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Investment in Emerging EquitiesIs there still more to go?
Michael Tjoajadi
For Professional Investors only.
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96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Growth contribution from the OECD countries Growth contribution from emerging markets
Global growth
Forecast GDP growth a two speed recovery
Source: IMF, Consensus Economics, Schroders, August 2011Please refer to the forecast risk warning in the important information
Emerging countries account for two thirds of global growth
y/y%
Last USrecession
Asiacrisis
Baseline forecasts
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Trend GDP growth estimates for world economyby region
Emerging economies expected to continue to grow much faster thandeveloped economies
0%
1%
2%
3%
4%
5%
6%
7%
8%
Worl
d
Adva
nced
econ
omies US
Euroz
one
Japa
n
Deve
loping
econ
omies As
ia
Latin
Ame
rica
Easte
rnEu
rope
Midd
leEa
st
Sub-S
ahara
nAfric
a
10 year historic trend, 1998 - 2008 Model-generated trend, 2010-2020
Source: UBS estimates, September 2010Regions are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.
The data includes some forecasted views. We believe that we are basing our expectations and beliefs on reasonableassumptions within the bounds of what we currently know. There is no guarantee that any forecasts or opinions will berealized. Opinions obtained from third parties have been obtained from sources we consider to be reliable.
GDP Growth
2010 2020 (f) pa
Developed 1.3%
Emerging 5.0%
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16
20
24
28
32
36
40
1990 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011
US Emerging Markets
EM & US consumption as a % of global consumption
EM consumption overtook US consumption in 2008
Source: JPMorgan, Data as at June 2011.Historical trends are not necessarily indicative of future trends.
%
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Emergence of BRICs middle class
Source: Euromonitor, Morgan Stanley Research. As at June 2011.* Includes Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal and Spain,Slovakia and Slovenia.The data includes some forecasted views. We believe that we are basing our expectations and beliefs on
reasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts oropinions will be realized.Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.
Household Disposable Income over US$10,000
No. of Households in Millions
0
50
100
150
200
250
300
350
400
450
500
1
991
1
992
1
993
1
994
1
995
1
996
1
997
1
998
1
999
2
000
2
001
2
002
2
003
2
004
2
005
2
006
2
007
2
008
2
009
20
10e
20
11e
20
12e
20
13e
20
14e
20
15e
20
16e
20
17e
20
18e
20
19e
20
20e
BRICs Euro Area* US
BRICs consumer has become a driving force in the global economy
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4
6
810
12
14
16
18
20
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Developed Markets Emerging Markets (Incl Asian NICs)
Investment spending trends
Investment spending as percentage of global GDP, 1980-2016F
Investment spending is higher in the emerging than the developed worldand is set to continue growing
Sources: IMF Forecast and Citi Investment Research and Analysis. Data as at April 2011
%
Forecast
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8
1012
14
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24
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
U.S. China
Emerging economies trade trends
Source: BCA Research as at June 2011
*Includes Brazil, Chile, Turkey, Taiwan, Korea, Thailand, Singapore, Malaysia, Indonesia, Philippines and IndiaCountries are mentioned for illustrative purposes and should not be viewed as a recommendation to buy/sell.
%
Share of emerging markets* exports
Declining importance of the US to global growth
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38
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42
4446
48
50
52
54
2000 2002 2004 2006 2008 2010 2012
Exports to Emerging Markets* Exports to G7
Chinese exports
Source: BCA Research as at June 2011
*Includes non-Japan Asia, Africa, Latin America and RussiaExport percentages are mentioned for illustrative purposes.
%
As a % of total Chinese exports
China exports more to GEMs than G7
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Government debt
G-20 vs. Emerging countries: General government debt ratios
Who is more likely to default?
Source: World Economic Outlook (WEO), September 22, 2009, The state of public finances cross -country fiscalmonitor, IMF, November 3, 2009 and UBS, Haver, as at June 2011
The data includes some forecasted views. We believe that we are basing our expectations and beliefs onreasonable assumptions within the bounds of what we currently know. There is no guarantee that any forecasts oropinions will be realized.Historical trends are not necessarily indicative of future trends.
0
20
40
60
80
100
120
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Advanced G-20 economies Emerging G-20 economies
%
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USD, billions
Current account balances indicate appreciation of Emergingcurrencies
Structural (and unsustainable?)
-500
-400
-300
-200
-1000
100
200
300
400
US Euro area Newlyindustrialised
Asian economies
Japan Emerging markets
Source: World Economic Outlook Database (April 2011), IMFNewly industrialized Asian economies are composed of 4 countries: Hong Kong SAR, Korea,Singapore, and Taiwan Province of China
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10Source: Schroders.
Climbing a mountain of worries
EmergingMarkets
overheating?
China hardlanding?
GlobalLiquidity
+US$
Developedeconomies
GDPGrowth
EuroCrisis
Cyclical Peak
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12
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56
7
8
910
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60 65 70 75 80 85 90 95 00 05 10
4.0
4.5
5.0
5.5
6.0
6.5
US savings as % of disposable income
Ratio: Net worth of US households/ disposable income (inverted), rhs
Source: Thomson Datastream, 20 September 2011.
% Ratio
Weak real income plus de-leveraging equals softconsumerUS net worth and savings
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Corporate cash flow
Source: Schroders, Thomson Datastream, 6 September 2011
-3.0-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.51.0
1.5
2.0
2.5
3.0
51 56 61 66 71 76 81 86 91 96 01 06 11
US total internal funds minus fixed investment as a % ofGDP
%
-40
-30
-20
-10
010
20
30
40
96 98 00 02 04 06 08 10
Japan machinery orders ex volatile orders
Germany capital goods
US durable good orders ex defence capital
y/y%, smoothed (3-month moving average)
Business capex orders
The great hope - corporate spendingCash flow surges capex accelerates
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95
96
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102
08 09 10 11
US total civilian employment US real GDP level
Source: Thomson Datastream, 6 September 2011.
US GDP and jobs
Still waiting for a recovery in jobs
Index (Base 100 = 15/02/2008)
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120
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1996
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2011
Liquidity
1Source: Morgan Stanley Research, Emerging Portfolio Fund Research. Data to 31 st August 2011. Both US and non-US domiciled funds. All dedicated EM: GEM, Asia ex Japan, LatAm, EMEA2Source: CEIC, UBS estimates. Selected countries: Malaysia, Indonesia, Korea, Mexico, Poland and Turkey.3Source: Factset, MSCI.*Goldman Sachs estimates that developed markets institutional asset managers hold 6% in EM equities within theirtotal equity portfolios. (Global Economics Paper No:204 as at Sep 2010)Historical trends are not necessarily indicative of future trends. There is no guarantee that any forecasts will berealized, and opinions may change.
US$ Billions
Foreign share of local market cap (selectedcountries)2
All Dedicated EM Equity Flows1
20%
22%
24%
26%
28%
30%
32%
34%
M
ar-00
A
ug-01
F
eb-03
A
ug-04
J
an-06
Jul-07
J
an-09
J
un-10
13.6%
23.7%
June 30, 2011GEMs MSCI Weight3
MSCI AC World
MSCI AC World ex-US
Record inflows in 2010 but still underowned*
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What could undermine the GEMS story?
Short/Medium term:
Eurocrisis
Economic Growth
Developed
Emerging
Liquidity/$
China hard landing
We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of
what we currently know.
Longer term:
Social unrest caused bylack of trickle down
Commodity supplyinhibiting growth potential
Lots to worry about
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PIGIS* cant fly
Source: Schroders.*Portugal, Ireland, Greece, Italy and Spain
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Emerging banks are not significantly exposed to Greecex
Selective reporting banks exposure to Greece,Ireland, Portugal, Italy (end 2010, $mn)
Source: Citi Investment Research and Analysis, BIS, as at July 14, 2011
France Germany UK US Chile India TurkeyWorldTotal
Total Exposure/Foreign Claims 3,074,681 2,940,334 3,866,503 3,154,137 3,433 44,561 23,605 25,153,260
Exposure to Greece, Ireland, Portugal, Italy 505,863 350,834 240,032 100,283 24 759 608 1,677,768
Greece/Ireland/Portugal/Italy Exposure(% total) 16.5% 11.9% 6.2% 3.2% 0.70% 1.70% 2.58% 6.67%
Exposure to Greece 56,740 33,974 14,060 7,318 0 22 107 145,783
Greece Exposure (% total) 1.8% 1.2% 0.4% 0.2% 0.00% 0.05% 0.45% 0.58%
Exposure to Italy 392,577 162,285 66,387 36,749 24 370 439 867,283
Italy Exposure (% total) 12.8% 5.5% 1.7% 1.2% 0.70% 0.83% 1.86% 3.45%
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-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2007 2008 2009 2010 2011
Y/Y GDP growth
Germany Austria Finland
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2007 2008 2009 2010 2011
Y/Y GDP growth
Greece Spain Ireland Italy Portugal
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Europe: Growth divergenceTwo speed economy
Source: Eurostat, Datastream. Data up to June 2011. Updated: 20/07/2011
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The Euro crisis
Source: Thomson Datastream, 9 September, picture from BBC
Can you deflate your way out of a debt crisis?
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Greece unemployment rate (% of labour force)
%
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2020
The Euro crisis
Source: Financial Times, Getty pictures
Buddy can you spare100 billion?
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0%
5%
10%
15%
20%
25%
Morocco
Egypt
Turkey
Poland
Hungary
CzechRepub
RussiaFed
SouthAfrica
Peru
Chile
Brazil
Colombia
Mexico
India
China
Indonesia
Thailand
Korea
Philippines
Malaysia
GEMS exports to PIGIS* (% of total exports) byregion
PIGIS are not important for emerging economiesSource: Citi Investment Research and Analysis, Haver, IMF as at July 2011.Taiwan exports to Greece N/A.*Portugal, Ireland, Greece, Italy and Spain
EMEA Average 11.2% Asia Avg 2.3%LATAM Avg 4.6%
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Public debt and fiscal balance as a percentageof GDP for EM and DM in 2010
Fiscal position and level of government debt much better in EmergingMarkets
Source: JP Morgan, Economics Team estimates, as at June 2011Countries are mentioned for illustrative purposes and should not be viewed as a recommendation to buy/sell.
We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of whatwe currently know.
Japan
Euro area
France
Italy
Spain
Ireland
Portugal
UK
Brazil
Peru
Malaysia
Thai
Poland
Turkey
DM
US
Germany
Greece
AustraliaEM
Mexico
China
India
Indonesia
Korea
Phil
Czech Hungary
Russia
S Africa
-14
-12
-10
-8
-6
-4
-2
0
2
0 50 100 150 200 250
Fiscal Balance (%GDP)
Public Debt (%GDP)
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-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%50%
60%
Brazil
Chile
China
Co
lombia
Czech
Egypt
H
ungary
Ind
onesia
Israel
Korea
M
alaysia
Mexico
Peru
Phil
ippines
Poland
Russia
S
.Africa
Taiwan
T
hailand
Turkey
UBS PPP estimates Big Mac Index (Economist)
Emerging currency valuations
Source: UBS, Bloomberg, June 2011
Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.There is no guarantee that any forecasts will be realized, and opinions may change.
EM currencies still cheap
Overvalued
Undervalued
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China hard landing?
Economy slowing from peak levels, but still strong
Credit growth slowing to around trend growth
Food inflation peaking, but core inflation rising
Property price increases slowing, but still positive andaffordability in line with trend
Fiscal situation good leaving room for further stimulus ifnecessary
Conclusion China slowing but hard landing very unlikely
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Global Equities Outlook: The greatrebalancing Soft patch or double dip?
The Positives Reversal of the impact of Japan on global supply chain
Global liquidity / Postponement of normalization of monetary policiesin DM given soft patch/ Coordinated effort
EM growth still strong
Companies are in good shape (strong cash flow)
Survival of the fittest
Softer global growth should provide relief to EM fiscal policies (andinflation)
Valuations are attractive
Equities under owned
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Source: SchrodersThe opinions stated in this presentation include some forecasted views. We believe that we are basing our expectationsand beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee
that any forecasts or opinions will be realized.
Challenges:
Will the Confidence crisis turn into a new economic crisis? Short time foraction.
The short and the medium term dilemmas: deleveraging in a low growthenvironment. Fiscal discipline, credibility and growth
Lack of leadership / election cycles and diverging interests (US and
Europe)
Adapting to the new normal in a bipolar world: picking the next winners
in a low DM growth / thirsty EM world
Altering global competitiveness (US vs Europe, EM vs DM):
Healing in an environment of deleveraging, low growth and currency volatility
Europe:
Peripheral Europe and banking system
Nationalism and fiscal integration
Global Equities Outlook: The greatrebalancing Soft patch or double dip?
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Dj vu? One year onincreasing fears ofdouble dipOil shock and Japanese earthquake hit growth
Manufacturing Purchasing Managers Index
Source: Schroders, Markit PMI, NBER (National Bureau of Economic Research), September2011. BRICs: Brazil, China, India & Russia.
GDP weights based on nominal GDP in USD from IMF.
25
30
35
40
45
50
55
60
65
70
07 08 09 10 11
US UK EZ Japan BRICs
Index
Output expanding
Output contracting
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Macro outlook - summary
Recession risks remain, but we continue to expect a better H2 for global growth asimpact of Japans earthquake and commodity price shocks unwind.
Corporate sector remains in good shape worldwide, indicating stronger capex, M&Aand (eventually) jobs.
Euro crisis set to continue until greater support is approved and in place (increasedEFSF, eurobonds). Default by Greece remains likely.
Subject to Congress, latest Obama package should boost US growth in 2012.Contrast with Europe where fiscal policy is tightening.
Monetary policy on hold US, UK and Eurozone in 2012
Emerging markets growth has moderated, but policy moving to neutral as inflationfears fade
More generally, in the post financial crisis economy interest rates are ineffective ashouseholds de-leverage - growth is weaker, making activity more vulnerable toshocks e.g. oil and Ag price surge
Much of the flow adjustment has taken place in the private sector (runningsurpluses), issue now is government deficits
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Indonesia Equity Market Outlook 4Q11
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JCI was the best performing market before sell-off
ETF volatilities affect JCI volatilities as well
Foreign selling US$1.7bn over the past 2 months and turns into net outflowof US$700m YTD
JCI Victim of its success
Source: Bloomberg as of Sept 26, 2011
Weak 1M JCI performance JCI index down 10% over pastmonth
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JCI is now trading on 2011E PE of 13x and 2012E PE of 11x, much morereasonable in our view
Earnings growth is strong and we expect 3Q results to be in line
Accelerating growth story over the next decade
JCI Valuation is now more attractive
Regional PE comparison Regional EPS growth comparison
Source: Bloomberg (26 September 2011) Source: Bloomberg (26 September 2011)
11.3
11.811.9
13.4
11.0
10.610.4
10.0
11.0
12.0
13.0
14.0
I ndonesia I ndia Mala ysia S inga pore China P hi llipines Thai la nd Hongk ong
(x)
Average: 11.3x
16.1
14.1
20.1
13.6
11.810.8
8.6
19.9
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
I nd on es ia C hi na I n di a Th ai la nd P hi lli pi ne s H on gk on g M ala y si a S in ga po re
(%)
Average: 14.4%
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Foreign ownership of government bonds and SBI at US$31bn (32% of total)
Estimates another Rp40tr of short-dated bonds and bills due by end 2011
Forex reserves adequate at US$122bn
However, at times policymaker slow to supply USD liquidity
Risk 1 Bond outflows pressuring IDR
Source: Citi Investment Research, DMO, Bloomberg Source: Bloomberg, DMO, UBS Research
Foreign bond holdings 21% of foreignreserves
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Inflation at 4.8% in Aug is low on a historical basis
Core inflation up in Aug but partly due to higher gold and education costs
Possible hike in electricity tariff and reduction of fuel subsidy in 2012E
But lower commodity prices help to contain inflation
Risk 2 Inflation should be under control
Source: Central Bureau of Statistics Source: CEIC
Inflation still manageable Core inflation to ease
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Indo corporates have low gearing of 30% as at Dec 2010
Average gross debt to EBITDA of Indonesian corporates at only 1x
Indo corporates USD debt exposure limited except mining and plantationcompanies
Banks USD lending is manageable
Risk 3 IDR weakness but muted impact
Source: UBSSource: Bank Indonesia, Central Bureau of Statistics
YTD Currencies vs USDGross debt/EBITDA
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China accounts for 10% of total exports hence manageable impact
Cash cost of CPO at 40% of current spot price
Cash cost of coal miners at 50% of current spot price providing buffer fordecline in prices
Gearing of listed plantation companies and coal miners relatively low
Risk 4 Lower commodity prices less impactthan feared
Source: Deutsche Bank, CEIC estimatesSource: Deutsche Bank, CEIC estimates
Less export contribution from ChinaIndos GDP growth beta toUS
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Indonesia should be less affected of US and Europe slowdown
Exports only 25% of GDP - the second lowest in Asia after India
Net reliance on exports 2% of GDP
Low dependence on US and the European economies
Growth driver 1 Domestic-driven economy
Source: Citi Investment ResearchSource: Citi Investment Research
Exports as % of GDPAsias Exports by destination
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FDI inflows at all time high US$5.1bn in 2Q11 up 60% yoy
Domestic investments very strong investment loans up 30% yoy
When utilisation rates reach 70%, capex cycle to accelerate
Growth driver 2 Robust investments
Source: CEIC, Citi Investment ResearchSource: BKPM (Investment Coordinating Board)
Record High Investments Manufacturing Utilisation Rate
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Consumer confidence, retail sales index at high levels
Car sales up 14% yoy in 8M11 despite Japans supply interruption
Cement sales up 13% yoy in 8M11
Property marketing sales up 48% in 1H11
Growth driver 3 Robust consumption
Source: Citi Investment Research, CEICSource: Citi Investment Research, CEIC
Strong consumer confidence index Strong retail sales index
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GDP per capita reaching US$3,000, the highest ever
Mininum wage increase of 10-15% per annum
Debt level at low level versus its regional peers
Household debt at 11% of GDP hence room to leverage
Growth driver 4 Room to leverage
Source: Citi Investment Research, CEICSource: Citi Investment Research
Rising income per capitaUnderleveraged economy
0%
5%
10%
15%
20%
25%
30%
2003 2004 2005 2006 2007 2008 2009 2010F
To ta l loan/GDP Consumer loan/GDP
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Indo public sector debt/GDP is at very healthy level
Government plans to reduce subsidies 10% increase in power tariff in2012E
Capex spendings to increase by 19% yoy to record level
But fuel subsidies remain high less of a problem if crude oil price remains
low
Growth driver 5 Healthy fiscal condition
Source: CEIC, Government
Low public sector debt/GDP
I i f i
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Important information
The information in this presentation is based on management forecasts and reflects prevailing conditions and our views as
of this date, all of which are accordingly subject to change. In preparing this presentation, we have relied upon andassumed, without independent verification, the accuracy and completeness of all information available from public sourcesor which was provided to us by or on behalf of the potential investor or which was otherwise reviewed by us. All opinionsor estimates contained in these documents are entirely SIM Indonesia judgement as of the date of this document and aresubject to change without notice.
Past performance is not necessarily a guide to future performance. You should remember that the value of investments cango down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments torise or fall.
The information contained in this document is provided for information purpose only and does not constitute any solicitationand offering of investment products. Potential investors should be aware that such investments involve market risk andshould be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material is issued by PT. Schroder Investment Management Indonesia and has not been reviewed by the Bapepam.
Schroder Investment Management Indonesia
Gedung Bursa Efek Indonesia
Tower 2, lantai 31
Jend. Sudirman, Jakarta
Telephone +62 21 51510101 Fax +62 21 5150505