MARKET INSIGHTS

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MARKET INSIGHTS

MARKET INSIGHTS

Strictly for distributor / investment adviser use only. Not for distribution to the public.

October 2002

Global Economic Outlook

SUMMARY:

• The global macroeconomic environment has further deteriorated,

with weakness in the US and the eurozone being offset by relative

resilience in the UK and Asia

• The US faces a prolonged period of sub-par growth as the longpresent

imbalances in the economy are slowly worked out of the

system

• Eurozone leading indicators have rolled over and now point to

renewed slowdown, particularly in Germany

• The UK consumer continues to support the economy, although we

expect rising unemployment and a weaker financial sector to

hamper confidence going forward

• Japan’s export-led recovery will be undermined by a deteriorating

external environment, while domestic demand remains subdued.

US

The US economy remains constrained by subdued consumer spending

and continued retrenchment by businesses. The boost to GDP growth

from inventory restocking in the first quarter has proved short-lived (as

expected), with Q2 GDP registering a relatively anaemic 1.3% (revised)

annualised rate.

Consumer spending remains supported mainly by zero-percent

financing incentives in the auto sector, and low mortgage interest

rates and refinancing in the housing sector. However, according to the

Conference Board's Index, consumer confidence is weakening, which

suggests that consumer spending will tail off in the coming months

(see chart below).

150

140

130

120

110

100

90

80

70

60

US Consumer Confidence & Retail Sales

Conference Board Consumer

Confidence Index (LHS)

Retail Sales ex-autos

(% change yoy) (RHS)

50

Jan-93 Sep-94 May-96 Jan-98 Sep-99 May-01

Source: Thomson Financial Datastream. Data from 1/1/93 to 26/9/02.

Severe imbalances in the US such as unsustainable levels of consumer

and corporate debt, overcapacity and a lack of pricing power, are

acting as a drag on corporate earnings recovery. Recent inventory

restocking has masked weak underlying growth, while the huge

10

9

8

7

6

5

4

3

2

1

0

Economic Growth and Inflation Expectation for

2002/2003 vs consensus (% change yoy) as at 30/9/02

GDP

2001 2002 Forecast 2003 Forecast

Actual INVESCO Consensus INVESCO Consensus

US 0.3 2.3 2.4 2.8 3.1

Japan -0.2 -0.6 -0.8 0.1 1.0

Eurozone 1.5 0.7 1.0 1.3 2.3

UK 2.0 1.5 1.6 2.4 2.6

Australia 2.6 4.3 3.6 3.5 3.4

CPI

2001 2002 Forecast 2003 Forecast

Actual INVESCO Consensus INVESCO Consensus

US 1.5 1.6 1.6 2.2 2.3

Japan -0.7 -0.8 -1.0 -0.2 -0.7

Eurozone 2.6 2.2 2.1 2.2 1.8

UK 2.3 2.2 2.1 2.0 2.3

Australia 4.4 3.0 2.9 2.5 2.4

Source: INVESCO, Consensus Economics for consensus forecasts.

current account deficit continues to grow. The labour market remains

weak, with greater risks of further lay-offs than any prospective pickup

in hiring.

Prospects for capital spending by businesses remain dismal, due to

exceptionally poor order visibility. July’s surge in new orders for

durable goods was largely down to erratic factors and was partly

offset by August’s subsequent fall. Measures of the US stock market

suggest that the bubble has been pricked, but that there is still

vulnerability on the downside. Meanwhile, the strength in the

housing sector could dissipate, as there is limited scope for growth in

demand.

Against this background the Federal Reserve is unlikely to raise interest

rates before 2003. Indeed, there is an increased possibility that the

Fed will cut rates at its November meeting, although only if Personal

Consumption Expenditure shows a significant downturn.

EUROZONE

Q2 GDP growth was weak (0.6%) for the second consecutive quarter,

while economic data from the eurozone continues to point to a

deteriorating environment. In particular, Germany (the area's largest

economy) is suffering from a downturn characterised by high

unemployment, subdued consumer spending and industrial weakness.

Having until recently been in an upward trend, eurozone leading

indicators have universally rolled over and now point down. For

example, the influential IFO survey of German business confidence

dropped to 88.8 in August from 89.9 in July. Manufacturing orders

and production data are also weak.

Investment involves risks. Past performance is not indicative of future returns. Please refer to the relevant prospectus for details.


MARKET INSIGHTS OCTOBER 2002

Global Economic Outlook

Despite rising levels of unemployment, eurozone consumer

confidence has held up remarkably well. However consumer

confidence has historically shown a negative correlation with the yearon-year

change in the unemployment rate (see chart below),

suggesting that it is set to decline over the coming months.

5

0

-5

-10

-15

-20

-25

Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

Source: Thomson Financial Datastream. Data from 1/95 to 7/02.

We have revised our eurozone GDP growth forecast for 2002 as a

whole down from 1.1% to 0.7%.

Given these subdued levels of growth and inflation (consistently

below the ECB’s target rate), the possibility of an interest rate cut has

increased, although consensus still expects rates to remain flat until

early 2003.

UNITED KINGDOM

Second quarter UK GDP growth has been downgraded from 0.9% to

0.6% to reflect the sharp month-on-month decline in June's

manufacturing output, while the global slowdown is also reining in

economic activity. The Bank of England's quarterly inflation report

revised down expectations for growth and inflation for the remainder

of 2002.

By contrast, and in further evidence of Britain's two-speed economy,

consumer spending has remained persistently high, fuelled by low

interest rates and high employment. Sales volumes rose 0.6% in

August compared with July, surpassing analysts' expectations of a

0.4% rise. Elsewhere, house prices continued to rise strongly.

However, we expect strength in both these areas to decline going

forward as unemployment rises, albeit not dramatically.

JAPAN

Eurozone Unemployment & Consumer Confidence

Eurozone Consumer

Confidence Index (LHS)

Unemployment rate

(% change yoy) inverted

scale (RHS)

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

Second quarter GDP growth was recently confirmed at 0.6%, the first

quarterly expansion since March 2001. Meanwhile the current

account surplus was up 58.1% in July over the previous year's

reading, confirming strong exports, although growth in this area

appears to have peaked.

The return to expansion masks the weakness at the heart of the

Japanese economy. The export-led recovery will be hampered by the

increasingly fragile global environment and the strength of the yen.

Subdued domestic demand, already weakened by deflationary

pressures, will be further constrained by the government’s inability to

increase public spending due to high levels of government debt. As a

result, weak domestic demand and slowing exports point to a

stagnant Q3 and Q4 for the Japanese economy.

The only meaningful positive factor in the short-term will be in the

profit recovery (see chart below), which is being fed by cost-cutting.

Nevertheless, given that top-line corporate growth is likely to be

negligible, further earnings gains will be largely reliant on corporate

restructuring.

10

5

0

-5

-10

-15

Japan Industrial Production & Operating Profits

-20

Q1 90 Q1 93 Q1 96 Q1 99 Q1 02

Source: Thomson Financial Datastream. Data from Q1 90 to Q2 02.

ASIA EX-JAPAN

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30

20

10

0

-10

-20

-30

-40

Interest rates and liquidity remain supportive throughout Asia and

corporate excesses have not resurfaced post the 1997/8 crisis.

Domestic demand is holding up in most economies evidenced by

buoyant vehicle and housing sales in Korea, Thailand, Malaysia,

Indonesia, India and the Philippines.

Most Asian economies therefore remain relatively strong. In particular,

China’s ability to produce a wide range of goods at low cost has

meant that it is benefiting from outsourcing by developed countries.

On the exports front, there has been anecdotal evidence of recovery in

PC motherboards and components for handsets since mid-2002 and

very high utilisation rates of shipping containers.

40

30

20

10

0

(10)

(20)

Jan-00

Operating Profits

(% change) (RHS)

Apr-00

Jul-00

Source: CEIC, ABN AMRO

Oct-00

Industrial Production

(% change) (LHS)

Indicators Point to Sustainable Thai Consumption

% chg yoy

Consumer Confidence Index (RHS)

Retail Sales (LHS)

Consumer Goods Imports (LHS)

Jan-01

Apr-01

Jul-01

Oct-01

Jan-02

Apr-02

Jul-02

90

85

80

75

70

65

60

55

50


2002 10

2002 03

2002 9 30


2001 2002 2003





0.3 2.3 2.4 2.8 3.1

-0.2 -0.6 -0.8 0.1 1.0

1.5 0.7 1.0 1.3 2.3

2.0 1.5 1.6 2.4 2.6

2.6 4.3 3.6 3.5 3.4

2001 2002 2003

1.5 1.6 1.6 2.2 2.3

-0.7 -0.8 -1.0 -0.2 -0.7

2.6 2.2 2.1 2.2 1.8

2.3 2.2 2.1 2.0 2.3

4.4 3.0 2.9 2.5 2.4

Consensus Economics

1.3%

Conference Board

7

8 7

150

140

130

120

110

100

90

80

70

60

Conference Board

50

0

Jan-93 1 94Sep-949 96 May-96 5 98Jan-98 1 99Sep-99 9 01May-01

5

Thomson Financial Datastream 93 1 1 02 9 26

10

9

8

7

6

5

4

3

2

1

2003

11

0.6%


2002 10

7 89.8 8 88.8

IFO

5

0

-5

-10

-15

-20

-25

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

10

5

0

-5

-10

-15

-20

95 Jan-95 1 Jan-96 1 Jan-97 1 Jan-98 1 Jan-99 1 Jan-00 1 Jan-01 1 02 Jan-02 1 90Q1 90 93Q1 93 96Q1 96 99 Q1 99 02 Q1 02

Thomson Financial Datastream 95 1 02 7

Thomson Financial Datastream 90 02

40

30

20

10

0

-10

-20

-30

-40

0.7%

2002 1.1%

1997/8

2003

6

0.9% 0.6%

7 8

0.6% 0.4%

0.6% 3

40

30

20

10

0

(10)

(

(

(

90

85

80

75

70

65

60

55

7

(20)

50

58.1%

00 Jan-00 1

00 Apr-00 4

00 Jul-00 7

00 Oct-00 10

01 Jan-01 1

01 Apr-01 4

01 Jul-01 7

01 Oct-01 10

02 Jan-02 1

02 Apr-02 4

02 Jul-02 7

CEIC, ABM AMRO

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