Market Forecast:
Third Quarter of 2007

We believe that the global equity markets will keep on rallying.

Possible higher-than-expected inflation and/or more significant deterioration in the U.S.A. housing market will serve as key downside risk to our equity forecasts.

Most probably, the recent bond sell-off was temporary, and is unlikely to continue over the next few quarters.

The troubles in the sub-prime market and concerns about high yield have brought a widening of spreads, with little impact on equities. This suggests a reassessment of -- rather than a major retreat from -- risk.

Nevertheless, we believe that the inflation remains a key source of risk and we might expect price pressures to remain subdued.

While we believe that the real GDP growth in the U.S.A. will settle at 2.6% -- below the trend growth rate -- in 2008, our Europe economic-growth forecast continues to be above the 2.3% consensus. We can expect a 2.9% in the UK and 2.7% in the Euro zone.

We can see an increasing number of liability-driven investors to take advantage of recent market moves, as well as consider hedging their interest rate risk, and improve diversification among their assets.

Oil prices are more likely to be inflationary at this stage of the cycle now that the global output gap is closing.

Central banks will continue to withdraw liquidity:

Fed to be on hold in 2007, ECB to raise interest rates to 4¼% - 4½% by end-2007 and then go on “datawatch.” Bank of Japan to raise rates gradually to ¾% - 1% by end-2007 and the Bank of England to take base rates to a peak of at least 6%.

Factors that could bring a re-pricing of risk:

Faster Monetary Tightening by ECB and Bank of Japan

Appreciation of Emerging Markets Currencies

Corporate Re-Leveraging

Credit Market Shock

Protectionist Measures

US Monetary Tightening

Capital Controls

Japan has been the main laggard market in the first half of the year both relative to Asia and vs other major markets. Any improvement in economic/earnings momentum could be a buying signal.