UUSS IINNDDUUSSTTRRYY MMOONNIITTOORR 2011 Second Half Issue

October 3 2011

【OVERVIEW】U.S. Industry Environment Increasingly Uncertain

The GDP growth in the U.S. decelerated from 3.0% in 2010 to 0.4% in the first quarter of 2011,

subsequently to 1.3% in the second quarter, amid stalled consumer spending due to high

gasoline prices and cuts in government spending, among other factors.

Going forward, while there are positive factors such as falling gasoline prices, recently

downward pressures are increasing such as the European debt problem and concerns over U.S.

fiscal situation in addition to high unemployment levels and continued weakness in the housing

market. The U.S. industry environment is increasingly uncertain.

《The Outlook for Major Sectors and Indicators》

Energy: While crude oil prices recently began to decline, there is a possibility of further

decline due to cut in demand from slowing economy. Natural gas prices are expected to remain

low due to booming shale gas production.

Materials: Ethylene prices trended upward during the first half of 2011. However, weaker

prices are expected going forward due to decline in demand. In metals, steel prices are trending

downward, reflecting deteriorating supply-demand balance.

Industrials: Non-residential construction expenditures are expected to remain weak,

predominantly due to slowing public sector spending. Although new order for machinery is

expected to increase in mining and power sectors, downside risk to order growth amid

economic slowdown should be monitored closely. Growth in rail freight shipments slowed due

to decline in coal shipments, among other factors.

Consumer discretionary/staples: While consensus forecast of U.S. auto sales for 2011 is

12.6MM units (+9% yoy), slowing economy may push the forecast downward. A solid

performance is expected in staples retailing, but the outlook of discretionary retailers are

cautious amid falling consumer confidence.

IT: PC shipments are trending downward for consumer market due to lost share to tablets and

other new devices. Meanwhile, enterprise shipments remain solid. Semiconductor shipment

continued to grow strongly, bolstered by the corporate refresh cycle and increased penetration

in electronic devices. Recently, however, the growth decelerated significantly.

NYIR.2011-49

1

Table of Contents

Sector Industry Indicator Latest Data

Page

Energy Oil & Natural Gas Offshore RigUtilization/ Dayrates Aug 2011 2

Crude Oil Prices / Natural Gas Prices Aug 2011 2

Materials

Chemicals Ethylene Price Jul 2011 3

Container & Packaging Cardboard Box Shipments Jun 2011 3

Metals & Mining Steel Price/ Production / Import Jun 2011

4 Aluminium LME Spot Price/Inventory Aug 2011

Paper & Forest Products Paper Price Aug 2011 4

Industrial

Construction & Engineering Non-Residential Construction Jun 2011 5

Aerospace & Defense Commercial Aircraft Orders and Backlog 2Q 2011 5

Industrial Machinery Machinery New Order Jun 2011 6

Freight & Shipping Railroad Traffic 2Q 2011 6

Airlines Airline Revenue Passenger Miles May 2011 7

Consumer Discretionary

Auto/Autoparts Car Sales / Production Aug 2011 7

Media Ad Revenue Growth with breakdown figures 1Q 2011 8

Hotels, Restaurants & Leisure Growth in Hotel Occupancy and Average Daily Room Rate (ADR)

2Q 2011 8

Consumer Discretionary Retailing

Same Store Sales (Dept. Stores, Apparel Specialty, Off-price, High-end)

2Q 2011 9

Consumer Staples

Food & Staples Retailing Same Store Sales (Supermarket, Supercenter, Drug Stores)

2Q 2011 9

Healthcare Medical Equipment

Electromedical , Measuring, and Control Instrument Manufacturing

Jun 2011 10

Pharmaceuticals Pharmaceuticals Shipment Jun 2011 10

Financials

Non-bank Finance Companies Owned and Managed Receivables Outstanding, Bank Delinquency Rate

May 2011 11

Insurance L/H Premiums, Consideration & Deposits, Net Investment Income

2Q 2011 11

Insurance P/C Combied Ratio 2Q 2011 12

Real Estate & REITS Office Rent (Manhattan, Midtown) 2Q 2011 12

Information Technology

IT Solution PC Shipment 2Q 2011 13

IT Components Semiconductor Shipment May 2011 13

Telecoms Telecommunications Wireless Subscription 2H 2010 14

Utilities Utilities Electricity Wholesale Price/ Retail Sales Jul 2011 14

Appendix1 - Macro Indicators 2Q 2011 15

Appendix2 - Exchange Rate Aug 2011 16

Note: The "FORECAST" period added in this edition is a short-term outlook (6 months-1 year).

Table of Contents

2

1. Offshore Rig Utilization/ Dayrates Forecast: Continued low utilization and lack of traction in dayrates

Utilization failed to improve meaningfully as the pace

of permitting in the Gulf of Mexico trickles in slowly

in the aftermath of the Macondo oil spill.

Fleet status reports of offshore drillers have failed to

impress. Jackup dayrates were flat as utilization

continues to remain weak. Although semi dayrates

have come off of the lows, the gains remain fragile as

utilization has stagnated in this rig class. Drillship

dayrates are having difficulty gaining traction in the

face of uncontracted newbuilds entering the market.

Utilization is expected to remain weak in the face of

newbuild supply and the slow pace of permit approvals

in the Gulf of Mexico. This is particularly apparent in

the shallow water where permitting appears to have

stalled out. However, the weak pace of rig fixtures and

deluge of newbuild capacity on the horizon has slowed

the pace of orders, which could help to tighten the

supply in the market longer-term.

Dayrates could decline as operators curb spending in

the face of economic uncertainty and commodity price

volatility. Uncontracted newbuilds will exacerbate the

problem as the increase in supply cannot be absorbed

by available demand. Commodity jackup rates could

be hit harder as natural gas prices continue to remain

low due to the oversupply driven by the shale gas

boom.

2. Crude Oil Prices and Demand / Natural Gas Prices and Storage

Forecast: Oil prices weakness likely as natural gas pricing to remain depressed

WTI crude increased 25% while Brent increased 37%

in 1H/11 over year-ago levels. While both prices

increased significantly, the WTI-Brent spread

continues to widen, currently at $26. This spread is

driven by the fact that Brent continues to reflect

strengthening emerging economy demand, while WTI

is pressured by oversupply at Cushing.

Both WTI and Brent prices have come off of their

highs and could continue to decline if economic

weakness brings about a drop in oil demand.

The WTI-Brent spread should continue to remain wide

as solutions to alleviate the Cushing oversupply remain

years away causing the WTI price to become less

reflective of global supply-demand conditions.

Natural gas prices declined 10% 1H/11 as oversupply

continues to be driven by the shale gas boom and lack

of demand growth.

We expect natural gas prices to remain depressed as

operators continue to drill under hedges, obtain

financing through joint ventures and M&A, produce to

hold acreage and perpetuate the production of

associated gas from liquids-rich plays.

Rig Demand/Supply and Utilization

Offshore Rig Dayrates

Crude Oil Prices and Demand

Natural Gas Prices and Storage

3

3. Ethylene Price Forecast: Slowing demand will weigh on ethylene prices

After rising sequentially in 1H/11, ethylene prices

retreated in July amid slowing domestic demand for

downstream products and lower export volumes as the

global economic recovery weakened. As customers

reduced their inventory levels to mitigate previous price

increases, they further weighed on demand.

With the global economy weakening, ethylene prices

will decrease, even as relatively steady exports,

reflecting competitively priced downstream products,

along with tighter capacity due to planned and

unplanned outages, will mitigate the effect of softer

domestic demand.

Operating rates for U.S. ethylene production are

forecast to rise to 93% over the next 18 months (by

CMAI), on the back of stable capacity, with recent

capacity additions limited to only two idled crackers that

came onstream in late 2010. While there have been

several announcements of capacity expansion projects,

these projects will come onstream only gradually and

will be completed in 2017. They include Shell

Chemical’s plan to build an integrated ethylene plant

atop Marcellus Shale natural gas deposits in either West

Virginia or Pennsylvania, coupled with capacity

increases at its existing crackers in Texas and Louisiana.

Dow and Chevron Phillips also plan to build world scale

crackers in the U.S.

4. Cardboard Box Shipments

Forecast: Box shipments to remain flat

Growth in cardboard box shipments has run out of

steam, mirroring the deceleration in underlying

economic growth. Through 1H/11 box shipments were

just 0.7% higher than they were in 1H/10. The long-

term growth trend since 1999 (all-time peak) has been

at a compound growth rate of -1%, which reflects

production outsourcing.

Box shipments should be relatively flat over the next

6-12 months due to the anticipated sluggish growth in

consumption of nondurable goods, which is the

primary driver for cardboard box use. Plastics used in

protective packaging applications face a similar slow-

to no-growth outlook.

4

5. Steel Price, Production & Import, Aluminium LME Spot Price/Inventory

Forecast: Slowing demand and oversupply concerns weigh on steel and aluminium pricing

Service center shipments have trended steadily higher,

up 17% yoy for YTD July 2011, but the pace of

demand recovery cooled off in recent months and

shipments remained -19% below the 2008 peak. At the

same time, additional supply is coming on-stream from

three U.S. mills, compounding the problem. As a

result, hot-rolled steel pricing has fallen about -22%

from a recent peak of over $880 in April to $690 in

July amid oversupply and a weak seasonal recovery.

Falling steel prices and short lead times have kept

many steel buyers from building inventories this

summer, with service centers keeping lean inventories

at 2.7 month supply in July. With few buyers returning

to the market, an attempt by producers to boost price

hasn’t gained traction. On the positive side, though, the

eroding U.S. price premium has discouraged steel

imports, which fell for a second consecutive month in

July, while a weak U.S. dollar supported strong export

sales. Capacity utilization has maintained modest gains

(to76%) over a historical dip in 2009.

Aluminum price was down 12% from the April peak to

around $2,400 per tonne in August, as mixed demand

trends continue to keep buyers at bay. Demand from

aerospace and automotive sectors is expected to remain

firm over the coming months, but demand for

commodity-type products have weakened. Moreover,

high aluminum inventories on the LME and global

overcapacity keep aluminium prices from surging.

These weaknesses are partially offset by pricing

support provided by supply restrains from China’s

high-cost smelters due to higher energy costs.

6. Paper Price Forecast: Downward pressure on pricing to increase

Demand for major paper grades remained tepid in

1H/11. Both uncoated free sheet (UFS) and newsprint

saw 2% declines in shipments vs. year-ago volumes,

while containerboard recorded a modest 1% increase.

Prices have been essentially flat for the last 12 months

as attempts by paper producers to raise prices have

been rebuffed by major customers. Pulp prices have

moved gradually lower over the last two months due to

reduced demand from China.

Downward pressures on pricing should increase over

the next 6-12 months due to continued slow economic

growth and the long-term downtrend in demand for

newsprint and business papers. Further cuts in

capacity will be needed to avoid serious price erosion.

In the containerboard sector the proposed acquisitions

(RockTenn-SmurfitStone, International Paper-Temple-

Inland) should be favorable for consolidation and

capacity rationalization.

Aluminum LME Spot Price/Inventory

Steel Price, Production & Import

5

7. Non-Residential Construction Expenditure Forecast: Non-residential construction expenditures to remain weak

Non-residential construction activity has continued to

decline in 1H/11. Both private and public spending

fell 5%. In the private sector manufacturing (-24%)

and office building (-15%) were particularly weak,

while spending on power projects (+16%) was the sole

major source of strength. The protracted decline in

public construction spending is very unusual and

reflects the significant budgetary problems faced by

state and local governments.

Non-residential construction expenditures are expected

to remain weak over the next 6-12 months. Private

construction spending should flatten out by early 2012.

Investment in multi-retail properties (e.g. shopping

centers) has begun to rise. Declines in expenditures on

health care facilities are slowing. Strength in electric

utility demand should offset weakness in the

manufacturing segment. However, public sector

spending should remain weak in the absence of a new

federal stimulus package.

8. Commercial Aircraft Orders and Backlog Forecast: Orders to see strong growth in 1H/11

New orders for commercial aircraft surged in 2Q/11

due largely to the Paris Air Show success of the Airbus

320 with the new engine (Pratt & Whitney) option.

Narrow-body aircraft demand has been very strong

over the last several years, driven by infrastructure

development in China, India and other developing

countries and expansion by low-cost carriers in the

U.S. and Europe.

Order books for Airbus and Boeing are expected to see

strong growth in the second half of 2011. High fuel

prices are causing legacy carriers to accelerate orders

for replacement aircraft. Boeing has responded to the

success of the 320neo with a reengined version of the

737, which is already generating strong order growth.

Both Airbus and Boeing will increase capacity by 20%

by 2013 to take advantage of large backlogs and

favorable demand outlook. Rapid production growth

will challenge supply chains.

6

9. Machinery Order Forecast: Further increases likely, although growth rates are expected to moderate

New machine orders rose a strong 16% in 1H/11, led

by construction (+47%), power (+38%) and mining

(+18%) equipment. A major driver behind growth in

orders continues to be the need to replenish and

upgrade inventory. This is particularly the case in the

construction equipment sector, where new orders have

remained brisk despite continued declines in

construction activity. New orders for earthmoving

equipment – particularly excavators – have led the

surge.

Further increases in machinery orders are likely,

although growth rates are expected to moderate. Fleet

rebuilding in construction equipment should be a

positive force into early 2012. The outlook for mining

and utility projects is also favorable over the next 6-12

months. However, if the economy remains on its

current slow-growth track, order growth will likely

move back into negative territory later next year.

10.Railroad Traffic Forecast: Rail freight to remain on slower growth track

Growth in rail freight shipments in revenue ton miles

slowed from 12% in 2H/10 to 5% in 1H/11. Coal

shipments, which account for almost 40% of total rail

tonnage, have been slowed by weakened demand from

electric utilities reflecting sluggish consumer

electricity demand and increased use of natural gas to

fire power generation. Weakness in the utility sector

has been partially offset by strong export demand for

metallurgical coal from Asia and Latin America.

Growth in shipments of chemicals and grain has also

slowed but has remained at a higher level (6-10%) in

early 2011.

Rail freight should remain on a slower growth track

over the next 6-12 months. Conditions are still

relatively good for chemicals and grain demand and

utility coal inventories are low and will soon need

replenishing. Automotive shipments are weakening

and demand for construction materials should remain

at low levels.

7

11. Airline Revenue Passenger Miles Forecast: Growth in air traffic to slow further.

U.S. airline traffic grew 4% in H1/11, down from 5%

in H2/10. Growth in international traffic (+5%)

continued to outpace growth on domestic routes (+3%).

Consolidation among legacy carriers (LC) has led to a

reduction in capacity, as decreases in domestic

resources have exceeded increases in international

capacity. Low-cost carriers (LCC) have moved into

the domestic markets vacated by the LCs. LCC traffic

increased 9.8% in 1H/11 surpassing the strong 2H/10

performance (+8.7%).

Growth in air traffic is expected to slow further over

the next 6-12 months as the economy holds to a slow-

growth track. Leisure traffic will be slowed by high

fuel prices and employment uncertainties. Growth in

business travel should also begin to slow as companies

increasingly look to reduce costs to offset the

downward pressure on profits in the weaker economic

environment.

12. Automobile Sales / Production Forecast: Resilient retail performance thus far is increasingly overshadowed by macro concerns

August U.S. light vehicle came in at 12.1mn SAAR,

down slightly from the 12.2mn level in July and far

below the 13.0mn level seen in pre-earthquake 1Q/11.

While deteriorating macro environment and supply

shortages weighed on U.S. SAAR growth, retail sales

to individual consumers remained unexpectedly strong

in recent months, rising to 10mn SAAR in August.

Better than expected retail performance was mirrored

in a steady dealer traffic, up 0.6 points mom.

Nevertheless, a gloomy picture is emerging about U.S.

SAAR growth, in the face of worse than expected

economic data. Along this line, consumers’ plans to

buy a new vehicle ticked down in August to 3.4% vs.

3.7% in Jan-July. Auto-loan approval rates, which have

improved significantly since the trough of late 2008

and are back to pre-crisis levels, also fell slightly in

August. Consensus forecast of U.S. auto sales was

trimmed to 12.6mn in 2011 (+9% yoy) and 13.4mn

(+6% yoy) in 2012. We see more risk to the downside

of that forecast.

North American production schedules by automakers

point to an 11% yoy unit growth in 3Q and a 19% yoy

growth in 4Q. This puts 2011 light vehicle production

to ~12.9-13.0mn units, up +9% from 2010.

Recovering production from Japanese automakers

could be somewhat overshadowed by muted U.S. sales

growth and weaker export demand in 2012. Still, some

Japanese automakers are switching some popular

models from imports to local production in North

America, and the domestic automakers are increasing

production plans for small cars.

US Light Vehicle Sales（SAAR）

North American Light Vehicle Production

8

13. Ad Revenue Growth Forecast: Economic slowdown bolstered by political and Olympic spend in 2012

Percent Change in Measured Ad Spending

Media Sector 1Q/11 y/y

Television Media 5.3%

Cable TV 31.9%

Network TV ▲10.4%

Spot TV ▲0. %

Magazine Media 4.5%

Newspaper Media ▲2.1%

Intern t (display a s only) 14.6%

Total 4.4%

(Source: Kantar Media)

The US ad market has rebounded nicely since the

recession which is a function of strong corporate

earnings bolstered by strong balance sheets. US

companies are eager for growth and have the where-

with-all for marketing investments.

Current domestic economic weakness is likely to cause

a slow-down in advertising spend over the next 6

months, but after that, ad prospects appear strong

during 2012 with the help of the Summer Olympics

and the upcoming political elections.

Print ad channels continue to remain lackluster as

information consumers prefer free a la carte Internet

sources in place of newspaper and magazines which

bundle static content. TV advertising is holding its

own with cable nets performing most strongly which is

a function of a strong corporate earnings cycle and the

rebound of some important verticals (particularly auto).

Internet advertising continues to outperform the

average.

14. Growth in Hotel Occupancy and Average Daily Room Rate (ADR)

Forecast: Growth in occupancy to slow, but prices to rise further

Hotel room demand has shown substantial

improvement over the last year and a half as both

leisure and business customers increased travel activity

in the economic recovery. Occupancy rates were up

4.4% in 2Q/11 – the sixth consecutive quarterly

increase. Improved utilization has permitted hotels to

raise room rates. The average daily rate (ADR)

increased 3.5% in 2Q/11 – the fastest rate of growth

since 2Q/08.

Improvement in hotel room demand will likely slow

over the next 6-12 months reflecting the deceleration in

economic growth. However, very little in the way of

new room supply will hit the market over the next year.

Consequently, occupancy rates should continue to

improve, albeit at a slower pace. Hotels should be able

to put through further increases in room pricing setting

the stage for healthy growth in revenues and profit

margins.

9

15. Consumer Discretionary Retailing (Same Store Sales)

Forecast: Weak consumer confidence and inflationary pressure weigh on sales growth

Apparel retailers’ 2Q/11 sales rose 5.8%, slightly

ahead of the previous quarter’s 4.9% increase,

bolstered by an 11.3% jump in high-end department

store sales. Data showed a diverging spending pattern

between upper and lower income shoppers. Specialty

apparel retailers’ same-store sales slowed in 2Q to

3.5% from the 4.3% gain in 1Q, as lower-priced chains

relied heavily on promotions to lure customers,

reflecting tougher competition in this category. In

contrast, mid-tier department stores fared better, with

same-store sales up sequentially to 4.0% in 2Q, helped

by more full-price selling. Part of the success was due

to a renewed focus on exclusive merchandise and

online channel. Off-price retailers, which sell brand-

name cloths and home goods at a discount, also posted

sequential gains in 2Q to 4.5% up from a 3.5% in 1Q.

Although retail same-store sales have managed decent

gains in 1H/11, retailers are cautious about their

performance in the upcoming quarters, with consumer

confidence falling sharply in August and

unemployment forecasts notched up. Retailers are also

facing the increase in costs, as high cotton prices from

early in 2011 will work their way through to show up

in higher ticket prices in the 2H/11. In the face of

spiking input costs and slow spending recovery,

retailers will keep a closer hold on inventory levels for

the 2H/11-1H/12 to avoid deep discounts and to protect

margins.

16. Food & Staples Retailing (Same Store Sales)

Forecast: Food retailing hold up relatively well as available dollars shift to essential items

With consumers seeking savings in the face of high

unemployment, supercenters/warehouse clubs were the

best performing group, posting a 6.3% increase in

same-store sales for 2Q/11. The accelerating sales were

driven by increased fresh food offerings and higher

gasoline prices, while demand for discretionary items

remained uneven.

Supermarkets also continued to turn in strong sales

results, as they have been passing along much of their

cost increases this year, after suffering food price

deflation during the recession. Some supermarkets have

exploited Wal-Mart’s less promotional intensity this

year and have narrowed the price gap, while creating

compelling value proposition through assortment and

convenience by adding increasingly popular organic or

by emphasizing personalized reward programs and full

service.

The recovery in drug store sales also continued, driven

by ongoing inflation in branded drugs and a slowly

improving traffic. Overall, industry prescription sales

are growing at around 2%, partly offset by weakness in

front-end sales.

10

17. Electromedical, Measuring & Control

Instrument Manufacturing (Medical Equipment)

Forecast: Shipments will grow at a moderate, mid-single digit pace

The chart above refers to NAIC 3345, which

includes not only electromedical and

electrotherapeutic products but also laboratory

analytical instruments, aeronautical instruments,

navigation and guidance systems, and physical

testing equipment.

After declining during the recession and the credit

crunch, electromedical shipments have returned to

growth since 2010, reflecting mainly pent-up demand

for many of this industry’s highly diverse products.

Deep cutbacks in hospital capital expenditures amid

tight governmental and private payers’ reimbursements

and reduced demand for hospital services due to high

unemployment levels are hampering sustainable

demand for new and replacement equipment. Demand

is strongest for products that hospitals can use to drive

volumes and that provide a relatively high return on

investment.

While domestic demand will be under pressure,

demand from fast growing emerging markets will

remain robust. However, lower pricing of products

sold in these countries will lessen the benefit of strong

export volumes.

Overall industry shipments are likely to grow over the

next six months but at a relatively moderate, mid-

single digits rate.

18. Pharmaceutical Shipment Forecast: Shipments will be flat

Pharmaceutical shipments were flat in 1H/11, as

consumers continued to switch to generics amid high

unemployment levels and restrictive branded

reimbursements.

The value of shipments would have declined, were it

not for higher prices, driven by specialty

biopharmaceuticals on which many companies are

focusing. PPI of pharmaceutical preparations rose by

4.7% yoy in the first half of the year

Although total sales of branded prescriptions increased

by 3% yoy in 1H/11, this growth was powered by

imports, which increased by 9.1%. During the same

period, exports decreased by 4.2% yoy, on the back of

heightened austerity measures in the EU. The

increased trade imbalance further weighed on domestic

shipments.

Pharmaceutical shipments will remain flat in the

foreseeable future, as there are no positive catalyst for

improvement on the horizon.

After years of dreaded anticipation, the industry has

entered a steep patent cliff. But although it is set to

lose an estimated $31 billion in sales this year, most of

the patent expiries will occur late in the year and their

full impact will not be felt till 2012.

11

19. Receivables Outstanding, Delinquency Rate (Non-bank Financial Companies)

Forecast: Slow return to asset growth on the back of greatly improved credit metrics

Non-bank finance companies continue to retrench in

the wake of the financial crisis and persistent economic

uncertainty. However, there are signs of stabilization

in commercial finance, where receivables outstanding

decreased at a much slower pace than in the troubled

real estate sector.

After tightening their standards, consumer finance

companies are also less averse to extend financing to

credit-worthy customers.

Credit metrics have improved in all segments, as

suggested by the declining trend in banks’ charge-offs

and delinquencies, a proxy for the industry. Credit card

charge-offs and delinquencies in particular fell to

levels not seen since the middle of the decade, enabling

companies, notably AMEX and Discover, to improve

their profitability.

Against the background of a slowly growing economy,

delinquencies and charge-offs will remain stable and

this stabilization will likely prompt finance companies

to return to cautious asset growth, except in real estate

where fundamentals are still weak.

20. Premiums, Consideration & Deposits, Net Investment Income (Insurance L/H)

Forecast: Tepid growth in life insurers’ premiums, annuities and investment income

After driving the life insurers’ top line, variable

annuities will lose their momentum amid equity market

declines.

Sales of life insurance products are unlikely to revive

amid high unemployment levels and uncertain estate

tax laws.

The fixed annuity market will continue to shrink on the

back of historically low interest rates, flat yield curve

and tight spreads. .

Low interest rates along with the impact of volatile

markets will also curb life insurers’ investment income

growth.

12

21. Combined Ratio (Insurance P/C) Forecast: Underwriting performance will deteriorate further

Combined ratio is a primary indicator of P/C insurers’

underwriting profitability. Calculation: losses incurred to

premium earned plus underwriting expenses to

premiums written after policyholders’ dividends

P/C insurers’ underwriting profitability is declining,

due to losses from a record number of winter storms,

tornadoes, and hailstorms. Its 2Q/11 combined ratio

soared to 118% and with the recent predicted insured

losses of $3 to $6 billion from Hurricane Irene, results

will deteriorate further in the next 6-12 months.

Following five years of soft pricing, the recent

catastrophe losses are expected to push up renewal

rates, leading to improved underwriting results down

the road.

However, with low interest rates pressuring investment

returns over the near term, unless price increases are

steep, operating profitability of P/C insurers will

remain squeezed in the near term.

22. Office Rent (Manhattan Midtown) Forecast: Recovery in the New York office market is likely to stall.

A sharp increase in activity in the second quarter led to

strong positive absorption and declining vacancy rates

in all of Manhattan. The midtown market led the way,

with 6.1 million square feet of new leases signed

during the quarter. The largest transaction was the

lease signed by Nomura for 900,000 square feet.

After sliding in the first quarter, midtown Class A rents

firmed up again, to $70.90 per square foot.

While no new office space will be delivered until 2013,

financial firms’ plans to cut their payrolls on the

expected weakness in third quarter results, will likely

end the recent recovery in New York office vacancies

and rents in the next several months. Should conditions

in the financial sector deteriorate further, vacancy and

rent trends will reverse direction.

13

23. PC Shipment Forecast: Slowing sales from economic weakness and share losses to devices

PC unit sales are beginning to slow down which is a

reflection of weakening economic trends (particularly

in developed markets) and because of lost share to

tablets, smartphones and e-readers.

Demand weakness is more notable among consumers

in developed markets with enterprise and emerging

market demand still holding its own.

Healthy server sales have been driven by enterprise

infrastructure refresh and data center growth.

Global unit level growth is expected to fall to the mid-

single digit range this year down from low double digit

growth last year.

Industry forecasts for 2012 are rather optimistic with

Gartner currently expecting +11% PC unit growth

driven by enterprise refresh and new PC chips from

Intel and AMD. Given rather weak economic trends,

we expect actual 2012 results will be lower and

comparable with 2011 expected growth of mid-single

digits.

24. Semiconductor Shipment Forecast: Economic weakness drives slowing revenue growth

While semi revenue growth is showing signs of

slowing into mid-year 2011, it seems possible that this

sector could drive flat to mid-single digit growth for

the year.

Global chip sales grew 3.7% during 1H/11 although it

started to show signs of slowing during 2Q with a –2%

q/q decline compared to the previous quarter.

1H/11 gains were driven by corporate refresh cycle,

strong smartphone and tablet demand, IT infrastructure

investments, growth in China somewhat offset by

slower consumer PC demand.

IDC forecasts 5% revenue growth for semi sales

during 2012 driven by the same trends cited above.

This growth forecast seems reasonable to us assuming

the absence of a recession (not currently expected).

Over the longer-term, we believe that the secular driver

of increased semi penetration in most all electronic end

markets (particularly automotive) helps to sustain chip

prospects.

14

25. Wireless Subscription Forecast: Data growth will continue to bolster mature voice business

Wireless service revenue grew at ~6% yoy during

2Q/11. This healthy growth was driven by 19% data

revenue growth which more than offset flattish voice

revenue growth of around 0.6% (hurt by price

competition from family and prepaid plans).

Data growth reflects that carriers are successfully

increasing their penetration of smartphones with more

aggressive marketing to both new users and existing

users. Data revenue now approximates 34% of total

service revenue.

Subscriber penetration is peaking at around 97% and

postpaid subs grew just 1.6% which is in-line with last

year’s results. Prepaid & wholesale subs (marketed by

resellers) and connected devices (i.e. tablets, e-books,

etc.) continue to take overall share.

26. Electricity Wholesale Price / Retail Sales

Forecast: Lower electricity demand with wholesale power prices under pressure

Electricity demand was relatively flat in 1H/11

increasing just 1% over 1H/10. Although industrial

demand increased by 2.8%, this was significantly

lower than the growth experienced in 2H/10 as the

economic recovery began to lose steam. Commercial

demand failed to gain any traction as unemployment

remained high and tempered consumption. Residential

demand was also flat as the coldest January in over 15

years was balanced by warmer than normal weather in

the Spring and the housing market remained anemic.

Wholesale power prices have remained relatively flat

over 2010 as wet weather fuelled increases in lower-

cost hydroelectric generation.

Retail sales of electricity are expected to decline as

economic growth is expected to slow, unemployment is

expected to remain high and the housing market is

projected to stay in the doldrums. Weather

comparisons will also be difficult as last year’s summer

was the fourth warmest in over 100 years. Wholesale

prices will continue to face pressure from low natural

gas pricing due to continued shale gas oversupply.

Excess generation capacity will continue to elevate

reserve margins and further dampen pricing.

15

Appendix1: Macro Indicators

Real GDP Growth ISM

-10

-8

-6

-4

-2

0

2

4

6

8

10

01/1Q 02/1Q 03/1Q 04/1Q 05/1Q 06/1Q 07/1Q 08/1Q 09/1Q 10/1Q 11/1Q

Real GDP % Ch.

(Source: Bureau of Economic Analysis) (Unit: %)

30

40

50

60

70

80

01/1 02/1 03/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1

Manufacturing Non-manufacturing

(Source: Institute for Supply Managemant) (Unit: %)

Industrial Production CPI・PPI

70

80

90

100

110

01/1 02/1 03/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1

-20

-15

-10

-5

0

5

10

15

20Industrial Production % Ch.

(Source: FRB) (Unit: index, %)

-8

-6

-4

-2

0

2

4

6

8

10

12

01/1 02/1 03/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1

CPI PPI

(Source: US Dept. of Labor) (Unit: %)

Consumer Confidence Index Unemployment Rate

20

40

60

80

100

120

140

01/1 02/1 03/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1

Consumer Confidence

(Source: The Conferrence Board) (Unit: index)

3

4

5

6

7

8

9

10

11

01/1 02/1 03/1 04/1 05/1 06/1 07/1 08/1 09/1 10/1 11/1

Unemployment Rate

(Source: US Dept. of Labor) (Unit: %)

16

Appendix2: Exchange Rate

Euro British Pound

0.70

0.90

1.10

1.30

1.50

1.70

98/1 00/1 02/1 04/1 06/1 08/1 10/1

(Source: Bloomberg)

1.25

1.50

1.75

2.00

2.25

98/1 00/1 02/1 04/1 06/1 08/1 10/1(Source: Bloomberg)

Canadian Dollar Japanese Yen

0.80

1.00

1.20

1.40

1.60

1.80

98/1 00/1 02/1 04/1 06/1 08/1 10/1

(Source: Bloomberg)

60

80

100

120

140

160

98/1 00/1 02/1 04/1 06/1 08/1 10/1

(Source: Bloomberg)

Opinions, views and projections in this document have been made by Bank of Tokyo-Mitsubishi UFJ Corporate Research Division (New York) and do not necessarily reflect the view of other business units. They represent our perceptions at the date of publication and are subject to change without notice. This document has been prepared solely for the information purposes of professional investors and non-private customers of Bank of Tokyo-Mitsubishi UFJ and is not intended to constitute an offer or solicitation to buy or sell securities. Bank of Tokyo-Mitsubishi UFJ and its subsidiaries trade in securities, futures and other financial instruments and may have a position in any of the financial products, securities or instruments mentioned in this commentary. Information appearing in this document is obtained from sources believed to be reliable. However, we cannot guarantee its accuracy and no liability is accepted whatsoever for any direct or consequential loss arising from its use. Bank of Tokyo-Mitsubishi UFJ is regulated by the Financial Services Authority. Copyright © The Bank of Tokyo-Mitsubishi UFJ, Limited 2011 No part of this publication may be reproduced, stored in a retrieval system or transmitted without the prior written permission of The Bank of

Tokyo-Mitsubishi UFJ Limited.

Publisher：BTMU Corporate Research Division （New York） 1251 Avenue of the Americas New York NY 10020 U.S.A.

Takeshi Nitta ＋1-212-782- 5706 tnitta@us.mufg.jp

Ryuta Nagai 5703 rnagai@us.mufg.jp

Philip Mangieri 5704 pmangieri@us.mufg.jp

Vera Kalina-Levine 5705 vlevine@us.mufg.jp

Gerardus Wynkoop 5551 gwynkoop@mufg.jp

Mayuko Hiramatsu 5707 mhiramatsu@us.mufg.jp

Javed Siddique 4108 jsiddique@us.mufg.jp

Brian Nogy 4716 bnogy@us.mufg.jp

Daisuke Yamamoto 4988 dyamamoto@us.mufg.jp

Magali Solimano 4260 msolimano@us.mufg.jp

Yukiko Otteson 5700 yotteson@us.mufg.jp