EFTA01156314.pdf

From: US GIO To: Undisclosed recipients:; Subject: Eye on the Market, January 18, 2011 Date: Tue, 18 Jan 2011 19:58:33 +0000 Attachments: 01-18-11_-_EOTM_-_0_futuro_e_agora_Brazil_.pdf I nline-Images: image001.png Eye on the Market, January 18, 2011 Topics: Market update; Brazil and related opportunities in Private Equity Market update. Developments in early January show a continuation of the 3 regional trends highlighted in our 2011 Market and Portfolio Outlook. In the US, manufacturing and service sector surveys point to expansion (strongest service sector activity in 4 years), consumer spending is solid, federal and state tax receipts are improving, and banks may reinstate dividends and stock repurchases in the second quarter. In the emerging world, rising currencies, higher interest rates and increased bank reserve requirements (particularly in China) are being used to stave off inflation. Food prices have risen sharply, which has a lot to do with it; more on that and the world's strange weather patterns next week. In Europe, even as Germany posts another round of positive economic data, financing costs for sovereigns and banks in the periphery are reaching new highs. As shown in the second chart, several European countries are growing well below the cost of financing their government debt, which is not a sustainable equilibrium. The largest concentration of 2011 European bank debt maturities lay in April; Europe may need a more comprehensive solution well before then. Recent events reinforce the rationale behind the US being the largest regional equity allocation in our portfolios. World food prices Peripheral Europe: an unsustainable dynamic UnitedNa6COSFoodandAgricultureworldtoodpriceindex Percent 220 10% GOPgowth minus cost of 8% government debt 200 6% 180 4% 2% 160 0% -2% 140 -4% -6% 120 - -8% 100 - fil Ing In glingLMS1 slemp211=g0,15 3npliPot-eZ if.1§62 RPM E2 8 nolig ot a ti z _er.u.o. p r =0 ea 133$ o E 2 1990 1992 1994 1996 1998 2000 2032 2004 2006 2008 2010 X 8 0) Source:Food and Agri we Oroanizationof e United Nation. Source: InternatimallionetacyFund, Bloomberg. Gaveld. 0futuro d agora. In the emerging world, equity markets tend to be dominated by manufacturing, financial, energy and utility stocks. This persists despite the growth of thousands of companies servicing a new class of emerging markets consumers. In China, consumer stocks servicing its middle class (now estimated at 300 million people) represent less than 10% of the market cap of the Shanghai Composite Index. Providing growth equity capital to such companies (typically at levels well below public market PIE multiples) has been one of our investment objectives. Like China, Brazil also migrated away from its 1970's centrally-planned economic model (before a pit-stop at inflation- financed growth in the I 980s). Brazil's success over the last decade has resulted in the emergence of 50 million new consumers, and the companies that service them. This week, we look at Brazil's transformation, its ongoing challenges, and the opportunity in private equity. While Brazil still grapples with legacies of its fiscal and monetary history, by the end of this decade, it will likely overtake Britain and France to become the world's 5th largest economy. For the first time in decades, the future is now (ofusion é agora), which is the topic of this week's Eye on the Market investment review (attached). Michael Cembalest Chief Investment Officer The material containedherein Is intended at a general market commentary Opinions expressed herein are those ofMichael Cembalest andmay differfrom those ofother. Motgan employees and affiliates. This information in no wayconstitutes. Alt:omen research and shouldnot be treated as. uch. Furthen the views expressed herein may differ EFTA01156314 from that containedin. Morgan research reports. The above summaolprices/quotes/stafittics have been obtainedfrom sources deemed to be reliable, but are do not guarantee their accuracy or completeness. any yieldreferenced Le indicative and. ubject to change. Pasigerformance isnot a guarantee offuture results. References to the performance or character ofour portfolios generally refer to our Balanced Model Portfolios constructedby. Morgan. It is a proxyfor client performance andmay not represent actual transactions or investments in client accounts. 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