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Friday, June 30, 2006

Tweaking The Foreign Allocation

By Yaser Anwar, CSC of Equity Investment Ideas

S&P Equity Strategy believes recent global stock market volatility is fueled by concerns that major central banks, fearing increased cost pressures, will overshoot and raise interest rates too much, stifling global economic growth in the second half of 2006.

Investors are worried that this will lead to a dramatic slowdown in global earnings growth. Thus, the current P/E contraction.

Global equities are experiencing their first major correction since the beginning of the current bull market in October 2002, with the S&P/Citigroup World Index down 11% from May 9 through June 21. S&P believes this volatility is shifting global risk-reward ratios and warrants several allocation changes.

The S&P Investment Policy Committee has decided to increase the allocation to developed international markets to 12% from 9%.

In the Model ETF Portfolio, this group is tracked by iShares MSCI EAFE (EFA). Since developed markets represent the largest international equity asset class, we believe greater exposure is warranted.

Also, Europe and the United Kingdom make up about two-thirds of developed international markets. Europe and the U.K. also have among the most attractively valued markets and offer a dividend yield higher than those of other developed markets.

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