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Greed & Fear 30th Apr

Greed & Fear 30th Apr

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Christopher Wood christopher.wood@clsa.

com (852) 26008516

Thursday, 26 April 2012 Page 1
The nature of Hollande
New York
Spain, in GREED & fear’s view, continues for now to be the critical fault line for risk aversion in
the Eurozone. That said, markets were made nervous this week by the first round of the
presidential election in France.
Still in GREED & fear’s view the second round, due to be held on 6 May, remains a close call.
This is because the 17.9% who voted for the National Front’s Marine Le Pen in the first round
are surely more likely to vote for Nicolas Sarkozy than Socialist Party candidate Francois
Hollande. The question is then how many of them will abstain. The other point is that, even if
Hollande is elected, it remains unlikely that he will push all the policies he is advocating, such
as demanding that the ECB buys government bonds at issuance. Such an approach would also
put Hollande in direct confrontation with Frau Merkel and risk undermining the proposed
ratification in Germany of Europe’s much-hyped “fiscal pact”. As an establishment Europhile,
and so a believer in a united Europe, GREED & fear doubts that Hollande would really want to
risk an open row with Germany. More likely is that the German establishment continues to
move incrementally towards the French view, as has been the case since the onset of the
Eurozone crisis. Flexible Mario also sought this week to push the debate in this direction with
his public comment about the need for a “growth pact” as well as a fiscal pact.
Figure 1
22 April French presidential election 1
st
round results
28.63
27.18
17.90
11.10
9.13
2.31
1.79
1.15
0.56 0.25
0
5
10
15
20
25
30
35
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(%vote)
22-Apr-12 French presidential election 1st round results

Source: Ministry of Interior, France
That said, Bundesbank President Jens Weidmann continues to make speeches calling for a
tougher line. Thus, GREED & fear heard that he made a speech in New York this week where,
among other things, the Bundesbank head called for a supranational fiscal authority to enforce
fiscal discipline. This clearly makes sense if the Eurozone wants to move proactively to fiscal
union. But all the evidence is that it will continue to be forced in this direction primarily by
market pressures, and that when this becomes sufficiently intense the Germans will again roll
over just as happened with the LTROs, whatever the Bundesbank now says. If this is the case
then Weidmann is making these speeches because he wants to preserve the institutional
credibility of the Bundesbank in the history books and not because he hopes to change policy.
Meanwhile, returning to Spain, the potential positive development remains the Spanish coming
up with a credible “bad bank” approach towards their banking sector problem. There has been
some noise on this issue over the past week. Thus, it has been reported of late that Spain is
considering a “bad bank”. Yet the typical bad bank structure, where the government provides a
guarantee for the funding of the bad bank, has now reportedly been discarded and the Spanish
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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 2
Government is seemingly exploring other routes, such as separating bad assets into vehicles
owned by the banks. Thus, on 21 April Spanish Economy Minister Luis de Guindos specifically
rejected the idea of a state-sponsored “bad bank” with the extraordinary comment that there
would not be “the smallest bit of public money available”, according to a Bloomberg report
(“Spain won’t create ‘bad bank’ for real estate: De Guindos”, 21 April 2012). Instead, the
minister said lenders should move real estate assets into separate “entities” or create
“securitised assets” for which they have already set aside provisions so that distressed
properties can be more easily valued and sold.
Figure 2
Spanish banks’ doubtful loans as % of total lending
0
1
2
3
4
5
6
7
8
9
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
(%)
Spanish banks' NPL ratio

Source: Bank of Spain
While GREED & fear is all in favour of private holders of bank equity and bonds taking a hit,
GREED & fear would be amazed if, sooner or later, the Spanish sovereign balance sheet does
not reflect a degree of socialisation of Spain’s bad debt problem. It is this Spanish banking
issue which in GREED & fear’s view remains the most likely trigger for the sort of risk aversion
in the Eurozone that would trigger renewed ECB sovereign debt buying and renewed LTROs. A
further obvious negative would be escalating deposit outflows from Spanish banks. Thus,
private deposits at Spanish banks, which exclude deposits by monetary financial institutions
and central government, fell by 5.1% from a peak of €1.74tn in June 2011 to €1.65tn at the
end of February, according to the ECB data (see Figure 3). The March deposit data will not be
available until 30 April.
Figure 3
Spanish banks’ private deposits
1,620
1,640
1,660
1,680
1,700
1,720
1,740
1,760
(6)
(4)
(2)
0
2
4
6
8
10
12
14
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
(%YoY) (Euro bn)
Deposit growth
Outstanding (RHS)

Note: Excluding deposits by monetary financial institutions and central government. Source: ECB
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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 3
Meanwhile, amidst the current bearish focus, it is important to remember that the LTROs have
succeeded in kicking the can down the road in terms of allowing for a large part of the 2012
sovereign debt refinancing schedule to have already been refinanced. Thus, in the case of
Spain, the Spanish Treasury reported last week that it has already funded €40bn or 47% of this
year’s total expected gross issuance of medium-term and long-term bonds of €86bn, which
includes €50bn of redemptions and €36bn of net new issuance.
Still a longer term negative consequence of the LTROs has been further to interconnect the
sovereign debt issue and the bank debt issue in the case of Spain and Italy, where the banks
most eagerly used the ECB funding to hoover up more of their own sovereign debt. Thus,
Spanish and Italian banks’ holdings of Eurozone government securities increased by €67.9bn
and €54.2bn respectively since December to €245.8bn and €301.6bn at the end of February
(see Figure 4).
Figure 4
Spanish and Italian banks’ holdings of Eurozone government securities
60
110
160
210
260
310
2001 2003 2005 2007 2009 2011
(€ bn)
Spanish banks Italian banks

Source: ECB
Figure 5
Net % of Eurozone banks reporting stronger demand for loans
(50)
(40)
(30)
(20)
(10)
0
10
20
30
4
Q
0
9
1
Q
1
0
2
Q
1
0
3
Q
1
0
4
Q
1
0
1
Q
1
1
2
Q
1
1
3
Q
1
1
4
Q
1
1
1
Q
1
2
(%)
Loans to non-financial corporations
Loans for house purchase
Consumer credit

Source: ECB – Bank Lending Survey
What trick will Flexible Mario pull out of the hat next time and what will be the Germans’
reaction? These are sure to be issues markets will increasingly focus on. Meanwhile, the latest
ECB bank lending survey published this week shows that loan demand in the Eurozone
continued to weaken in 1Q12. Thus, a net 30% and 43% of Eurozone banks reported weaker
demand for loans for non-financial corporations and home mortgages respectively in 1Q12, up
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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 4
from 5% and 27% in 4Q11 (see Figure 5). This sort of data is likely to be used by Draghi in
coming months to justify ECB easing.
Figure 6
Euro Stoxx Banks Index
80
120
160
200
240
280
320
360
400
440
480
520
2007 2008 2009 2010 2011 2012
Euro Stoxx Banks Index
Source: Bloomberg
The growing Eurozone tremors, including a Eurozone banking index now close to re-testing its
March 2009 and November 2011 lows (see Figure 6), also causes GREED & fear to reduce the
overweight in India by two percentage points in the Asia Pacific ex-Japan relative-return
portfolio. This is because, as argued here previously, if real Eurozone-triggered risk aversion
resumes, then India is Asia’s most vulnerable stock market since the likely rupee weakness
would remove the Reserve Bank of India’s scope for further easing. The reduced overweight in
India will be paid for by increasing the allocation in China and Malaysia (see Figure 15).
Ironically, evidence of more distress in the Eurozone is likely to increase pressure for easing in
China; though as ever investors should take their queue on the policy dynamic in China from
the action in the Shanghai A-share market. So far this quarter the market has been behaving
somewhat better, outperforming the rest of the Asia Pacific region. Thus, the Shanghai
Composite Index has risen by 6.3% in US dollar terms so far this quarter. This compares with a
1.2% gain in the MSCI China Index and a 1.1% decline in the MSCI AC Asia Pacific ex-Japan
Index (see Figure 7).
Figure 7
Shanghai Composite and MSCI Asia country indices 2Q12 quarter-to-date performance in US$ terms
-8
-6
-4
-2
0
2
4
6
8
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(%QTD)
Source: Datastream
Prepared for - W: lesley.wong@clsa.com



Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 5
Moving away from the perhaps tediously familiar subject of the Eurozone crisis, an interesting
theory has been brought to GREED & fear’s attention of late. That is on the subject of Japan.
The theory, put simply, is that the deflation trend in Japan is finally ending not because the
Bank of Japan has finally got religion on quanto easing but because the demographics means
that the working-age population continues to decline as post-war baby boomers reach
retirement age. This in turn means that labour should increasingly have pricing power, which
also should mean that income growth has bottomed.
What is the evidence for the above? First, there were about 2.7m people a year born in the
three years between 1947 and 1949, who will become 65 years old in 2012-2014, compared
with the latest birth rate of 1.06m in 2011. Second, the working-age population aged between
15 and 64 has fallen from a peak of 87.3m or 69.5% of the total population in 1995 to 81.3m
or 63.6% last year, and is projected by the National Institute of Population and Social Security
Research to decline by an annual average of 1.07m over the next five years to 76m or 60.2%
in 2016 (see Figure 8).
Figure 8
Japan working-age population projection
50
52
54
56
58
60
62
64
66
68
70
40
45
50
55
60
65
70
75
80
85
90
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Japan working-age population (15-64)
as % of total population
(m) (%)

Source: National Institute of Population and Social Security Research, Statistics Bureau
Figure 9
Japan job offers to applicants ratio
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
(x)
Japan job offers to applicants ratio

Source: Ministry of Health, Labour and Welfare (MHLW), CEIC Data
The theory is also supported by the improving job offers-to-applicants ratio which has risen
from a record low of 0.43 reached in August 2009 to 0.75 in February, the highest level since
October 2008 (see Figure 9). True, none of the above is clear cut evidence. There is also the
fact that the elderly have continued to participate in the labour force. But that said, the
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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 6
demographics of Japan clearly mean that there has to be a supply shortage building in labour
which seemingly has positive implications for employees’ pricing power.
Figure 10
Japan wage growth (contractual cash earnings per employee)
-4
-3
-2
-1
0
1
2
3
4
5
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
(%YoY)
Japan wage index (contractual cash earnings)

Source: Ministry of Health, Labour and Welfare (MHLW) - Monthly Labour Survey
This leads in turn to whether there is the evidence for such a shift in the demand for labour in
terms of the reported income data. The chart above of average monthly contractual cash
earnings per employee shows a 0.3%YoY rise in February, the first such increase since
December 2010, based on the revised data released this week by the Ministry of Labour (see
Figure 10). Another potential lead indicator could be wages of temporary workers. In this
respect, data published by the recruitment company Recruit Co. shows that the average
offering wage per hour for temporary jobs in the three major metropolitan areas in Japan rose
by 1.4%YoY in March, the 17
th
consecutive month of year-on-year growth.
The above has potentially huge implications from an investment standpoint since a definitive
move out of deflation, even if it is only to 1% or 2% annualised inflation, should be very
positive for many Japanese domestic stocks. It should also finally trigger at least the start of a
reallocation of domestic institutional portfolios out of JGBs into equities. For now all that can be
said is that the inflation data is showing no deterioration in the deflationary trend, if not yet
moving definitively into inflation. Thus, the core CPI excluding food and energy declined by
0.6%YoY in February, compared with a 1.1%YoY decline in December, while the overall CPI rose
by 0.3%YoY (see Figure 11).
Figure 11
Japan CPI inflation
-3
-2
-1
0
1
2
3
4
5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Japan overall CPI inflation
Japan CPI excluding food & energy
(%YoY)
Source: Statistics Bureau
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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 7
Another encouraging development is that Japan’s breakeven inflation rate, measured as the
yield differential between the nominal 10-year JGB and the 10-year inflation-indexed JGB,
turned positive in February for the first time since September 2008 and is now 0.49% (see
Figure 12). The issue is whether this move has been driven by current market hopes for more
aggressive BoJ easing rather than the labour market issues discussed above.
Figure 12
Japan breakeven inflation rate
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
(%)
10-year breakeven inflation rate

Breakeven inflation rate = Nominal JGB yield - Inflation-indexed JGB yield. Source: Bloomberg
One point is clear. If Japan’s inflation rate gradually moves into positive territory over the next
12 months and more, no one will be happier than BoJ Governor Masaaki Shirakawa since that
will remove the growing political pressure for more monetary quackery. It is clear that the BoJ
remains deeply skeptical of the efficacy of monetisation even though it is also evident that the
central bank is now monetising rather aggressively. In this respect, the BoJ is on course to buy
Y34tn or 78% of the planned Y44tn in new JGB issuance this fiscal year as a result of both its
so-called Asset Purchase Programme and its regular outright JGB purchases of Y21.6tn per
year.
GREED & fear raises all of the above issues not because there is conviction here that Japan is
finally poised to move definitively out of deflation but rather because this is an issue which
merits monitoring, most particularly income growth, because of the obvious potentially
significant investment implications.
Meanwhile a further change in the Japan long-only portfolio will be made this week. The
investment in steelmaker JFE Holdings will be removed with the money raised added to the
existing investments in drugstore operators Sugi and Tsuruha and internet play CyberAgent
(see Figure 16).
Australia has traditionally been a country of cosy monopolies or oligopolies where leading
domestic players enjoyed pricing power. GREED & fear was therefore interested to read about a
new thematic report from CLSA’s Australian office which discusses in detail the destructive
threat to the profit margins of Australian companies, most particularly discretionary retailers,
caused by consumers using the internet for “price discovery” (see CLSA research Australian
consumer: Price discovery - Online shift forcing structural changes, 16 April 2012 by head of
Australia research Scott Ryall).
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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 8
Figure 13
Australia system credit growth and nominal GDP growth
(5)
0
5
10
15
20
25
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
(%YoY)
Australia system credit growth
Australia nominal GDP growth

Source: CLSA Asia-Pacific Markets, Reserve Bank of Australia, Australian Bureau of Statistics
This is an issue over and above the overvalued Australian dollar and related high real interest
rates, which have already caused a marked slowdown in Australia’s domestic economy.
Meanwhile, the continuing deceleration in credit growth portends deflationary risks given the
credit excesses that preceded it. Thus, as has been noted by CLSA’s Australia banking analyst
Brian Johnson, between 1992 and 2007 Australian system credit growth was 1.9x nominal GDP
(see Figure 13 and CLSA research Australian Banks: Housing Bubble – Pop or Pss?, 20 April
2012). The money markets are now expecting the Reserve Bank of Australia to cut rates by
25bp to 4% at its next monetary policy meeting scheduled on 1 May, and are anticipating a
total of 100bp rate cuts by the end of this year (see Figure 14). GREED & fear will maintain for
now the underweight in Australia in the relative-return portfolio.
Figure 14
Reserve Bank of Australia cash target rate and December 2012 interbank cash-rate futures
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12
RBA cash target rate
December-12 interbank cash-rate futures
(%)

Source: Bloomberg

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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 9

Figure 15
CLSA Asia Pacific ex-Japan asset allocation
MSCI AC Asia
Pacific ex-Japan
weightings
25-Apr-12
CLSA
recommended
weightings
26-Apr-12
Mismatch
from current
benchmark
Australia 25.2% 8.0% -17.2%
China 18.4% 21.0% 2.6%
Hong Kong 8.5% 7.0% -1.5%
India 6.5% 7.0% 0.5%
Indonesia 2.8% 7.0% 4.2%
Korea 15.5% 17.0% 1.5%
Malaysia 3.5% 5.0% 1.5%
New Zealand 0.4% 0.0% -0.4%
Philippines 0.8% 6.0% 5.2%
Singapore 5.3% 4.0% -1.3%
Taiwan 11.1% 9.0% -2.1%
Thailand 2.1% 7.0% 4.9%
Vietnam -- 2.0% 2.0%
Total 100.0% 100.0% --

Source: CLSA Asia-Pacific Markets
Figure 16
Japan absolute-return long-only thematic portfolio
Theme Weight
(%)
Stocks Description Weight
(%)
Trading 15 Mitsubishi Corp general trading company 5
Mitsui & Co general trading company 5
Sumitomo Corp general trading company 5
Real Estate 22 Mitsubishi Estate real estate company 10
Mitsui Fudosan real estate company 6
Daito Trust Construction property developer 6
Autos 11 Suzuki Motor automaker 4
Isuzu Motors truck maker 3
Yamaha Motor motorcycle maker 4
Machinery 13 Keyence optical-sensor maker 4
Fanuc industrial robot maker 5
Nabtesco precision gear manufacturer 4
Gold mining 4 Sumitomo Metal Mining gold & non-ferrous metal miner 4
Consumer 21 Asahi Breweries beer producer 5
Sugi Holdings drugstore operator 6
Tsuruha Holdings drugstore operator 6
Sega Sammy gaming equipment maker 4
Airport 3 Japan Airport Terminal Haneda airport operator 3
Telecoms 7 Softbank mobile operator 7
Internet 4 CyberAgent internet conglomerate 4
Source: CLSA Asia-Pacific Markets



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Christopher Wood christopher.wood@clsa.com (852) 26008516

Thursday, 26 April 2012 Page 10
Key to CLSA investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return;
O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less
than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to
provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock
against the 12-month forecast return (including dividends) for the local market where the stock is traded.
CLSA changed the methodology by which it derives its investment rankings on 1 January 2012. The stocks covered in this report are
subject to the revised methodology. We have made no changes to the methodologies through which analysts derive price targets - our
views on intrinsic values and appropriate price targets are unchanged by this revised methodology. For further details of our new
investment ranking methodology, please refer to our website.

©2012 CLSA Asia-Pacific Markets (“CLSA”). Note: In the interests of timeliness, this document has not been edited.
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26 April 2012 Page 2 .640 1. It is this Spanish banking issue which in GREED & fear’s view remains the most likely trigger for the sort of risk aversion in the Eurozone that would trigger renewed ECB sovereign debt buying and renewed LTROs. which exclude deposits by monetary financial institutions and central government. Figure 3 Spanish banks’ private deposits 14 12 10 8 6 4 2 0 (2) (4) (%YoY) Deposit growth Outstanding (RHS) (Euro bn) 1. the minister said lenders should move real estate assets into separate “entities” or create “securitised assets” for which they have already set aside provisions so that distressed properties can be more easily valued and sold.760 1. Instead. on 21 April Spanish Economy Minister Luis de Guindos specifically rejected the idea of a state-sponsored “bad bank” with the extraordinary comment that there would not be “the smallest bit of public money available”.620 (6) Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Note: Excluding deposits by monetary financial institutions and central government. Source: ECB Thursday.1% from a peak of €1. private deposits at Spanish banks. 21 April 2012). sooner or later. the Spanish sovereign balance sheet does not reflect a degree of socialisation of Spain’s bad debt problem. Figure 2 Spanish banks’ doubtful loans as % of total lending 10 9 8 7 6 5 4 3 2 1 (%) Spanish banks' NPL ratio 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Bank of Spain While GREED & fear is all in favour of private holders of bank equity and bonds taking a hit. A further obvious negative would be escalating deposit outflows from Spanish banks. such as separating bad assets into vehicles owned by the banks.700 1. according to a Bloomberg report (“Spain won’t create ‘bad bank’ for real estate: De Guindos”. Thus. GREED & fear would be amazed if.Christopher Wood christopher.720 1.65tn at the end of February.680 1. fell by 5.660 1.com (852) 26008516 Government is seemingly exploring other routes. according to the ECB data (see Figure 3). Thus.740 1.74tn in June 2011 to €1.wood@clsa. The March deposit data will not be available until 30 April.

Thus. Figure 4 Spanish and Italian banks’ holdings of Eurozone government securities 310 (€ bn) Spanish banks Italian banks 260 210 160 110 60 2001 Source: ECB Figure 5 2003 2005 2007 2009 2011 Net % of Eurozone banks reporting stronger demand for loans 30 20 10 0 (10) (20) (30) (40) (50) (%) Loans to non-financial corporations Loans for house purchase Consumer credit 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 Source: ECB – Bank Lending Survey What trick will Flexible Mario pull out of the hat next time and what will be the Germans’ reaction? These are sure to be issues markets will increasingly focus on.wood@clsa. up Thursday. which includes €50bn of redemptions and €36bn of net new issuance. where the banks most eagerly used the ECB funding to hoover up more of their own sovereign debt. 26 April 2012 1Q12 Page 3 . in the case of Spain. Spanish and Italian banks’ holdings of Eurozone government securities increased by €67. Still a longer term negative consequence of the LTROs has been further to interconnect the sovereign debt issue and the bank debt issue in the case of Spain and Italy.2bn respectively since December to €245.6bn at the end of February (see Figure 4). the Spanish Treasury reported last week that it has already funded €40bn or 47% of this year’s total expected gross issuance of medium-term and long-term bonds of €86bn. Meanwhile. amidst the current bearish focus. a net 30% and 43% of Eurozone banks reported weaker demand for loans for non-financial corporations and home mortgages respectively in 1Q12.Christopher Wood christopher. it is important to remember that the LTROs have succeeded in kicking the can down the road in terms of allowing for a large part of the 2012 sovereign debt refinancing schedule to have already been refinanced. Thus.9bn and €54.com (852) 26008516 Meanwhile.8bn and €301. the latest ECB bank lending survey published this week shows that loan demand in the Eurozone continued to weaken in 1Q12. Thus.

Christopher Wood christopher. the Shanghai Composite Index has risen by 6. The reduced overweight in India will be paid for by increasing the allocation in China and Malaysia (see Figure 15). Ironically. Figure 7 Shanghai Composite and MSCI Asia country indices 2Q12 quarter-to-date performance in US$ terms 8 6 4 2 0 -2 -4 -6 -8 (%QTD) Shanghai A AsiaPac ex-Japan Asia ex-Japan New Zealand Hong Kong Thailand Taiwan Korea Japan Philippines Australia Indonesia Source: Datastream Thursday.1% decline in the MSCI AC Asia Pacific ex-Japan Index (see Figure 7). also causes GREED & fear to reduce the overweight in India by two percentage points in the Asia Pacific ex-Japan relative-return portfolio. if real Eurozone-triggered risk aversion resumes.com (852) 26008516 from 5% and 27% in 4Q11 (see Figure 5). then India is Asia’s most vulnerable stock market since the likely rupee weakness would remove the Reserve Bank of India’s scope for further easing. This is because. 26 April 2012 Singapore Malaysia China India Page 4 . including a Eurozone banking index now close to re-testing its March 2009 and November 2011 lows (see Figure 6). though as ever investors should take their queue on the policy dynamic in China from the action in the Shanghai A-share market.wood@clsa. This compares with a 1. as argued here previously.3% in US dollar terms so far this quarter. So far this quarter the market has been behaving somewhat better. evidence of more distress in the Eurozone is likely to increase pressure for easing in China.2% gain in the MSCI China Index and a 1. Thus. Figure 6 Euro Stoxx Banks Index 520 480 440 400 360 320 280 240 200 160 120 80 2007 Source: Bloomberg Euro Stoxx Banks Index 2008 2009 2010 2011 2012 The growing Eurozone tremors. outperforming the rest of the Asia Pacific region. This sort of data is likely to be used by Draghi in coming months to justify ECB easing.

2 1. There is also the elderly have continued to participate in the labour force. who will become 65 years old in 2012-2014.3m or 63. is that the deflation trend in Japan is finally ending not because the Bank of Japan has finally got religion on quanto easing but because the demographics means that the working-age population continues to decline as post-war baby boomers reach retirement age.4 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Ministry of Health.0 0. which also should mean that income growth has bottomed. What is the evidence for the above? First.7m people a year born in the three years between 1947 and 1949. the Page 5 Thursday. an interesting theory has been brought to GREED & fear’s attention of late. there were about 2.06m in 2011. True.8 0. This in turn means that labour should increasingly have pricing power.6% last year.3m or 69. put simply.6 (x) Japan job offers to applicants ratio 0.07m over the next five years to 76m or 60. That is on the subject of Japan. Statistics Bureau Figure 9 Japan job offers to applicants ratio 1. The theory. none of the above is clear cut evidence. Second.com (852) 26008516 Moving away from the perhaps tediously familiar subject of the Eurozone crisis.75 in February. CEIC Data The theory is from a record October 2008 fact that the also supported by the improving job offers-to-applicants ratio which has risen low of 0. Figure 8 Japan working-age population projection 90 85 80 75 70 65 60 55 50 45 (m) (%) 70 68 66 64 62 60 58 56 Japan working-age population (15-64) as % of total population 54 52 50 2050 40 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 Source: National Institute of Population and Social Security Research. the highest level since (see Figure 9). 26 April 2012 .43 reached in August 2009 to 0. Labour and Welfare (MHLW).2% in 2016 (see Figure 8). But that said.4 1.6 1.Christopher Wood christopher. and is projected by the National Institute of Population and Social Security Research to decline by an annual average of 1.wood@clsa. compared with the latest birth rate of 1.5% of the total population in 1995 to 81. the working-age population aged between 15 and 64 has fallen from a peak of 87.

Christopher Wood christopher. Another potential lead indicator could be wages of temporary workers. Thus.3%YoY (see Figure 11). shows that the average offering wage per hour for temporary jobs in the three major metropolitan areas in Japan rose by 1. 26 April 2012 Page 6 . even if it is only to 1% or 2% annualised inflation. data published by the recruitment company Recruit Co. It should also finally trigger at least the start of a reallocation of domestic institutional portfolios out of JGBs into equities. the core CPI excluding food and energy declined by 0.3%YoY rise in February.wood@clsa.1%YoY decline in December. Figure 11 Japan CPI inflation 5 4 3 2 1 0 -1 -2 (%YoY) Japan overall CPI inflation Japan CPI excluding food & energy -3 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Statistics Bureau Thursday. the first such increase since December 2010.6%YoY in February. Labour and Welfare (MHLW) . In this respect.4%YoY in March.Monthly Labour Survey This leads in turn to whether there is the evidence for such a shift in the demand for labour in terms of the reported income data. while the overall CPI rose by 0. based on the revised data released this week by the Ministry of Labour (see Figure 10). if not yet moving definitively into inflation. compared with a 1. Figure 10 Japan wage growth (contractual cash earnings per employee) 5 4 3 2 1 0 -1 -2 -3 (%YoY) Japan wage index (contractual cash earnings) -4 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Ministry of Health.com (852) 26008516 demographics of Japan clearly mean that there has to be a supply shortage building in labour which seemingly has positive implications for employees’ pricing power. should be very positive for many Japanese domestic stocks. The above has potentially huge implications from an investment standpoint since a definitive move out of deflation. the 17th consecutive month of year-on-year growth. For now all that can be said is that the inflation data is showing no deterioration in the deflationary trend. The chart above of average monthly contractual cash earnings per employee shows a 0.

wood@clsa.Online shift forcing structural changes. turned positive in February for the first time since September 2008 and is now 0.0 0.Christopher Wood christopher.5 -1. Meanwhile a further change in the Japan long-only portfolio will be made this week. most particularly income growth. because of the obvious potentially significant investment implications.0 -3. the BoJ is on course to buy Y34tn or 78% of the planned Y44tn in new JGB issuance this fiscal year as a result of both its so-called Asset Purchase Programme and its regular outright JGB purchases of Y21. Source: Bloomberg One point is clear. most particularly discretionary retailers. If Japan’s inflation rate gradually moves into positive territory over the next 12 months and more.5 0. Australia has traditionally been a country of cosy monopolies or oligopolies where leading domestic players enjoyed pricing power.49% (see Figure 12).0 -2. Thursday. no one will be happier than BoJ Governor Masaaki Shirakawa since that will remove the growing political pressure for more monetary quackery.5 (%) 10-year breakeven inflation rate -4.Inflation-indexed JGB yield. measured as the yield differential between the nominal 10-year JGB and the 10-year inflation-indexed JGB. The investment in steelmaker JFE Holdings will be removed with the money raised added to the existing investments in drugstore operators Sugi and Tsuruha and internet play CyberAgent (see Figure 16). Figure 12 Japan breakeven inflation rate 1.0 -0. caused by consumers using the internet for “price discovery” (see CLSA research Australian consumer: Price discovery .0 -1. In this respect. GREED & fear was therefore interested to read about a new thematic report from CLSA’s Australian office which discusses in detail the destructive threat to the profit margins of Australian companies.com (852) 26008516 Another encouraging development is that Japan’s breakeven inflation rate.6tn per year. It is clear that the BoJ remains deeply skeptical of the efficacy of monetisation even though it is also evident that the central bank is now monetising rather aggressively. The issue is whether this move has been driven by current market hopes for more aggressive BoJ easing rather than the labour market issues discussed above.5 -3. GREED & fear raises all of the above issues not because there is conviction here that Japan is finally poised to move definitively out of deflation but rather because this is an issue which merits monitoring. 26 April 2012 Page 7 . 16 April 2012 by head of Australia research Scott Ryall).5 -2.0 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Breakeven inflation rate = Nominal JGB yield .

Australian Bureau of Statistics This is an issue over and above the overvalued Australian dollar and related high real interest rates.0 (%) RBA cash target rate December-12 interbank cash-rate futures 2.5 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Source: Bloomberg Thursday.0 4. 26 April 2012 Page 8 . the continuing deceleration in credit growth portends deflationary risks given the credit excesses that preceded it. The money markets are now expecting the Reserve Bank of Australia to cut rates by 25bp to 4% at its next monetary policy meeting scheduled on 1 May. Thus.5 5.9x nominal GDP (see Figure 13 and CLSA research Australian Banks: Housing Bubble – Pop or Pss?.wood@clsa.com (852) 26008516 Australia system credit growth and nominal GDP growth 25 20 15 10 5 0 (%YoY) Australia system credit growth Australia nominal GDP growth (5) 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Source: CLSA Asia-Pacific Markets. Reserve Bank of Australia.5 4. Figure 14 Reserve Bank of Australia cash target rate and December 2012 interbank cash-rate futures 5.Christopher Wood Figure 13 christopher. GREED & fear will maintain for now the underweight in Australia in the relative-return portfolio. between 1992 and 2007 Australian system credit growth was 1. 20 April 2012).5 3. which have already caused a marked slowdown in Australia’s domestic economy. as has been noted by CLSA’s Australia banking analyst Brian Johnson.0 3. and are anticipating a total of 100bp rate cuts by the end of this year (see Figure 14). Meanwhile.

0% 7.4% 0.0% 17.wood@clsa.0% 4.5% 4.0% 7.0% 0.3% -2.3% 11.5% 0. 26 April 2012 Page 9 .com (852) 26008516 Figure 15 CLSA Asia Pacific ex-Japan asset allocation Australia China Hong Kong India Indonesia Korea Malaysia New Zealand Philippines Singapore Taiwan Thailand Vietnam Total Source: CLSA Asia-Pacific Markets Figure 16 MSCI AC Asia Pacific ex-Japan weightings 25-Apr-12 25.2% 1.8% 15.5% 3.6% -1.5% 0.0% 2.1% 2.0% 9.0% Mismatch from current benchmark -17.0% 7.0% CLSA recommended weightings 26-Apr-12 8.9% 2.2% 18.2% -1.Christopher Wood christopher.0% 7.0% -- Japan absolute-return long-only thematic portfolio Theme Trading Weight Stocks (%) 15 Mitsubishi Corp Mitsui & Co Sumitomo Corp 22 Mitsubishi Estate Mitsui Fudosan Daito Trust Construction 11 Suzuki Motor Isuzu Motors Yamaha Motor 13 Keyence Fanuc Nabtesco 4 Sumitomo Metal Mining 21 Asahi Breweries Sugi Holdings Tsuruha Holdings Sega Sammy 3 Japan Airport Terminal 7 Softbank 4 CyberAgent Description general trading company general trading company general trading company real estate company real estate company property developer automaker truck maker motorcycle maker optical-sensor maker industrial robot maker precision gear manufacturer gold & non-ferrous metal miner beer producer drugstore operator drugstore operator gaming equipment maker Haneda airport operator mobile operator internet conglomerate Weight (%) 5 5 5 10 6 6 4 3 4 4 5 4 4 5 6 6 4 3 7 4 Real Estate Autos Machinery Gold mining Consumer Airport Telecoms Internet Source: CLSA Asia-Pacific Markets Thursday.1% 4.8% 5.5% -0.0% 100.0% 6.4% 8.5% 2.5% 6.0% 21.2% 2.0% 5.4% 5.1% -100.5% 1.

As a result. 88 Queensway. ©2012 CLSA Asia-Pacific Markets (“CLSA”).clsa. If you require disclosure information on previous dates. We have made no changes to the methodologies through which analysts derive price targets . this document has not been edited.wood@clsa.com (852) 26008516 Key to CLSA investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return. Disclosures therein include the position of the CLSA Group only and do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates.com/member/research_disclosures/.our views on intrinsic values and appropriate price targets are unchanged by this revised methodology. we benchmark the 12-month total return (including dividends) for the stock against the 12-month forecast return (including dividends) for the local market where the stock is traded.com or (852) 2600 8111. please contact compliance_hk@clsa. Note: In the interests of timeliness.clsa. please refer to our website. U-PF: Total return expected to be less than market return but expected to provide a positive absolute return. For relative performance.Christopher Wood christopher. Hong Kong. potential or perceived conflicts of interests relating to research report and such details are available at www. intervention or pressure by any person/s in compiling such publication/ communication. 01/01/2012 Thursday. SELL: Total return expected to be less than market return AND to provide a negative absolute return. The CLSA Group. CLSA changed the methodology by which it derives its investment rankings on 1 January 2012. O-PF: Total return expected to be greater than market return but less than 20% absolute return. If investors have any difficulty accessing this website. 18/F. a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual. The stocks covered in this report are subject to the revised methodology. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence. please contact webadmin@clsa. investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. For further details of our new investment ranking methodology. One Pacific Place. telephone (852) 2600 8888.com/disclaimer.com IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at www. 26 April 2012 Page 10 .html. CLSA's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research reports.

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