Martin Barnes June 1007

Dublin, Ireland May 2007

GIC ABROAD IN IRELAND GLOBAL STOCK MARKETS, VALUATION AND OUTLOOK Martin Barnes

Managing Editor Bank Credit Analyst

THINGS TO WORRY ABOUT

• Geopolitics • Oil • U.S. Housing • Trade Imbalances • Financial Accidents

THINGS TO BE REASSURED ABOUT

• Growth is better balanced globally • Inflation is low • Corporate sector finances are healthy • Liquidity is plentiful for financial assets • Equity valuations are reasonable

GOOD GROWTH AND LOW INFLATION Ann% Chg

GLOBAL REAL PER CAPITA GDP* (LS) CORE** CONSUMER PRICES (RS)

Ann% Chg

14

3 10

2

6

1

2 © BCA Research 2007

1975

1980

1985

1990

1995

* SHOWN AS A 5-YEAR MOVING AVERAGE; SOURCE: IMF ** EXCLUDING FOOD AND ENERGY; SOURCE: OECD

2000

2005

A FAVORABLE MONETARY ENVIRONMENT Ann% Chg

8

Ann% Chg

G7 BROAD MONEY GROWTH

8

6

6

4

4

Ann% GLOBAL FOREIGN EXCHANGE Chg RESERVES

Ann% Chg

20

20

10

10

0

0

© BCA Research 2007

1996

1998

2000

2002

2004

2006

AN EARNINGS-DRIVEN BULL MARKET

MSCI GLOBAL EQUITY PRICE INDEX* GLOBAL EARNINGS**

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0 © BCA Research 2007

1994

1996

1998

2000

2002

2004

2006

*SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL; INDEXED TO 1 IN MARCH 2003 **INDEXED TO 1 IN MARCH 2003

MARKET PERFORMANCES AND VALUATIONS HAVE CONVERGED %

%

60

DISPERSION OF GLOBAL EQUITY MARKET RETURNS*

60

40

40

20

20

%

%

STANDARD DEVIATION OF GLOBAL P/E RATIOS**

50

50

40

40

30

30

20

20 © BCA Research 2007

1998

2000

2002

2004

2006

* MAXIMUM MONTHLY RETURN MINUS MINIMUM; INCLUDES 24 MARKETS ** STANDARD DEVIATION OF 12-MONTH FORWARD PERs FOR 24 MARKETS

RELATIVE STOCK PERFORMANCE TWO BIG WINNERS

TWO BIG LOSERS

1.1

RELATIVE STOCK PRICES: U.S./WORLD

1.1

RELATIVE STOCK PRICES:

1.5

1.5

EMU/WORLD

1.0

1.0

1.4

1.4

.9

.9

1.3

1.3

1.2

1.2

.42 .40 .38 .36 .34 .32

JAPAN/WORLD

.42 .40 .38 .36 .34 .32

© BCA Research 2007

2003

2005

2007

.16

EMERGING MARKETS/ WORLD

.16

.14

.14

.12

.12

.10

.10 2003

2005

2007

VALUATIONS ARE REASONABLE EVERYWHERE 12-MONTH FORWARD P/E:

24

40 12-MONTH FORWARD P/E: 40

20

20

30

30

16

16

20

20

24

24

U.S.

EMU

20

16

EMERGING MARKETS

16

20

16 12

24

JAPAN

16 © BCA Research 2007

12

2000 2002 2004 2006 SOURCE: THOMSON FINANCIAL / IBES

12

12

8

8

2000 2002 2004 2006

EQUITIES ARE ATTRACTIVE VERSUS BONDS %

8

REAL G7 10-YEAR BOND YIELD GLOBAL FORWARD EARNINGS YIELD

%

8

6

6

4

4

2

2

2

GLOBAL EARNINGS YIELD RATIO*

1

2 STOCKS EXPENSIVE

0

0 -1 -2

1

STOCKS INEXPENSIVE © BCA Research 2007

1990 1992 1994 1996 1998 2000 2002 2004 2006 * REAL G7 10-YEAR BOND YIELD MINUS GLOBAL FORWARD EARNINGS YIELD; STANDARDIZED

-1 -2

THREE PILLARS OF THE U.S. EQUITY BULL MARKET Ann% Chg

Ann% Chg CORE* PCE INFLATION

8 6 4 2 %

12 10 8 %

60 50 40

8 6 4 2 %

AFTER-TAX CORPORATE PROFITS AS A % OF GDP

12 10 8 %

HOUSEHOLD EQUITIES AS A % OF PORTFOLIOS

© BCA Research 2007

1980

1985

1990

* CORE EXCLUDES FOOD AND ENERGY

1995

2000

2005

60 50 40

DECOMPOSING EQUITY MARKET RETURNS Average Annual % Change Historical Past Optimistic Status quo Bear Average Decade Scenario* Scenario** Scenario*** 1950-95 1996-2006 2006-16 2006-16 2006-16 Nominal GDP

7.6

5.4

5.0

5.0

5.0

Earnings

6.7

9.0

5.0

4.5

4.0

+ Valuation change

2.3

0.8

2.0

0.0

-2.0

= Growth in S&P 500

9.0

9.8

7.0

4.5

2.0

+ Reinvested dividends

4.2

1.8

1.8

1.8

1.8

= Total equity

13.2

11.6

8.8

6.3

3.8

returns

4.2

2.6

2.0

2.0

2.0

Inflation (CPI)

8.6

8.8

6.7

4.2

1.8

Real returns * Assumes that the forward price-earnings ratio rises to 18 over the period ** Assumes that the price-earnings ratio remains at its current level near 15. *** Assumes that the price-earnings ratio falls to 12 over the period.

TIGHTER MONEY LEADS TO LOWER EQUITY MULTIPLES

30

S&P 500 P/E RATIO BASED ON OPERATING EARNINGS

30

20

20

10

10

%

%

18

FED FUNDS RATE

18

14

14

10

10

6

6

2

2

© BCA Research 2007

1965

1975

1985

1995

NOTE: SHADING DENOTES PERIODS OF RISING FED FUNDS RATE

2005

EQUITY PERFORMANCE AND PROFIT MARGINS: NOT WHAT YOU WOULD EXPECT 1200 800 400 200 30

S&P 500 INDEX

Multiples have risen when margins contracted

S&P 500 P/E RATIO BASED ON OPERATING EARNINGS

1200 800 400 200 30

20

20

10

10

%

20

%

TOTAL PRE-TAX ADJUSTED* PROFITS AS A % OF CORPORATE SECTOR GDP

20

16

16

12

© BCA Research 2007

1982

1986

1990

1994

1998

2002

*ADJUSTMENTS INCLUDE INVENTORY VALUATION AND DEPRECIATION NOTE: SHADED AREAS CORRESPOND TO FALLING PROFIT MARGINS

2006

12

CEOs FAVORING STOCKS Bn$

Bn$ U.S.:

NET EQUITY ISSUANCE NET CORPORATE BOND ISSUANCE

500

500

0

0

-500

-500

© BCA Research 2007

1990

1992

1994

1996

1998

2000

2002

NOTE: ALL SERIES BASED ON THE NON-FINANCIAL AND FINANCIAL CORPORATE SECTORS

2004

2006

PRIVATE EQUITY AND M&A ARE ON THE RISE IN EMERGING MARKETS TOO Bn US$

Bn US$

GLOBAL M&A AND PRIVATE EQUITY FLOWS TO:

140

G7 (LS) EMERGING MARKETS (RS)

120

800

100 600 80 400

60 40

200 © BCA Research 2007

2004

2005

2006

2007

EMERGING MARKETS EQUITY WEIGHT WILL GROW %

%

20

20

15

15

10

EMERGING MARKET MARKET CAP AS A % OF GLOBAL* EMERGING MARKET GDP AS A % OF GLOBAL**

5

5 © BCA Research 2007

1990

10

1995

* SOURCE: DATASTREAM **SOURCE: IMF

2000

2005

EMERGING MARKETS: EQUITY FACTOR RANKING*

Potential leaders

11 10 9

Solid gains to be expected

Potential laggards

8 7 6 5 ZIL ESIA KEY AND ARY REA AND HINA INES WAN YSIA TINA HILEXICO SSIA ECH RICA NDIA A I BR DON TUR POL UNG KO HAIL C LIPP TAI ALA GEN C ME RU CZ . AF I S H T M AR IN PH * BASED ON A COMBINATION OF VALUATION, GROWTH, LIQUIDITY AND MOMENTUM

MARKET ATTRACTIVENESS SCORES

Emerging Markets

Valuation 2

Earnings potential 3

Liquidity 3

Total 8

Japan

3

0

1

4

Euro Area

2

-2

0

1

U.S.

0

1

-2

-1

U.K.

1

-1

-2

-2