THE EMERGING MARKETS WEEKLY

EMERGING MARKETS RESEARCH 2 September 2010 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 29 THE EMERGING MARKETS WEEKLY Bounce „ The exuberant reaction to positive activity data from China and the US owed at least as much, we think, to cautious market valuation and defensive ‘psychological positioning’ as to the magnitude of the surprises themselves. „ The data were consistent with the Barclays Capital view of a slow but steady recovery in the United States and a soft landing to high growth in China. But they were not strong enough to dispel fears of a more negative outcome, which will likely remain for some considerable time to come. „ We think the range-trading environment remains alive and well and that the economic and financial consequences of a two-speed global recovery are becoming a more important market theme. Macro Outlooks Emerging Asia: Window of opportunity to hike closing 7 Even as economic activity showed signs of moderating in August, we believe rising core inflation has increased policymakers’ bias to pre-empt inflation expectations. We believe central banks in the region will use currency appreciation to lean into imported price pressures. Next week, we expect the Bank of Korea to raise its policy rate 25bp. EMEA: Growth holding steady 9 EMEA growth appears to be steady, notwithstanding a deceleration in exports. We expect South Africa to lower rates again, following the surprise decline in inflation and GDP growth. Russia held its policy rate unchanged, with food inflation rising and the recovery deemed fragile. Latin America: Fiscal times 11 After Brazil’s decision to leave interest rates unchanged, pausing (ending?) its cycle, the focus shifts towards 2011 fiscal budgets. The 2010 fiscal outlook looks somewhat weaker, though it remains fairly healthy, with moderate deficits and declining debt ratios. Strategy Focus Indonesia: Defensive rate hikes 13 The recent spike in inflation has fanned concerns that Bank Indonesia may be falling behind the curve. We expect BI to hike the policy rate 50bp before the end of the year. We recommend investors reduce their positions in the front end (<5y) and stay long in the long end of the curve (15-20y), with FX risks unhedged. Mexico: Sharpen your pencil 16 We recommend that investors increase their underweight position in Mexican bonds. On a relative basis, there may be more value in the long end of the LatAm low beta curve. EM Views on a Page 2EM Dashboard 18 EM FX Views on a Page 19 EM Credit Portfolio 20 Data Review & Preview Emerging Asia 21 EMEA 22 Latin America 25 FX Forecasts and Forwards 27 Official Interest Rates 28 What we like FX Sell USD/KRW 1m NDF Rates Receive Brazil Jan 13s Weekly EM Asset Performance EM FX0.2%0.2%0.3%0.8%0.8%1.2%1.4%1.7%0.0%TWD / USDMXN/USDRUB/USDINR/USDKRW/USDTR Y/ USDZAR/USDCLP/USDBRL/USD EM Rates-2 bp4 bp5 bp6 bp10 bp11 bp13 bp-5 bp8 bp13 bpBraz Jan 12CLP 2yr IRSMex TIIE 5yrIndia 2yr IRSSA 2yr IRSKor 2yr IRSIndo 5yr GovHun 5yr IRSPol 5yr IRSCZK 5yr IRS EM Credit-9 bp-1 bp0 bp0 bp1 bp1 bp6 bp14 bp-11 bp8 bpTurk 5yr CDSRus 5yr CDSBraz 5yr CDSSA 5yr CDSMex 5yr CDSThai 5yr CDSArg 5yr CDSPhils 5yrIndo 5yr CDSHun 5yr CDS EM Equity2.0%2.7%3.1%3.3%3.5%3.6%3.7%4.5%0.1%3.9%SensexShanghaiKospiTurk ey ISERussia RTSBolsaJSE All shareS&PFTSE JSEBovespa NB: EM Assets Performance charts as of 26 August 2010 except CDS spreads, which are as of 25 August 2010. Source: Bloomberg, Markit, Barclays Capital Barclays Capital | The Emerging Markets Weekly 2 September 2010 2 EM VIEWS ON A PAGE What happened Markets Global equities sold off following Chairman Bernanke’s speech at Jackson Hole, but pared back losses after a stronger-than expected ISM report. Volatility has decreased as fears of a double-dip recession have become more subdued. EM FX and credit performance has been positive, in line with overall market performance, despite a lower beta to S&P. Global macro Better-than-expected data out of the US – ISM, consumer confidence, pending home sales – proved convincing, calming markets and fears of a double-dip recession. EMEA PMIs for August were positive and all above 50, demonstrating the resilience of the euro area. Additionally, the new orders components increased in Czech Republic, Poland, Russia and South Africa, signaling domestic demand strength. Monetary Policy The Brazilian central bank left the benchmark interest rate unchanged at 10.75%, against our call for a 25bp hike. Bank Negara Malaysia also kept its overnight policy rate on hold at 2.75%, as did Russia at 7.75%. Chile released less hawkish than expected minutes from its August monetary policy meeting. August inflation data from Thailand, Korea and I