Analysis of markets and principal investment themes ….

Edmond de Rothschild Asset Management

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After bouncing sharply in October, risk assets plunged again in November. Sentiment was once again dominated by concerns over debt levels on the eurozone’s periphery. Yields in Italy and Spain peaked but, more importantly, curves flattened with Italy’s yields on maturities of 6 months to 30 years ranging between 7-7.5%. The new development towards the end of the month concerned German bonds. Already widely held by investors, their yields are so low that fi nding buyers has become tricky and a failed bond auction caused the 10-year Bund yield to rise to 2.30%.

The eurozone’s worsening economic situation points to recession and the impact that will have on fi nance and trade led to another risk aversion phase.

As a result, between October 24 and November 25, the S&P 500, MSCI EM in local currency and the Euro Stoxx 50 all fell heavily, losing 7.6%, 4.6% and 8.9% respectively. The euro tumbled from 1.39 to 1.32 against the US dollar. Credit indices and emerging currencies (or those linked to commodities) gave back most of the gains racked up in October.

In the circumstances, we remain very cautious.

Notwithstanding systemic risk, economic indicators already show that the real economy is under duress. There are clear signs of a slowdown, even in Germany, and credit circuits, which are already seizing up, will be further impacted as bank leverage shrinks. True, recent US data have been brighter but the economy is only expected to post moderate growth, a striking contrast with the brisk recoveries the country is used to seeing. Moreover, the recent failure of the supercommittee shows how dii cult it is to get vital measures adopted in the current political climate.

We raised our score on euro equities by one notch on November 7, moving from (–) to (=); in our view, falling markets had failed to fully take on board the political progress made in Greece and Italy. We are maintaining this position as the market could just as easily rise or fall. Nevertheless, we are looking to turn negative again if the prevalent gloom on markets and heavy short positions trigger a sharp technical bounce on news of any signifi cant political progress.

The Japanese market, on which we have remained positive, suf ered less in November as it had risen less in October.

In the absence of strong convictions, we have decided to go back to (=) from (-) on the US.

If tension escalates further, the US market should prove the most resilient. We remain positive on Asia which should benefi t from its relatively stronger economic situation; unlike developed countries, it also enjoys monetary and budgetary leeway. In China, which seems to be focal point of investor concerns in the emerging zone, the government is becoming less hawkish over credit distribution, particularly to small and medium sized companies. Any confi rmation in coming weeks that year- on-year infl ation is falling back slightly should provide support for what is an astonishingly cheap market.

In fixed income, we are maintaining our slightly negative bias on US government bonds due to the budget deficit, fresh warnings from rating agencies and the possible introduction of QE3. We believe that the conjunction of falling Bund prices and a looming recession represents a good opportunity to start a new position -ideally through selling puts with volatility still at historic highs- as the ECB is expected to announce further rate cuts and the 10-year/2-year yield curve has steepened by 0.40%. Investment grade credit, which is trading below government debt in many countries, does not strike us as attractive.

On the other hand, for investors with no short term constraints –volatility is persistently high and liquidity mediocre-we think that yields in the high yield sector largely compensate for any default risk, especially as companies are in much better shape than in 2008. Similarly, the sell-of in emerging country debt is overdone given its fundamentals and the segment now of ers attractive yields.

We also recommend being overweight convertible bonds as the carry is once again attractive and they also benefit from cheaper convexity than traded options.

In forex, we are maintaining our structural positions in emerging market currencies and have reinforced the Canadian dollar and Norwegian krone by buying into weakness.

We remain neutral on the USD vs. EUR due to contradictory forces: higher growth rates in the US and possible ECB easing are bullish for the dollar but this is counterbalanced by massive shorts on the euro and the Fed’s determination to weaken the dollar. Note that a sharp euro rebound on any signifi cant decline in risk would rapidly weigh on euro equities.

This is a noncontractual document.

Disclaimer: the figures comments and analysis included in this presentation refl ect the opinion of Edmond de Rothschild Asset Management or its affiliates concerning markets, market trends, regulations and taxation, based on its own expertise, economic analysis and information in its possession on this date. However, this presentation under no circumstances constitutes a commitment or guarantee by Edmond de Rothschild Asset Management. Under no circumstances, shall Edmond de Rothschild Group be liable for investment decisions to acquire, sell or hold investments based on these comments and analysis. Each investor shall be responsible for obtaining the different regulatory disclosures for UCITS or other fi nancial product before making an investment, to analyze the potential risk and form an opinion independently of Edmond de Rothschild Asset Management, supported as necessary, by the opinion of professionals specialized in these matters to ensure notably that this investment meets the investors needs and situation. Prospectuses registered with the Autorité des Marchés Financiers are available on request from our web site: www.lcf-rothschild.fr.