Baring Asset Management (Asia) Limited

19/F, Edinburgh Tower, 15 Queen’s Road Central, Hong Kong Tel +852 2841 1411

www.barings.com

The Asia Pacific Fund, Inc.

Global and Asian Investment Outlook

www.asiapacificfund.com

Authorised and regulated by the Financial Services Authority Khiem Do January 21, 2009

After a 39% fall in the S&P 500, now what ?

Experience over past 180 years suggests ....

S&P Index from 1825 to 2007 Positive years : 129 (70%) Negative years : 54 (30%) 1 9 3 1 -50 to -40 2008 YTD 1 9 3 7 -40 to -30 2 0 0 2 1 9 7 4 1 9 3 0 1 9 0 7 1 8 5 7 1 8 3 9 -30 to -20 2 0 0 1 1 9 7 3 1 9 6 6 1 9 5 7 1 9 4 1 1 9 2 0 1 9 1 7 1 9 1 0 1 8 9 3 1 8 8 4 1 8 7 3 1 8 5 4 1 8 4 1 1 8 3 7 1 8 3 1 1 8 2 8 1 8 2 5 -20 to -10 2 0 0 0 1 9 9 0 1 9 8 1 1 9 7 7 1 9 6 9 1 9 6 2 1 9 5 3 1 9 4 6 1 9 4 0 1 9 3 9 1 9 3 4 1 9 3 2 1 9 2 9 1 9 1 4 1 9 1 3 1 9 0 3 1 8 9 0 1 8 8 7 1 8 8 3 1 8 8 2 1 8 7 6 1 8 6 1 1 8 6 0 1 8 5 3 1 8 5 1 1 8 4 5 1 8 3 5 1 8 3 3 1 8 2 7 -10 to 0 2 0 0 7 2 0 0 5 1 9 9 4 1 9 9 3 1 9 9 2 1 9 8 7 1 9 8 4 1 9 7 8 1 9 7 0 1 9 6 0 1 9 5 6 1 9 4 8 1 9 4 7 1 9 2 3 1 9 1 6 1 9 1 2 1 9 1 1 1 9 0 6 1 9 0 2 1 8 9 9 1 8 9 6 1 8 9 5 1 8 9 4 1 8 9 1 1 8 8 9 1 8 8 7 1 8 8 1 1 8 7 7 1 8 7 5 1 8 7 4 1 8 7 2 1 8 7 1 1 8 7 0 1 8 6 9 1 8 6 8 1 8 6 7 1 8 6 6 1 8 6 5 1 8 5 9 1 8 5 6 1 8 4 4 1 8 4 2 1 8 4 0 1 8 3 6 1 8 2 6 0 to 10 2 0 0 6 2 0 0 4 1 9 8 8 1 9 8 6 1 9 7 9 1 9 7 2 1 9 7 1 1 9 6 8 1 9 6 5 1 9 6 4 1 9 5 9 1 9 5 2 1 9 4 9 1 9 4 4 1 9 2 6 1 9 2 1 1 9 1 9 1 9 1 8 1 9 0 5 1 9 0 4 1 8 9 8 1 8 9 7 1 8 9 2 1 8 8 6 1 8 7 8 1 8 6 4 1 8 5 8 1 8 5 5 1 8 5 0 1 8 4 9 1 8 4 8 1 8 4 7 1 8 3 8 1 8 3 4 1 8 3 2 1 8 2 9 10 to 20 Percentage Total Return 2 0 0 3 1 9 9 9 1 9 9 8 1 9 9 6 1 9 8 3 1 9 8 2 1 9 7 6 1 9 6 7 1 9 6 3 1 9 6 1 1 9 5 1 1 9 4 3 1 9 4 2 1 9 2 5 1 9 2 4 1 9 2 2 1 9 1 5 1 9 0 9 1 9 0 1 1 9 0 0 1 8 8 0 1 8 5 2 1 8 4 6 20 to 30 1 9 9 7 1 9 9 5 1 9 9 1 1 9 8 9 1 9 8 5 1 9 8 0 1 9 7 5 1 9 5 5 1 9 5 0 1 9 4 5 1 9 3 8 1 9 3 6 1 9 2 7 1 9 0 8 1 8 3 0 30 to 40 1 9 5 8 1 9 3 5 1 9 2 8 1 8 6 3 1 8 4 3 40 to 50 1 9 5 4 1 9 3 3 1 8 8 5 1 8 7 9 1 8 6 2 50 to 60 … a chance of positive returns in years ahead ?

Source: Bron: Value Square Asset Management, Yale University (December 2008)

1

Global Economic Outlook:

What is being discounted and what could surprise?

 A global recession in 2009 is priced in  Even China’s GDP growth has been downgraded to 5-6% in 2009  Only a mild global economic recovery is expected in 2010  All governments are expected to continue to expand their fiscal and monetary policies in 2009

Room for unexpected (positive) surprises ?

2

Global Investment Outlook:

Will ‘safety’ continue to rule in 2009 ?

 ‘Safe’ assets out-performed in 2008, but are now deemed expensive and over-owned  ‘Growth’ assets collapsed in 2008, but are now deemed cheap and under-owned  Global reflation and US dollar weakness could spark renewed interest in Asian/Emerging Markets equities and commodities

Profits are likely to be made in cheap and under-owned ‘growth’ assets 3

US Credit Markets:

High grade vs Government bonds

US High Grade Corporate Bonds: Pricing in a 1929-33 depression scenario US 10-Year Government Bond Outlook: A bubble about to burst ?

(% ) (% ) Worst-case scenario priced in the corporate bond (and equity) markets ? At 2.10% p.a., there appears to be little value left. Risk, however, appears significant.

Source: US Hight Grade Corporate Bonds BCA Research, Moody’s Investors Service (December 2008) US 10-Year Government Bond Outlook - Ned Davis Research (December 2008)

4

US Stock Market Outlook:

Buy stocks before or after the recession ends ?

(Index) – DJIA 1974-1975 (Index) (%) – DJIA 1938-1939 (%)

Source: Ned Davis Research (December 2008)

Buying equities at the tail-end of a recession often proven too late !

5

Risk Appetite Outlook:

‘Panic- and fear-induced selling’ appears to be over

We expect investors in 2009 to re-focus on assets with cheap valuations and future growth potential, i.e., stocks

Source: UBS, Datastream (December 2008)

6

Asian market valuations

Cheap enough?

MSCI China Trailing PBV band 110 90 70 Index P/B = 1.5

P/B = 2.5

P/B = 3.5

P/B = 4.5

P/B = 5.5

P/B = 1.0

P/B = 2.0

P/B = 3.0

P/B = 4.0

P/B = 5.0

50 30 10 01 02 03 04 05 06 07 08 09 10 MSCI China 12-month forward PE band 120 100 80 60 Index P/E = 5 P/E = 9 P/E = 13 P/E = 17 P/E = 21 P/E = 25 P/E = 29 40 20 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: MSCI, Citi Investment Research as at January 2009.

MSCI AC Asia ex Japan Trailing PBV band 800 700 600 500 Index P/B = 1.0

P/B = 1.3

P/B = 1.6

P/B = 1.9

P/B = 2.2

P/B = 2.5

P/B = 2.8

400 300 200 100 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 MSCI AC Asia ex Japan 12-month forward PE band 800 700 600 500 Index P/E = 8 P/E = 10 P/E = 12 P/E = 14 P/E = 16 P/E = 18 P/E = 20 400 300 200 100 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

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Significant Flows In/Out of EM Asia:

Has the ‘forced selling’ liquidation sale stopped ?

-5 -10 -15 -20

Net Foreign Flows in EM Asia (ex-China)

10

(US$bn)

5 0 Monthly Net Foreign Buying in EM Asia 2.7

0.5

-3.7

-5.4

-10.3

-11.1

-14.8

-15.2

-12.9

-18.3

Net Foreign buying/selling in EM Asia (ex-China and Malaysia)

4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% 97 98 99 00 01 02 03 04 05 06 07 08 EM Asia ex-China & Malaysia

Recent data has been encouraging: small inflows seen

Note: EM Asia here includes India, Indonesia, Korea, Taiwan, Thailand and the Philippines.

Net Foreign Buying in EM Asia – Source: Morgan Stanley as at January 2009 Net Foreign Buying in EM Asia ex-China & Malaysia – Source: Credit Suisse estimates as at January 2009

8

Asian Key Growth Forecasts:

Difficult 2009, Recovery in 2010?

Country China India Hong Kong South Korea Taiwan Asia GDP Growth (%, p.a.) 2008 E 2009 F 2010 F

8.9

6.0

9.0

6.7

3.0

5.8

-3.0

6.6

3.5

3.9

1.5

6.9

1.8

-3.0

4.4

2.7

3.5

6.8

EPS Growth (%, p.a.) 2008 E 2009 F 2010 F

3.8

-8.6

14.7

1.2

-37.3

2.6

-32.6

19.0

9.2

-23.4

-47.0

-23.2

-5.8

-34.4

-19.3

38.4

91.4

27.7

Source: Goldman Sachs as at January 2009

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Has the Chinese economy bottomed out ?

Encouraging signs in key sectors

Property Sales vol show stabilizing Primary Market

10 8 2 0 6 4 14

mm sqm

12 Average Mar 06-Dec06 transaction vol.

Average 07 transaction vol.

43% Average Jan 08 - Nov 08 transaction vol.

Power output shows sign of recovery China: Monthly Power Generation Growth (Year-on-year Percentage, %)

30% 25% 27.3% 20% 15% 10% 5% 9.0% 14.3% 16.6% 15.4% 16.0% 17.0% 15.5% 15.0% 15.5% 13.9% 13.7% 12.8% 11.8% 5.3% 8.3% 8.1% 5.1% 3.4% 13.8% 12.3% 0% -5% -4.0% -9.5% -9.1% -10% -15% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 Property Sales vol show stabilizing – Source: Goldman Sachs as at January 2009 (Primary market — Beijing, Tianjin, Shanghai, Hangzhou, Guangzhou, Shenzhen, Chengdu, Chongqing, Wuhan and Nanjing) Power Output shows sign of recovery – Source: China Electricity Council and Citi Investment Research as at January 2009)

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Chinese to lead the world in 2009 ?

Equity markets’ performance since 27/10/08

Source: Bloomberg (January 2009)

China H-shares up 55%, Asia up 26% and US up 5% 11

Conclusion

‘Beta neutral’ for now, looking to add to growth

 We expect to see more global policy easing as short-term economic data is expected to remain disappointing  Asian economies are expected to slow down cyclically, but remain solid structurally  With Asian equity valuations looking fair value, we consider to prudently add to growth/cyclicals on weakness

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Appendix

Management (Asia) Limited

19/F, Edinburgh Tower, 15 Queen’s Road Central, Hong Kong Tel +852 2841 1411

www.barings.com

Authorised and regulated by the Financial Services Authority

Current Equity Investors’ Positioning:

Very defensive !

Equity Positioning Across Sectors Equity Positioning Across Regions We expect investors to switch out of expensive defensives to cheaper cyclical and growth in 2009

Source: UBS, Datastream (December 2008)

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US Stock Market Outlook:

Which sectors to do well in 2009 ?

-

Note : “ – ” is equivalent to “Marketperform”

We could potentially witness a change of leadership in sectors, from ‘defensives’ in 2008 to ‘cyclicals’ in 2009

Source: Ned Davis Research (December 2008)

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Important Information

This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its investment adviser affiliates in other jurisdictions. The affiliate serving as the Asia Pacific Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial Services and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.

This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset Management group companies, their affiliates and/or their directors, officers and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. This document may include forward-looking statements, which are based upon our current opinions, expectations and projections as of the date on the cover hereof. We undertake no obligation to update or revise any forward-looking statements.

Actual results could differ materially from those anticipated in the forward-looking statements. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance will not necessarily be repeated. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available.

Private investors in the Company referred to herein should obtain their own independent financial advise before making investments. This document must not be relied on for purposes of any investment decisions. Before investing in the Company, we recommend that all relevant documents, such as reports and accounts and prospectus should be read, which specify the particular risks associated with investment in the Company, together with any specific restrictions applying and the basis of dealing. The Company may not be available for investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document and other material relating to the Company and accordingly recipients of any such documents are advised to inform themselves about and to observe any such restrictions.

Research Material

Baring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example of research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinions expressed herein may change at anytime.

For data sourced from Morningstar: © 2008 Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Complied (Boston): January 13, 2009

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