Regional Report

Natural resource supply and demand, particularly the direction of crude oil, will have a major impact on the capital markets. “EUROPEAN NATIONS CONTINUE TO STRUGGLE WITH BURDENSOME FISCAL DEBT THAT PUTS SEVERAL EUROPEAN GOVERNMENTS’ ABILITIES TO SUSTAIN THEIR SPENDING INTO QUESTION.”

Regionally, we remain bullish on Asian emerging markets as they continue to lead the way with the greatest potential for growth. We expect the US to follow as the fi-nancial sector has stabilized and cyclical sectors have gained momen-tum. We expect Europe to lag mod-estly as it struggles with its public sector debt burden and modest growth prospects. Last and unfortu-nately least, Japan, which we ex-pect to remain stuck within its never-ending recessionary cycle.

The US economic rebound is rela-tively secure from its 2008-depths and it appears that it will continue to drive forward in 2010. It, how-ever, has major obstacles and con-straints in the upcoming few quarters that will need to be addressed be-fore we can call it a full-blown re-covery.

Corporate profitability has re-covered from its unprecedented depths of 2008 and has progres-sively grown over the last 4 quar-ters. GDP, also has staged a strong rally with the more cyclical compo-nents (auto consumption, residential construction, and change in invento-ries) providing the major contribu-tions to the resurgence. Currently, we are not too anxious with US in-operate below full-capacity and em-ployment wage-growth remains sub-dued.

The US economic revival, however, has been a jobless one so far, as pro-ductivity has increased causing incomes to stagnate and allowing corporations to avoid adding to their payrolls. US housing indicators remain mixed and its future continues to be unpredictable. Additionally, substantial monetary and fiscal support will have to be withdrawn over the next few quarters and the reaction by the overall economy and capital markets in general to such a withdrawal will be important in measur-ing the stability of the recovery.

We anticipate developed Europe to lag the US in terms of growth rates and overall market returns. European na-tions continue to struggle with burden-some fiscal debt that puts several Euro-pean governments’ abilities to sustain their spending into question. Fiscal tightening will undoubtedly occur, con-sequently damaging domestic demand for products and services. The strong Euro in comparison to the US dollar also has put pressure on exporters and Southern European industrials, which will dampen their recovery in 2010.

Asia (excluding Japan) has experi-enced a substantial improvement in economic conditions. An increase in do-mestic and external demand reinforced by loose monetary/fiscal policy condi-tions has allowed Asia to recuperate much of its losses from 2008. Inflation risks are higher in these countries and we expect rate hikes to occur in 2010. Japan, on the opposite spectrum, ap-pears that it will continue to struggle with its ultra-low growth rates and heavy deflationary risk. The Yen has appreciated dramatically versus the dollar, which has additionally hurt ex-porters’ top and bottom-lines.

Emerging markets are geared for strong positive returns in 2010. They have the growth story working in their favor as BRICs plus other emerging market nations trounced the developed world in expected growth rates. There has also been a substantial increase in appetite for riskier assets by investors which has precipitated a flow of funds back into emerging markets equity. Emerging market nations’ risks include currency risk with appreciation hurting exporters, increasing commodity prices and reduced foreign demand, particu-larly from the US.

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