treasury yields already down at 2.6%, it is not obvious
                                                                            US Dollar weakness
that simply buying them in for newly created Dollars will stimulate
the economy. The risk of a policy error is now serious with unknown
consequences. Hopefully, mid term elections in early November will
lead to the authorities getting a firmer grip on policy.

                                                                            Source: Bloomberg, 1st November 2010.

www.edenfinancial.com                                                                                                                           2
Eden Asset Allocation Framework
                                                                             CORPORATE BONDS
Equity markets have consolidated in the short term but we expect
further progress by year end. Valuations, enhanced by better than            Developed Markets
expected Q3 results, are still attractive and further significant earnings
                                                                             Avoid 10 year Gilts, European and US government issues which are
growth in is 2011 is increasingly visible. Investors remain cautious
                                                                             expensive. Yields have started to rise as economic growth picks up
and focused on the risks, the most serious of which is policy mistake
                                                                             and though quantitative easing may boost prices short term, it will
by the authorities in the face of improving economic data. As we
                                                                             threaten inflation in the long term.
enter the most favourable part of the year for investment returns and
the most favourable part of the US political cycle, investors should         Corporate bonds
not wait for a setback before adding to risk assets.                         High grade credit spreads look stretched but there continues to be
US Equities                                                                  selective opportunities in the medium risk area, especially in financials,
                                                                             and high yield still offers very good value. Invest for income, not for
Buy, despite the risk of misguided and over-zealous quantitative
                                                                             capital gain, and protect from higher government bond yields through
easing. The average return since 1960 from the mid term elections
                                                                             focusing on short duration issues.
to the end of the following year is 21% with no down precedents.
Technology, pharmaceutical and reliable growth stocks are especially         Emerging Markets
attractive but there is value across the board.                              Local currency debt funds remain attractive both for the currency
UK Equities                                                                  and the bond return. Buy.

Buy. The economic and fiscal outlook is improving and there is value         ALTERNATIVE INVESTMENTS, NO CHANGE IN WEIGHTINGS; ADD
right across the market: in domestic earners as well as overseas             INFRASTRUCTURE FUNDS TO PORTFOLIOS
earners and the resources sector. We particularly favour companies           Listed private equity funds remain very good value with good discounts,
with a high or medium but growing yield. Mid and small caps still            rising asset values and an improving outlook for new deals. Property
look attractive.                                                             shares still look very good value. Quoted infrastructure funds offer
Europe ex-UK                                                                 high and rising income for low risk. The gold price usually performs
                                                                             well in Q4 and is underpinned by quantitative easing; buy the metal
Buy: the economic performance of Europe is diverging but companies
                                                                             or a precious metal mining fund
are producing strong profits growth. The strength of the € is now a
headwind and Euro-zone worries will return so avoid banks and                ALTERNATIVE INVESTMENTS, HEDGED ASSETS: NO CHANGE IN
companies with high exposure to the distressed economies.                    WEIGHTINGS

Japan                                                                        Returns have been mixed in the year to date so it is important to
                                                                             seek out the quality funds which can deliver high single digit
Buy. Very cheap, with strong earnings momentum and good earnings
                                                                             returns. Performance of the quality quoted funds and UCITS 3
surprises. Further intervention by the Bank of Japan to stop the Yen
                                                                             “absolute return” funds mimicking hedge funds is solid.
rising is needed to remove the risk to the market.
                                                                             CASH AND CURRENCIES: NO NEED FOR MORE THAN MINIMAL
Asia Pacific ex-Japan
Buy. Popular and performing well, so be aware of the risk of a setback.
                                                                             Holding cash for a better investment opportunity makes no sense as
The long term drivers of economic and market performance appear
                                                                             markets are likely to rise further. The $ is cheap but held back by
                                                                             the prospect of more quantitative easing. Sterling is at our $1.60
Emerging Markets                                                             target but has upside against the Euro. Best value is in EM, Asian
                                                                             and commodity currencies.
Buy. Strong earnings growth, good valuations and an absence of
economic concerns make it still attractive though performance has
been strong and a setback is likely at some point.

Model weights (%) for Medium            Model weights (%) for Medium         Model weights (%) for High
Risk Balanced Portfolios                Risk Growth Portfolios               Risk Growth Portfolios

            10                                      10                                                                    Equities
       5                                        5                                   5                                     Bonds: government
   5                                        5                                   5                                         Bonds: corporate IG
                              53                                      58                                   65             Bonds: high yield and EM
 12                                       15                                  15
       10                                       7                                                                         Alternatives: risk assets
            5                                                                                                             Alternatives: hedged

www.edenfinancial.com                                                                                                                                 3
Antofagasta (ANTO)                                                      Mining                                                                        Buy
Medium Risk                            Year End Dec               2009A*       2010E       2011E
Price: 1,340p                          EPS (p)                    47.0         73.6        109.9
Market Cap: £13,249m                   PER (x)                    28.5         18.2        12.2
12 mth high/low: 1340p/761p            Net Dividend (p)           16.3         22.7        34.7
Next Results: March ’11                Net Yield (%)              1.2          1.7         2.6

Source: Consensus Forecast, FactSet, 02.11.10. Chart: Proquote, 02.11.10.        *Translated at $1.44/£

The Antofagasta (Chile) and Bolivia Railway Company Ltd., a UK incorporat-        February’s earthquake, interim pretax profits rose from $477m to $932m
ed company linking the interior of South America to the Pacific, was              on a 49% increase in turnover and full year pre-tax profits are expected
inaugurated and listed in London in 1888. In 1980, the late Andrónico             to recover to $2,335m on copper production of 447,000 tonnes. Two key
Luksic, one of Chile’s most renowned and successful entrepreneurs,                ongoing projects, an expansion at Los Pelambres and development of a
acquired control of what had become primarily a transporter of copper.            new mine at Esperanza, remain well on track. Copper production is planned
Through a series of acquisitions, divestments and restructurings which            to jump to almost 700,000 tonnes in 2011 (0.4% of world consumption),
combined prudence with audacity, he created a world class copper mining           with pretax profits expected to reach a new peak of $3460m.
group with three huge mines; Los Pelambres, El Tesoro and Michilla. Total         Antofagasta is well able to afford its massive investment programme.
production in 2009 was 442,500 tonnes of copper and 7,800 tonnes of               Profitability is opulent with margins of 72.6% in 2006 and 49.4% even
molybdenum. Antofagasta also still operates an extensive railway network          last year, and return on capital likewise 136% and 37%. Cash conversion
in north Chile and operates a water distribution concession but mining            over five years has averaged 71%, taking net cash up from $276m to
represents 92.5% of group turnover and 94.1% of trading profits. The              $1516m. The sizeable exploration programme in Chile, including proving
company is still 65% owned by the Luksic family.                                  up prospects across its Sierra Gorda licences, bodes well for further growth.
From 2004 to 2006 turnover, surged from $1942m to $3870m, before a                There is also an increasing portfolio of international projects including the
cyclical decline to $2,963m last year. Likewise, pretax profit rose from          very promising Reko Diq copper-gold joint venture with Barrick in Pakistan.
$1,221m to $2,859m, before declining to $1438m. Meanwhile,                        Antofagasta represents a prime investment opportunity through which to
Antofagasta has invested massively, increasing capital employed from              profit from the structural acceleration in demand for copper and other
$1,700m to $4,790m in five years. The benefits of this investment                 base metals. It has a high-quality asset base with assured, ongoing
boosted by a strong recovery in copper prices should now show through             production growth sitting in a wider portfolio of projects, plus cash to
in profits. Despite minor disruption at the core Los Pelambres mine from          tide it through any downturn.

Shaftesbury (SHB)                                                       Retail REIT                                                                   Buy
Medium Risk                            Year End Dec               2010A        2011E       2012E
Price: 448p                            NAV (p)                    315          416         488
Market Cap: £1,020m
12 mth high/low: 465p/348p             Net Dividend (p)           9.75         10.5        11.2
Next Results: Nov ’10                  Net Yield (%)              2.2          2.3         2.5

Source: Consensus Forecast, FactSet, 02.11.10. Chart: Proquote, 02.11.10.

The property sector was a dull performer in 2009 and for most of 2010             consequent attention to detail that results from this. Their shrewd
but Shaftesbury, a prime quality company which we wrote about first in            opportunism is demonstrated by their investment last year at a time
June 2009, is the exception to the trend. After adjusting for the rights          when others were under pressure but more importantly by their record
issue which it was just completing at that time, the shares have risen by         of revitalizing faded destinations by refocusing on the core retail
around 45% far better than the All Share Index. We believe this company           proposition. The weakness of sterling, which encourage overseas visitors
to be one of the safest and strongest property players in a sector which          clearly helps, but most of their success is down to their own efforts,
looks, at last, to be coming out of the doldrums.                                 working closely with local authorities, to enhance rather than altering
While other companies raised capital to repair their balance sheets,              the character of their “villages.”
Shaftesbury did so to expand its portfolio on favourable terms. Its latest        The development of St Martin’s Courtyard jointly with the Mercers
management statement in August reported buoyant trading conditions                Company, one of London’s leading livery companies, is on a larger scale
with healthy demand for retail, restaurant, leisure and residential               than earlier schemes such as Kingley Court (Carnaby Street) and Neal’s
accommodation across a portfolio which 11 acres of London’s West End              Yard (Covent Garden). It includes 22 shops, 5 restaurants, 69,000 sq ft of
and includes in excess of 500 shops, restaurants, café’s and bars which           offices and 34 apartments and is due for completion this autumn, lettings
provide over 70% of its income, The portfolio is focused on five “villages”:      having made excellent progress. We have no doubt that Shaftesbury has
Carnaby Street, Chinatown and the Seven Dials area of Covent Garden to            its eye on other potential developments and “villages” utilising its
which they have recently added Berwick Street and a 50% interest in a             unique strength in upgrading and renovating under-managed assets.
site in Covent Garden that includes the St Martins Courtyard development.         Despite the share price rise, we believe that the shares still offer good
Shaftesbury is a unique property play because of its geographic focus             long term value helped by a strong and consistent management and the
on the area within a 15 minute walk from its head office and the                  focused nature of its portfolio. We recommend them as a buy.

www.edenfinancial.com                                                                                                                                         4
Review of Past Recommendations
COMPANY                          DATE         RECOMMENDATION   RECOMMENDED           CURRENT        CHANGE*        RELATIVE TO ALL     CURRENT
                                                                    PRICE (p)        PRICE (p)          (%)        SHARE INDEX (%)     RECOMMENDATION

Experian                         Oct          Buy                       690              743             +8                   +6       Buy
Smith & Nephew                   Oct          Buy                       563              552              -2                   -4      Buy
Lloyds Bank                      Sept         Buy                      71.5             69.5              -3                 -10       Buy
Barratt Developments             Sept         Buy                       100               76            -24                  -30       Buy
Hiscox                           Sept         Buy                       363              352              -3                   -9      Buy
Diageo                           Aug          Buy                     1119             1164              +4                    -5      Buy
Halma                            Aug          Buy                       285              328           +15                    +6       Buy
Prices as at 2nd November 2010. Source: Reuters                                                                  *percentage change since recommendation

Hardy Underwriting (Bermuda) (297p) Strong Hold                                 Inmarsat (653p) Buy
Hardy has been a steady performer since we recommended it at                    The sale by Harbinger, the US hedge fund cum telecoms services
227p in our November 2008 edition. The first half of this year saw              business, of 65m Inmarsat shares, reducing its holding from 28% to
heavy claims owing to the Chilean earthquake and a “once-in-a-                  14%, has resulted in market indigestion notwithstanding a 180-day
hundred-years” Australian hailstorm. Meanwhile persistent gloom                 lock-up arrangement over the remaining stake. Still, this is a technical
has surrounded the Lloyd’s market, with talk of endemic weakness                not a fundamental depressant: Harbinger has less interest in holding
in rates and investors looking forward to the next disaster. But the            a stake in Inmarsat or, as earlier mooted, staging a full bid following
job of insurance companies is to price risk and the greater the                 August’s deal whereby it achieved direct access to the company’s
perceived risk, the higher the price and the less new capital enters            US spectrum asset. Under this deal, Inmarsat receives $337.6m over
the sector. With shares selling only at around the net asset value of           18 months and stands to receive an annual $115m thereafter
companies’ investment portfolios, investors are paying nothing for              assuming Harbinger goes ahead with a continuing arrangement.
the insurance businesses, which is unjustified given the substantial if         This helps finance Inmarsat’s heavy capital expenditure, running at
volatile profit and dividend stream that they generate. It is therefore         $240m for 2010 including the new major phase of investment in
not surprising that Hardy has received, though rejected, a bid approach         “Ka-band” satellites. There is almost limitless hunger for broadband
from competitor Beazley at 300p. This represents 1.2 times Hardy’s              in today’s world and Inmarsat possesses valuable spectrum by virtue
net asset value but compares poorly with the 1.4x net assets that               of its intergovernmental origins. We believe the current weakness
Amlin paid Fortis for FCI and the 1.8x RSA offered for Aviva’s general          affords buying opportunity.
insurance business. Unsurprisingly Beazley’s shares rose on the
                                                                                Asset Co (65p) Buy
prospect of them buying a bargain: one analyst thinks Hardy is worth
at least 380-400p. Hardy still offers a yield of 5.0% (5.4% next year)          The London Fire Brigade is currently seeing a number of unauthorised
and is on a prospective PE of perhaps 6.0 for 2011.                             strikes by its members and this is highly beneficial to Asset Co who
                                                                                were asked to train 700 back up fire fighters to be used on a stand
Autonomy (1455p) Buy
                                                                                by basis in the event of terrorist attacks, a pandemic, or the 2012
The global standing of this Cambridge technology company makes it               Olympics. They can equally be used in the event of a strike and have
something of a national champion. Life with Autonomy is certainly a             already been called into action. Asset Co is paid for training this
roller-coaster because of the lumpy order book, but the rating now              back up service but in the event of its use is strongly rewarded and
looks cheap by American standards for intellectual property of this             is likely to benefit this year. The shares remain a buy.
calibre. Following share price slump caused by the third quarter
                                                                                Barratt Developments (76p) Buy
trading statement. It referred to customers being affected by macro
economic uncertainty and management revised full year revenue                   The shares have fallen by over 30% in the past three months on
expectation down by 3% reducing organic growth to 12%. Earnings                 negative news flow surrounding the UK housing market. The AGM on
expectations for 2011 are now 12% lower than they were six months               the 17th of November should provide a catalyst for a rebound. The
ago but we are still looking for increases of 27% this year and 4%              shares look cheap at these levels.
next. The third quarter numbers showed revenues, pre-tax profits
and earnings per share ahead 10%, 34% and 25% respectively.
There is no sign of the perennially indicated big acquisition which
one day might depress the share price. Meanwhile, US shareholdings
in Autonomy have risen from 20% to 40% over the past year and a
bidder might even materialise from across the Atlantic.

www.edenfinancial.com                                                                                                                                  5
Collectives & Managed Funds: Emerging Market Equity Funds
Emerging market equities should be included in a diversified global        Findlay Park Latin American Fund Unit Trust £: The fund has been
portfolio with a medium to high risk profile. Most of the countries have   managed by Rupert Brandt since 2006. It is currently invested 66%
not suffered directly from the issues which are weighing on the growth     Brazil, 21% Mexico and 5% Chile. The manager strongly believes the
prospects for developed markets: the banking systems, government           region has been through a period of structural reform which has resulted
finances and trade balances are generally in good shape. Trade             in a tangible decline in sovereign risk and an acceleration in growth and
surpluses help fund investment in the domestic infrastructure which in     business opportunities. This will make the region one of the strongest
turn creates jobs. Domestic consumption is increasing at a fast pace       macro links in the global economy in the current economic cycle.
as the middle class rapidly grows. A fundamental shift is underway
                                                                           JP Morgan Russian Securities Investment Trust (JRS.L): The fund
which will take many decades to play out and will benefit investors.
                                                                           invests in quoted Russian securities and has a broad sector spread,
There are exchange traded funds (ETF) for emerging markets but             currently 17% consumer staples, 16% materials, 15% financials,
active funds have a good record of justifying their higher fees,           13% energy, 13% telecoms and 13% consumer discretionary. It is
thanks to an abundance of opportunities and some pitfalls for the          under weight mining and energy stocks which are often subject to
unwary in the leading stocks. We advocate targeting global or              political influences. We think that exaggerated prejudices have led to
regional funds rather than specific countries in the absence of            a significant undervaluation of the Russian market.
exceptional circumstances. Some exposure to the newer ‘frontier’
                                                                           Whilst we do prefer actively managed funds for emerging markets,
markets should also be considered. The following is a selection of
                                                                           the passive alternative is the ishare MSCI Emerging Markets
the funds we recommend:
                                                                           Index (EEM.N), an exchange traded fund (ETF) listed on the NYSE.
Genesis Emerging Markets Investment Trust (GSS.L): The fund is             The fund seeks results that correspond generally to the price and
listed in London and a member of the FTSE 250. It is currently 45%         yield performance of the MSCI Total Return Emerging Markets Index.
invested in Asia, 20% in Middle East & Africa, 17% Latin America           The Fund will concentrate its investments in a particular industry or
and 16% in Eastern Europe. They take a bottom up approach focusing         geographic region to approximately the same extent the Index
more on individual companies than on economic factors and look for         benchmark is. It is denominated in US Dollars. The current largest
undervalued companies with long term potential for growth. There           geographic weightings are 16% Brazil, 13% South Korea, 13%
investment time horizon is 5 years.                                        China, 11% Taiwan and 8% South Africa.
First State Asia Pacific Leaders Unit Trust £: The fund, managed           Annualised Performance in Sterling
by Angus Tulloch, invests in the Pacific region excluding Japan but                                       1 Year       3 Year      5 Year
including Australasia. The fund is currently invested 38% in the greater   Genesis Global EM              31.80%       13.70%      18.81%
China region, 20% South East Asia, 17% Australasia, 17% Korea and
                                                                           First State Asia Pacific       23.90%       9.80%       20.25%
5% India. The manager is a stock picker with an investment approach
                                                                           Morgan Stanley China A         19.97%       2.05%       32.00% (4 year)
geared to value.
                                                                           Findlay Park Latin America     48.16%       18.46%      23.50% (4 year)
Morgan Stanley China ‘A Share’ Investment Trust (CAF.N) $: This            JP Morgan Russia               53.43%       -1.42%      25.01%
is a closed-end fund listed on the NYSE which invests in Chinese
                                                                           EEM.N ETF                      28.01%       4.51%       18.34%
companies listed on the Shanghai and Shenzhen stock exchanges.
                                                                           MSCI TR EM Index               27.04%       4.96%       17.36%
The fund uses bottom-up fundamental analysis of companies, to identify
companies with strong earnings and cash flow growth potential.             Source: Bloomberg, 29th October 2010.

Bond Picks of the Month - Marfrig and Co-op (High Risk)
MARFRIG                                                                    well positioned brands with leadership in regional markets. It had
Currency                                      USD                          revenues of R$9.6bn and operating cash flow of R$820m in 2009.
Coupon                                        9.625%                       Independencia’s recent debt restructuring has highlighted the risks
Maturity                                      Nov-16                       in Brazilian beef producers - it is a cyclical business and margins can
                                                                           be volatile. Besides this, there are the risks inherent in the animal
Callable?                                     No                           foods industry: disease outbreaks, volatile cattle prices, and cattle
Rating                                        B+ (S&P) / B1 (Moody's)      availability risks. However, Marfrig is having a great year and the
Current Price                                 109.25                       company is improving its business profile through acquisitions leading
                                                                           to a more geographically diversified and consumer-branded product
YTM                                           7.68%
Source: Bloomberg, 26th October 2010.                                      The equity-financed acquisition of Brazil-based poultry processor
Marfrig is Brazil’s third largest food processing company which has        Seara Alimentos diversified the business and will help boost Marfrig’s
successfully transitioned from a pure commodity business into a            revenues in Brazil. The recent acquisition of Keystone foods is likely
more value-added meat and poultry business. Such companies have            to be accretive to creditors as it is being financed through mandatory
passed through a difficult period in the past two years but significant    convertible notes so any cash flow from the business will help
consolidation in the sector has improved the profile of the market         improve metrics. Net debt to operating cash flow is 4.0x and is set
leaders and growth drivers are now in place. Marfrig has a production      to fall further as the benefits of the acquisition flow through.
base in Latin America and Europe combined with an international            Credit View This is a story of improving credit quality: the company
distribution network and a solid client portfolio. It has low production   has made significant moves in the past few years, and is moving
costs, geographic flexibility in the production and distribution and       towards becoming a truly global business.
www.edenfinancial.com                                                                                                                             6
CO-OPERATIVE BANK                                                                The group has continued to report robust financial performance. In
                                                                                 the first half of 2010, total income was up 21% while like-for-like
Currency                     GBP                                                 costs were down. Underlying profit rose to £85m as like-for-like
Coupon                       5.5555%                                             impairments were down 39% from the previous half year, due to
Maturity                     Perpetual, with Call on Dec-15 at 100               continued focus on credit risk and prudent 2009 provisioning. The
                                                                                 bank has tightened its credit risk scorecards in unsecured lending.
Rating                       Ba2 (Moody's) / BBB (Fitch)
                                                                                 The balance sheet shows improving asset quality, with reducing
Current Price                85.88
                                                                                 loan-to-value ratios (the average was 51.5% at the end of 2010)
Yield to Call                9.05%                                               and arrears. Prime mortgages are around 70% of the residential
Source: Bloomberg, 26th October 2010.

The Co-operative Bank is part of The Co-operative Group, the UK’s                The bank’s capital position is reasonable with a Tier 1 ratio of 10.4%
largest consumer co-operative which is uniquely diversified amongst              and a core Tier 1 ratio of 8.7%. It is significantly customer funded,
UK mutuals, offering retail and corporate customers a full range of              with deposits continuing to grow and a funding ratio of 110%. While
financial services. The Co-operative Bank offers a range of financial            risks remain for any sector exposed to the UK housing market, the
products, including current accounts, savings accounts, credit cards             bank’s credit quality has stabilised, as shown by its recent financial
and loans.                                                                       results and its balance sheet. The Perpetual Subordinated bonds
                                                                                 offer an attractive Yield to Call.

Fixed Income Model Portfolios
Eden’s Model Bond Portfolios are developed for three risk categories:            The Model Bond Portfolios performed well during the recent market
High, Medium and Low. Each of these portfolios presents a diversified            volatility; our picks have remained largely stable despite a broader
mix of credits, with underlying fundamentals that compare well to                correction in the bond market.
the peer group.
Issuer                           Coupon %      Maturity        Price £        Yield to     Rating     Industry                        Min Piece
                                                                              Maturity %                                              Increment
Low Risk GBP

METLIFE                                 5.25   Jan-14             106.6            3.04    Aa3/AA-    Insurance                       50k / 50k

ROCHE                                    5.5   Mar-15             112.3            2.47    A2/AA-     Pharmaceuticals                 5k / 5k

E.ON                                 5.125     Jan-14             109.6            2.05    A2/A       Electric Utility                50k / 50k

GENERAL ELEC                            5.25   Dec-13             108.0            2.55    Aa2/AA+    Diversified                     1k / 1k

CIBA                                     6.5   Apr-13             109.4            2.55    Unrated    Specialty Chemicals             1k / 1k

RWE                                  6.375     Jun-13             111.6            1.74    A2/A       Electric Utility                1k / 1k

Medium Risk GBP

CLOSE BROTHERS                           6.5   Feb-17             105.2            5.50    A3         Banking / Broking               50k / 1k

INTERCONTINENTAL HOTELS                   6    Dec-16             107.0            4.65    BBB-       Hotels                          50k / 1k

LONDON STOCK EXCHANGE                6.125     Jul-16             109.0            4.33    Baa2/A-    Financial Services              50k / 1k

GAZPROM                                 6.58   Oct-13             107.2            4.00    Baa1/BBB   Oil & Gas                       50k / 1k

IMPERIAL TOBACCO                         5.5   Nov-16             109.7            3.69    Baa3/BBB   Tobacco                         50k / 50k

KPN                                     5.75   Mar-16             111.6            3.36    Baa2/BBB+ Telecommunications               50k / 1k

High Risk GBP

GLOBAL CROSSING UK                   11.75     Dec-14             102.1          11.09     B3/B-      Telecom Services                50k / 1

VIRGIN MEDIA SECURED                     7.0   Jan-18             107.6            5.69    Ba1/BB+    Cable                           50k / 1k

INVESTEC                                7.75   Mar-16              98.6            5.61    Ba1        Banking                         1k / 1k

THOMAS COOK GROUP                       7.75   Jun-17              99.7            7.78    Unrated    Travel Services                 50k / 1k

IRON MOUNTAIN                           7.25   Apr-14             100.9            6.96    B2/B+      Commercial Services             75k / 1k

WILLIAM HILL                         7.125     Nov-16             104.6            6.19    Ba1/BB+    Gambling                        50k / 1k

Prices as at 26th October 2010; Source: Bloomberg; Ratings: Moodys and S&P.

www.edenfinancial.com                                                                                                                                   7
Pensions - all change again! (Part II)
In his September Eden View article, David Goodfellow, of our                          that pension provision must have been made previously in that year
affiliated company, Eden Financial Advisers Limited, considered                       otherwise there is no allowance to carry forward.
some of the pension issues that had been ‘circulating’ in the
                                                                                      For those in final salary schemes, the new rules add complexity,
press. In “Part II” he adds more detail following further
                                                                                      particularly for those who have significant salary increases which
announcements by the government.
                                                                                      could result in a breach of the annual allowance and a subsequent
The Coalition stated in its June emergency Budget that it would                       higher rate tax charge on that excess employer contribution.
review the complex arrangements announced by Labour in their
                                                                                      Lifetime Allowance - an unwelcome change is that the lifetime
April 2009 Budget (revised for additional complexity in December
                                                                                      allowance is to be reduced from the current £1.8m back to £1.5m.
2009), and consult on alternative methods of saving £4bn per
                                                                                      It is widely thought that this reduction is to compensate for the
annum from the pensions industry. The Government announced the
                                                                                      slightly higher than expected annual allowance. There is no provision
main changes on 14 October and these are detailed below:
                                                                                      to increase this allowance. Those who have already breached this
Annual Allowance - From 6 April 2011 the annual allowance for tax                     level will have their benefits protected, but the mechanics of this are
relief on pension contributions will be £50,000, reduced from                         as yet unclear. It is also not clear whether this change will be from
£255,000 in 2010/11 in the previous 2009 regime but more than                         6 April 2012 or 2011. The tax charge that applies to any fund that
expected. There will be no additional complexities for those with                     exceed the Lifetime Allowance will continue to be taxed at 55% if
income in excess of £130,000, which is a welcome relief. The                          paid as a lump sum. If they are taken as an income the tax remains
allowance will not increase for five years (up to 5 April 2016), but                  at 25% in addition to the income tax paid on the pension income.
may be indexed thereafter. A further welcome development is that
                                                                                      Conclusion - Not all of the changes are positive, as was to be
the tax relief will continue to be at the member’s marginal rate, and
                                                                                      expected, but they do simplify the pension regime again, and with
not restricted to the standard rate.
                                                                                      the re-introduction of the three year carry forward provision add
Under the ‘post A-day’ regime there was a little known provision                      some welcome flexibility. This may also provide investors with the
where the annual allowance was exempt in the year that benefits                       opportunity to top up their pension fund using their new increased
were to be taken which enabled someone retiring with a fund                           2008/09, 09/10 and 10/11 allowance. As stated in the September
below the lifetime allowance to ‘top up’ their fund with a significant                article, those with relevant earnings in the 2010/11 tax year of less
contribution if circumstances permitted. This exemption has been                      than £130,000 have a window of opportunity to invest 100% of their
removed.                                                                              earnings into a pension scheme and receive tax relief. This opportunity
                                                                                      is unlikely to arise again!
In a return to the ‘pre A day’ pension world, the carrying forward of
unused relief is to be introduced which can be a great help for those                 Pensions will always remain a complicated area and it is imperative
with variable income. As this is to be from the last three years, it                  that clients take advice on the structure and the investment
does mean that those who were restricted under the complex post                       management, Eden can help in both.
22 April 2009 rules, may be able to utilise ‘unused annual
                                                                                      Those who wish to receive advice should contact David Goodfellow on
allowance’ as the £50,000 applies to tax years 2008/09, 2009/10
                                                                                      020 7509 7475 or by e-mailing david.goodfellow@edenfinancial.com.
and 2010/11. There are strings; the current year allowance must be
used first and then back to the earliest year. Another condition is

For further information please contact:                Recommendation Guide
Lawrence Peterman Investment Director                  Buy +20% expected absolute price performance over next 12 months
                                                       Hold +10% to -10% expected absolute price performance over next 12 months
                                                       Sell -20% expected absolute price performance over next 12 months

                                                       Eden Financial Limited            phone +44 (0)20 7509 7000                             Member of the London
                                                                                                                                               Stock Exchange
                                                       Moorgate Hall                        fax +44 (0)20 7509 7010
                                                                                                                                               Authorised and regulated
                                                       155 Moorgate                       email enquiries@edenfinancial.com                    by the Financial Services
                                                       London EC2M 6XB                    www.edenfinancial.com                                Authority

RISK WARNING This document has been prepared, approved and issued by Eden Financial Limited on the basis of publicly available information, internally developed
data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure the facts stated and opinions given are fair, Eden Financial
Limited offers no guarantee as to the accuracy or completeness of any such information or data. This publication is not intended to be an offer to buy or sell any
securities of any of the companies referred to herein and any opinions expressed are subject to change without notice. The view expressed are as at the date stated
and are subject to change. At any time, Eden Financial Limited (or its directors and employees) may have a position or holding in any of the above investments or
in a related investment. This publication may not be reproduced or copies circulated without authority. Past performance of investments referred to above is not
necessarily a guide to future performance and the value of the investment may go down as well as up. Some investments are not readily realisable and investors
may have difficulty in selling or realising the investment or obtaining reliable information on the value or risks associated with the investment. If you are in doubt
please contact your financial adviser. Where any reference is made to tax, it should be noted that tax reliefs or rates assumed are those currently applying, whereas
their value will depend on the individual circumstances of the investor. Levels and bases of, and reliefs from taxation, are subject to change. Eden Financial Limited
is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. Registered address: Moorgate Hall, 155 Moorgate,
London EC2M 6XB.

www.edenfinancial.com                                                                                                                                                  8

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