the year of the bounce -...

1

the year of the bouncethe higher the developed markets rise the more attractive asia looks.

Let’s taLk markets

Japan was different. company restructuring, (which was underway long before “abenomics”), would be the primary equity rally driver. china’s low valuations more than discounted

china concerns. any rally was unlikely until developed market rallies had run their respective courses. Within asia, 2014 could see a switch from

defensives to cyclicals. as above, the timing would likely reflect developed market rallies running out of steam.

With four months under the belt, how does that assessment stack up?

at the beginning of 2014, I argued: the income story was not over. the

decision whether income should be attained via bonds or dividend yielding equities was important.

us and eurozone equities were in “fair value” territory, but their continued rallying was dependent on 2014 profit forecasts being delivered.

Robert RountreeGlobal market strategist eastspring Investments

continued on page 3

Welcome to our quarterly issue of “eastspring news” which has taken on a new look. We are delighted to share with you news and views on what’s going on in the markets and also to give you an insight into the funds we manage.

In this issue, robert rountree, our global market strategist shares his views of the global markets and where he sees the investment opportunities in 2014 in "Let's talk markets".

In "funds in the spotlight", we feature the north american Value fund and asian bond fund where the respective portfolio managers - richard brody and David Lai take us through the funds they manage.

We have the underlying portfolio managers of the World Value equity fund that cover us, europe, Japan and Developed asia, to give us their insights of the markets and their value philosophy under "In conversation".

eastspring is proud to be the sponsor for the "Prudential eye awards" and "rolling stones'14 on fire asia tour" in singapore and the "fund forum International" in monaco.

We hope you will enjoy reading “eastspring news” as much as we have in putting it together.

The Eastspring Team

WeLcome to eastspring news

1 LET’s TaLk maRkETs

8 Funds in ThE spoTLighT

15 in ConvERsaTion

22 EvEnTs highLighTs

singapore april - June 2014

eastspring.com.sgQuarterly news and views from eastspring | the asia investment expert the world trusts

2 news april - June 2014

InsIDeapril - June 2014

page 1 LET’s TaLk maRkETs

robert rountree shares his views of the global markets and where he sees the investment opportunities in 2014.

1. eastspring Investments – north american Value fund. 2. eastspring Investments – asian bond fund.

page 8 Funds in ThE spoTLighT

Insights from our Portfolio managers on the markets and the value philosophy of our World Value equity fund.

page 15 in ConvERsaTion

page 22 EvEnTs highLighTs

a brief round-up of past events and preview of what's up and coming.

Eastspring Investments (Singapore) Limited is an ultimately wholly-owned subsidiary of Prudential plc of the United Kingdom. Prudential plc. is not affiliated in any manner with Prudential Financial, Inc. of the United States of America. This advertisement is solely for information purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. An investment is subject to investment risks, including the possible loss of the principal amount invested. A prospectus in relation to the fund is available and a copy of the prospectus may be obtained from Eastspring Investments (Singapore) Limited and its distribution partners. Unit values and income from them may fall or rise. Investors should read the prospectus and the product highlights sheet or seek relevant professional advice, before making any investment decision. Past performance is not indicative of future results. For further details and risk factors,visit eastspring.com.sg

We see opportunities BeYonD tHe ABenoMiCs WAVeeAstsprinG inVestMents – JApAn DYnAMiC FunD

Japan is now in focus. Prime Minister Shinzo Abe’s pro-growth reforms have led investors to re-look at this market and a new sense of optimism has emerged with the announcement of the 2020 Olympics. Fundamentally, we see investment opportunities beyond Abenomics.

Significant opportunities exist for companies trading at attractive valuations, backed by good corporate health which is yet to be recognised by the market. The eastspring investments – Japan Dynamic Fund, managed by our Japan investment experts sees opportunities that others miss. No one sees Asia like we do.

Singapore | Hong Kong | Dubai | Ho Chi Minh City | Jakarta | Kuala Lumpur Mumbai | Seoul | Shanghai | Taipei | Tokyo | Chicago | Luxembourg | London


Global liquidity continues climbing dampening rate hikes

my view that global liquidity will continue rising is on track despite further us federal reserve “tapering” (now at $55bn per month but expected to be over by year-end). the bank of Japan continues pumping cash into its system courtesy of “abenomics”. both are more than offsetting cash withdrawals by the bank of england and the european central bank in particular.

us rates may not rise until early 2016

the major implication, in conjunction with still “spotty” us economic data, is that it will be some time before us rates rise – despite ms. yellen’s mid-march comments that this could possibly occur in around six months. as

with mr. bernanke’s mid-2012 comments on tapering, I suspect investors read more into this than was warranted. unless the us jobs numbers improve in the manufacturing rather than the services sector, it is difficult to see the fed getting aggressive (although I would not dismiss a “token” rate rise purely to signal it is “serious” about “normalising” rates, however long that takes).

high yields still look attractive for income

the bottom line is that investments in us high yields and asian bonds remain attractive as long as one is focused on income rather than capital gains. Indeed, there is a case for switching from us investment grade to asian usD investment grade bonds to increase yield. asian local and high yield bonds also look attractive for their higher yields.

continued from page 1

the year of the bounce

$55bn per month. that's what reserve “tapering” is now at, but is expected to be over by year-end.



source: Eastspring investments (singapore) Ltd. from the relevant central banks and official data sources on datastream as at 14 april 2014. any views expressed above are valid as of the date of this note and may alter without notification. 1 = The assets of each central bank’s balance sheet as a percentage of nominal gdp.

Chart 1: Rising liquidity implies low upside rate pressure.

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how much of a developed market rise will one forego to establish positions in cheaper asian markets?

the equity picture has clouded as developments in first, the ukraine and turkey and second, slowing china growth have hit sentiment generally.

my central view remains intact. If anything, it has hardened; 2014 could be the year in which investor attention switches back towards the asian markets. for the us and european equity markets to rally further, for example, the high new order hopes implicit in the PmI surveys must translate into hard new orders, thence sales and profits. so far, the first link in this chain is missing. a close look at the sales data, however, presents the tantalising possibility of a future sales uptick, to which, no doubt, many investors will cling. I stress again, this profit delivery is important if us and european rallies are to be sustained. chart 2 illustrates why.

as is evident, the 2013 rises in both markets reflected rising expectations more than profit delivery. the entire european rally reflected rising expectations; it is easy to conclude that europe’s recovery has been discounted. It is probably a step too far to argue that these markets will fall if profit forecasts disappoint – there is too much liquidity. Instead, I suspect both markets would trend in line with declared earnings.

Japan stands in stark contrast. because of strong 2013 earnings delivery, the market ended the year cheaper than it started – a point lost on many investors.

the widening Dm vs em gap is exposing asian opportunities

the march quarter's big change, for me, was the widening sentiment gap between developed and emerging markets as ukraine et al took their toll.

Investors lumped emerging markets together dragging them down. chart 2 highlights the pricing anomalies that emerged over 2013; these have extended into 2014. Getting behind the drivers of each market throws up mispricing opportunities, especially within asia.

several investment messages clearly emerge from chart 2:

european and us equities rallied on rising expectations rather than profits delivery as already discussed. (It should be noted that Japanese equities continue to get cheaper; the historic Pe was 14½X at the time of writing compared with 17X in early January, 2014).

emerging asia saw their historic Pe valuation fall more than emerging europe and Latam despite the latter’s sharp fall in recorded profits.

china recorded profit growth in excess of that in the us but saw its market valuation fall. china fears seem more than deeply discounted.

It is not difficult to conclude that asian equities have been dragged down by other emerging market fears. When these fade, asia’s snapback could be sharp.

emerging asia stands out

Valuation and profit forecasts point in asia’s favour. emerging europe has a low value (chart 3) but profit growth forecast to be -1.2% in the coming year.


source: Eastspring investments, msCi and ibEs from datastream, 12 march 2014. The price earnings multiple is the trailing pE based on the msCi index for each market and the declared 2013 earnings as recorded by ibEs. all markets are in usd bar China which is in Cny. note that past performance is no indicator of future performance. any views expressed may alter at any time without notification. 1Emerging asia comprises China, india, indonesia, korea, malaysia, philippines, Taiwan and Thailand.

Chart 2: Emerging asia1 profits fared better than other emerging markets, but its valuation fell most.

index price to earnings ratio (expectations) Earnings per share (profits)

2014 could be the year in which investor attention switches back towards

the asian markets.




emerging Latam has profit forecast to rise by 14¾% but has a higher valuation. In contrast, emerging asia has a low valuation and profits forecast to rise 11¾1.

asian capital outflow and currency weakness fears seem exaggerated

one sticking point is that despite asia’s (in particular, china’s) apparently attractive valuations, investors still fret over the potential for currency weakness. the narrative is that us “tapering” will trigger an asian capital outflow (although exactly how a slower rise in us capital injections will trigger an asian outflow escapes me. It is not as if the fed is reducing liquidity, in which case asia could have a problem). “a self-fulfilling prophecy” is the phrase that springs to mind.

Indonesia’s rupiah and India’s rupee fell for solid economic reasons

In reality only Indonesia and India saw their currencies under significant pressure both for clearly identifiable economic reasons as both moved into sharp current account deficits. With foreign reserves and net capital inflows providing little in the way of buffer (chart 4), both were forced to borrow offshore to plug the gap. not unnaturally, their currencies weakened.

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Chart 3: valuation cases exist for Emerging asia and Emerging Europe.

source: Eastspring investments (singapore) Limited and ibEs from datastream, 14 april 2014. 2 The “Z” valuation is a composite index giving equal weights to the variation of the historical price to book ratio from its long-term trend and the variation of the prospective price earnings ratio from its long-term trend. around 70% of all values lie within the two outer dotted lines. The middle line is the 10-year average.

1 ibEs from datastream.

u.s. Europe (including uk) japan China

source: morgan stanley Research august 2012. sourced from bloomberg, iiF, iFs, jEdh and national sources. 1 safety ratio = (Fx reserves + liquid foreign claims of local banks) / (2012F C/a deficit + sT external debt + 12 month forward amortisation of mT debt).

Chart 4: Low Fx reserves and low net capital inflows lay behind most Em currency weakness.

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argentina Turkey poland Romania Chile hungary Czech Republic israel mexico Latin america india Columbia south africa brazil korea indonesia Thailand Egypt peru asia (ex-japan) malaysia Russia China philippines




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Chart 5: Foreign investors begin to return to asian markets.

under these circumstances, the potential for the currencies to fall was already present; only the trigger was missing. tapering and em problems elsewhere provided that trigger. one cannot help but point to korea. korea had a similar (low) level of fX and net inflow buffer, yet its currency rallied. the difference? korea was recording a current account surplus.

In short, most asian currencies held up. Indeed, as of mid-march, capital was returning to both India and Indonesia with their currencies either stabilising or rising. I should add that while the rupee looks

attractive on a real effective exchange rate basis, the rupiah does not; it could still see downward pressure if the current account again deteriorates.

Just as asian currency fears seem to have been exaggerated, so too do the fears of capital outflows.

In a nutshell

Little needs to be said about the above (chart 5) – it is self explanatory. the charts show the net foreign purchases of asian equities.

asian currency fears seem to have been

exaggerated, so too do the fears of capital

outflows.

source: bloomberg as of 14 april 2014.

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so where does this leave us? our investment messages remain intact.

the bond story has further to run if one is buying bonds for income:

holders of us investment grade bonds could consider a switch into asian investment grade usD bonds for the higher yield.

asian local bonds and asian high yield bonds also look attractive for their yields with the possibility of some capital growth as investor confidence returns.

us and european equities could rally further. this will likely reflect effective delivery of forecast profits. Valuations, while not expensive, have discounted a lot of good news. there is little room for disappointment:

because of these earnings concerns, our global asset allocation team, is underweight us equities. Instead, it is “playing” the us via an over-weight to us high yielding bonds given the strong company fundamentals.

Japanese equities look attractive. but while focusing on “abenomics”, I suspect many investors are overlooking the corporate restructuring that is laying the basis for future sustained profit growth.

asian equities have been (unfairly, in my view) tarred with the same brush as emerging markets per se. this is throwing up value. It is unlikely this value will be priced out until sentiment towards the developed markets dulls.

I conclude by reiterating the question I think is important when investing today. “how much of a rise in the developed markets is one prepared to forego so as to establish a position in the cheaper asian markets?”

as Japan illustrated, when a cheap market bounces back, it does so quickly!

funDs In the sPotLIGht1. eastspring Investments – north american Value fund

2. eastspring Investments – asian bond fund

read on to find out more about their strategies and what lies ahead.



under what environment would a value strategy do best? is today's environment best suited for a value strategy?

We believe that the benefits of investing in a value strategy are best achieved over full market cycles. because timing the peak and trough of market cycles is very difficult – if not impossible – we think that investors are best served by holding value strategies as long-term investments.

In terms of short-term performance behavior, value tends to under-perform in periods characterised by extreme fear or exuberance. In periods of extreme fear, investors tend to overreact to negative news flow and future uncertainty, leading them to discount stocks beyond what the underlying business fundamentals warrant. When this occurs, value stocks tend to under-perform, given that they are already predisposed to heavier discounts. Periods of extreme exuberance, on the other hand, also typically coincide with value style under-performance, as investors become less focused on fundamentals and valuations and bid more expensive stocks even higher. this temporarily punishes value investors, who avoid those same stocks in favour of more attractively priced opportunities.

In today’s current market environment we are not facing either of these extremes, creating a relatively positive backdrop for value investing.

Richard brodyPortfolio manager PPm america, Inc.*

eastsPrInG InVestments – north amerIcan VaLue funD ("funD")this fund aims to use a value based investment philosophy to maximize long-term capital growth by investing primarily in equity and equity related securities of companies, which are incorporated, or have their area of primary activity, in north america. the fund may also invests in debt securities convertible into common shares, preference shares and warrants.

is there an optimal size for number of holdings or market cap per stock that works well for your value strategy?

p/E# oF

sToCksTuRnovER

RaTio1

eastspring Investments – north american Value fund (a share class)

15.9 50 15.4

s&P citi Value Index 16.2 336 n/a

Large-cap Value Peer Group avg.

16.6 792 35.0

because we look for stocks that are not only undervalued relative to the broad market but also relative to other value opportunities, the eastspring Investments north american Value fund tends to display an even deeper value tilt than its benchmark and average value-oriented peer. the fund also tends to demonstrate higher conviction positioning (i.e., a lower number of holdings) than peers. this higher concentration results from our focus on stocks that trade at significant discounts to the market and is supported by the rigorous fundamental analysis that we perform. It also reflects our belief that greater

funDs In the sPotLIGht

eastsPrInG InVestments | north amerIcan VaLue funD

source: morningstar direct as of 31 december 2013. p/E ratios are presented by morningstar direct on a twelve-month trailing basis. 1Turnover ratios are provided by individual fund managers and aggregated by morningstar direct. The figures provided by individual fund managers may not be comparable based on various calculation methodologies. 2The peer group average number of stocks was calculated by taking the simple average number of stocks for those funds categorised by morningstar in the Europe oE us Large-Cap value category and which have reported number of holdings on 31 december 2013. The peer group was filtered for only the oldest share class of each fund. *ppm america, inc. is the investment sub-manager for the Fund.


as an example, chevron corp. is a current holding that we think is attractively priced, trading at approximately 11x forward twelve months consensus earnings, which represents a 30% discount to the s&P 500’s forward P/e ratio. We think that this is an attractive discount for a fully integrated global energy company with a strong financial position, effective management strategy, low debt, $16.5 billion in cash (as of this writing) and a dividend yield of 3.5 percent.1

on the pace of corporate profits, there is a concern that profits have risen due to cost cutting and strong margins and not sales. as cost cutting cannot go on indefinitely, at some point in time sales will have to be the main driver for profits. is there evidence of top line sales picking up?

While we recognise that revenue growth will be required to maintain profit growth, we also believe that the cost side of the equation remains favourable as well. there are still good reasons to expect further margin improvements. Wage growth, input prices and borrowing costs – all which directly impact margins – are unlikely to rise materially. furthermore, as companies grow more confident, they will likely increase capital investment in technology, and in turn, positively impact margins by improving labour productivity.

there are signs that corporate revenues should grow modestly in 2014. We saw improved revenue growth during the fourth quarter reporting season, and if consensus expectations for improved economic momentum are realised, we believe this trend can continue as the year progresses. consensus expectations call for 2.7% revenue growth for Q1 2014, which compares positively to 2013’s 2% growth rate2. moreover, earnings growth could continue to be positively impacted by share repurchases in 2014. In 2013, management share repurchases were a significant driver of earnings growth.

what is the key difference between a growth strategy and value strategy?

as implied by their name, growth strategies are focused on stocks with the potential to grow revenues or earnings at faster rates than their overall industry or market. In exchange for this potential, growth

concentration can reduce holdings dilution, because each stock plays a larger role in portfolio. for the same reason, concentrated portfolios may also be more volatile. there is no universally accepted optimal number of holdings. our philosophy and process has historically resulted in a portfolio of approximately 50-55 stocks with absolute stock weights between 1 to 2.5%.

with the us market hitting fair value territory, how relevant is a value strategy now?

We recognise that market valuations are less compelling than in prior years. however, focusing solely on a broad index level (such as the s&P 500) in order to measure the level of opportunity in the marketplace can be misleading. We believe short-term price inefficiency is an inherent characteristic of the capital markets. In light of this view, we assess fair value on a security-by-security basis and can find compelling value across different market cycles, including those periods when broad market valuations are relatively expensive. for example, we believe that a number of compelling value opportunities exist within the financial and energy sectors, which despite recent market appreciation, continue to offer more attractively priced opportunities relative to the broad market.

is there a minimum margin of safety you place on each stock?

We do not establish static price targets for intrinsic value when considering potential investments. market conditions and investor sentiment can change daily. We believe building a portfolio of companies that trade at significant discounts relative to the overall market incorporates the concept of margin of safety without reliance upon explicit forecasts. In fact, the core goal of our investment process is finding opportunities that are significantly discounted compared to long-term fundamental value. We attempt to do so by analysing companies’ financial strength and underlying asset values as well as unknown or misunderstood sources of opportunity and/or potential for positive change. this process naturally tends to select stocks that we believe have higher margins of safety – and without constraining our relative value-focused process by absolute limits.

Q1 2014: consensus expectations call for 2.7% revenue growth, which compares positively to 2013’s 2% growth rate.

as cost cutting cannot go on indefinitely,

at some point in time sales will have to be the

main driver for profits.

1as of 31 december 2013. This should not be considered a recommendation to purchase or sell any particular security. There is no assurance that the securities referenced here remain in the fund's portfolio at the time this newsletter is received. The securities referenced represent only a small percentage of the fund’s holding and it should not be assumed that the securities referenced were or will prove to be profitable. 2Factset Earnings insight. 28 march 2014.




investors are usually willing to pay higher prices relative to current earnings. as such, growth strategies are more dependent on stocks’ future earnings.

conversely, value strategies focus on stocks that trade at lower prices relative to fundamentals (i.e. earnings, book value, etc.) and thus tend to exhibit lower price-to-earnings and price-to-book ratios. they also often offer higher dividend yields. Value strategies are therefore less dependent than growth strategies on the manager’s ability to forecast future earnings and more dependent on the manager’s ability to identify dislocations between fair value and market value. at PPma, we focus on the latter. We follow a deep-value approach to look for stocks that are inexpensive relative to both the broad market and to other value stocks. because of this deeper value tilt, the eastspring Investments north american Value fund tends to demonstrate lower price-to-earnings and price-to-book ratios, not only relative to growth strategies, but also compared to other value strategies.

p/E RaTio p/b RaTio

us Large-cap Growth 23.1 3.5

us Large-cap Value 16.6 2.1

es north american Value fund

15.9 1.9

source: morningstar direct as of 31 december 2013. price-to-earnings (p/E) and price-to-book (p/b) ratios are calculated on a twelve month trailing basis and provided by morningstar. us Large-Cap growth refers to morningstar’s Europe oE us Large-Cap growth Equity category and us Large-Cap value refers to morningstar’s Europe oE us Large-Cap value Equity category. as categorized by morningstar, the Es north american value Fund belongs in the Europe oE Large-Cap value Equity category.

what are some potential risks in the us market that investors should be aware of?

Deteriorating economic data; geopolitical flare-ups, including those related to russia and the ukraine; and credit issues in china are among the most notable risk factors that could incite heightened volatility during the coming months. these issues – particularly the latter two – pose risks globally, not just to the us. In fact, if any of these situations were

to deteriorate significantly, us investments would likely fare relatively well compared to their non-us counterparts, given investors’ perception of the us as a safe-haven.

how does your team plan to add value in 2014?

We follow macro trends closely; however, it’s important to note that our investment process does not rely on top-down projections. as always, we will look to add value by finding attractively priced stocks, researching those stocks in depth, determining the unknown or misunderstood factors leading to their discount and identifying the potential for positive change and selecting those with superior fundamentally-driven performance potential. We are highly committed to this approach and believe that it can help us uncover attractive opportunities both in 2014 and beyond.



the eastspring Investments – north american Value fund

tends to display an even deeper value tilt than its benchmark and average

value-oriented peer.


seek “carry” opportunities where the risk-return trade off justifies, as coupon income could still potentially underpin a moderate return this year.

how did the Fund fare in 2013?

In 2013, the fund registered a decline of 3.1% (bid-to-bid basis, a class share). the us fed’s Qe tapering talk triggered sharp rises in us treasury yields, while volatility in asian bond markets also rose on the back of concerns over the health of asian economies. nevertheless, our strategy then to focus on “carry” or coupon income through an overweight in high yield corporate has helped mitigate the fund’s decline given the sector’s outperformance (chart 1 below). We continued to keep our overweight allocation in high-yield corporate papers even as market volatility rose since may last year as we believed they would do better than investment grade issues in a rising interest rate environment, due to their lower sensitivity to interest rate movement and higher coupon income.

2013 has been a challenging year for asian bond markets. Including asian usD-denominated bond market. surge in us interest rates following

tapering comments last year, coupled with concerns on health of emerging markets (including asia) has weighed heavily on performance. nevertheless, the eastspring Investments – asian bond fund has done well and has recently garnered award and citation by independent fund research companies for the fund’s risk-adjusted returns and performance relative to its peers.

Going into 2014, we maintain a more cautious positioning as some of the macro headwinds faced by asia have not dissipated. however, we remain sanguine on the outlook for asian economies further out and will

david LaiPortfolio manager eastspring Investments

eastsPrInG InVestments | asIan bonD funD


eastsPrInG InVestments – asIan bonD funD ("funD")this fund invests in a diversified portfolio consisting primarily of fixed income/debt securities issued by asian entities or their subsidiaries. Its portfolio primarily consists of securities denominated in us dollars as well as the various asian currencies and aims to maximize total returns through investing in fixed income/debt securities that are rated as well as unrated.

We remain sanguine on the outlook for asian

economies ... will seek “carry” opportunities where the risk return

trade off justifies, as coupon income

could still potentially underpin a moderate

return this year.

Chart 1: asian bonds performance by sector – 2013.

source: jp morgan asia Credit indexes from bloomberg, 25 march 2014 (data from 1 january 2013 to 31 december 2013).

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given the performance of asian bond market last year, how do we expect asian usd bonds to perform in 2014?

following the back up in asian bond yields last year, we think that the market has largely priced in possibility of a gradual tightening in global liquidity conditions. We also remain cautiously optimistic on asia’s economic outlook, which could provide a benign macro backdrop for asian debt issuers. We expect 2014 to remain challenging as bouts of volatility could still be triggered by negative headline news arising from political developments and structural concerns in asia and, more significantly, in china.

although china’s pace of growth may edge down further this year as it strives to re-balance the economy and contain the leverage in the system, we believe there will be no hard landing this year as the authorities still have ample ammunition to tackle any global and domestic-related economic deterioration.

Chart 2: asian high yield default rate expected to remain low.

source: jpmorgan, February 2014 (data as at 31 december 2013).

asia Emerging Europe Latin america middle East and africa

2013: has been a challenging year for asian bond markets. nevertheless, the fund has done well and has recently garnered award by independent fund research company for its risk-adjusted returns and performance relative to peers.

china’s pace of growth may edge down further this year as it strives to re-balance the economy and contain the leverage in the system, we

believe there will be no hard landing...

Going into

2014 we maintain a more cautious positioning

as some of the macro headwinds faced by asia have not

dissipated.

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given the tapering fears’ impact on emerging market bonds, do we see this as a threat to asian bonds?

one potential risk is that if the us fed tightens monetary policy too early and too fast, it could choke off the recovery in the us and trigger turmoil in emerging markets. While our base case scenario remains that of a gradual and drawn out policy normalisation in the us, we are mindful that this concern could also weigh on market sentiment, on top of the above concerns on asia. We have positioned the fund more defensively by adding exposures to high quality investment grade names, while reducing the fund’s exposure to longer-dated high yield bonds.

what is the potential impact of higher interest rates on asian bonds as well?

traditionally, credit assets would not fare too badly in a rising interest rate environment (chart 3 refers) as this generally occurs during periods of economic expansion. Potential capital loss from interest rate increases would typically be offset by coupon income and potential credit spread tightening as a result of investors feeling more confident about the macro environment.

this scenario could potentially pan out for the asian bond market in the longer term, after “the dust has settled” and given our base case scenario of a gradual global recovery and measured normalization of interest rates. but support from credit spread tightening could be more limited as compared to previous cycles given current valuations.

how is the Fund positioned given this outlook?

under the premise of a relatively stable outlook for the region, we would continue to look for “carry” this year. nevertheless, we would refrain from going too aggressively “down the credit curve”, or in other words buying papers with lower credit quality; current valuations of high-yield corporate credits do not appear to have sufficiently priced in downside risk, in our view. on the other hand, in view of the significant dislocations in asian currencies and some domestic bond markets last year, we see selective opportunities there this year.

We have positioned the fund more defensively

by adding exposures to high quality investment

grade names...

source: bloomberg, 28 February 2014; asian usd bonds represented by jpmorgan asia Credit index, asian hy usd bonds represented by jpmorgan asia non-investment grade index, us Treasuries represented by Citigroup us Treasuries/agencies index, us hy Corporates represented by bofa-merrill Lynch us high yield index, asian Equities represented by msCi aC asia ex japan index.

Chart 3: performance of asian and us bonds over recent interest rate cycle.

5yr us Treasury yields (Rhs) asian usd bonds us Treasuries us hy Corporates asian Equities

+43%

+161%

+64%

+16%

-2%

+14%+2%

+27%

Period of higher interest rates(December 1998 - January 2000)

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Dec '98 Apr '01 Jun '02 Aug '03 Oct '04 Dec '05 Feb '07 Aug '10 Oct '11 Dec '12 Feb '14Apr '08 Jun '09

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Period of higher interest rates(August 2003 - June 2007)

Feb '00



In conVersatIon Insights from the underlying Portfolio managers of eastspring Investments – World Value equity fund. read on for their insights on the markets and the value philosophy.



In conVersatIon

eastsPrInG InVestments | WorLD VaLue eQuIty funD

VaLue baseD InVestInG Is a key InVestment strateGy aDoPteD by many PortfoLIo manaGers arounD the GLobesimply put, it refers to buying a mis-priced investment that is worth more than its current market price. at eastspring Investments, our approach is to identify and invest in such mis-priced investments once our analysis confirms that value exists.

In the first quarter newsletter edition, we introduced our world value Equity Fund ("Fund") which invests in developed market equities. this fund captures the best value in developed markets over time. as the coverage spans us, europe, Japan and Developed asia, we have portfolio managers on the ground with local expertise that can identify value stocks. read on for our portfolio managers' insights on the markets and the value philosophy.


In conVersatIon


In conVersatIon

how will us economic recovery compare to global recovery in 2014? ?

the International monetary fund expects global economies to withstand short-term volatility and make continued progress towards recovery in 2014. and it expects the us to lead other advanced economies as part of this recovery. In its most recent outlook, the organisation raised its global growth forecast to 3.7% and cited higher domestic demand and reduced fiscal drags as catalysts for a relatively strong 2.8% u.s. growth rate1.

is value still present given that us equities posted the strongest returns in 2013?

While gains are unlikely to reach 2013 levels, valuations and earnings forecast suggest room for healthy returns still exists. Price to earnings ratios have undoubtedly climbed to higher levels, but they remain below their two-decade average, nonetheless2.

Last but not least, the significant breadth and depth of the us equity market3 offers a variety of value opportunities. the us represents over 45% of the world’s investable equity markets. Ignoring u.s. equities in a global portfolio could unnecessarily limit portfolio diversification4.

3.5

2.5

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% GDP Growth

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Chart 1: 2014 imF gdp projections.

source: imF. world Economic outlook update, january 2014. other advanced economies aggregate includes: australia, Czech Republic, denmark, hong kong saR, iceland, israel, korea, new Zealand, norway, singapore, san marino, sweden, switzerland, and Taiwan province of China.

1Imf. World economic outlook (Weo) update. “Is the tide rising?” January 2014.

2bloomberg. based on the average quarterly P/e ratios of the s&P 500 Index. the average P/e ratio was calculation over a 20-year period beginning 1Q94 and ending 1Q14. as of 4Q13, the s&P 500 Index’s current P/e ratio was 17.02 and the 20-year average was 19.13.

3as measured by the World economic forum’s Global competitiveness report, the us ranks 1 out of 148 in Domestic market size. and 2 out of 148 in foreign market size. (1 being the best).

4ftse. as indicated by the aggregate weightings of us constituents in the ftse all World Index as of 28 June 2013, the latest accessible data as of 15 January 2014.

*PPm america, Inc. is the investment sub-manager for investments in us.

Richard brodyPortfolio manager PPm america, Inc.*

35P/E Ratio

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01994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

20-YEARAVERAGE

19.13

Chart 2: is value still present given that us equities posted the strongest returns in 2013?

source: bloomberg. based on the quarterly p/E ratios of the s&p 500 index, and the 20-year average p/E ratio of the s&p 500 index. The average p/E ratio was calculated over a 20 year period beginning 1q94 and ending 1q14.

united states Euroarea germany France italy spain japan united kingdom Canada other

advanced Economies aggregate

price earnings ratio (p/E) 20-year average p/E ratio

unIteD states


what is your value strategy?

as our value strategy basically exploits market inefficiencies in out-of-favour companies, we begin our screening process by ranking the value of stocks in each sector. We then focus on the cheapest quartile of stocks within that sector. It is well documented that investing in cheap stocks tends to outperform the market over time. the chart below shows that relative returns of buying the cheapest quartile of stocks on a price-to-book (P/b) basis over a 3 year period.

P/b is our primary valuation metric as book values are more stable than earnings data. as the divergence of returns within the cheapest quartile can be wide, we identify the cheap stocks that have been mispriced by the market and avoid those that are cheap for a reason. by screening according to sector, we avoid large sector biases in our investible universe. for example, if we had screened the whole market in 2009 without breaking it down by sector, we would have had an investment universe heavily weighted in financials.

Richard hallePortfolio manager m&G Investment management *

Chart 3: Europe by quartiles of price/book: three-year average annualised excess returns since 1988.

source: m&g, backtest, 30 april 2013. Returns in excess of msCi Europe index.

is it an opportune time to invest in value stocks in Europe?

Value is a compelling strategy not just for today but for the long term. european equities staged a sharp rally in 2013 but the underlying earnings are still far from their peak levels in 2008 and, more importantly, value stocks continue to trade at a significant discount to the market.

the value proposition is even more compelling looking at the valuation gap between the cheapest and most expensive quartile of the market on a P/b basis. the spread between the two quartiles is at one of the widest levels over the past 25 years. moreover the previous occasions when the spread has been as wide, the cheapest quartile was values at around 1.9 times P/b. at the moment it is trading at just 1.2 times, demonstrating that value is cheap both on a relative and absolute basis. this type of screening leads to a diversified portfolio of between 50 and 100 undervalued stocks. a long-term investment approach also leads to low portfolio turnover.

Chart 4: msCi Europe index: price/book spread between 25th and 75th percentile.

source: datatream, 31 december 2013.

spread between 25th and 75th percentile (Lhs) price/book of 25th percentile (Rhs)

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Jun'87 Aug'91 Oct'95 Dec'99 Feb'04 Apr'08 Jun'12Jul'89 Sep'93 Nov'97 Jan'02 Mar'06 May'10

euroPe

by screening according to sector, we avoid

large sector biases in our investible universe.

In conVersatIon


*m&G is the investment sub- manager for investments in europe.


In conVersatIon


In conVersatIon

where do you see value?

starting valuations are critically important when investing in equities. We are not just looking to buy cheap stocks, but companies that are undervalued relative to their longer term earnings power. In Japan for instance, there are more stocks which are extremely mispriced compared to the market and their own long term trend valuation than prior to the 2013 rally5. out of a wide universe of over 2000 stocks, we are finding compelling value opportunities to replace stocks that have already delivered. some of these opportunities can be found in the technology and financial sectors.

similarly we are able to identify opportunities in Developed asian markets (singapore, hong kong, australia and new Zealand) as all are trading below their long term average price to book multiple. In australia, the attractive yield characteristics and valuation lead us to be overweight sectors such as energy and real estate, while we are underweight

industrials and consumer staples. We find singapore real estate stocks expensive while we find some attractive opportunities in hong kong real estate. In new Zealand, we own the telecom corporation of new Zealand which delivers a strong yield for the fund. cheap valuation outliers. refer to chart 5.

JaPan & DeVeLoPeD asIa

5this is based on a comparison of the number of stocks trading at least one standard deviation cheap on a Price to book relative the universe basis between December 2012 and february 2014.

juan pablo gaviria-vetanderPortfolio manager eastspring Investments

Chart 5: number of "cheap" stocks relative to the japan equity universe.

source: Eastspring investments, nomura, as at 18 december 2013.

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out of a wide universe of over 2000 stocks, we are finding compelling value opportunities to replace stocks that have already delivered.

john dupreezPortfolio manager eastspring Investments


as discussed by the underlying portfolio managers, value is evident across the various developed markets, how then does the overall fund manager add value?

the portfolio manager makes top down tactical asset allocation decisions based on macro fundamentals and asset valuations. We look for investment opportunities that are mispriced relative to their own history as well as relative to the global equity market. We then focus on assessing whether these markets provide sufficient “margin of safety” in delivering future returns.

once such opportunities have been identified, the portfolio manager may choose to add exposure via exchange traded funds. examples include select peripheral european markets such as Italy and spain. both offer value, in our view and they appear pretty advanced in their macroeconomic adjustments, including improvements in current account balance, deleveraging of the banking sector and housing market correction.

the portfolio manager may also choose to maintain some off-benchmark exposure in select markets where valuation is very attractive. one such example is russia which is still one of the cheapest markets in the world, and trades at a deep discount to other global equities. We believe that this historical discount is in part justified by the market’s concentrated exposure to oil prices and corporate earnings risk. nonetheless we are comfortable with a modest overweight as the market is currently trading close to its historical discount.

Chart 6: deep value stock selection can uncover the most compelling opportunities.

nicholas FerresPortfolio manager eastspring Investments

In a nutsheLL

In conVersatIon


FoRwaRd p/E (x)

Fund* bEnChmaRk

us Portfolio 12.4 15.5

europe Portfolio 13.3 13.7

Japan Portfolio 12.9 13.0

asia Portfolio 11.2 13.9

p/b (x)

Fund* bEnChmaRk

us Portfolio 1.9 2.4

europe Portfolio 0.7 1.8

Japan Portfolio 1.0 1.4

asia Portfolio 1.5 1.8

source: Eastspring investments, 31 march 2014. *include direct and indirect equity holdings and exclude cash. stocks data sourced from Thomson Reuters datastream as of 31 march 2014, whilst ETFs and Futures data is approximated by their benchmarks, sourced from bloomberg as of 31 march 2014.

our value approach is evident in the lower P/e and P/b at both the fund and underlying portfolio level.

We are comfortable with a modest

overweight as the market is currently trading close to its historical discount.


*As at 31 December 2013. Eastspring Investments (Singapore) Limited is an ultimately wholly-owned subsidiary of Prudential plc of the United Kingdom. Prudential plc. is not affiliated in any manner with Prudential Financial, Inc. of the United States of America. This advertisement is solely for information purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. An investment is subject to investment risks, including the possible loss of the principal amount invested. A prospectus in relation to the fund is available and a copy of the prospectus may be obtained from Eastspring Investments (Singapore) Limited and its distribution partners. Unit values and income from them may fall or rise. Investors should read the prospectus and the product highlights sheet or seek relevant professional advice, before making any investment decision. Past performance is not indicative of future results. For further details and risk factors,please visit eastspring.com.sg

Singapore | Hong Kong | Dubai | Ho Chi Minh City | Jakarta | Kuala Lumpur | Mumbai | Seoul | Shanghai | Taipei | Tokyo | Chicago | Luxembourg | London

WE SEARCH THE WORLD TO DISCOVER VALUE FOR YOUEASTSPRING INVESTMENTS – WORLD VALUE EqUITY FUND

Global growth is back. As developed markets continue on a recovery course in 2014, the United States is expected to lead the pack with Europe and Japan following suit. At Eastspring Investments, we also have our radar on developed markets in the Asia Pacific – Australia, New Zealand, Singapore and Hong Kong as we see value in these markets.

With almost 300 on-the-ground investment professionals scouring the world to uncover its opportunities and about US$100 billion* in assets under management, invest in the Eastspring Investments – World Value Equity Fund to ride on the recovery of these developed markets.

eVents hIGhLIGhtsa brief round-up of past events and a sneek preview of what's up and coming.


following the success of Prudential’s sponsorship of the Indonesian eye and hong kong eye, the inaugural Prudential eye awards was launched in January this year in singapore, expanding the company’s support for the arts across greater asia. the awards are also aimed at recognising and celebrating emerging asian talent in contemporary art.

a number of key clients were invited to the awards evening, which was a black-tie affair held at suntec city in singapore on January 2014. the event was also part of singapore art Week and was attended by more than 300 business partners, leaders of the art world, artists and journalists.

eastspring Investments was the sponsor of the Photography award and Jackie chew, ceo of singapore, presented the award and a $10,000 cash prize to the winner from australia.

eastsPrInG sPonsor PhtoGraPhy aWarD In the PruDentIaL eye aWarDs

whaT Prudential eye awardswhEn 17 January 2014 whERE suntec city


In conVersatIonPast eVents hIGhLIGhts

eastsPrInG InVestments | eVents

eastspring Investments, together with Prudential corporation asia, was the proud sponsor of the rolling stones’ 14 on fire asia tour, which ended on 15 march. the seven-concert tour, which kicked off with a sell-out show in abu Dhabi on 21 february, covered five cities including tokyo, macau, shanghai and singapore.

the singapore leg was also the band’s last asia stop – and offered a very special experience for die-hard fans. Working in partnership with radio station Gold 90.5 fm and marina bay sands, eastspring Investments singapore offered fans the opportunity to win tickets to the concert in a three-week radio promotion sponsorship, which included pre-concert dinner and drinks at kuDeta. a live simulcast of the concert was also broadcast at mbs’ event Plaza, a free event that enabled fans who could not get tickets to the sold-out show to still be able to enjoy the concert.

this unique sponsorship brought together two british icons – Prudential and the rolling stones – who share a long-lasting legacy. as partners with Prudential, it provided us with not only high-profile branding but also the ability to offer our important clients a once-in-a-lifetime opportunity to get up close and personal with members of the band.

eastsPrInG off to a roLLInG start In 2014

whaT the rolling stones’14 on fIre asia tourwhEn 15 march 2014 whERE marina bay sands

the singapore retail team rolled out its eastspring Investments - Japan Dynamic fund campaign with fundsupermart.com on 15 april 2014.

fundsupermart.com is a popular online unit trust distribution platform in singapore.

the campaign started off with a client event and more than 50 clients attended the event. eastspring Global strategist, robert rountree spoke on why Japan is more than abenomics. and sale team's Jimson ang presented why investors should consider the Japan Dynamic fund. the seminar ended well with lots of interests and questions raised to both speakers. a one month promotion campaign on the fund followed immediately after the seminar. the promotion has embraced the use of our Japan Dynamic fund eyeball image and banners were created using the fund image on their home and announcement pages. other activities include a write-up and webcast on the fund which will take place in april and may respectively.

eastsPrInG kIckeD off Its JaPan DynamIc funD camPaIGn WIth funDsuPermart.com

whaT fundsupermart.com client eventwhEn 15 april 2014 whERE ocean financial centre


eastsPrInG LookInG to create a stIr In euroPe aGaIn

uPcomInG eVents hIGhLIGhts

eastsPrInG InVestments | eVents

whaT fund forum International whEn 23-26 June 2014 whERE monaco

In June, eastspring Investments will be returning to fund forum International in monaco, a four-day conference widely acknowledged as the leading asset management event for the industry in europe.

the annual conference is attended by about 1,200 delegates from europe, north america, middle east, asia and africa. they include c-suite executives and key decision makers from fund selectors and distributors, including selectors and distributors of cross-border and boutique funds, insurance houses, funds of funds, private banks and wealth managers, Ifa groups, discretionary fund managers, platforms, multi-managers and sovereign wealth funds; service providers; media companies, as well as other fund houses.

chief executive Guy strapp is expected to sit on a panel discussion with fellow ceos and cIos, including David blumer, ceo for europe from blackrock and anne richards, cIo, aberdeen asset management. eastspring Investments’ kevin Gibson, cIo, asia equity, will also be participating in a panel discussion at an emerging markets summit.

at its maiden outing in monaco last year, the eastspring Investments sponsored coffeehouse proved to be a huge hit with delegates. the sponsorship involved the creation of a bespoke coffeehouse, complete with professional baristas and branded giveaways such as coffee mugs and tumblers, mints and fortune cookies.

occupying a central space at the conference, the 900 sq ft coffeehouse saw high traffic over the two-and-a-half days of the main conference, moving almost 1,000 cups of coffee.


disclaimer

eastspring Investments (singapore) Limited, uen: 199407631h

this document is intended for general circulation and for information purposes only. It may not be published, circulated, reproduced or distributed in whole or part to any other person without the prior consent of eastspring Investments (singapore) Limited. this information is not an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not lawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such an offer or solicitation. It should not be construed as an offer, solicitation of an offer, or a recommendation to transact in the investment units in the fund(s) or any securities mentioned herein. the information does not take into account the specific investment objectives, financial situation or particular needs of any person. advice should be sought from a financial adviser regarding the suitability of the investment product before making commitment to purchase the investment product. a prospectus in relation to the fund(s) is available and a copy of the prospectus may be obtained from eastspring Investments (singapore) Limited and its distribution partners. Investors should read the prospectus before making any investment decision. the value of units in the fund(s) and the income accruing to the units, if any, may fall or rise. Past performance of the fund(s)/manager is not necessarily indicative of the future performance. any prediction, projection or forecast on the economy, securities markets or the economic trends of the markets targeted by the fund(s) is not necessarily indicative of the future performance of the fund(s). an investment in the fund(s) is subject to investment risks, including the possible loss of the principal amount invested. Whilst eastspring Investments (singapore) Limited has taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, eastspring Investments (singapore) Limited cannot guarantee its accuracy or completeness. any opinion or estimate contained in this document is subject to change without notice.

the fund(s) / underlying fund(s) may use derivative instruments for efficient portfolio management and hedging purposes.

some of the fund(s) mentioned in this document is(are) sub-fund(s) of eastspring Investments (“the sIcaV”), an open-ended investment company with variable capital (société d’investissement à capital variable) registered in the Grand Duchy of Luxembourg on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 17 December 2010 relating to undertakings for collective investment (the "2010 Law") and the Directive 2009/65/ec of the european Parliament and of the council of 13 July 2009 (the "ucIts Directive") and recognized under the securities and futures act of singapore. the sIcaV has appointed eastspring Investments (singapore) Limited as its singapore representative and agent for service of process in singapore.

eastspring Investments (singapore) Limited is an ultimately wholly-owned subsidiary of Prudential plc of the united kingdom. eastspring Investments (singapore) Limited and Prudential plc are not affiliated in any manner with Prudential financial, Inc., a company whose principal place of business is in the united states of america.

news april - June 2014

If you have any queries about eastspring news, please contact our local office or email [email protected]

Eastspring Investments (singapore) Limited (uen. 199407631h) 10 marina boulevard #32-01 marina bay financial centre tower 2 singapore 018983 tel: 6349 9711 | fax: 6509 5382

www.eastspring.com.sg

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the year of the bounce -...

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