Citigroup Global Emerging Markets Strategist

Beyond the Turbulence
 Long-Term Bullish — In our first Global Emerging Markets (GEMS) strategy report, we set our long-term bullish case for the asset class. Our forecast is for around 15% returns in 2010, with a continuing pattern of volatility within a rising trend.

 Overweight Asia — We recommend an Overweight in Asia (the growth area of GEMs), a Neutral in Latin America (where earnings momentum is strong) and an Underweight in EMEA (which is the valuation play of the asset class).

 Top Country Picks — Our Overweight calls are Taiwan, Korea, Russia, Brazil,
Turkey, Thailand; we are Neutral in China, India, Chile, Mexico and South Africa.

 Top Sector Picks — Our Overweight calls are IT, Materials, Utilities and Consumer
Discretionary. We are Neutral in Financials, Industrials and Energy.

 The Bull Case — Our long-term positive view is based on: i) the global economy is
in the early stages of a new upswing; and ii) corporate earnings growth should remain strong. There will be headwinds, notably rising interest rates across the EM
world and in the US over the rest of 2010 and a higher long-term cost of capital.

 Growth/Valuations — Progress will likely be slow; the recent average GEMs gain in
Year 2 of a bull market is 9%. We forecast GDP growth of 6.7% for GEMs in 2010, an even bigger gap than usual over developed countries (+2.4%e). EPS growth of 36% is forecast in GEMs for 2010. Sluggish markets, combined with strong EPS growth, are cutting valuations; an 11.7x forward P/E is back to its recent average.

 ‘Tail Risks’ — We look at two areas of concern for this bullish view: i) the fiscal crisis in the EU; and ii) the risk of a fall in Chinese property prices. These may lead to continuing near-term volatility – and some desire from investors for less beta – but, in our view, are unlikely to de-rail the long-term bull trend.