Last updated 04/May/2007

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Market Summary

The baseline view of Schroders? economic team remains a soft landing for the global economy in 2007. This mid-cycle pause is expected to be followed by a reacceleration of growth next year. Although our estimate of overall growth this year is little changed, we have revised our view of the drivers of growth. We have reduced our forecast of US growth this year from 2.6% to 2.2%. GDP in the first quarter is expected to be around 2% and will be the fourth quarter of below trend growth.

Consumer spending appears to be holding up, but may fade due to the rise in oil prices and as the housing slowdown begins to feed through. We continue to expect the Federal Reserve to cut interest rates later this year to 4.75% in response. We do not believe US inflation is a serious problem, although it is currently above target. As we progress through the year we expect unemployment to increase and price pressures to ease. This in turn will trigger lower rates. European growth, on the other hand, remains firm and momentum continues to build with recent survey data confirming this positive trend. Exports are also strong. In particular exports to Asia and Eastern Europe have risen sharply. Japanese growth is also holding up reasonably well. Capital spending in Q1 is likely to have slowed somewhat following a period of strong growth, but consumer spending should see a modest improvement going forward. Finally, growth in the emerging world continues to strengthen driven in particular by China. As noted on previous occasions, the emerging economies are experiencing a shift in the balance of growth towards domestic demand and are likely to continue to deliver growth well above that of developed markets.

In conclusion, global growth is expected to see a modest slowdown this year but become increasingly desynchronised with emerging markets less vulnerable to a slowdown in the US economy than in the past. Our baseline forecast of a soft landing is given a 70% probability with the alternatives of a hard landing or acceleration ascribed probabilities of 20% and 10% respectively. Against this background we remain positive on the outlook for Emerging Markets. The outlook for Global Growth has not changed a great deal. A sharper slowdown in the US is still a possibility, but commodity prices and markets are not reflecting this. The strength of the emerging economies, which have become less reliant on the US growth, is supporting markets. If further monetary tightening in India and China began to impact growth in the emerging economies we would become more concerned but this is unlikely in the near term.

Global emerging markets are not expensive and earnings growth is solid. We expect global emerging markets to rise between 15-20% this year driven by earnings growth. Year to date they are up 8%. There is also the possibility of a PE re-rating due to the structural improvement in these economies which would boost returns further.

Current Strategy

While we remain concerned about the political situation in Thailand the valuations are now very attractive and interest rates are declining. We have therefore moved from neutral to overweight. Although valuations in Korea are not expensive in absolute terms, they are close to the high end of their historic range. Additionally the outlook for earnings and economic growth is uninspiring. We have therefore moved from overweight to neutral. We have reduced the degree of the underweight to India as valuations are no longer as stretched on a relative basis, although they are still quite high in absolute terms. The outlook for ongoing interest rate cuts and attractive valuations coupled with strong earnings growth has led us to increase the overweight to Brazil.

On the other hand we have moved further underweight Mexico. The market is expensive and the economic outlook is deteriorating. The potential for slower US growth is also negative for Mexico. An improving economy, strong earnings growth and reasonable valuations have led us to move from neutral to overweight Egypt and due to ongoing improvements in the economic imbalances and attractive valuations we have increased the overweight to Hungary. We have moved from neutral to a zero weight in the Czech Republic. Valuations are expensive and the outlook for earnings is deteriorating. Finally, we have moved from neutral to underweight South Africa. Although valuations appear reasonable and earnings are improving, a deteriorating current account and the potential for currency weakness are a significant negative.

Schroder Investment Management (S) Ltd