Oil prices undergo a sharp correction
Brent crude oil prices plummeted yesterday (May 5), falling $10.39/bbl to
$110.80/bbl as of the NYMEX close, extending the declines of the past
three days. In our view, this sharp decline resulted from prices pushing
ahead of fundamentals in recent weeks, leaving them vulnerable to a
substantial correction. We believe the catalysts for the sell-off were a string
of disappointing economic data releases and the DOE statistics published
on May 4.
While a large portion of the risk premium likely came out of prices
yesterday, we remain wary of the potential for further downside in
coming days
The sell-off yesterday (May 5) has likely removed a large portion of the risk
premium that we believe has been embedded in oil prices, which could
suggest further downside may be limited from here. However, we remain
wary of potential further downside should economic data releases in
coming days continue to disappoint, with the focus now turning to today’s
(May 6) Non-farm payroll report in the United States.
We continue to see fundamentals tightening over the course of
this year, likely pushing prices back to recent highs by next year
It is nevertheless important to reiterate that while we saw recent prices as
having risen above the levels consistent with underlying near-term supplydemand
fundamentals, we continue to believe that the oil supply-demand
fundamentals will tighten further over the course of this year, and likely
reach critically tight levels by early next year should Libyan oil supplies
remain off the market. Consequently, it is important to emphasize that even
as oil prices are pulling back from their recent highs, we expect them to
return to or surpass the recent highs by next year.

Global Economics View
The ‘Strong Dollar’ Policy of the US:
Alice-in-Wonderland Semantics vs. Economic Reality
 Since August 1995, the ‘Strong Dollar’ policy has consisted of ‘open mouth
operations’ only.
 As regards forex market intervention and monetary policy, the Strong Dollar policy
has either amounted to dollar neglect/indifference, or a weak dollar policy.
 Since 2008, US monetary policy has been a weak dollar policy.
 Reputational capital and the ability to use policy intentions/announcements as a
policy instrument are eroded by this persistent refutation of words by actions.

Global Emerging Markets Strategy
Earnings Momentum in Perspective
 Earnings Risk — Investors in EM equities have faced a ‘wall of worry’ in 2011 – rising
oil prices, the end of QE2, early Fed tightening fears, a dollar rebound, etc. A new
worry is that earnings momentum may now be slowing. If correct, the argument goes,
EPS downgrades will follow and current below-average valuations cannot be trusted.
 Slowing Earnings Mo — The sharp rebound in earnings from the 2007-9 recession is
indeed slowing; that was inevitable. Twelve-month forward EPS forecasts are down
from +30% in early-2010 to +16%. However, this appears to be almost entirely due to
the rolling forward of 12-month forecasts, from a higher to a lower growth period.
 Annual Estimates — Calendar year estimates of EPS growth in EMs have actually
risen recently to 18% for 2011 and 13.3% for 2012. Upward revisions have been
concentrated in Asia and, for 2011, in Latin America. EMEA estimates have fallen. Most
notable upgrades for 2011 have been for Mexico, Korea, Poland, Taiwan, Colombia,
China, Malaysia and Russia, and among sectors, for Materials, Energy and IT.
 Rising ROEs/Solid Margins — Average profitability is back up to 14.6%, still lower
than the 2008 ROE peak of 17%, but well above recession lows of 10%. There is little
sign of ROEs retreating again. Investors are worried about top-line growth due to GDP
downgrades and margin pressure due to rising commodity prices and higher wages.
CIRA analysts still expect higher margins across EMs in 2011.
 Downgrades — However, our Upgrades/Downgrades ratio for emerging markets has
just dipped back into negative territory, suggesting an increased risk of downward
aggregate EPS revisions over the next few months. This must be watched carefully.
 Staying Bullish — We do not expect earnings downgrades to derail the bull market in
EM equities in the near-term. Assuming the global economy continues to grow, we
continue to expect solid gains in emerging markets over the rest of 2011.

好东西，支持一下，哈哈哈

Post quake Japanese market strategy
Japanese equities—near term caution but bullish medium term
 Slump in FY3/12 earnings looks inevitable — Our analysts have substantially cut
their FY3/12 EPS estimates for the major automakers and for the Big 4 blastfurnace
steelmakers, for whom the automakers are key customers, in light of parts
and power shortages due to the disaster. We expect downward revisions in other
sectors to gather steam and note the possibility that FY3/12 TOPIX EPS could fall
by 20% or more from FY3/11. However, we anticipate a surge in earnings in FY3/13
as supply constraints ease and the economy rebounds.
 Cautious near term on Japanese equities — We expect Japanese equities to be
weak near term in an environment of downward revisions to FY3/12 forecasts.
However, we expect that declines in FY3/12 earnings will largely be caused by
supply constraints and that visibility on a profits recovery will ultimately be better
than it would be for an earnings slump caused by demand constraints. We think this
will keep any sell-off in check.
 But bullish medium term on valuations and global growth — We expect
foreigner buying to continue based on low valuations (especially CAPE and PBR)
and a recovery in the global economy and global stock prices. Using metrics that
are highly correlated with Japanese equities and estimating the probability of
Japanese equities entering a medium-term downtrend, we see little possibility of a
downtrend {see figure 17}. As a result, we are confident Japanese equities will
eventually turn up. We accordingly set our March 2012 TOPIX target at 950.
 Model portfolio — We overweight the consumer staples, healthcare, and energy
(excluding nuclear) sectors with Japanese equities likely to be weak short term. We
underweight the consumer discretionary and materials sectors on concerns like
component shortages. Within sectors, we select stocks with a focus on value.
 Multi-Strategy for short-term uncertainty/long-term normalisation — NKY
protection in demand vs. upside participation and short-term volatility looks
expensive vs. long-term, both indicating near-term nervousness. Credit and volatility
combined may indicate mid-term recovery in equities. Trades: 1) Long equallyweighted
basket of top picks, 2) Hedge long basket with short NKY near-term, 3)
Sell short-dated NKY ATM calls vs. Buy long-dated ones to implement direction and
take advantage of inverted term structure.

Chapter 1: Slump in FY3/12 earnings 3
Chapter 2: FY3/12 Japan equity outlook 9
Chapter 3: The post-quake market 17
Chapter 4. Post-quake investment strategy 22
Chapter 5.Multi-Strategy: Gradually Normalising 25
Chapter 6. NKY skew, and factor returns 30
Appendix A-1 32