US / North America Economic Outlook of the Week

EQUITIES
Overweight healthcare sector
Week ending June 20, 2008:
Dow: -3.78% S&P500: -3.10% Nasdaq: -1.91%

• In Citi’s opinion, persistently tight credit conditions are likely to impact the tech sector’s capital expenditure and further weakness in 2H08 is likely. As such, Citi analysts are now underweight on the Tech hardware & equipment sector.
• On the other hand, given severe underperformance this year, Citi’s valuation and economic models are now signalling a favourable outcome for the Health Care sector over the next 12 months.
• Meanwhile, Citi analysts are now cautious on the Energy,
Industrials and Materials sectors, given unattractive valuations and the possibility of fundamental weakness spreading to the more industrially sensitive parts of the economy due to deteriorating international trends.

FIXED INCOME
Favour corporate bonds
As at June 20 vs. June 13, 2008:
2-yr Try: 2.88/3.04 5-yr Try: 3.57/3.37 10-yr Try: 4.14/4.26

Treasuries: The outperformance in Treasuries is unlikely to
continue, in the view of Citi analysts, as risk aversion recedes and as the Federal Reserve takes a pause in its easing cycle.
High-Grade Corporates: Citi analysts prefer high-grade
corporate bonds given that the risk/reward trade-off is appearing more attractive and, as it has historically been one of the first to recover from periods of extreme market conditions.
High-Yield Corporates: Citi analysts are cautious on high-yield bonds, as yield spreads have typically risen further during recessions.
EMD: Citi analysts remain neutral on emerging-market bonds. For investors who are seeking exposure, Citi analysts favour
economies with stronger fundamentals and greater resiliency in the face of a US and global economic slowdown.