Daily Breakfast Spread, 7 June 2011

Daily Breakfast Spread
DBS Group Research 7 June 2011

Economics
Greater China, Korea
• TW: May trade data (due tomorrow) will likely show a slowdown in exports (DBSf: 12.9% YoY, vs. 24.6% in April). The uncertainties on the external trade outlook have increased for the near term, due to weaker-than-expected US recovery and China’s economic slowdown. Taiwan’s export orders, as a leading indicator for actual exports, have fallen -2.3% MoM sa in April. Because of slower export demand and the supply chain disruption caused by Japan earthquake, industrial production for April also dropped markedly by -3.8% MoM sa. Imports of electrical equipments and machinery fell too, by -3.7% MoM sa in April, reflecting the deterioration in business sentiment and/or supply shortage from Japan. The second quarter GDP growth in Taiwan should be significantly dragged down by these unfavourable external factors. In the domestic economy, consumer confidence may also be temporarily weighed down in 2Q, as a result of the spreading of food safety crisis caused by the toxic plasticizer scandal. Despite the weakness in the current quarter, we expect GDP growth to revert to the trend rate on sequential basis in 2H. Global uncertainties are likely to dissipate after US recovery is affirmed to be sustainable albeit slow, and Japan’s reconstruction work kicks in during the second half. At the local front, consumer confidence is likely to recover from the event risk related to food crisis. Meanwhile, consumers’ purchasing power is expected to be aided by the ongoing recovery in employment and the upcoming pay hikes for civil servants in July. In addition, retail sales in 2H should be underpinned by the policy initiative to launch the individual visiting scheme for mainland tourists. Also note that growth in 1Q has beat expectations and the second round GDP estimates have further revised up 1Q growth to 19% QoQ saar from 13.4%, which leads to a significant upward shift in the forecast trajectory for the full year. As such, notwithstanding the 2Q weakness, we have lifted GDP forecast for the whole year of 2011 to 5.0% from 4.1% (for details, please see “Economics-Markets-Strategy” to be released this Thursday).

US Fed expectations
Implied fed funds rate Dec-11 Mar-12 Jun-12 Market Current 0.17 1wk ago 0.17 DBS 0.25 0.23 0.24 0.50 0.31 0.33 0.75

Southeast Asia, India
• IN: Industrial production (Apr, Friday) will be interesting if the government does release the data with the new 2004-05 base as indicated last month. Industrial production has been growing at about a 7% annual rate (slightly lower than the 8% rate last year) but the monthly figures remain volatile as ever. According to the old data, we expect production growth to moderate sequentially (-1% MoM, sa) as a payback for the strong sequential reading in March. This would still make for 8% annualized growth in the quarter-ending June (and 15% in the quarter-ending May). The year-on-year readings, however, will remain volatile from month-tomonth and should dip to 4.4% (YoY) in April. We have penciled in full-year industrial sector growth of close to 7% in 2011 in the GDP accounts (pared down slightly when we downgraded our GDP forecast yesterday) and a weak YoY in April would be made for by strong readings in coming months. Meanwhile, if the new production series is released, it is likely to point to a generally more robust industrial sector than the old figures. In a fast growing manufacturing sector, the old index based on fixed 1993-94 weights would have naturally given greater weight to today’s sunset industries and lesser weight to today’s growth industries than if the weights were recomputed based on today’s (or a more recent) production basket. Indeed, the old data series was based on 350 items while the new series would be based on 500 items, many of which are new products that didn’t exist in the production basket two decades ago.

Source: Bloomberg fed fund futures Notes: Given a FF target rate of 0.25%, an implied FF rate of 0.30 is interpreted roughly as the market pricing in a 20% chance of a Fed hike to 0.50% from 0.25% (30 is 1/5th of the distance to 50 from 25). DBS expectations are presented in discrete blocks of 25bps, i.e., the Fed moves or it does not. See also “Policy rate forecasts” below.

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Daily Breakfast Spread, 7 June 2011

G3
• US: ‘Tis a slow week for data allowing minds to wander to the inevitable question: is QE3 in the cards? Would it help? Would it hurt? On the first question, our sense is that it won’t ultimately prove necessary and that it’s certainly too early for Fed officials to be make any hints in that direction. Only six weeks ago, the Fed intimated that QE2 would be the end of it all. To even hint at a reversal so soon would invite all kinds of howls from politicians anxious to embarrass and/or straightjacket the Fed. But to dismiss the possibility outright would / should raise eyebrows even further: no one knows for sure where the economy is headed and pretending otherwise is the quickest way for any central bank governor to lose his or her job. The right thing to say right now is what Bernanke will surely say tomorrow: that the economy probably does not need another round of quantitative easing but that, as always, the Fed stands ready to do whatever is necessary to ensure that recovery proceeds. Indeed. Through the worst financial crisis in 100 years, Bernanke has pursued QE1 and QE2 with the single solitary aim of preventing a recession similar to that experienced between 1928-1940. With 80% of the dirty work behind him, does anyone really doubt that he would go ahead with QE3 if the goal posts started moving in the wrong direction? He’d order QE3 in a heartbeat and even Republican politicians would fall in lockstep right behind him. Would it do any good? Our sense is probably not. QE1 was equivalent to 10 percentage points of GDP; QE2 to another 4 percentage points of GDP. In both cases, not a drop of the money “injected into the economy” was really injected into the economy. It stayed locked up at the Fed in the form of excess reserves. It is as if your local bank lent you a $100 but you never withdrew the money and used it: it never went into the economy. Yes, maybe you behave a little differently just knowing that that $100 is sitting there but, for the most part, those behavioural changes are minor – frills around the edges. The big part – the “show me the money” part – doesn’t take place. There’s no money to show. It’s locked up in the Fed’s vaults. That being the case, why bother with QE3 at all? A fair question. The answer is simple: you do what you’re supposed to do, even if it’s unlikely to have much effect. Monetary policy may do nothing for an economy at the bottom of a cycle. But that doesn’t mean you pack up go and home. You do what you’re supposed to do or someone else will. What about the flip side? The down side. Might QE3 cause inflation even though it doesn’t bring any real growth? The answer is the same today as it was when Q2 was being put into place: no. If QE3 has no effect on economic activity, it can’t have an effect on inflation. At some point, of course, the Fed will have some fancy foot work to do. It has already expanded its balance sheet by $2trn (14% of GDP) and when the banks holding those reserves decide they want to use them, they are free to do so. At some point, the Fed will have to mop up QE1 and QE2 and a hypothetical QE3 as well. But that’s a lot easier than it sounds. In any event, unfortunately, that looks like another story for another day. Again.

Currencies
• FX: Today’s inflation data should be important for the Philippines. Consensus expects May CPI to come in at 5.0% YoY, smack center of the central bank’s 4.55.5% projection. Bangko Sentral ng Pilipinas (BSP) first joined its Asian peers in hiking its overnight borrowing rate by 25bps to 4.25% on March 24. Following a second hike to 4.50% on May 5, it appears that monetary policy may be seeking to keep the real policy from falling into negative territory. Although BSP is less convinced about the real economy achieving this year’s official 7-8% GDP growth target, it seems determined to keep monetary policy focused at keeping within its 3-5% target. Hence, a strong reading of 5% or more for inflation would set the stage for another rate hike at the next meeting on June 16. Judging from the past experiences, USD/PHP is likely to trade lower to discount the rate hike. That said, the peso’s appreciation is likely to be tempered by BSP, who on May 13, revealed that it favored a stable peso near-term with a strengthening bias. Mindful that the US dollar is weak from a dovish US rate outlook, the central bank

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Daily Breakfast Spread, 7 June 2011

has sought to discourage undue speculation in the offshore peso market by requiring banks to report their daily transactions in the non-deliverable forward markets.

USD/PHP & rate hikes in the Philippines
45.0

44.5

USD/PHP BSP hikes

44.0

43.5

43.0

42.5 Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

CNY: CNY traded at a 17-year high last week after the PBoC setting new peaks for the mid-point for six consecutive sessions. The currency reached 6.4777 on June 1, the strongest level since 1993. CNY will likely advance further this week for three major reasons: 1) A wave of weak US data including the widely watched non-farm payrolls may spur speculation over another episode of QE. 2) China’s inflation may surprise on the upside at over 5.5% given the re-acceleration of food prices alongside speedy rebound of raw material prices. 3) Greece may win a second bailout that should lend support to the EUR and improve appetite for emerging market assets. Six-month/twelve-month NDFs only rose 0.07 percent/0.09 percent respectively last week to 6.4270/6.3635 implying a premium of 0.8 percent and 1.8 percent to the spot. We continue to see good value there.

Fixed Income
• ID: The current correction in commodity prices it taking pressure off Asian central banks to actively limit the pass-through of higher commodity prices to underlying inflation with monetary policy tightening. It buys them time, as lower commodity prices allow headline inflation rates to fall, which renders the outlook for underlying inflation more benign. For Indonesia, the correction means that rate hikes are delayed. Bank Indonesia is widely expected to keep the overnight reference rate unchanged at 6.75% when its policy makers meet this Thursday. They will likely point to easing annual headline inflation rates and a moderation in global growth. However, rate hikes are only delayed by a few months, as there is a good chance that core inflation, which currently runs at 4.64%YoY, comes under fresh upward pressure in 2H11 amid domestic excess liquidity and possibly a rebound in commodity prices. As such, rate hikes from Bank Indonesia in 2H11 cannot be ruled out. For bonds all that means little. The outlook for yields at the moment depends more on the direction of capital flows than determinants of fair value, like inflation and fiscal deficits. That’s why even higher oil prices in 1H11 and their negative impact on inflation measures and the government’s fiscal position had no impact on yields in the past four months. Bond yields are low and the curve is flat because of foreign demand, not fundamental factors. Government bond yields have fallen for four months in Indonesia and will now either consolidate or rise. At best, if foreign demand for the bonds remains strong, benchmark 2Y yields are likely to trade between the FASBI rate (5.75%) and the BI Reference rate (6.75%) and 10Y yields around 7.5%. That said, we remain wary of short periods of capital outflows or higher USD yields triggering a bearish resteepening of the Indonesian local currency government bond yield curve. There is no doubt that the

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Daily Breakfast Spread, 7 June 2011

bonds, especially the longer-term ones, are very expensive and that makes them vulnerable to external stress factors.

2Y IDgov Yield vs Policy Rate, 3M Jibor & FASBI
%pa 14 2Y IDgov Yield 12 3M Jibor 10 Policy Rate 8 6 FASBI 4 Jan-09

2Y IDgov, 10Y IDgov & Spread
%pa 22 20 18 16 14 12 10 8 6
2/10 Spread (RHS) 2Y IDgov Yield 10Y IDgov Yield

bps 400 350 300 250 200 150 100 50 0 Jan-08 Jan-09 Jan-10 Jan-11

Jul-09

Jan-10

Jul-10

Jan-11

4 Jan-07

Looking back
• US mkts: US stocks fell overnight amid ongoing concerns about the sustainability of the recovery. The Dow Jones Industrial Average fell 0.5% to 12089.96 and the Nasdaq closed 1.11% lower at 2702.56. Treasury yields were little changed around 0.43% in the 2Y sector and 2.99% in the 10Y sector.

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Daily Breakfast Spread, 7 June 2011

Economic calendar
Event Jun 7 (Tue) PH: CPI (May) TW: CPI (May) EZ: retail sales (Apr) Jun 8 (Wed) KR: GDP (1Q, F) -JP: adj currenct acc (Apr) TW: trade balance (May) -- exports -- imports EZ: GDP (1Q, P) -Jun 9 (Thur) JP: GDP (1Q, F) MY: industrial production (Apr) US: initial jobless claims (Jun) US: trade balance (Apr) Jun 10 (Fri) PH: exports (Apr) CN: trade balance (May) -- exports -- imports IN: industrial production (Apr) Consensus 5.0% y/y 1.64% y/y 0.3% m/m sa Actual Previous 4.5% y/y 1.34% y/y -1.0% m/m sa

JPY 266bn USD 2.56bn 8.7% y/y 11.6% y/y 0.8% q/q sa 2.5% y/y

1.4% q/q sa 4.2% y/y JPY 752.7bn USD 2.96bn 24.6% y/y 25.7% y/y 0.8% q/q sa 2.5% y/y

-3.1% q/q saar 2.8% y/y 419K -USD 48.9bn

-3.7% q/q saar 2.4% y/y 422K -USD 48.2bn

8.0% y/y USD 19.8bn 22.0% y/y 22.5% y/y 5.8% y/y

4.0% y/y USD 11.42bn 29.9% y/y 21.8% y/y 7.3% y/y

Central bank policy calendar
Policy Date Country Rate This week 09-Jun Ezone 7-day refi rate 09-Jun ID o/n reference rate 10-Jun KR 7 day repo rate Next week 14-Jun 16-Jun 16-Jun 17-Jun Last week 01-Jun Current Consensus 1.25% 6.75% 3.00% 1.25% 6.75% 3.13% DBS 1.25% 6.75% 3.25% Actual

JP IN PH EZ

o/n call rate 0.10% o/n repo 7.25% rev repo 4.50% ECB monthly report (Jun)

0.10%

TH

1 day repo

2.75%

3.00%

3.00%

3.00%

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Daily Breakfast Spread, 7 June 2011

GDP & inflation forecasts
GDP growth, % YoY 2008
US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* 0.0 -1.2 0.3 6.0 4.6 3.6 1.4 2.5 6.2 9.6 2.1 0.7 2.3 6.8

CPI inflation, % YoY 2012f
3.0 2.4 1.7 6.1 5.6 5.2 6.5 5.0 7.0 9.0 4.5 4.3 4.1 7.5

2009
-2.6 -6.3 -4.0 4.6 -1.7 1.0 -1.3 -2.2 5.3 9.2 -2.7 -1.9 0.2 8.0

2010
2.9 4.0 1.7 6.1 7.2 7.3 14.5 7.8 6.8 10.3 6.8 10.9 6.2 8.5

2011f
2.4 1.0 1.9 6.4 5.5 5.5 7.0 5.0 6.5 9.5 5.0 5.0 4.1 7.5

2008
3.8 1.4 3.3 9.8 5.4 9.3 6.5 5.5 23.1 5.9 4.3 3.5 4.7 8.4

2009
-0.3 -1.4 0.3 4.8 0.6 3.2 0.6 -0.8 7.0 -0.7 0.5 -0.9 2.8 3.6

2010
1.6 -0.4 1.6 5.1 1.7 3.8 2.8 3.3 9.2 3.3 2.4 1.0 3.0 9.5

2011f
2.6 0.5 2.6 6.7 3.1 5.6 4.2 4.0 18.5 4.5 5.0 1.8 4.4 8.0

2012f
2.2 0.7 1.9 6.3 2.4 5.2 3.0 4.0 8.0 4.0 4.5 1.6 3.2 7.0

* India data & forecasts refer to fiscal years beginning April; inflation is WPI Source: CEIC and DBS Research

Policy & exchange rate forecasts
Policy interest rates, eop
current US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam^ China* Hong Kong Taiwan Korea India 0.25 0.10 1.25 6.75 3.00 4.50 n.a. 3.00 14.00 6.31 n.a. 1.75 3.00 7.25 2Q11 0.25 0.10 1.25 6.75 3.00 4.50 n.a. 3.00 14.00 6.56 n.a. 1.88 3.25 7.25 3Q11 0.25 0.10 1.50 7.00 3.25 4.75 n.a. 3.50 14.00 6.81 n.a. 2.13 3.50 7.75 4Q11 0.25 0.10 1.75 7.50 3.25 5.00 n.a. 4.00 14.00 7.06 n.a. 2.38 3.75 8.00 1Q12 0.50 0.10 2.00 8.00 3.25 5.00 n.a. 4.00 12.00 7.06 n.a. 2.63 4.00 8.00 current … 80.1 1.459 8,513 3.01 43.2 1.23 30.3 20,593 6.47 7.78 28.6 1080 44.8

Exchange rates, eop
2Q11 … 81 1.42 8,800 2.92 42.0 1.23 29.1 21,240 6.46 7.75 28.0 1020 43.5 3Q11 … 80 1.46 8,750 2.87 41.0 1.21 28.8 21,480 6.38 7.75 27.5 1000 43.0 4Q11 … 79 1.50 8,700 2.82 40.0 1.19 28.5 21,720 6.30 7.75 27.0 980 42.5 1Q12 … 78 1.52 8,675 2.79 39.8 1.18 28.1 21,770 6.25 7.75 26.8 970 41.8

^ prime rate; * 1-yr lending rate

Market prices
Policy rate Current (%) US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand China Hong Kong Taiwan Korea 0.25 0.10 1.25 6.75 3.00 4.50 Ccy policy 3.00 6.31 Ccy policy 1.75 3.00 7.25 10Y bond yield Current 1wk chg (%) (bps) 3.00 1.13 3.06 7.37 4.00 6.65 2.32 3.74 … 2.29 1.42 4.21 8.29 -8 0 7 -3 -1 7 -2 #N/A … -8 -2 -3 -12 FX Current 73.7 80.4 1.464 8528 3.00 43.2 1.227 30.2 6.48 7.78 28.7 1076 44.8 1wk chg (%) -1.7 0.7 2.5 0.4 0.7 0.3 0.7 0.3 0.2 0.0 0.6 0.4 0.8 Index S&P 500 Topix Eurostoxx JCI KLCI PCI FSSTI SET S'hai Comp HSI TWSE Kospi Sensex Equities Current 1,300 817 2,556 3,844 1,560 4,298 3,146 1,058 2,728 22,950 9,046 2,113 18,376 1wk chg (%) -1.9 -1.0 -2.4 0.8 0.7 0.5 0.3 -0.9 0.7 -0.7 2.7 0.6 0.6

India Source: Bloomberg

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Daily Breakfast Spread, 7 June 2011

Contributors:
Economics
David Carbon Ramya Ma Tieying Irvin Seah Chris Leung Singapore Singapore Singapore Singapore Hong Kong (65) (65) (65) (65) (852) 6878 6878 6878 6878 3668 9548 5282 2408 6727 5694

Currencies / Fixed Income
Philip Wee Jens Lauschke Nathan Chow Singapore Singapore Hong Kong (65) 6878 4033 (65) 6224 2574 (852) 3668 5693

Administrative / technical support
Violet Lee Singapore (65) 6878 5281

Please direct distribution queries to Violet Lee on 65-6878-5281

Client Contacts
Singapore
DBS Bank DBS Asset Management DBS Vickers Securities The Islamic Bank of Asia (65) (65) (65) (65) 6878 6878 6533 6878 8888 7801 9688 5522

Japan
DBS Tokyo (81 3) 3213 4411 (82 2) 339 2660 (6 03) 2148 8338 (6 08) 7595 500 (6 04) 263 6996 (63 2) 845 5112 (886 4) 2296 (886 7) 323 (886 4) 2230 (886 6) 213 (886 2) 8101 (886 3) 339 0088 2362 9188 3939 0598 6060

Korea
DBS Seoul

China
DBS Beijing DBS Dongguan DBS Fuzhou DBS Guangzhou DBS Hangzhou DBS Shanghai DBS Shenzhen DBS Suzhou DBS Tianjin (86 010) 5839 7527 (86 769) 2211 7868 (86 591) 8754 4080 (86 20) 3884 8010 (86 571) 8788 1288 (86 21) 3896 8888 (86 755) 8269 1043 (86 512) 6288 8090 (86 22) 2339 3073 (852) 3668 (853) 2832 (852) 3668 (86-21) 6888 0808 9338 1148 6820

Malaysia
DBS Kuala Lumpur DBS Labuan Hwang-DBS Penang

Philippines
DBS Manila

Taiwan
DBS Chungching DBS Kaohsiung DBS Taichung DBS Tainan DBS Taipei DBS Taoyuan

Hong Kong
DBS Hong Kong DBS Macau DBS Asia Capital DBS Asia Capital Shanghai

Thailand
DBS Bangkok (66 2) 636 6364 (44 20) 7489 6550 (97 1) 4364 1800 (1 213) 627 0222

India
DBS Delhi DBS Mumbai (91 11) 3041 8888 (91 22) 6638 8888 (62 021) 390 3366 (62 061) 3000 8999 (62 021) 531 9661

United Kingdom
DBS London

Indonesia
DBS Jakarta DBS Medan DBS Surabaya

UAE
DBS Dubai

USA
DBS Los Angeles

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Daily Breakfast Spread, 7 June 2011

Recent research
Asia: Food prices and income inequality in Asia CN: A case study of price control on electricity CN: Good value in CNY forwards US: Interest Rate Outlook & Strategy CN: Latent risks facing China SG: Election effect on policy HK: Mild tightening at work KR: Interest Rate Outlook & Strategy ID: The balance of payments outlook FX: The CNH & its role in yuan reforms CN: The formation of Chinese wealth CN: Interest Rate Outlook & Strategy CN: The roller coaster ride continues CN: Offshore CNY progress check SG: A well-calibrated budget CN: Inflation and labor productivity CN: CNY capital account liberalisation -recent developments and implications ID: Interest Rate Outlook & Strategy TW: Appreciation impact IN: Interest Rate Outlook & Strategy IN: Food inflation demand-driven SG: Budget to tackle the gap US: Interest Rate Outlook & Strategy 6 Jun 11 SG: Singapore attempts the impossible SG 2011: Above expectations 20 May 11 KR: Interest Rate Outlook & Strategy 18 May 11 11 May 11 9 May 11 9 May 11 15 Apr 11 11 Apr 11 8 Apr 11 7 Apr 11 1 Apr 11 31 Mar 11 28 Mar 11 24 Mar 11 21 Feb 11 21 Feb 11 8 Feb 11 EUR: One for the bulls KRW: Stronger than consensus ID: 2011 budget preview Asia: Interest Rate Outlook & Strategy IN: Higher rates or higher inflation Asia: The six ways to absorb capital inflow MY: A step towards Vision 2020 IN: Rising growth potential ID: Inflows & monetary policy SG: It’s payback time ID: Inflows drown fundamentals Asia: Another day, another $2bn of inflow SG: Higher with or without tightening HK’s inflection point as offshore CNY center CN: Medium-term inflation outlook IN: Interest Rate Outlook & Strategy 2 Feb 11 SG: GDP contribution of the IRs 28 Jan 11 FX: JPY intervention risk rising 27 Jan 11 24 Jan 11 17 Jan 11 11 Jan 11 HK: How far can HKgo as China's major Renminbi offshore center? US Fed: Between a stock and bond place China and US: Demand trumps supply 10 Aug 10 18 Aug 10 26 Aug 10 11 Nov 10 11 Nov 10 3 Nov 10 1 Nov 10 28 Oct 10 26 Oct 10 26 Oct 10 18 Oct 10 13 Oct 10 13 Oct 10 11 Oct 10 8 Oct 10 7 Oct 10 7 Oct 10 28 Sep 10 27 Aug 10 27 Aug 10 6 Dec 10 29 Nov 10

10 Aug 10 6 Aug 10

Disclaimer:
The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

Licence No.: MICA (P) 083/11/2010

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