Global liquidity enters second
stage of money flow cycle
Financial mkt to face negatives Feb~Mar; floating capital moves key
We see two types of liquidity rally. In the first, market participants believe that
liquidity will increase and that financial crisis and economic contraction will
not worsen further. In this case, the market rallies around 30~40% from its
bottom, but pulls back again when economic recovery fails to be confirmed. In
the second type, actual capital inflow catalyzes the market, and it is this second
type that we expect to see in 1Q. The MMF balance, representing floating
capital, hit a record in the W100tn-range. In particular, more than W20tn
flowed into MMFs in January alone, and will likely continue rush in forward
due to the low-interest-rate environment and liquidity build-up. Even in the US,
M1 is nearing the highest level since the 1960s, while the Marshallian K, a
measure of liquidity, shows excess liquidity from 4Q08. Lower interest rates
and excess liquidity mean that while businesses will not go bust due to the lack
of money, there is no place for this large chunk of funds to go. Thus,
technically, a liquidity-driven rally has not started yet. Indeed, such rallies have
started when floating money decreased, such as in the wake of the 1998
financial and 2003 credit-card crises.
Fears of reemerging financial crisis may trigger floating capital moves
In the coming months, we expect capital inflow into assets, including equity
and property, in pursuit of higher returns, as the financial market’s volatility is
likely to increase from February amid worries of another financial crisis. The
financial instability expected in February~March is unlikely to escalate into a
crisis like the one seen in Sep~Oct 2008. Thus, if known negatives such as
decreasing yen carry trade surface, we advise closely monitoring the movement
of short-term money like MMFs to equities. Second, our analysis indicates that
beneficiaries of increased liquidity would be construction and securities. These
sectors should show stronger-than-market volatility (beta greater than one) in
2009, as they are always exposed to risks and are likely to be primary
beneficiaries, directly or indirectly, when capital flows into the market.

Contents
[Rumors of financial crisis in March]
1. Global liquidity enters second stage of money flow cycle......................................
- Global liquidity: enters initial stage of expansion
- Funds yet to circulate
- Historically, market inflects when MMF balance starts to fall
2. Financial negatives from February; floating capital movement is the key ............
- Rumor of March crisis compounded by yen carry trade and maturing bonds
- Negatives for March largely known, but then again, market was hit by known negatives in
Sep~Oct 2008
3. Investment points related to liquidity improvement ................................................
- Investment point 1: Financial instability unlikely to develop into crisis, in contrast with Sep~Oct
- Investment point 2: Financial instability to trigger movement of floating capital
- Investment point 3: Beneficiaries of increased liquidity would be construction and securities
[Model portfolio evaluation]
1. Model Portfolio ............................................................................................................
2. Model portfolio performance......................................................................................
[Chart book] ...............................................................
1. Economic cycle
2. Corporate Earnings
3. Valuation/Momentum
4. Capital flow

[Investment strategy]
1. Global liquidity enters second stage of money flow cycle
2. Financial negatives from February; floating capital movement is the key
3. Investment points related to liquidity improvement