rbs investment magazine

8/3/2019 RBS Investment Magazine

1/60

An interview with Ross WalkerRBS Chief UK Economist, Ross Walker discusses the true implications of the UK election. Page 16

The magazine or the sel-directed investor 01/2010

MARKETS Direct

Politics & Opportunity:A new dawn in Westminster?Page 10

Indices

Emerging Markets on the

fast-track to recovery

Emerging market shares

have risen sharply since 2009

Page 18

Currencies

Currencies - potential

trends for 2010

Will the pound become

the target o speculation?

Page 30

Commodities

After the

gold peak

Whats really driving

the gold price higher?

Page 25

Product inormation


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This document is an advertisement and is not a prospectus for the purposes of EU directive 2003/71/EC (the directive) and/or Part VI of the Financial Services and Markets act 2000. A prospectus has beenprepared and made available to the public in accordance with the directive. Investors should not subscribe for any securities referred to in this document except on the basis of information contained in the

prospectus. Investors may obtain copies of the prospectus from the o ces of the issuer and the paying agents. The Royal Bank of Scotland plc (RBS). This advertisement contains numerous trade marks

belonging to The Royal Bank of Scotland Group plc and other companies in the RBS Group. These trade marks include, but are not limited to, The Royal Bank of Scotland logo, The Royal Bank of Scotland andRBS. If you are in doubt as to whether an item is a trade mark of The Royal Bank of Scotland Group plc or a member of the RBS Group, please contact us for clarifi cation at the registered o ce address The

Royal Bank of Scot land plc, Registered in Scot land No 90312. Registered O ce: 36 St Andrew Square, Edinburgh EH2 2YB. RBS is authorised and regulated in the UK by the Financial Ser vices Authority. RBSis an authorised agent of The Royal Bank of Scotland plc N.V in certain jurisdictions.

www.rbs.co.uk/markets

Easy access to the

worlds hottest markets

Now with the ease of buying a share, you can

gain exposure to new markets, asset classes and

investment strategies at a level of risk that you

choose. You can access a wide range of alternative

savings, investment and trading products through

your share dealing account for the same dealing

costs* and with the same transparency as buying a

share. The markets are now open to all, its time to

take control of your own portfolio.

Free investment reportsTo help in your journey through the hottest equity

markets and commodities, RBS Markets has a

wealth of information and independent reports

available online at www.rbs.co.uk/markets

Risk Warning

In the unlikely event The Royal Bank of Scotland plc

fails or becomes insolvent you may lose some or all

of your investment. Products may not be suitable for

all investors, you should therefore ensure you fully

understand the risks involved.

*Check with your broker for specific fees.

Get access to the worlds

hottest markets today, visit

rbs.co.uk/markets


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Welcome to Markets, a division o The Ro-

yal Bank o Scotland, which ocuses spe-

cically on the needs o the sel directed

private investor. Our aim is to open up in-

vestment markets to give private inves-

tors access to the same opportunities that

our institutional clients enjoy. Our extensi-

ve range o investment products covers

varying risk levels, complexities, regions

and asset classes. RBS listed productshave been created to allow investors to

meet needs which may not necessarily

be met through the standard nancial in-

struments available in the wider markets.

They are oten used as an alternative to

direct investment and as part o an asset

allocation process to help reduce risk and

exposure within a portolio. They are lis-

ted on the London Stock Exchange and

can be bought through a UK stockbro-

ker. Our whole range can be ound on our

website www.rbs.co.uk/markets along

with regular market news, views and pro-

duct guides.

This exciting new business was only laun-

ched in the UK in November 2008, but it is

ounded on a proven model that is well es-

Welcome to Markets rom

The Royal Bank o Scotlandtablished in Germany, Italy, Switzerland,

Netherlands, the Nordics and Asia. RBS

Markets has over 30,000 products glo-

bally and has recently won the prestigious

2009 Euromoney award or Best Structu-

red Products House. In the UK we have

already ollowed in this vain, accumula-

ting three awards and being shortlisted

or a ourth in our rst year o business:

2009 FT Investors Chronicle Investment

Awards Winner - Innovation o the year

award.

2009 Shares Awards Winner - Best Lis-

ted Structured Products provider.

Short-listed for The 2010 FT and IC

Wealth Management Awards 2010 Best

investment / banking website.

MARKETS Directis designed to help you

construct your own view on the markets.

However, you should bear in mind that the

content o this magazine does not con-

stitute inedependent research or analy-

sis. Every edition will ocus on the hot-

test topics rom the markets, new product

ideas and a run down o the events and

seminars that you can attend or ree. This

quarter we look at the likely impact o the

election, todays burning investment the-

mes and Covered Warrants as a means

to gain amplied exposure to both rising

and alling markets.

Enjoy the rst issue o our RBS MARKETSDirect magazine.

Sincerely,

Ben Board

Director, UK Listed Products

Next issue o MARKETS Direct will be published in September 2010.

MARKETS Directis a orm o marketing communication issued by the Royal Bank o Scotland plc

and, among other things, it reers to products and services oered by the RBS group. We would draw

your attention to the legal points set out on page 59. The inormation contained in this magazine

does not constitute independent investment research or analysis.

The products reerred to and/or eatured in MARKETS Directare restricted to those issued by RBS and

listed on the London Stock Exchange. There may be other products available in the wider market that meet

your investment objectives and requirements. I you are unsure o any details relating to the product that

you are considering, consult a nancial adviser prior to undertaking any investment activity.

EditorialMARKETSDirect| 01/2010

3Further information on the risks associated with any of the products mentioned in this magazine can be found online at www.rbs.co.uk/markets and in the prospectus relating to the relevant product which is available to the public in accordance with applicable legal requirements.


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Past perormance is no indication or guarantee o uture perormance.

South Arica

Will the beautiul game bring a beautiul

gain to South Arica? 6

Listed Products

The dawn o a better

structured product? 8

News 6

MARKETS Direct

Indices 18

Commodities 25

Global 30

Emerging Markets on the

fast-track to recovery 18

Index ocus 23

Ater the gold peak 25

Commodities focus 29

Currencies

Potential trends for 2010 30

Are interest rates set to rise

globally? 33

Content MARKETSDirect| 01/2010


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at a Glance | 01/2010

Covered Warrants 44

Trackers 56

Accelerated Trackers 56

Auto calls and Bonds 56/57

Legal inormation 59

Products Service

Ross WalkerWhat a coalition government

could mean or the UK 16

Interview 16

Building a diversied Portolio 37

By David Stevenson

Special

A Beginners Guide to

Covered Warrants

By Andrew McHattie 40

Internet

Introducing the website 58

Education

Cover StoryPolitics & Opportunity

A new dawn for Westminster? 10

Outlook 10

ContentMARKETSDirect| 01/2010


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News Focus: South Arica

Will the beautiul game bring a beautiul gain to South Arica?

The World Cup comes to South Arica in 2010.

With the World Cup football

tournament taking place in Sou-

th Arica, its not just the Eng-land team that stands to gain

rom the big event. During and

following the previous 4 events,

the host nations main share in-

dex perormed better than both

the MSCI World Index (which

represents shares rom com-

panies across the globe) and

the FTSE 100 Index (represen-

ting UK shares) in the year ol-

lowing the World Cup.

The economic halo o the

World Cup

The last World Cup hosted

in Germany or example saw

the domestic DAX Index rise

by 15.58% from the 1st June

2006 - 29th December 2006*.

It also performed 53.09%

better in the year o the World

Cup and the following year ofthe event than the MSCI World

Index, a air indicator o global

economic growth. As a com-

parison to the historical per-

ormance o the DAX Index

against the MSCI Index, if we

take the 10 year period of Dec

1995 to Dec 2005, the DAX

Index perormed better than

the MSCI Index by 36.81%*,

considerably less than the

period immediately ollowingthe event. With the infux o an

estimated 300-400k tourists1,

mass global media exposu-

re and the investment o big

name sponsors, comes the

potential or a real boost to the

South Arican economy and

its domestic index, the FTSE/

JSE Top40 Index of stocks

listed on the JohannesburgStock Exchange.

The longer-term story or

South Arica

As the main constituents table

shows, big global mining com-

panies such as Anglo Ameri-

can (AAL, AGL:SJ) and BHP

Billiton (BLT, BIL:SJ) are part

of the FTSE/JSE Top40 Index.

This illustrates South Aricas

position as one o the globescore producers o commodi-

ties or manuacturing - the

nation is the worlds largest

producer o platinum, gold

and chromium2. As econo-

mies such as China continue

to rebound rom the global re-

cession the demand or raw

materials has the potential to

rise, providing opportunitiesor South Arican companies

to urther establish themsel-

ves on the world stage.

Moreover, while the FTSE/JSE

Top40 Index has seen returns

of 32% since March 2009*, it

still remains 18%* below its

peak in May 2008. So, with the

potential boost which could re-

sult rom being the next World

Cup host nation, there is still alot o scope or growth in South

Arican shares to rise in value.

*Bloomberg, April 2010

1) Grant Thornton, http://www.gt.co.za/

News/Press-releases/Strategicsolutions/

2010/domestic10.asp, 18 March 2010

2) CIA World Factbook, 1 April 2010

News MARKETSDirect| 01/2010

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News Focus: South Arica

About the FTSE/JSE Top40 Index

The FTSE/JSE Top40 Index

includes the 40 largest com-

panies by market capitalisati-on of the FTSE/JSE All Shares

Index. Market capitalisation is

calculated by multiplying the

number o shares in a compa-

FTSE/JSE Top 40 Index Perormance

35000

30000

25000

20000

15000

10000

06/05 06/06 06/07 06/08 06/09 06/10

ZAR

FTSE/JSE Africa Top 40 Index

Source: Bloomberg; 8 June 2010

Top 10 FTSE/JSE Top40 Index constituents by index weighting

Constituent Bloomberg code Weight

BHP Billiton BIL SJ 16.52%

Anglo American AGL SJ 12.44%

SABMiller SAB SJ 7.91%

MTN Group MTN SJ 6.14%

SASOL SOL SJ 5.67%

Standard Bank SBK SJ 5.23%

Financiere Richemont CFR SJ 4.39%

Impala Platinium Holdings IMP SJ 3.91%

Naspers NPN SJ 3.75%

Anglogold Ashanti ANG SJ 3.01%

Source: Bloomberg, 8 June 2010The table above shows a list of some of the companies included in the FTSE/JSE Top40

Index which is ranked according to the weighting they are given in the Index. Companieswith the highest rating will contribute most to the perormance o the Index.

Companies may benet from additional business and media focus during the World Cup.

ny by its share price.

A word o warningAs with any oreign invest-

ment, we need to consider the

impact o exchange rate fuc-

tuations. Investments linked to

The world cup encourages the development o new inrastructure.

the performance of the FTSE/

JSE Top40 Index will bene-

it i the South Arican Randstrengthens in value when

measured against Sterling,

and lose value i the South A-

rican Rand weakens in value

when measured against Ster-

ling. You also need to consider

the act that South Arica is anemerging market and thereo-

re carries more economic, po-

litical and nancial risks than

developed markets.

NewsMARKETSDirect| 01/2010



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News Focus: Listed Products

Listed Products, the dawn o a better structured product?

Structured Products in the

UK are like the marmite o

the investment communi-ty; you either love them, or

you hate them. They clear-

ly have their advocates as

according to www.structu-

redretailproducts.com, the

UK Structured Product mar-

ket grew 50% between 2008

and 2009 to reach an eye-wa-

tering 13.6bn in sales. The

growth o the industry could

be attributed to the ability o

structured products to provi-de exposure to a given mar-

ket or underlying whilst also

oering some degree o ca-

pital protection something

particularly attractive when

the markets are unsettled.

When Lehman Brothers col-

lapsed in 2008, Structured

Products came under close

scrutiny from the Financial

Services Authority and the

industry as a whole. Issues

such as credit worthiness

and the risk o the issuer go-

ing bust came to the fore. Cri-

ticisms o overly-complica-

ted structures, opaque ees

and even an over reliance

on UK underlyings had to be

addressed by the industry. A

big concern surrounded the

lack o lexibility. Once you

were invested it was hard to

sell back your investment wit-

hout penalty.

Introducing Listed Pro-

ducts, a more exible struc-

tured product

So how much o a dierence

can the word listed really

make. Well more than you

might think. The term Listed

Product in the context o RBS

Listed Products reers to any

nancial instrument issued by

RBS which is in the nature o astructured product and is lis-

ted and traded on a stock ex-

change, typically the London

Stock Exchange and thats

where the big dierence is.

Typically when we think o tra-

ding on exchange, we think o

buying and selling shares but

the same rules apply to Listed

Products. With the same ease

o buying a share, investors

can gain exposure to excitingnew markets, asset classes

and investment strategies. Its

as simple as that to buy, and

i you ever want to get out o

your investment, you can sell

it back at the price quoted on

the LSE between 8.15am and

4.30pm under normal trading

conditions and on a regular

trading day. This makes the

listed products market extre-

mely transparent; you know

rom the start what youre in-

vesting in, what it costs and

how to get in, or out i you

want to. You do need to be

aware that prices will luc-

tuate throughout the invest-

ment term and i you sell your

investment beore the ull in-

vestment term, you may get

back less than your original

investment. Also, whilst RBS

will assist in the stimulation o

a secondary market in these

products you must be awa-

re that market liquidity cannot

be guaranteed and in certain

trading conditions it may be

dicult or impossible to liqui-

date your investment (this is

called liquidity risk).

With ready access to this new

world o investment opportu-

nity, it is now easier than ever

to build and manage your

own portolio. You no longerneed to rely on products that

charge commissions, exten-

sive management ees or in-

fict early redemption penal-

ties. With Listed Products you

will pay an execution ee with

your stockbroker which is ty-

pically around 10 - 18 per

trade. Trackers may also in-

clude an Annual Manage-

ment fee of 0%-1.5%.

So now, you can decide or

yoursel where and how you

want to invest, and or how

long you want to do it. Plus,

you can do it yoursel through

your share dealing account

or the same dealing costs as

buying or selling a share. Just

some o the reasons to try Lis-

ted Products include:

Control you decide whe-

re, how and when you want

to invest and you can decide

exactly when you want to end

your investment, subject to li-

quidity risk.

Simplicity can be bought

and sold through your stock

broker in exactly the same

way that you would buy and

sell shares.

Accessibility just like

shares, they can be bought

or sold at any time during a

regular trading day (08:15

16:30) and do not have to be

held or any minimum period

o time.

Transparent two-way pri-

ces must be quoted throug-

hout the day so you can al-

ways access the current va-

lue o your product.

Low cost just as with sha-

res, the only costs involved in

buying a Listed Product will

be the bid/ask spread (the

dierence between the price

at which you can buy the pro-

duct and the price at which

you can sell the product) and

your standard broker ees.

Trackers may also have an

annual management charge.

Regulated all products lis-

ted on the London Stock Ex-

change must adhere to the ru-

les o the UK Listing Authority.

Risks to be aware o

Listed products are subject

to price fuctuations and in-

vestors may not get back any

o their initial investment;

In the event that RBS ails or be-

comes insolvent you may lose

some or all o your investment.

The RBS Markets team is dedicated tohelping you shape your market view.

News MARKETSDirect| 01/2010

8


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These products may not be

suitable or all investors, you

should thereore ensure you

ully understand the risks in-

volved, and seek independent

advice where necessary.

Product costs are built into

the structure o the product.

In the case o a Tracker in-

vestment, this may include an

annual management charge

of 0%-1.5%.

Subject to any technical pro-

blems, RBS will endeavour to

oer a secondary market in

line with LSE rules and mar-

ket making obligations. RBSmay be the only market maker

in the Listed Products which

may aect liquidity.

What can you invest in?

A real eature o Listed Pro-

ducts is their inherent lexi-

bility and diversity. Through

Listed Products you can gain

exposure to shares, indices,

currencies or commodities

so the question may not be

what you can invest in, but

how you can do it. The range

is growing continuously but

the main types o product in-

clude:

Listed bonds which provide

a xed annual income but wit-

hout redemption penalties.

Trackers or uncapped ex-

posure to global indices and

commodities.

Accelerated Trackers or

amplied, capped exposure

and the possibility o capital

protection.

Autocalls or the potential to

receive a coupon depending

on the perormance o global

markets or commodities.

Covered Warrants: or gea-

red perormance rom global

indices, shares, commodities

or currencies.

Choosing the right product

or you largely depends on

your own market view and thelevel o risk that you are pre-

pared to take. More inorma-

tion on all our products can

be found on page 44 in the

product lists or online at www.

rbs.co.uk/markets.

Trading Listed Products

One o the great things about

Listed Products is how easily

they can be bought and sold

during normal market condi-

tions, subject to liquidity risk.

As they are listed on the stock

exchange, they can be tra-

ded in exactly the same way

as you would trade a share

through your stockbroker.

As Listed Products are ge-

nerally considered complex,

the rst time you want to buy a

Listed Product your stockbro-

ker will need to assess whe-

ther the product is appropria-

te or you and make sure you

understand the relevant risks.

This will involve the issue o

a risk warning which you will

need to read careully beore

investing. You must consider

whether the investment is ap-

propriate or you and meets

your investment needs and

obtain advice i necessary.

Once you have returned this

orm to your broker and i the

product is deemed suitab-

le or you based on the Risk

Warning orm, you are ready

to invest.

You can trade online or bycalling your broker, quoting

the product code o the pro-

duct you want to purchase

e.g. RB01.

The whole trading process

is roughly as ollows:

1. Open a share dealing ac-

count with a stockbroker (only

needs to be done once!).

2. Complete the Risk War-

ning orm to enable the stock-

broker to asses whether the-

se products are appropriate

or you and read the risk war-

nings careully. Seek inde-

pendent advice i necessary.

3. Decide which product you

want to purchase by visiting

www.rbs.co.uk/markets.

4. Go online or call your bro-

ker.

5. Quote the product code

(TIDM code) you want to

purchase which will be listed

on the relevant product page

o the RBS Markets website.

6. Inorm your broker how

much you want to buy and

they will process your new in-

vestment.

These products may not be

suitable or all investors, you

should thereore ensure you

ully understand the risks in-

volved, and seek indepen-dent advice where necessa-

ry.

The cost o investment

With a Listed Product there

are 3 potential costs to be

aware o:

1. Brokerage fees as with

buying shares, each time you

trade a Listed Product your

stockbroker will charge a ee.

This will usually be approxi-

mately 10 - 18 per trade.

2. Bid/ask spread There is

a bid/ask spread which is the

dierence between the price

at which you can buy and the

price at which you can sell the

product.

3. Annual Management Char-

ge Trackers may have an

annual management charge,

payable each year out o your

initial investment. This will ty-

pically be 0.2%-1.25%.

NewsMARKETSDirect| 01/2010



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Politics & Opportunity

A new dawn or Westminster?Following the most exciting election night in decades, the UK has a new coalition government in place. So, how did thissituation arise, and what eect will it have on the markets?

Cover Story MARKETSDirect| 01/2010

10


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How is this election going to aect my

portolio? The recent election has pro-

ved to be one o the most exciting and

unpredictable this country has seen or

decades. From the rst ever live televised

leader debates, the rise, all and subse-

quent rise again of Nick Clegg, to the -nal farewell of Gordon Brown the elec-

tion was hugely absorbing or anyone with

even a remote interest in politics.

The nal hours o 6 May raised a sen-

se o surprise rom political commenta-

tors as the initial euphoria around Nick

Cleggs TV performance and groundswell

o Liberal Democrat support had come to

little more. All the exit polls predictions o

a hung parliament proved to be accurate

by the morning news on the 7th May.

With no single party clinching an out-

right majority, the hours o deal making

dragged into days before nally the Ca-

meron-Clegg partnership began and our

political landscape changed signicant-

ly with a Conservative-Liberal Democrat

coalition agreed. Labour, after 13 years

in power, returned to the opposition ben-

ches and started the search or a new lea-

der. The reason or this hung parliament

is simple. The British rst-past-the-post

system means that or a single party to

achieve a majority government they must

secure 326 seats in the Houses o Parlia-

ment. As you can see by the election re-

sults shown below, despite a swing of 5%

from Labour to Conservati-

ve, the Tories could not reach

this target, alling short at 306

seats. So they were acedwith two choices: to either try

to push ahead and rule with a

minority government, or to seek to orm a

coalition with the Liberal Democrats. With

the Lib Dems winning 57 seats (ve less

than they held in the previous parliament)

the coalition would have a comortable

majority with 363 seats in total.

While this political coalition is not one that

had been easily envisaged by most vo-

ters or analysts, the more likely on pa-

per at least centre-left coalition of La-bour and the Lib Dems ell down on the

maths. Even with Labours 258 seats and

the Lib Dems 57 this gave it only 315 in

total which meant it would also have to

rely on the support o smaller parties. A

rainbow coalition as it was dubbed was

not an impossibility, but there was a clear

eeling across all parties that with Labour

only getting a 29% share of the vote, this

was not the mandate o the electorate.

Because o the parlous state o our

economy, trying to govern with a mino-

rity was far from ideal for the Conserva-

tives. Achieving a stable government

was the phrase constantly trotted out du-

ring, and ater, the election with everyone

from the City to the politicians

demanding this was the pri-

ority above all else. The ne-

cessity or this in tumultuoustimes was starkly illustrated

by the riots, and subsequent

deaths, on the streets o Greece as its

government, bailed out by the EU and

International Monetary Fund (IMF) to the

tune of 110 billion, had to slash its public

spending and boost tax revenue to meet

the conditions o the loan.

So, while the political shenanigans

kept the electorate at large enthralled,

how did the markets, which do not nor-

mally like indecision or a political vacu-um, perorm?

Despite ears, the markets proved re-

markably tolerant during the ew days de-

lay required to hammer out the coalition. I

anything, it was the bigger picture actors

such as the Eurozone debt crisis that had

a greater impact than the domestic situ-

ation. Greeces nancial straits also high-

lighted how intolerant the markets were to

countries that did not introduce credible

policies to cut budget decits.

But in the UK there was a sense o cau-

tious optimism surrounding this coalition

and the FTSE 100 remained broadly un-

changed since the election with UK bond

prices rising although sterling weakened

slightly. Some commentators pointed to

the gap narrowing between the yield on

equivalent German and UK government

bonds, suggesting that investors saw

lending to the British government as less

risky than previously.

Short-term gains in sterling imme-

diately ater the coalition was agreed

abated as the bigger issues o econo-

mic recovery took hold and the Bank o

England continued to predict that infa-

tion would remain low despite Aprils -

gure of 3.7% (the highest rate for almost

a year and a hal and above the target

of 2%).

The key issue has been how this

government would tackle reducing

Britains budget decit of 163bn.

There was a

sense o cautious

optimism surround-ing this coalition.

UK - National results at a glance

36,10% Conservative

29,00% Labour

23,00% Liberal Democrat

11,90% Others

Share

Party Seats Gain Loss Net Votes % +/-%

Conservative 306 100 3 97 10.706.647 36,1 3,8

Labour 258 3 94 -91 8.604.358 29 -6,2

Liberal Democrat 57 8 13 -5 6.827.938 23 1

Source: news.bbc.co.uk/1/shared/election2010/results/

Cover StoryMARKETSDirect| 01/2010



12/60


Perormance o the FTSE 100 Index

7000

6500

6000

5500

5000

4500

4000

3500

3000

05/05 11/05 05/06 11/06 05/07 11/07 05/08 11/08 05/09 11/09 05/10

Points

FTSE 100 Index

Source: Bloomberg, 26 May 2010

Perormance o GBP/EUR

1,6

1,5

1,4

1,3

1,2

1,1

1

05/05 11/05 05/06 11/06 05/07 11/07 05/08 11/08 05/09 11/09 05/10

GBP/EUR

Pound Sterling - Euro

Source: Bloomberg, 26 May 2010

While Labours approach had been to de-

lay drastic cuts arguing this would tip the

country back into recession just as it was

falteringly coming out of it, the Conserva-

tives wanted more immediate action. How

the Lib Dems would all into line was still

unknown but as the details o the coaliti-on came to light it was clear that this was

one area where Tory policy was the victor.

Many the Conservatives among them

felt that the markets would not stand

a delay. As a result, the government an-

nounced that spending cuts worth 6bn

would be implemented in 2010, which was

welcomed by the governor o the Bank o

England, Mervyn King. Full details of how

these cuts will be achieved will be presen-

ted in the emergency budget announced

by Chancellor of the Exchequer, GeorgeOsborne, on 22 June.

But this government will still have to

hope that the markets work to its avour as

there are trends in the underlying econo-

my that can have a signicant impact. A

sterling crisis for instance where inves-

tors sell the pound to buy dollars or euros

would almost certainly be bad news for

the coalition government.

Perhaps the most sensitive indicator

o condence will be the long-term gilt pri-

ces these show how much the market is

willing to pay or government securities or

gilts dated at more than 10 years. So far

they have held relatively steadily.

The election aside, much o the in-

creased conidence is also a result o

positive economic indicators. In parti-

cular, recent macro-economic data and

GDP trends have been surprisingly po-

sitive of late at the very end of March,

or instance, ourth quarter GDP growth

was revised up 0.4% quarter-on-quar-

ter, ahead of City economists forecasts.

The main upward impetus seems to have

come rom companies inventory stocks

which were running down at a signicant-

ly slower rate in the last quarter of 2010

according to RBS analysis this contribu-

ted 0.7 percentage points to last quarter

GDP, almost ully accounting or the rise

in domestic demand.

The data based on the purchasing

decisions and the expectations o ma-

nufacturers and service companies (the-

Cover Story MARKETSDirect| 01/2010

12


13/60

12

11

10

9

8

7

6

5

4

3

2

1

0

-1

-2

2006 2007 2008 2009

Government defcit as a percentage o GDP, calendar years

70

60

50

40

30

20

10

0

2006 2007 2008 2009

Source: National Statistics www.statistics.gov.uk/cci/nugget.asp?id=277

Government debt as a percentage o GDP, calendar years

Concerns in the city?

Source: National Statistics www.statistics.gov.uk/cci/nugget.asp?id=277

se widely used indicators are something

called the PMI or purchasing manager

indices) also contained some positive

news. Even though the new business

part o the index ell to a level o 52.8 rom

54.6 in April, the purchasing managers

index (PMI) for services rose to a level

of 55.4 from 55.3 in April. A level of more

than 50 is generally considered to be a

rise in activity.

Headline manuacturing PMI stayed

at 58 and the construction PMI even rose.

However, infation made a comeback with

3.7% which is well above the 2% target.

But this new ound optimism ater one

of the toughest 18 to 24 months in living

memory, welcome though it may be, still

needs to be tempered with caveats.

The broad economic data still suggests a

number o worrying issues, not least:

The savings ratio has declined again

this is good news or shops and actories

looking to sell more to ree spending con-

sumers, but is less positive i rebuilding

household nances and cutting down on

high debt levels is seen as an imperative

A defcit is created when a government spends more than it takes in. Government debt is the accumulated borrowing.

Cover StoryMARKETSDirect| 01/2010



14/60


15/60

*This document is an advertisement and is not a prospectus for the purposes of EU Directive 2003/71/EU (the Directive) and/or Part VI of the Financial Services and Markets Act 2000. A prospectus has

been prepared and made available to the public in accordance with the Directive. Investors should not subscribe for the securities referred to in this document except on the basis of the information containedin the prospectus. Investors may obtain copies of the prospectus from the oces of the issuer or paying agent. The Royal Bank of Scotland plc is authorised and regulated in the UK by the Financial Services

Authority. The Royal Bank of Scotland plc, registered in Scotland No 90312. Registered Oce: 36 St Andrew Square, Edinburgh EH2 2YB. RBS is authorised and regulated in the UK by the Financial ServicesAuthority. RBS is an authorised agent of The Royal Bank of Scotland N.V. in cer tain jurisdictions.

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An interview with Ross WalkerChief UK Economist for The Royal Bank of Scotland plc.

MARKETS Direct: Weve finally got

through this election and now face a

hung parliament with a Con-Lib coa-

lition. Were you surprised by this out-

come?

Ross Walker:Its what the opinion polls

had been signalling so in that sense it pro-

bably shouldnt have been a huge surpri-

se. Because all the projections that come

rom the national opinion polls assume a

uniorm national swing, there was an as-

sumption that the Conservatives would dobetter in some marginal seats. The big pic-

ture in the end was that the Conservatives

tended to win target marginal seats against

Labour, and they won some seats that were

beyond what they needed, but they didnt

quite make the inroads against the Libe-

ral Democrats in some o those marginals.

So, overall the result wasnt really a sur-

prise, we had been quite early in fagging

the risks o a hung parliament. The HIPPO

(Hung Parliament Probability Observer) in-

dicator we developed, which took the opi-

nion poll data and expressed it as a proba-

bility o a hung parliament, showed it was

a higher probability than the markets and

bookmakers were actoring in.

MARKETS Direct:The city has traditi-

onally been more sceptical o the Li-

beral Democrats economic position

and more comortable with the Con-

servative, where does this coalition

leave it?

Ross Walker:Its an evolving picture.

Weve had a major announcement on

scal policy [the establishment o the O-

ce o Budget Responsibility] and this is

one thats been put together by the coali-

tion; in our view its the most radical scal

policy development since the IMF rolled

into town back in 1976. There are some

early signs that maybe this will be a new

politics, at least in some areas. The city

will continue to judge as events unold.

But there are signs that things have mo-

ved more quickly and more decisively

in some areas than people might have

thought.

MARKETS Direct:Can such opposing

ideas be easily married?

Ross Walker:As Cameron and Clegg

have made clear their parties do not ag-

ree on everything and there are a sizeab-

le number o areas where there are die-

rences. What they are ocusing on is the

areas o agreement. I think the surpriseso ar has been in terms o the big pic-

ture economic and scal situation the

Conservatives have largely got their way.

Theyve given ground on some o the in-

dividual policies such as the inheritance

tax threshold rise whereas the Liberal po-

licy o liting some o the lowest earners

out o tax altogether, looks like it will be a

higher priority. So some o the micro eco-

nomics have gone the Lib Dems way but

the big picture, macro economics that our

business cares about currency markets

and xed income, the scal tightening this

year not next year its Conservative poli-

cy thats getting implemented.

MARKETS Direct:How have the city

and markets responded so ar to this

new government?

Ross Walker:Its been reasonably po-

sitive there have been other big issu-

es happening and Greece is the ob-

vious one. What Greece has done is

bring into ocus concerns about is-

cal deicit and downgrades and that

ocus could have been detrimental to

the UK. In act, UK government bonds

have beneted, weve seen some sort

o fight to saety moves so gilt yields

have been driting down a little. Weve

also seen our UK sovereign CDS (credit

deault swap) prices come down relati-

ve to other similar economies. So there

are signs that are cautiously positive,

but its early days.

MARKETS Direct:The great concern

is that this coalition will all apart in

a way similar to 1974, how would the

markets react i the country was aced

with another election in a year or 18

months?

Ross Walker:Its very dicult at this sta-

ge to say how durable this is going to be.

Beore the election the eeling was that a

hung parliament would bring an election

within a year. I think the act that one o

the agreements between the two partieswas xed parliamentary terms indicates

they would like this coalition to run or se-

veral years, i not or a ull ve. Against

that you have the ringes o both parties

saying that its not going to last. The real

test will be a year rom now when we ex-

About Ross Walker

Ross Walker, Chief UK Economist for

The Royal Bank o Scotland plc, pro-vides an inside view on what a coaliti-

on government could mean to the UK

recovery prospects

Ross Walker

Interview MARKETSDirect| 01/2010

16


17/60

pect therell be urther tax rises taking e-

ect and when spending cuts are starting

to bite, and then well get a better idea o

just how robust this coalition is.

MARKETS Direct:Do you think peop-

le are ready or a more austere Bri-tain and what do you think o propo-

sals so ar?

Ross Walker:I think with the public nan-

ces eaturing so prominently during the

election there is clearly some public awa-

reness o this issue and the implications

to their own nancial positions. Personally

Im still sceptical that people have rea-

lised just how dicult this is going to be to

correct in terms o the scale o the spen-

ding cuts and tax rises required and the

prolonged period o time over that thoseausterity measures will be in place.

MARKETS Direct:How will the short-

term impact o a coalition government

compare to the longer-term impact?

Ross Walker:Its very dicult to say. The

early announcements on the scal side

have been quite positive. The real test

will be when the unpopular decisions like

spending cuts and tax rises take eect.

So ar the tax increases have been large-

ly about hitting higher earners so at this

stage its not the average person in the

street having to ork out a lot more tax.

MARKETS Direct:While some indica-

tors point to Britain coming out o re-

cession many commentators continue

to highlight the risk o a double dip re-

cession. How do you see the economy

developing over the next year?

Ross Walker:I think although the scal

tightening measures that have been an-

nounced will have some short-term net

dampening eect, overall they should

support growth. Because there are a

number o risks o not taking this action:

one would be that the markets would

demand a much higher rate o interest

on government debt so governments

own nancing cost would rise more ra-

pidly. Secondly that some o that extra

cost o those higher gilt yields would get

passed onto companies so higher borro-

wing would deter some investment and

uture growth. The big risk then is market

panic and an aggressive sell o o ster-

ling. All o those things would really un-

dermine growth, certainly over the me-

dium term. Short term there are risks o

dampening growth but I dont think its

going to be enough to tip us into reces-sion, certainly thats the Bank o England

view, and seemingly the advice o tre-

asury ocials to the new government is

the same. For me the bigger risk was not

tightening enough.

MARKETS Direct:This government

has said it will introduce ixed-term

parliaments, is this something that the

market will react well to?

Ross Walker:Im not sure it makes a

huge amount o dierence. I, as a politi-cian, you know when an election is going

to be then you have less fexibility, but in

reality it was always a relatively constrai-

ned choice. Did you go to the country a-

ter our years or did you wait or the ull

ve? So there was never that much ree-

dom. It was almost impossible to micro

manage the economy in a way that would

ensure you had buoyant growth and low

unemployment during an election. From

a scal credibility point o view the inde-

pendent Oce or Budget Responsibility,

which will produce the growth and scal

orecasts, is the biggest bulwark against

political intererence in terms o trying to

align the political and economic cycles.

So or me the xed parliament issue is

very much a secondary one.

MARKETS Direct:In light o the out-

come to the election, do you have any

tips or investors as to where they

should be looking now?

Ross Walker:Economists are the worst

people in the world to listen to in terms

o investment advice. But the big ques-

tion is still the basic one o how sturdy is

risk appetite? And youd never look at just

one indicator, when you do that things

start to go badly wrong either or eco-

nomic policy or investing. I think the key

gauge is do you think the economic reco-

very is sustainable? Look at the risk indi-

cators stock markets, CDS levels, cor-

porate bond yields are we on track for

what the markets think will be a relatively

healthy recovery or are things going to

alter? Im somewhere between the two

in terms o our own orecasts, theres al-

ways a risk the markets have got ahead

o themselves and the gains weve seen

in stock markets, in particular or the pastsix or nine months, may indicate that.

But were not in the double dip recession

camp, we think that can be avoided and

theres enough momentum in the econo-

my, but its going to be a slow and drawn

out recovery and rom an investors point

of view guess what? There arent any

quick easy bucks to be made!

Big Ben

InterviewMARKETSDirect| 01/2010



18/60


Despite the global crisis optimism prevails in the emerging markets.

Emerging Markets

on the ast-track to recoveryThe higher growth rates in many emerging markets are uelling share price rises. However, some independentcommentators are warning that a speculative bubble is now orming in Asia and Brazil. We look at the case or

and against investing in Emerging countries.

.

Indices MARKETSDirect| 01/2010

18


19/60

Those who have been watching on the

stock markets o some o the worlds de-

veloped countries could be orgiven or

eeling somewhat bafed. Since 2003,

shares listed on the stock markets o

emerging countries have risen sharply,

while the more developed countriesstocks have climbed only moderately in

comparison1. The nancial and economic

crisis has done nothing to change this si-

tuation. Ater dropping sharply, emerging

market stocks again outperormed their

counterparts in developed nations1.

However, the equity markets are

only refecting the global economic situ-

ation: The bulk o the worlds economic

growth is concentrated in emerging mar-

kets, since developed nations are having

to deal with high unemployment, enor-mous government debt and a weakened

banking system. The recent nancial cri-

sis has scarred developed nations more

deeply than the emerging markets. While

the largest economic regions, the USA,

the Eurozone and Japan, have registered

negative growth over the last three ye-

ars, the major emerging market countries

have proved robust, maintaining impres-

sive levels o economic expansion1.

Emerging market growth remained

unabated

The economic recovery over the last ew

months means the 2010 economic out-

look or developed nations is now brigh-

ter. Nevertheless, emerging market

growth will remain stronger. The beating

heart of this growth will be Asia. Central

and Eastern Europe has greater structu-

ral problems than Asia, so we orecast

lower growth there, says Emerging Mar-

kets economist rom the German Deka-

Bank, Janis Hbner.

A key actor in the growth potential o

emerging markets is the rising domestic

consumer spending that comes hand in

hand with the increasing wealth o many

people. Booming China alone, with its

population of 1.3 billion, is signicantly

bolstering demand or many industrial

goods. And auto sales in emerging mar-

kets are higher than in the USA, Euro-

pe and Japan2. Experts believe that by

2020 the Chinese will have replaced the

Americans as the worlds largest consu-

mers. And, while consumers in develo-

ped countries are saving, some experts

expect the BRIC countries to lead the glo-

bal recovery in consumer spending.

Consumer-based industries set tothrive

The sectors likely to fourish in emerging

Asian countries over the coming years

are thereore those that are largely con-

sumer-driven. According to Union Invest-

ment und manager Hans Hlzl, the con-

sumer and inrastructure sectors will ex-

perience the strongest growth in Asia,

ollowed by the energy sector, including

alternative energy and energy supply. Mr

Hlzl, who has managed Unions SouthEast Asia und since 2002, believes that

the pensions and healthcare, and tourism

segments will be a central theme. From

experience, these consumer-ocused

All Markets vs. Emerging Markets

250

225

200

175

150

125

100

75

50

Points

06/05 06/06 06/07 06/08 06/09 06/10

MSCI Emerging Markets Index

MSCI World Index

Rebased: June 2005 = 100 points

Sharp price gains

New capital markets arose in these countries (the emerging markets), which perormed extremel y well. The MSCI

Emerging Markets Index, a barometer o Emerging Markets stock markets, has signifcantly outperormed the MSCI

World Index rom 1988 to the present day. However, these eme rging markets also experience higher levels o volati-

lity.

Jakarta The centre o growth or Indonesia.

1) Bloomberg, 21 April 20102) http://globaleconstats.com/wp/2010/01/01/scotia-economics-emerging-market-

auto-sales-to-climb-higher-in-2010/, 1 January 2010

Source: Bloomberg; 8 June 2010

IndicesMARKETSDirect| 01/2010



20/60


market segments trend upwards when

the per capita annual income reaches

around USD 3,000. Below this, it makes

little dierence to consumption whether

per capita GDP rises from USD 1,000 to

2,000 or stagnates.

Equities set to keep rising

The healthy growth outlook is heightening

equity market expectations in the emer-

ging markets. While industrial countries

are likely to continue suering the con-

sequences o the crisis, experts belie-

ve that the emerging markets prospects

are better.

Carry trades benefting the emerging

markets

The emerging market boom is viewed cri-tically by some. Some market commenta-

tors warn that a speculative bubble could

emerge owing to the hot money on the

markets. The background to this is the

interest rate dierential between deve-

loped and emerging market countries:

Risk tolerant investors (carry traders) take

on debt in low-interest currencies such

as the US Dollar and invest their capi-

tal in other, higher-interest currencies or

in the equity, real estate or commodities

markets o the booming emerging mar-

kets. This increases the risk o a bubb-

le orming.

This is the case today. Capital inows

rom developed countries have contribut-

ed to the stock markets o emerging mar-

kets outperorming those o developed

countries. In the past, when interest rates

rose in the USA and Europe, unds fowed

back out o the emerging markets. Such

return fows o money, also reerred to as

repatriation, led to the appreciation o de-

veloped nations currencies, particularly

the US Dollar. It also gave rise to oreign

currency shortages in emerging markets.

The high level o oreign debt could then

not be repaid. A credit squeeze and the

fight o oreign capital has in many cases

then caused share prices to crash in the

respective emerging markets.

Increased economic stability

The US Dollar has regained a certain de-

gree o stability recently, but it is probably

Price/Earnings (P/E) ratio o the MSCI World and MSCI Emerging Markets

90

80

70

60

50

40

30

20

10

0

P/E Ratio

06/95 06/97 06/99 06/01 06/03 06/05 06/07 06/09 06/10

MSCI Emerging Markets IndexMSCI World Index

No over valuation based on P/E ratios

When comparing the P/E ratio o the MSCI Emerging Markets Index to the P/E ratio o the MSCI World Index, we can

see that emerging markets seem cheaper when valued with their P/E ratio.

Source: Bloomberg, 8 June 2010

Emerging Markets are booming

Indices MARKETSDirect| 01/2010

20


21/60

Comparison o economic growth

20

15

10

5

0

-5

-10

Change in real Gross Domestic Product (GDP) compared to

the previous year in %

1990 1994 1998 2002 2006 20101992 1996 2000 2004 2008

China Germany India Japan USA

Source: International Monetary Fund; 28 January, 2010

Long-term stronger growth

Major emerging markets such as China and India showed stronger GDP grow th

than established markets such as the US, Japan and Germany.

Comparison o per capita annual income

9.000

8.000

7.000

6.000

5.000

4.000

3.000

2.000

1.000

0

USD

India Vietnam Philippines I ndonesia China Mala ysia

2009

Source: IMF; February 2010

Consumer spending threshold reached

According to Jim ONeill, Goldman Sachs Economist and inventor o the term

BRICs, emerging markets economies start to gr ow once per capita GDP rises above

USD 3,000 per year. With its population o 1.3 billion, China has already crossed

this threshold. Indonesia is set to ollow in the next ew years. The aver age per ca-

pita GDP o all emerging countries is already more than USD 9,400.

Major inrastructure projects are driving emerging market growth.

IndicesMARKETSDirect| 01/2010



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RBS Listed products linked to the perormance o the Emerging Markets

Covered Warrants oer leveraged exposure and Tracker Certicates track the underlying index.

Name Underlying ISIN TIDM (Product code) Expiry Strike Currency

Emerging Market Tracker (cer tifcate) MSCI Emerging Market EUR Price Index GB00B 436S J76 RB08 20/11/19 EUR

Emerging Market Tracker GBP (cer tifcate) MSCI Emerging Market Index GB00B 4X TW837 RB15 16/12 /19 975,01 GBP

Fron tier Marke ts Tracker (cer tifcate) MSCI Fron tier Marke ts Net TR USD Index GB00B5VDGW64 RB18 20/01/20 548 ,441 GBP

South Arica Accelerated Tracker (certifcate) FTSE/JSE TOP 40 GB00B59SRD16 RB42 08/04/13 26.045,83 GBP

China Accelerated Tracker (certifcate) HSCEI GB00B54W1D61 RB03 17/06/13 10.700,15 GBP

China Bear Super Tracker (cer tifcate) iShares FTSE/Xinhua China 25 Index Fund GB00B61FBF70 RB94 05/02 /16 GBP

Covered Warrants (certifcate) Bovespa Index Various n/a Various Various GBP

Covered Warrants (certifcate) Nikkei 225 Index Various n/a Various Various GBP

Covered Warrants (certifcate) HSCEI Index Various n/a Various Various GBP

Covered Warrants (certifcate) FTSE/JSE TOP 40 Index Various n/a Various Various GBPInvesting in Emerging markets involves certain risks and special considerations not typically associated with investing in more established economies.Please see www.rbs.co.uk/markets for more information. Source: RBS; 3 June 2010

still too early to say whether the trend has

reversed, and developed nations central

banks are still holding o raising inte-

rest rates. The upturn ollowing the se-

vere nancial and economic crisis o

the two preceding years is, quite sim-

ply, still too ragile.In addition, the overall economic

stability in many emerging markets has

improved considerably in recent years.

The export success o these countries

has been used to build currency re-

serves and, at the same time, oreign

debt has been reduced. Consequently

the sensitivity o servicing

debt against exchange

rate fuctuations has been

reduced. Scenarios likethe 1997/98 nancial cri-

sis in Asia, when the high level o or-

eign currency-denominated debt and

low currency reserves triggered a a-

tal chain reaction, are much less likely

to happen now. Moreover, the growth

in domestic demand in these countries

has also had the eect

o stabilising the over-

all economy. This means

that the economy can beless reliant on exports

to industrial countries. There is a very

good chance that the economic ascent

o the emerging markets will continue.

Emerging markets

have become more

economically stable.

The agricultural sector is losing economic signifcance, even in Asia.

Indices

For more inormation, educational material and expert views, please visit rbs.co.uk/marketsReerences to particular share indices do not indicate any association between RBS and the third party Index provider, or endorsement o any products by the Index provider. The productsare not in any way sponsored, sold or promoted by any relevant stock market, relevant Index, related exchange, index sponsor or investment und provider, and they make no warranty orrepresentation whatsoever, express or implied, either as to the results to be obtained rom the use o the relevant stock market and/or the gure at which the relevant stock market, relevant In-dex, related exchange or investment fund level stands at any particular time on any particular day or otherwise. They shall not be liable (whether in negligence or otherwise) to any person forany error in the relevant stock market, relevant index, related exchange, or relevant investment und and shall not be under any obligation to advise any person o any error therein.

MARKETSDirect| 01/2010

22


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This document is an advertisement and is not a prospectus for the purposes of EU directive 2003/71/EC (the directive) and/or Part VI of the Financial Services and Markets act 2000. A prospectus has beenprepared and made available to the public in accordance with the directive. Investors should not subscribe for any securities referred to in this document except on the basis of information contained in theprospectus. Investors may obtain copies of the prospectus from the o ces of the issuer and the paying agents. The Royal Bank of Scotland plc (RBS). This advertisement contains numerous trade marks

belonging to The Royal Bank of Scot land Group plc and other companies in the RBS Group. These trade marks include, but are not limi ted to, The Royal Bank of Scotland logo, The Royal Bank of Scot land andRBS. If you are in doubt as to whether an item is a trade mark of The Royal Bank of Scotland Group plc or a member of the RBS Group, please contact us for clarification at the registered o ce address The

Royal Bank of Scot land plc, Registered in Scotland No 90312. Registered O ce: 36 St Andrew Square, Edinburgh EH2 2YB. RBS is authorised and regulated in the UK by the Financial Serv ices Authority. RBSis an authorised agent of The Royal Bank of Scotland N.V in cer tain jurisdictions.

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25/60

Ater the gold peakExperts believe that gold production hit its peak in 2001. Resources that can be minedinexpensively are now depleted, which is likely to push up gold prices in the long term.

The gold price has increased ve-old

since 2002. One ounce of ne gold (1

troy ounce = 31.103481 grams) now

costs more than USD 1,200. The recent

surge in the price o gold can be largely

attributed to the widespread volatility that

weve seen across asset classes and the

enormous infows o investment into gold

Exchange Traded Funds. However, dig

below the surace and you could also

nd that the gold price is being driven

higher by the gradual depletion o our

global reserves.

Until 2008, global gold production

had allen or eight consecutive years.

According to the World Gold Council

(WGC), annual production in 2008 was

2,400 tonnes. In 2009, production rose

by 150 tonnes, which the WGC attribu-

tes to an increase in gold recycling. De-

spite the brie uptick last year, market

commentators believe that production

is set to sink over the long term. This is

because existing gold reserves are de-

pleted and new reserves are not being

discovered quickly enough to oset the

decline. Owing to the long lead time o

Gold in its purest orm.

CommoditiesMARKETSDirect| 01/2010



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High production costs

The WGC estimate that the average

global production cost is approximate-

ly USD 400 per ounce. The signicant

exploration costs also push down gold

companies margins. When the gold pri-

ce experienced a 20-year downwardtrend, between 1980 and 1999, many

small gold mines closed.

A ew years ago, between USD 300

and 500 million was needed to open up

a mine, said Jamie Sokalsky, Chief Fi-

nancial Officer of Canadas Barrick

Gold, at an investor conerence in Ge-

neva. Now, you need between USD 3

and 5 billion, he continued. At the same

conference, Barrick CEO Aron Regent

revealed that Barrick, together with its

competitors Goldcorp Newmont Mi-ning and Kinross Gold, invested a to-

tal of USD 4 billion in gold exploration in

2009. However, hardly any new deposits

were ound.

As in the oil sector, resources that

are easy and inexpensive to mine are

largely depleted. Extracting poor or very

deep ore oten comes up against tech-

nical and economic hurdles. In open-pit

mining, an average o one tonne o stone

has to be processed or our grams o

gold, says gold expert and Erste Bank

analyst Ronald-Peter Sterle in an in-

terview with Rohsto-Spiegel earlier this

year. Mr Sterle points out that gold pro-

duction is stagnating or sinking in eight

o the twelve most signicant gold pro-

ducing nations, which together account

for more than 50% of the primary supply.

This includes the big our gold mining

regions, Canada, Australia, the US and

South Arica.

The gold peak

The comparison with depleting oil re-

sources has been increasingly drawn

over the last ew years. However, the si-

tuation is not exactly the same, as gold

is not consumed ater it is produced. But

there is talk o a gold peak, as experts

believe that production peaked in 2001

with annual production o 2,600 tonnes.

The worlds largest producer, Barrick

Gold, also holds this view. The Canadi-

an group anticipates a long-term decline

Gold demand per annum

Global gold mining costs

4.500

4.000

3.500

3.000

2.500

2.000

1.500

1.000

500

0

-500

Others Bar & coin retail investment

Jewellery

ETF (Exchange Traded Funds)

tons

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Industrial & dental

500

400

300

200

100

0

2003 2004 2005 2006 2007 2008

USD/ounce

Global gold supply per annum

4.500

4.000

3.500

3.000

2.500

2.000

1.500

1.000

500

0

-500

Net producer hedging (This means that producers store gold to hedge themselves against inflation.)Official sector salesTotal mine supply

tons

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Old gold scrap

Gold supply and demand

The bulk o the worlds gold demand o around 3,500 tonnes per year is attributable to the jewellery industry. Demand or gold

in major emerging markets, such as China and India is increasing in line with the grow th in the populations wealth. Gold is

also used in the electronics industry and dentistr y. Added to this, investors interest in gold has spiked in recent years and

contributed signicantly to the price rises. According to Barclays Capital, investment demand amounted to 1,400 tonnes o

gold last year, which corresponds to a 40% share o global gold production. Today, annual gold production is roughly 2,500

tonnes. Demand is thereore outstr ipping mine production by more than one third. Additional supply is generated through

recycling and the gold reserves o central banks, which have been consistently reduced since the end o the 1990s. However,

there seems to be a change o thinking in this regard, demonstrated in particular by the gold purchases o Asian central banks.

Surging costs

Over the last 7 years, gold production cost s have more than doubled. This upward trend r efects the act that gold de -

posits that can be easily exploited are already largely exhausted.

Source: GFMS, June 2010

Source: U.S. Geological Survey; March 2010

Source: GFMS, June 2010

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RBS Listed products linked to the perormance o Gold.

Covered Warrants provide leveraged exposure to the underlying and Tracker Certicates track the perormance o the Underlying.

Name Underlying ISIN TIDM (Product code) Expiry Strike Currency

Gold Bullion Tracker Certifcate, GBP Hedged Gold GB00B59N1890 RB81 17/06/19 937,25 GBP

Gold Bugs Tracker (Certifcate) Gold Bugs Index GB00B4LZCF09 RB11 02/12/19 500,55 GBP

Gold Super Tracker (Certifcate) Gold GB00B67JNK20 RB92 25/11/14 GBP

Covered Warrants Gold Various n/a Various Various GBP

Source: RBS; 3 June 2010

From gold rush to industrial production

When James Marshall checked

his water mill on Californias Ame-

rican River on 24 January 1848,

something was glinting in the wa-

ter. Marshall bent down, grabbeda handul o grit and mud and

held it up to the light. Then he re-

alised what was shining: Gold!

Thousands o gold prospectors

were subsequently attracted by

the dream o getting rich quick.

Between January 1848 and De-

cember 1949, San Franciscos population grew from 1,000 to 25,000. The Californi-

an gold rush also marked the start o industrial gold production.

In Australia, gold fever took hold in the 1850s, when immigration swelled. The dis-

covery o gold also had signicant ramications on South Aricas industry. The dis-

covery of the worlds largest gold deposit in 1886 in Witwatersrand transformed the

economic and social structure o the previously remote and agriculturally-dominated

Boer Republic. The American gold rush in 1896 also brought signicant change.

Hundreds o thousands o gold prospectors came to the Klondike River near Daw-

son City. This led to the establishment of the Canadian Yukon Territory and the dra -

wing of the border between Alaska and Canada. Most of the gold produced through

mining today comes from China, Australia, the USA, South Africa, Canada and Rus-

sia. Annual production is now roughly 2,500 tonnes, some one hundred times the

production in the nineteenth century. We now produce more gold in two years than

documented in the thousand years o the middle ages.

Westward Ho! Gold prospectors on the way to Caliornia.Only a ew were able to realise their dreams.

Photo:wiki.histnet.ch

Difcult mining conditions.

in production o one million ounces per

year. 2009 was a statistical anomaly in

terms o gold production, according to

the second largest gold mining compa-

ny, Newmont Mining (USA).

Since gold production began, an

estimated 160,000 tonnes of gold has

been extracted rom the earth. It is be-

lieved that there are reserves o a urther

100,000 tonnes. The expected decli-

ne in gold production is an indicator o

long-term gold price rises. While supply

shrinks, many experts consider that de-

mand will rise in the uture, particular-

ly rom burgeoning emerging markets

and investors who are banking on ano-

ther gold rally.

Gold ever.

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Currencies Potential trends for 20102010 promises to be an interesting year for the currency markets. Will the Pound

become the target o speculation?

The capital markets were marked by three

major developments in 2009: The unex-

pectedly rapid exit rom the global reces-

sion, the increased risk appetite o priva-

te investors and the break away o emer-

ging markets rom developed nations. In

the currency markets, the most signicant

o these was investors return to riskier as-

sets. Given the extremely low interest ra-tes in most developed nations, investors

sought out currencies oering interest

rate advantages. A resurgence o carry

trades, where investors take out credit in

low-interest currencies and invest the mo-

ney in higher-interest currencies, began

as early as the start o 2009.

Structural problems

Overall, the structural problems in many

countries were tackled in 2009 by massi-

vely expanding government debt and IMF

lending, in order to stop the nancial cri-

sis spreading like an international wild-

re. However, this year will likely see some

severe adjustments. Countries in nanci-

al diculties may be able to help them-

selves but i not, more bailouts may be on

the cards. This will require painul, even

excruciating, cost cutting measures and

structural reorms that not all countries are

prepared or. We have already seen ex-

amples o this in Greece, Iceland, Portu-

gal, Mexico and Dubai. A similar situation

is brewing in the Baltic States and other

Eastern European countries. It is thereore

highly likely that, despite the general cal-

ming o the global credit market, there will

be urther local nancial crises and the po-

tential or signicant turbulence or some

currencies. A lot depends on whether the

economic recovery gathers pace, as this

would allow many o the structural prob-

lems to be eradicated. However, many are

sceptical as to whether this type o blan-A new world oopportunity.

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ket recovery is possible in the timescale

that it is needed. This puts particular pres-

sure on the currencies o countries which

have high decits and debt ratios.

Despite the scepticism surrounding

the Euro in recent months, a ree-alling

US Dollar is the biggest threat to the glo-bal economy that could emerge rom the

currency market in the long term. Cer-

tainly China and many other countries in

Asia, which own billions o US Dollars,

could ace signicant economic allout

i this was to occur. This uncontrolled de-

valuation o the currency would occur i

the market lost condence in Americas

ability to service its huge debt position.

Such a scenario is too grim to contemp-

late and, in actual act, an entirely die-

rent story has played out over the past ewmonths: The US Dollar has been in de-

mand again, as many investors are spe-

culating that the US economy will recover

more quickly than the European or Japa-

nese economies, or example. In addition,

the events in Greece cast doubts over the

stability o the European Monetary Union

which cast downward pressure on the va-

lue o the Euro.

Nevertheless, speculation about an

early interest rate hike by the US central

bank is exaggerated. The Fed is not like-

ly to raise its key rate beo-

re the ECB, so interest inthe Eurozone will remain

higher than in the USA or

an extended period. This

should boost the EUR/USD rate in the me-

dium term. The Yen, on the other hand,

could again come under selling pressu-

re, as it has already done in recent weeks.

Chronic deation in Japan means that the

Bank of Japan will likely keep its key rate

at zero throughout 2010 and beyond. It is

possible that over the long term, the Yen

could replace the Dollar as the borrowingcurrency or carry trades once more and

start losing ground again. From the se-

cond hal o the year, the issue o a rever-

sal o interest rates will become increasin-

gly important in the USA and Eurozone. In

particular, the downward pressure on the

Dollar will increase again i the US econo-

my starts to lose pace.

Like the Euro, the Pound could be-

come the target o speculative attacks

in the coming months, as Britains bud-

get decit is running at more than 12% of

GDP, a similar level to that o

Greece. Furthermore, thenew coalition government

in Westminster has yet to

explain how it intends to

put its budget in order. It aces an unple-

asant task o consolidating the UK bud-

get, which will be likely to require dras-

tic government spending cuts and, in all

likelihood, tax increases. Should an an-

nouncement on the new budget conso-

lidation measures be urther delayed, ra-

ting agencies could strip UK government

bonds o their top-level credit rating. Thiscould put signicant downward pressure

on the British currency.

Summary

The stability o the US economy may be

overstated. The present strength o the

Dollar is unlikely to be long-lasting. The Yen

The strength othe US economy

is unknown.

The greatest threat is orUSD depreciation.

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Are interest rates

set to rise globally?Australia was the rst major developed country to raise its interest rates. I this is the rst sign o a globalinterest rate snap back, investors will have to get used to the idea o alling bond prices.

Are interest rates set to soar?

Government bonds at a glance

This table shows a list o leading government bonds and their perormance over dierent time periods.

Name Future contract Future price Perormance YTD % Perormance 1 year % Per. 5 years % Yield %

German governmen t bond BUND uture 128 ,28 5 ,85 7,05 4,57 2 ,72

UK government bond Gilt uture 119,66 4,55 32,28 5,22 3,62

Swiss government bond Swiss ederal bond 142,15 3,99 15,27 5,44 1,50

US gover nment bond T- not e uture 119,8 3 3,79 1,70 6,0 6 3,41

US gover nment bond T- bond ut ure 12 2,0 9 5,82 3,76 3,63 4, 30

Japan government bond JGB uture 140,37 0,48 2,50 -0,46 1,29

Source: Bloomberg, 3 June, 2010

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Israel, Australia and Norway have all

raised their key interest rates over the

last year. These countries are not usu-

ally the central ocus o international mo-

netary policy, but this time the nancial

world is tracking their interest rate deci-

sions very closely, as Australia was the

irst major developed country to raise

its interest rates ater the economic and

nancial crisis. Almost all o the worlds

central banks reacted to the crisis with

swingeing interest rate cuts. Investors

are now concerned that the rate hikes

in these countries could trigger a globalturnaround in interest rates. However, ta-

king a closer look, it is clear that the inte-

rest rate rise in Australia is largely attribu-

table to the brightening economic envi-

ronment in the Asia-Pacic

region. With its commodity-

driven economy, the count-

ry is reaping the rewards o

the still high growth rates o

China and its neighbours.

No whisper o rate hikes in the USAt the heart of the world economy

which is still the US the situation is com-

pletely dierent, however. During the -

nancial crisis, the Federal Reserve cut

its key rate to a historic low of 0 to 0.25%.

At the same time, it pumped enormous

amounts o cash into the economy, infa-

ting its balance sheet by USD 2 trillion,

Household consumption and GDP (nominal) in the US

16

14

12

10

8

6

4

2

0

-2

-4

Change compared to previous year in %

01/55 01/61 01/67 01/73 01/79 01/85 01/91 01/97 01/03 01/09

Household consumption

Gross domestic product

Source: Bloomberg, February 2010

Massive decline

Both gross domestic product and household consumption have declined consi-

derably in US Dollar terms (nominal). A crisis o this scale was last seen in 1958.

This means that company revenues are trending downward.

as a reaction to the contracting GDP a

situation last seen in early 1958. Com-

panies saw their potential revenues shri-

vel and reacted by making redundan-

cies, which in turn put a brake on con-

sumer spending, exacerbating the US

economic slowdown over the ollowingquarters. As well as the central bank, the

US government also mounted a charge

against the declining nominal GDP. Ba-

rack Obamas government decided to

tackle the economic crisis

with substantial economic

stimulus packages, which

also caused the budget

decit during the last scal

year (to 30 September 2009) to climb to

an immense USD 1.417 trillion its high-

est level since the Second World War.However, US exports were avoured by

the weaker US Dollar. These eorts paid

off: according to the Department of Com-

merce, during the ourth quarter, the US

economy registered 5.7% growth on an

annualised basis. The Fed is nonethe-

less sticking to its zero interest rate po-

licy. The deteriorating situation in the la-

The Fed is still

holding its key rates

extremely low.

Australia is leading the way.

Its hard to calculate where interest rates go next

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bour market is causing the central bank

concern. Fed Chairman Ben Bernanke

has stated that the low interest rate will

likely be maintained or an extended pe-

riod, but that the US central bank is pre-

pared to rein in monetary policy when the

situation has improved suciently.

ECB and Bank o England maintain

low interest rates

A similar approach has been adopted

in Europe. During the nancial crisis, in-

terest rates were cut to unprecedented

lows the ECB headline rate is now at

a historic low of 1.0%, while the Bank of

England rate is 0.50%. Banks can now

borrow unlimited funds from the ECB for

a period o up to one year, which has

pumped more liquidity into the marketthan ever beore. The respective heads

of the ECB and BoE believe the current

monetary policy to be appropriate. Des-

pite signs o the economy stabilising, the

outlook is still uncertain and a bumpy

landing is expected. Many experts be-

lieve that it is still too early to tighten m

rbs investment magazine

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