GLOBAL QUANTITATIVE RESEARCH Quantitative Outlook 2010€¦ · Average correlation of typically...

GLOBAL QUANTITATIVE RESEARCH

Quantitative Outlook 2010Rebalancing: prepare for a new driver

Latest Anchor:• China: Towards the futuresSandy LeeEquity Quantitative StrategiesEquity Research, Non-Japan Asia+852 2252 2101 / [email protected] 2010

NOMURA INTERNATIONAL (HK) LIMITED

Any authors named on this report are research analysts unless otherwise indicated.

See the important disclosures and analyst certifications on pages 44 to 48.


2© Nomura International (Hong Kong) Limited

Summary Equity markets in 2009 were led by a risk-relief value rally typical of markets setting off from a

recessionary trough. Value and risk-related factors that were crushed in the crisis have outperformed since March 2009. B/P value spread has narrowed – the success of the factor could become narrow in 2010.

Global growth has been led by intra-emerging market trade and the improving demand in the US could spur further growth. Asian earnings are passing through an attractive stage as order backlogs are increasing and margins are expanding. Forecast E/P and earnings-revision related indicators are both seeing better performance in recent months, indicating that earnings prospects remain the main focus.

Of late, the rate of earnings revisions have started to slow and return to more normal levels. History tells us that when the market moves out of a recessionary trough and the rate of earnings revisions is returning to normal levels, investors focus not only on stocks with reasonable valuations and positive earnings revisions, but also on those that are backed by an ability to sustain margin quality and growth.

A theme running through our recent research has been that the scope for large upgrades may narrow as the year proceeds, as wage pressures, increasing costs and ceilings on utilisation suggest that earnings momentum will increasingly depend on margin quality and growth. The historic rebound of earnings as a return driver may have partly been spent but it may be time to review how much we’ve paid for growth.



Rebalancing: prepare for a new driver

Notes: Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest quintile and short the quintile with the lowest scores (rebalanced monthly), except for the factors marked *, which are computed reverse-based. Factor returns do not include transaction costs. Universe is based on MSCI Standard Index in AC Asia Pacific ex-Japan. YTD performance data run to 7 May, 2010. Factor definitions are shown in Appendix I. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

YTD the success of value factors has narrowed, while earnings revisions indicators see rising impact. Performance of risk-related factors has become volatile in 2010. One-year price momentum has resumed a positive impact.

Top 18 factors by 2009 annualised return % Top 18 factors by YTD annualised return %

Rank Factor 2009 annualised return (% ) Factor category1 Default probability * (28.79) Financial strength2 Cashflow yield 26.24 Valuation3 B/P 25.39 Valuation4 Price momentum (12M -1M) (25.33) Size, momentum & liquidity5 Sales/Price 23.33 Valuation6 Price momentum (6M -1M) (22.76) Size, momentum & liquidity7 Long term price momentum (21.14) Size, momentum & liquidity8 Earnings yield 19.59 Valuation9 Estimate dispersion 18.66 Revision & chg in EY10 Price momentum (3M) (16.37) Size, momentum & liquidity11 Price momentum (1M) (16.00) Size, momentum & liquidity12 Volume turnover ratio 15.39 Size, momentum & liquidity13 EPS growth (FY1) (15.25) Growth14 Volatility 14.70 Size, momentum & liquidity15 Trailing EBITDA/EV 14.06 Valuation16 Shareholders’ equity ratio (13.95) Financial strength17 Return on equity (13.01) Financial strength18 Return on assets (12.56) Financial strength

Rank Factor YTD annualised return (% ) Factor category1 Change in earnings yield 12.14 Revision & chg in EY2 Sales growth (1Y) 11.89 Growth3 Earnings yield 10.23 Valuation4 Dividend yield 9.47 Valuation5 Normalised E/P 9.21 Revision & chg in EY6 Revision index 9.00 Revision & chg in EY7 Shareholders’ equity ratio (8.67) Financial strength8 Sales/Price 7.74 Valuation9 Trade momentum (3M) 7.36 Size, momentum & liquidity10 Return on equity 6.15 Financial strength11 Change in ROE (FY1) 5.40 Growth12 Price momentum (12M -1M) 5.21 Size, momentum & liquidity13 Price momentum (1M) (5.15) Size, momentum & liquidity14 EBITDA/EV 4.88 Valuation15 Volatility (4.68) Size, momentum & liquidity16 Earnings revision indicator (FY2) 4.33 Revision & chg in EY17 Default probability * (4.22) Financial strength18 StarMine predicted surprise 3.92 Revision & chg in EY



Factor performance in Asia

Notes: Universe is based on MSCI Standard Index in AC Asia Pacific ex-Japan. Data run to 7 May, 2010. Factor definitions are shown in Appendix I.Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Some growth and quality measures also see improved returns in 2010.

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Capex to assetsAsset turnover

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Shareholders’ equity ratioReturn on equity

Return on assets

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Sales growth (FY2)Sales growth (FY1)

Sales growth (1Y)Change in ROE (FY2)Change in ROE (FY1)

Consensus rating *Estimate dispersion

StarMine predicted surpriseNormalised E/P

Change in earnings yieldEarnings revision indicator

Revision index

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B/PEarnings yield

Dividend PayoutDividend yield

Volume turnover ratioTrade momentum (3M)

Average daily traded valueVolatility

Long-term price momentum Price momentum (12M -1M)

Price momentum (6M -1M)Price momentum (3M)Price momentum (1M)

Market cap *



How risk relief affects value stocks One prominent factor in the market’s recovery was risk relief. The risk relief rally in 2009

boosted cheap stocks, causing the average B/P of high default probability stocks to decline and mean revert to near the long-term average. Risk appetite has been priced in.

B/P of high and low default probability stocks

Notes: Red line shows the average B/P for the quintile group in the MSCI AC Asia Pacific ex Japan with the highest default probability; grey line shows the average B/P for the quintile group with the lowest default probability. Data run to 30 April, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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Correlation between quant factors is falling When quant factors suffered in 2008, short-term average correlation between factor

returns of typical quant factors rose to an exceptionally high level. We observe a falling average correlation of factor returns since mid-2009, implying that

quant performance is resuming to more normal levels.Average correlation of typically quant factors versus cumulative return to B/P, E/P and revision factors

Note: Universe is based on MSCI All Country Asia-Pacific ex Japan. Performance is calculated by cumulating the return spread (in local currency) between group #3 and #1 by each factor. Portfolios are rebalanced monthly and grouping simulation is conducted with country diversification. For correlation, the chart shows short-term (60-day) rolling average (absolute) correlation of return for 12 typically quant factors. Data run to 11 May, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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DM and EM Asia: Quant factor returns Since the credit crisis, quant factors have fared relatively better in Emerging Asia. Quant factor performance seems to be back on track since mid 2009.

Average factor spread performance (long short return by quintile)

Notes: Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest quintile and short the quintile with the lowest scores (rebalanced monthly), except for the factors marked *, which are computed reverse-based. Factor returns do not include transaction costs. Universe is based on MSCI Standard Index in AC Asia Pacific ex-Japan. Data run to 7 May, 2010. Factor definitions are shown in Appendix I. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

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Developed Pacific ex Japan

AC Asia Pacific ex Jp



The outlook for alpha Positive values of the information coefficient (IC) mean that our representative set of

quant factors are, on average, delivering returns, and vice versa. The utility of quant factors for investing looks more promising in Emerging Asia.

Notes: The information coefficient measures the correlation of the monthly ranking of stocks according to quant factors and the subsequent month’s ranking of the returns of these stocks. Data run to 30 April 2010. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies.

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The potential return of PBR factor From a quantitative perspective, the wider the value spread, the greater the potential

return of value factors. When many value stocks are trading below book value, the PBR factor may gain investors’ traction.

Looking at the current value spread, the success of PBR factor could narrow compared with what we saw at the beginning of 2009.

Average PBR for value stocksQuarterly PBR factor return versus average PBR for value stocks

Notes: Value stocks are defined as the stocks in the bottom quintile ranked by PBR. Universe is based on the constituents of MSCI Hong Kong, Korea, Taiwan, Singapore and Australia.Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Notes: Figures are market cap-weighted PBR for the bottom quintile portfolio by PBR. Universe is based on the constituents of MSCI Hong Kong, Korea, Taiwan, Singapore and Australia. Data run to 7 May, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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Change in value leadership from B/P to E/P The revival of B/P efficacy in 2009 initially surpassed forecast E/P. The divergence in

value efficacy suggests that various risk has been priced differently across value factors. Recent performance of valuation devices was mixed, with B/P faring worst and dividend

yield and E/P delivering better performance. The increased risk aversion does not seem to have hurt all value factors in the same manner. The economic recovery and declining uncertainty of earnings in Asia are increasing the efficacy of E/P since late 2009.

Correlation between factor return and market returnDaily factor return — value factors

Note: Universe is based on MSCI All Country Asia-Pacific ex Japan. Portfolios are rebalanced monthly and grouping simulation is conducted with country diversification. Performance is calculated by cumulating the return spread (in local currency) between group #3 and #1. Data run to 11 May, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Note: The chart shows short-term (60-day) rolling correlation. Universe is MSCI All-Country Asia-Pacific ex-Japan. Data run to 11 May, 2010.Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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B/P is closely connected with estimate dispersion Performance of B/P is closely connected with estimate dispersion. That is to say, B/P

outperformed when risk appetite was high, and underperformed amid rising risk aversion. Driven by domestic policy risk and Greece’s debt crisis, recent sentiment has changed

from risk-seeking mode in March to risk avoidance in April and early May. B/P has under-performed E/P in recent months. B/P performance is likely to stay volatile in the near term amid rapid changes in risk appetite. If sovereign risk gets resolved and we see a resurgence in risk, there could be a short-term tactical case for value.

Correlation: B/P and E/P, B/P and dispersionFactor return of E/P, B/P and dispersion


Note: The chart shows short-term (60-day) rolling correlation between factor returns. Universe is MSCI All-Country Asia-Pacific ex-Japan. Data run to 11 May, 2010.Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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Rising impact of earnings revision indicators The analyst revision index and StarMine-predicted surprise indicators are showing a

rising impact in recent months especially in Emerging Asia markets. Whereas in the past, investors tended to put emphasis on forecast E/P and revision-

related factors in different circumstances, the fact that these factors have both fared relatively better recently indicates earnings prospects are still the main focus.

Revision and predicted surprises (DM versus EM)Daily factor return – revision indicators


Notes: Universe is based on MSCI AC Asia-Pacific ex Japan. Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest quintile and short the quintile with the lowest scores (rebalanced monthly). Data run to 7 May, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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Improved returns on price momentum and growth In Asia, we observe short-term reversal and mid-term price momentum effect over the

long run. Return of one-year price momentum is usually negatively correlated with B/P. The risk-relief rally in 2009 has greatly rewarded value stocks with high B/P, and at the

same time the remarkable reversal wrecked the factor performance of one-year price momentum. Of late, one-year price momentum has resumed a positive impact. Growth factors such as sales growth also see improved returns.

Performance of mid-term momentum, B/P, actual sales growth and capex to sales

Z-scores of cumulative return to one-year price momentum and B/P factors

Note: Z-scores (based on deviations from the trend) of cumulative return to price momentum and B/P factors. Data run to 7 May, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Note: The chart shows cumulative long-short performance since January 1999. Universe is MSCI All-Country Asia-Pacific ex-Japan. Data run to 7 May, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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Earnings momentum as return driver Another prominent factor in the market’s recovery is the earnings growth rebound. Global growth has

been led by intra-emerging market trade and improving demand in the US could spur further growth. A theme running through our recent research is that the scope for large upgrades may narrow as the

year proceeds, and the rate of earnings revisions will return to more normal levels. And this is how it has panned out of late. As Asian countries experience diminishing trade surpluses, companies will experience margin compression. Wage pressures, increasing costs and ceilings on utilisation suggest that earnings momentum will increasingly depend on margin stability and growth.

Note: Earnings momentum index is defined as: % of companies with +ve Revi,t / % of companies with -ve Revi,t. Data run to 7 May, 2010.Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Earnings momentum index

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Country Earnings momentum indexBest Singapore 3.83

Hong Kong 2.45Thailand 2.00Taiw an 1.94Korea 1.73Malaysia 1.44China 1.37India 1.03

Worst Australia 0.97AP Total 1.55

Regional sector Earnings momentum indexBest Information Technology 2.75

Consumer Discretionary 2.00Materials 1.71Financials 1.47Industrials 1.43Consumer Staples 1.35Health Care 1.20Utilities 1.18Telecommunication Services 1.00

Worst Energy 0.82



Reality check on earnings, quality and growth Current earnings revision cycles resemble the crisis recovery in the post IT bubble and SARS period. History tells us that when the market moves out of a recessionary trough and the rate of earnings

revisions is returning to normal levels, investors focus not only on stocks with reasonable valuations and positive earnings revisions, but also on those backed by an ability to sustain margin and growth.

Notes: Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest quintile and short the quintile with the lowest scores (rebalanced monthly), except for the factors marked *, which are computed reverse-based. Pink highlight indicates top 10 ranked strategies; grey highlight indicates bottom 10 strategies in the given column (time period). Factor returns do not include transaction costs. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

Factor return rankings Period 1: Jun 03-Mar 04 Period 2: Apr 04 - Sep 04 Period 3: Oct 04 - Oct 05APXJ APXJ APXJ

Market cap * 18 40 21Price momentum (1M) 38 39 41Price momentum (3M) 27 35 24Price momentum (6M -1M) 7 31 3Price momentum (12M -1M) 13 16 1Long-term price momentum 28 12 18Volatility 12 36 38Average daily traded value 34 34 23Trade momentum (3M) 33 20 27Volume turnover ratio 14 37 30Dividend yield 32 3 11Dividend Payout 40 21 10Earnings yield 4 7 25B/P 5 19 40Sales/Price 2 28 36Cashflow yield 1 14 39Trailing EBITDA/EV 8 6 37EBITDA/EV 3 5 35Revision index 11 13 5Earnings revision indicator (FY2) 10 4 2Change in earnings yield 15 1 4Normalised E/P 17 2 22StarMine predicted surprise 22 26 6Estimate dispersion 9 41 33Consensus rating * 21 17 8Change in ROE (FY1) 25 23 7Change in ROE (FY2) 23 27 16Sales growth (1Y) 20 18 31Sales growth (FY1) 30 38 13Sales growth (FY2) 29 22 17EPS growth (FY1) 24 32 14EPS growth (FY2) 6 30 20Return on assets 37 9 19Return on equity 26 11 15Shareholders’ equity ratio 35 25 26Trailing profit margin 39 8 9Pretax profit margin 36 10 12Asset turnover 31 24 28Capex to assets 16 33 29Capex to sales 19 29 34Default probability * 41 15 32



Blending earnings momentum and PEG Lower-beta downstream technology hardware and equipment looks more attractive on

PEG compared with high-beta semiconductors. Asia strategist is bullish on regional ports and container companies – the inventory

restocking cycle in G7 has further to run alongside rising emerging market demand.Mapping earnings momentum versus PEG for regional industry

Notes: Earnings momentum index is defined as % of companies with +ve Revi,t / % of companies with -ve Revi,t. PEG is calculated using forecast FY1 PE divided by EPS 2Y CAGR, and we exclude companies with negative PEG in the analysis. Universe is MSCI AC Asia Pacific (excluding Japan, New Zealand, the Philippines, and Indonesia). Data run to 7 May, 2010.Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

Utilities

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Tech Hardw areSoftw are Insurance

Div. Financials

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Food Bev.& Tob

Food Retailing

RetailingMedia

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AutomobilesTransportation

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Re-rating?



A flight to quality? Quality factors such as ROE have recently shown improved performance (for the old-

fashioned safe haven reason). If risk appetite resumes, we believe when the cyclical/value part of the market has run

too far and when the rebound of earnings as a return driver have largely been spent, quality and growth factors could become more prominent.

Daily factor return – quality and growth factors (Asia Pacific ex Japan)

Note: Universe is based on MSCI All Country Asia-Pacific ex Japan. Portfolios are rebalanced monthly and grouping simulation is conducted with country diversification. Performance is calculated by cumulating the return spread (in local currency) between group #3 and #1. ST accruals = (Δ (Current Asset - Cash ) - Δ (Current Liability - Short Term Debt & Current Portion Of Long Term Debt) -Depreciation) / Total Assets. Data run to 7 May, 2010. Source: Worldscope, I/B/E/S, MSCI, Nomura Quantitative Strategies

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China: Towards the futures• Latest market initiatives and implications• Factors that work — and when they work best• An overview of relevant quantitative strategies• Potential tradable pair trading universe and opportunities



Latest market initiatives and implications In early January, the CSRC announced that the State Council had approved, in

principle, the launch of a pilot scheme for margin financing and securities lending and the introduction of index futures. The first batch of four CSI 300 Index Futures is listed on 16 April, 2010. The first six eligible firms to participate in margin trading and securities lending pilot testing program are local securities firms. The initial launch has taken a conservative stance, starting with small scale in the beginning and gradually expanding.

CSRC has drafted the interim provisions on QFIIs participating in index futures and is soliciting industry opinions. The relevant regulations for QFIIs to participate in index futures or margin trading and securities lending have not been finalised.

Past experiences in other markets suggest these initiatives will facilitate new trading and hedging tools, and offer a short sale mechanism that should help improve management of market risk, attracting foreign institutional investor participation and reducing market volatility over the long term.



Does quant factor work in domestic China? For the whole period, valuation factors produce the best performance, followed by

revision-related factors. Small-cap and return reversal phenomenon are obvious. 2007 is a clear divider for the valuation factors’ performances. Earnings-revision and

StarMine-predicted surprise indicators fared well before the credit crisis erupted in summer 2008, but have underperformed value since then.

Annualised factor performance and information ratio in CSI 300 (whole period)

Note: Figures are annualised long-short returns with the corresponding factor exposure. Whole period starts from May 05 to Jan 10. The factors marked with * are reverse-based. Factor definitions are shown in Appendix II. Source: Worldscope, I/B/E/S, StarMine, Nomura Quantitative Strategies

Annualised return % (Whole period)

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Default Probability *Pretax Profit Margin (F12M)Shareholders' Equity Ratio

Return On Equity (F12M)

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Sales Grow th (Historical)

Estimate DispersionStarmine Predicted Surprise (F12M)

Earnings Revision Indicator (FY2)Revision Index

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Factors that work — rising interest rates Earnings-revision strategies have fared best and surpass value style during times of

rising interest rates. The earnings-revision indicators, revision index and predicted surprise indicators are near the top of our information ratio rankings.

Size factor is less important during times of rising interest rates, while growth and momentum indicators tend to see a positive impact in such a period.

Annualised factor performance and information ratio in CSI 300 (rising interest rates)

Note: Figures are annualised long-short returns with the corresponding factor exposure. Rising interest rates period starts from Nov 05 to Oct 07. The factors marked with * are reverse-based.Source: Worldscope, I/B/E/S, StarMine, Nomura Quantitative Strategies

Annualised return % (Rising interest rates)

-20 -10 0 10 20 30










MarketCap *

Information ratio (Rising interest rates)

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0










MarketCap *



Factors that work — declining interest rates The effectiveness of valuation factors increases when interest rates are in a downward

phase. Meanwhile, earnings-revision indicators and growth factors see declining impact as interest rates fall.

Small cap and reversal effect become apparent.Annualised factor performance and information ratio in CSI 300 (declining interest rates)

Note: Figures are annualised long-short returns with the corresponding factor exposure. Declining interest rates period starts from Nov 07 to May 09. The factors marked with * are reverse-based.Source: Worldscope, I/B/E/S, StarMine, Nomura Quantitative Strategies

Annualised return % (Declining interest rates)

-40 -20 0 20 40 60










MarketCap *

Information ratio (Declining interest rates)

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0










MarketCap *



RCVB-based composite value strategy Reference report: Enhanced value strategy using RCVB, 10 March 2009 The Rank Correlation coefficient between the Value measure and Beta (RCVB)

can help to determine whether individual valuation indicators are likely to be effective at any given time. RCVB can also be applied to create composite alphas when combining different valuation indicators in a value strategy.

Since high-risk stocks should have higher discount rates, their earnings yield should be higher than that of low-risk stocks in the fair market, assuming other conditions being equal. As beta is one risk measure, high-beta stocks should have higher earnings yield in the fair market, and there should be a positive cross-sectional correlation between earnings yield and beta. A stock with high earnings yield does not always mean it is undervalued if its beta is high.

If the RCVB for earnings yield is high, it would be difficult to use the earnings yield factor alone to decide whether a stock is under- or over-valued, and in turn, using the factor as an investment indicator is less likely to be effective. Similar logic can also apply for B/P.

Thus, we expect investment strategies based on earnings yield to be less effective than those based on B/P when RCVB for earnings yield is higher than RCVB for B/P, and vice versa.



Methodology In line with our hypothesis, there is a

negative correlation between RCVB spread (earnings yield – B/P) and the factor return spread between earnings yield and B/P, indicating that performance is better if we dynamically adjust the factor exposure between earnings yield and B/P based on the RCVB spread.

RCVB spread (EPR-BPR) versus factor return spread (EPR-BPR)

Source: Worldscope, I/B/E/S, Nomura Quantitative Strategies Source: Nomura Quantitative Strategies

Methodology: RCVB-based composite value strategy Calculate beta versus CSI 300 Index (use Nomura AP China if

not available) using 36-month monthly returns; RCVB is defined as the cross-sectional rank correlations

between earning yield (or B/P) and beta, and

Normalise earnings yield and B/P within the CSI 300 universe; Composite value alpha is defined as

where Φ is the cumulative distribution function of the standard normal distribution and we set σ=0.1

BPRNormalizedRCVB

EPRNormalizedRCVB

factorComposite spreadspread

1

BPREPRspread RCVBRCVBRCVB

Allocation between E/P and B/P using composite factor

y = -30.886x - 2.5038R2 = 0.1294

(25)(20)(15)(10)(5)05

1015202530

(0.3) (0.2) (0.1) 0.0 0.1 0.2

RCVB spread (EPR - BPR)

Fact

or re

turn

spr

ead

(EP

R -

BP

R)

(%) Wgt (%)

% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90

% 100

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

Nov

-06

Mar

-07

Jul-0

7

Nov

-07

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Nov

-09

Mar

-10

Earnings yield

B/P



Performance summary Over the testing period, the RCVB-based model has delivered better information ratio

than a simple earnings yield or B/P strategy.

Performance (L-S) of RCVB-based value strategy versus earnings yield and B/P

Source: Worldscope, I/B/E/S, Nomura Quantitative Strategies Source: Worldscope, I/B/E/S, Nomura Quantitative Strategies

Cumulative long and short performance of RCVB-based composite value strategy

(20)

0

20

40

60

80

100

120

140

Jun-

05

Nov

-05

Apr-

06

Sep-

06

Feb-

07

Jul-0

7

Dec

-07

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-08

Oct

-08

Mar

-09

Aug-

09

Jan-

10

Perfo

rman

ce o

f L/S

por

tfolio

RCVB composite value

Earnings yield

B/P

(80)

(60)

(40)

(20)

0

20

40

60

80

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

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Jun-

09

Dec

-09

Exce

ss p

erfo

rman

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g an

d sh

ort

RCVB long RCVB short

RCVB composite value Earnings yield B/PAverage return(%) 22.55 11.50 15.42Std deviation(%) 13.90 15.51 18.46R/R 1.62 0.74 0.84Sample months 58 58 58



Enhanced earnings-revision strategy Reference report: The long and the short of beating the herd: An enhanced earnings-revision

strategy, 25 September 2009. Our earnings-revision indicator: Concept: Investors can make better use of analysts’ earnings-revision information by quantifying

market signals and factors — such as valuations, predicted surprises and price/volume momentum — that reinforce the impact of earnings revisions.

Image of enhanced earnings-revision strategy

Note: Shaded five factors are selected to form a composite factor. Source: Worldscope, I/B/E/S, StarMine, Nomura Quantitative Strategies

Grouping simulation results for each factor (CSI 300) Bottom ER Top ER Top-bottom ER Hypothesis: (Factor: Top-bottom) (Factor: Top-bottom) (Factor enhanced)

Factor Expected Impact Mean (%) t-stat Mean (%) t-stat Mean (%) t-stat Log of market cap in US$ Negative -5.8 -1.38 -10.4 -2.39 15.5 4.47 Turnover Positive 5.8 1.32 10.2 2.18 12.2 3.42 Book value to price ratio Positive 13.7 3.53 6.1 1.33 16.3 4.52 Forecast earnings to price ratio Positive 11.7 3.36 7.2 1.91 14.2 3.64 Dividend yield Positive -0.3 -0.09 5.3 1.64 6.4 1.67 Forecast dividend yield Positive 3.9 1.27 0.1 0.03 5.7 1.26 Past one-month return Negative -15.9 -3.76 1.4 0.32 16.7 3.85 Past three-month return Negative -9.0 -2.11 1.6 0.33 11.9 2.76 Change in turnover Positive -9.0 -2.91 2.2 0.62 10.6 2.44 Liquidity impact Negative -7.9 -1.73 -14.8 -4.23 17.5 3.40 Price volatility Positive 1.6 0.38 -2.0 -0.49 8.8 2.29 Analyst coverage (FY1) Positive 1.0 0.29 7.2 1.34 11.2 1.80 Analyst coverage (FY2) Positive 2.4 0.63 3.3 0.66 7.2 1.17 Earnings estimate dispersion (FY1) Positive -0.5 -0.14 4.1 1.16 4.0 0.85 Earnings estimate dispersion (FY2) Positive 1.7 0.40 1.9 0.45 7.0 1.57 StarMine predicted surprise (FY1) Positive 1.0 0.27 8.3 3.23 9.2 2.01 StarMine predicted surprise (F12M) Positive 5.1 1.49 7.2 2.37 10.0 2.27 Analysts’ recommendation revision Positive -3.9 -1.27 2.8 0.73 6.9 1.82 Consensus rating Negative 0.7 0.23 -5.7 -1.82 10.1 2.25 Change in consensus rating Negative -10.4 -4.05 -5.9 -2.03 14.8 3.48

13/)222(

2

3,2,1,

,,

tititi

titi EPSFYEPSFYEPSFY

EPSFYERI



Methodology and performance summary Using these five factors, we then construct a composite factor (CF), with a predefined weight of 1

(or -1) based on the expected positive (negative) impact.

Long potential outperformers (high CF) in top earnings revision group; short potential underperformers (low CF) in bottom earnings revision group.

Performance of enhanced ER vs single-factor ER

Source: Nomura Quantitative Strategies Source: Nomura Quantitative Strategies

Enhanced earnings-revision strategy (CSI 300)

weightingnfactornormalisedfactorcompositen

titi *___5

1,,

Note: Figures are annualised statistics. Source: Nomura Quantitative Strategies

Consideration of market signals in an earnings-revision strategy yields a better return with lower risk.

Enhanced ER (L-S) Single-factor ER (L-S)Average return(%) 19.36 8.86Std deviation(%) 9.20 13.91R/R 2.10 0.64Sample months 55 55

(20)

0

20

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60

80

100

Sep-

05

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-06

Sep-

06

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-07

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-10

Perfo

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f L/S

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Enhanced ER (L-S)

Single-factor ER (L-S)

(60)

(40)

(20)

0

20

40

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

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-10

Exce

ss p

erfo

rman

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f lon

g an

d sh

ort

Enhanced ER Long

Enhanced ER Short



Low-dispersion return-reversal strategy Reference report: Return reversal: catching the swing, 7 December, 2009. Concept: Similar to other Asian markets, a one-month return-reversal strategy has

generated consistent returns in China. We look at two potential fine-tuners. First, to identify stocks that are more likely to revert from overreactions, we focus on those with low analysts’ earnings estimate dispersion. Second, we attempt to remove the proportion of raw price returns that can be explained by fundamental factors, to analyse residual return as a purer technical estimate of overreaction.

Image of low-dispersion return-reversal strategy

Source: Nomura Quantitative Strategies

Calculation of the residual returns (CSI 300)

Losers(Low residual return)

Lowdispersion

High dispersion

Winners(High residual return)

Lowdispersion

High dispersion

Long Short

Low dispersion reversal

Long Short

High dispersion reversal

Perform cross-sectional regression with the following fundamental factors as independent variables and add a sector dummy to neutralise the sector effect.

Market beta (36-month sensitivity against the index) Size (log of market cap) Value (forward 12-month E/P) Momentum (12-month return) Sector dummies (GICS 1)

The residual return is calculated by the following equation:

jjj

iiisr IdXbrr

j

jji

iis IdXbar



Performance summary By using residual return and focusing on low-dispersion stocks in a return-reversal strategy,

investors can effectively screen for stocks that are more likely to show a price reversal after overreaction.

Returns from the strategy are contributed more by the short side, perhaps reflecting: 1) the lack of mechanism for investors to exploit short opportunities in the past and 2) returns of both long and short side could be negatively affected by the small-cap size effect in China.

Performance of low-dispersion reversal strategy

Note: Universe is based on the constituents of CSI 300 Index. Cumulative performance in US dollars. Source: Nomura Quantitative Strategies

Source: Worldscope, I/B/E/S, StarMine, Nomura Quantitative Strategies

Annualised performance statistics (CSI 300)

Note: Universe is based on the constituents of CSI 300 Index. Cumulative performance in US dollars. Source: Nomura Quantitative Strategies

Low-dispersion reversal strategy (long and short)

(20)

(10)

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Low dispersion reversal

High dispersion reversal

Low dispersion reversal High dispersion reversalAverage return(%) 17.32 8.39Std deviation(%) 13.56 18.24R/R 1.28 0.46Sample months 52 52

(60)(50)(40)(30)(20)(10)

0102030

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Low dispersion reversal long

Low dispersion reversal short



Pair trading opportunities On 22 February, 2010, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock

Exchange (SZSE) announced the eligible stocks for margin trading and securities lending. The number of eligible stocks is limited (50 constituents in the SSE 50 Index and 40 in SZ Component Index) during the pilot scheme, mainly focusing on major blue chips with high daily trading volume.

On 19 March, 2010, the China Security Regulatory Commission (CSRC) announced the first six eligible local securities firms to participate in margin trading and securities lending pilot testing program.

On 22 March, 2010, the SSE and the SZSE starts accepting dealing authority applications for margin trading and securities lending business from the approved securities firms.

Of late, QFIIs are not allowed to participate in China’s margin trading and securities lending with local brokerage firms during the pilot scheme. However, investors should pay attention to the new development in infrastructure and process in the A-share market to be better prepared until the drafting of relevant regulations for QFIIs.

The current securities lending rate proposed by the first six eligible local securities firms is ranged from 7.86% - 9.86% per annum.



Pair trading back-tested methodology We generate potential stock pairs from the large-cap and liquid stock universe

(market capitalisation greater than US$1bn and average daily turnover larger than US$5mn), with the short candidates limiting to the 90 eligible stocks. Of late, there are approximately 1,000 qualified pairs.

We run pair trading back-tests on the potential pairs, starting from 22 February, 2010 when the eligible stocks for securities lending were announced.

Trading signals are generated and returns are calculated using below rules: Calculations: 1) moving average and standard deviation of the price ratio are calculated using

rolling 130-trading day prices and 2) price ratio is calculated by:ln [ price of A / price of B ]

Open signals: price ratio broke +/- 2 standard deviation bands, a minimum of 5% expected return criteria is imposed.

Close signals: price ratio mean-reverted within +/- 0.5 standard deviation bands. Stop loss and maximum holding period: trades are closed whether return has reached -20% or

holding period has exceeded a maximum of 80 trading days. Performance: we use next day opening prices for opening and closing of a trade; all prices/returns

are in local currency. Additional filter: we apply the Augmented Dickey-Fuller test to determine if the price relations of the

pairs have mean-reverting properties in statistics over the past six months. We open a pair trade position only if the price ratio series is stationary.



Back-tested results: per trade statistics With DF test filter, the average return per trade is 1.9% over an average of 15 trading days.

Note: Figures are pair trading back-tests using the selected pairs over the period from February 2010 to May 2010. Source: Thomson Datastream Reuters, Nomura Quantitative Strategies

Before transaction costs performanceClosed Outstanding Total Closed Outstanding Total

Average return per trade (%) 4.88 (2.43) (0.19) 4.60 (3.14) 1.91Hit rate (%) 87.67 35.76 51.68 93.33 25.00 69.57Number of trades 73 165 238 15 8 23Maximum trade return (%) 18.56 15.33 18.56 9.45 4.32 9.45Minimum trade return (%) (22.66) (20.98) (22.66) (20.34) (13.82) (20.34)Average trade duration (no. of trading days) 16.56 12.12 13.48 13.80 15.38 14.35% of trades closed due to stop loss 9.59 - 3.78 6.67 - 4.35% of trades closed due to maximum holding days 0.00 - 0.00 0.00 - 0.00

All trades With DF test filter

We estimate the one-way transaction costs as 50 bps and the securities borrowing costs as 7.86% per annum. After deducting estimated costs, the average return per trade is 0.48% with DF test filter.

After transaction costs performanceClosed Outstanding Total Closed Outstanding Total

Average return per trade (%) 3.38 (3.80) (1.60) 3.19 (4.61) 0.48Hit rate (%) 86.30 26.67 44.96 93.33 25.00 69.57Number of trades 73 165 238 15 8 23Maximum trade return (%) 16.80 14.24 16.80 8.12 3.20 8.12Minimum trade return (%) (23.81) (22.76) (23.81) (22.61) (15.96) (22.61)Average trade duration (no. of trading days) 16.56 12.12 13.48 13.80 15.38 14.35% of trades closed due to stop loss 9.59 - 3.78 6.67 - 4.35% of trades closed due to maximum holding days 0.00 - 0.00 0.00 - 0.00

All trades With DF test filter



Cumulative performance We analyse the cumulative return of pair trading by building a time series long-short

portfolio index, assuming the same initial investment of each trade. We deduct the one-way transaction cost when a trade was opened and closed, and the

securities borrowing cost when a trade was closed. While the current securities lending rate is high, we expect returns from statistical pair

trading in China should be improved in the long run when the costs are lowered.

Cumulative return of pair trading all qualified pairs

Source: Thomson Datastream Reuters, Nomura Quantitative Strategies Source: Thomson Datastream Reuters, Nomura Quantitative Strategies

Cumulative return of pair trading with DF test filter

(4)

(2)

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24-F

eb

10-M

ar

24-M

ar

07-A

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21-A

pr

05-M

ay

perfo

rman

ce (%

)

(80)

(40)

0

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200

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of o

peni

ng tr

ades

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(RHS)

(2)

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eb

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)(4)

1

6

11

16

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of o

peni

ng tr

ades

No. of opening trades

Performance (LHS)

(RHS)

All tradesAnnualised return % -2.61Anuualised risk % 9.40Average no. of concurrent trades 69Information ratio -0.28

With DF test filterAnnualised return % 8.11Anuualised risk % 13.23Average no. of concurrent trades 7Information ratio 0.61



Conclusion The forthcoming launch of a pilot scheme for margin financing, securities lending

and the introduction of index futures marks a new era for China’s capital markets. These market initiatives will facilitate new trading and hedging tools and offer a short sale mechanism that should help improve management of market risk and reduce market volatility over the long term.

Quant factor performance in China A-shares reveals common characteristics compared with Asian markets. Value, earnings revision and short-term return reversal strategies appear to work in this market. After examining a variety of relevant long-short quantitative models for the CSI 300 universe, we notice that theoretical returns from some of these strategies are higher for the short side, possibly reflecting the lack of mechanism for investors to exploit these opportunities in the past. Once the new initiatives are in place, the long-short spread return could narrow over the longer term, in our view.

Mock pair trading results for tradable A-shares prove to be profitable, indicating pair trading opportunities should emerge in this market once the short sale mechanism has been established and the cost of borrowing is coming down.

Active investors seeking opportunities in China should be prepared and mindful of the future development of these new market initiatives.



Appendix I: Definition of factors (slide 3 – 4)

Note: The factors marked with * are reverse-based. Source: Worldscope, I/B/E/S, StarMine, MSCI, Nomura Quantitative Strategies

# Factor Description1 Market cap * Log of US$ market cap2 Price momentum (1M) Past 1-month local currency return3 Price momentum (3M) Past 3-month local currency return4 Price momentum (6M -1M) Last 6-month return less the last 1 month return in local currency5 Price momentum (12M -1M) Last 12-month return less the last 1 month return in local currency6 Long term price momentum Past 36-month local currency return7 Volatility Past 36-month price return volatility8 Average daily traded value Monthly traded value in USD / number of traded days9 Trade momentum (3M) Past 1-month trading volume - previous 3-month average trading volume10 Volume turnover ratio Past 1-month trading volume / shares outstanding at month-end11 Dividend yield F12-month DPS / stock price12 Dividend Payout Actual dividends / actual net profit before extraordinary items13 Earnings yield F12-month EPS / stock price14 B/P Actual BPS / stock price15 Sales/Price F12-month sales per share / stock price16 Cashflow yield F12-month cashflow per share / stock price17 Trailing EBITDA/EV Actual EBITDA / (market cap + interest-bearing debt - cash - short-tern marketable securities)

18 EBITDA/EV(F12-month net profit + actual interest expense + actual depreciation) / (market cap + interest-bearing debt - cash -short-tern marketable securities)

19 Revision index (Number of upward analyst revisions - number of downward analyst revisions) / total number of analysts’ estimate20 Earnings revision indicator (FY2) FY2 EPS / previous 3-month average FY2 EPS21 Change in earnings yield F12-month earnings yield - past 3-month average earnings yield

22 Normalised E/P(F12-month earnings yield - average earnings yield in past 36 months) / standard deviation of the earnings yields inthe past 36 months

23 StarMine predicted surprise (SmartEstimate F12-month - consensus mean) / max(divisor, |mean|)24 Estimate dispersion I/B/ES FY1 consensus EPS standard deviation / absolute value for FY1 consensus EPS25 Consensus rating * I/B/E/S consensus analyst rating26 Change in ROE (FY1) FY1 ROE - actual ROE27 Change in ROE (FY2) FY2 ROE - FY1 ROE28 Sales growth (1Y) Actual sales / previous year actual sales29 Sales growth (FY1) FY1 sales / actual sales30 Sales growth (FY2) FY2 sales / FY1 sales31 EPS growth (FY1) FY1 EPS / actual EPS32 EPS growth (FY2) FY2 EPS / FY1 EPS33 Return on assets Actual net profit / actual total assets34 Return on equity F12-month net profit / actual shareholders’ equity35 Shareholders’ equity ratio Actual shareholders’ equity / actual total assets36 Trailing profit margin Actual net profit / actual sales37 Pretax profit margin F12-month pretax profit / F12-month sales38 Asset turnover Actual sales / actual total assets39 Capex to assets Actual capital expenditure / actual total assets40 Capex to sales Actual capital expenditure / actual sales41 Default probability * Default probability estimated using Merton model



Appendix II: Factor definition (China A analysis)

Note: The factors marked with * are reverse-based. Source: Worldscope, I/B/E/S, StarMine, Nomura Quantitative Strategies

No. Category Factor Definition 1 Size, Momentum Market cap * Log of USD market cap 2 Price momentum (1M) Past 1-month local currency return 3 Price momentum (12M -1M) Last 12-month return less the last 1 month return in local currency 4 Value Earnings yield (F12M) F12-month earnings yield 5 B/P Actual net assets / market cap 6 Dividend yield (F12M) F12-month dividend yield 7 Cashflow yield (F12M) F12-month net profit + actual depreciation / market cap 8 Revisions Revision index (Number of upward analyst revisions - number of downward analyst revisions) /

total number of analyst revisions 9 Earnings revision indicator (FY2) FY2 EPS / average( FY2 EPS(-1M) + FY2 EPS (-2M) + FY2 EPS (-3M)) 10 StarMine predicted surprise (F12M) (SmartEstimate F12-month - consensus mean) / max(divisor, |mean|) 11 Estimate dispersion Standard deviation of FY1 earnings yield 12 Growth Sales growth (historical) Actual sales growth (past 1 year) 13 Sales growth (FY2) FY2 sales / FY1 sales 14 EPS growth (FY2) FY2 EPS / FY1 EPS 15 Financial Return on equity (F12M) F12-month net profit / actual common equity 16 Shareholders' equity ratio Actual shareholders' equity / actual total assets 17 Pretax profit margin (F12M) F12-month pretax profit / F12-month sales 18 Default probability * Default probability



Appendix III: Contract specifications

Note: Information as at 7 May, 2010. Source: CFFEx, Nomura Quantitative Strategies

The minimum trading margin of the CSI 300 index future is set to be 12%, which is one of the highest among major markets in the Asia ex Japan region.

CSI 300 Index futures contract specificationsType Index FutureUnderlying CSI 300 IndexCurrency Renminbi (RMB)Contract size 300 RMB x Index PointTick size 0.2Tick value 60 RMBContract months Spot month, next calendar month, and next two calendar quarter monthsTrading hours AM: 09:15 – 11:30, PM: 13:00 – 15:15Trading hours for the last trading day AM: 09:15 – 11:30, PM: 13:00 – 15:00Daily price fluctuation limit +/- 10% of previous closeMargin Spot month and next calendar month: 15%; next two calendar quarter months: 18%Minimum trading margin 12% of contract valueLast Trading Day The Third Friday of the Contract MonthFinal Settlement Day The Third Friday of the Contract MonthSettlement Type CashTrading code IFHandling fee Trading: 0.005 %

Delivery and settlement: 0.01 %Holding disclosure Disclosure on single side holding with more than 10,000 hands and the top 20

holding members for a single contract after each trading dayExchange China Financial Futures Exchange (CFFEX)



Appendix IV: Regular publications and models Asian Equity Quantitative Research reports

Quantitative Outlook 2010 Asia Pacific Quantitative Insight Quants Factor Dynamics, Quants/Technicals Bulletin Asia Pacific Fundflow Insight, Asia Technical Analysis Focus Index reshuffle projection research [coverage: MSCI Asia Pacific ex-Japan, HSI/HSCEI, S&P/ASX 200 (pending

for license), FTSE STI, KOSPI 200, FTSE Xinhua China 25/A50 Indices] Asia Pair Trade Monitor (statistical) / Asia Trading Places (statistical + fundamental) Event-driven strategy: Buyback announcement signals value Hong Kong Short-Selling Activity Asia Earnings Results Monitor Earnings revision turning point Asia Pacific Quantitative Landscape - A basic guide for investors Global Market Guide (Annual)

Monthly update on Asia Equity/China A Quant Models & daily factor performance (presentations) Asian Quant models reports

Consensus Rating Strategy – Cornering the market on ratings Mid-term Momentum Strategy – Boosting the power of the Big Mo Downside Beta Strategy – Fishing in the wind Value-based Accruals Strategy – The impact of accruals and the flight to quality Enhanced Earnings Revision Strategy – The long and the short of beating the herd Low Dispersion Return reversal: catching the swing China Quantitative Strategy – Towards the futures Asia Pacific Statistical Pair Trading – Managing the ups and downs



Appendix V: Regional valuation

Note: All valuation ratios are calculated using a share-weighted and ex-negative approach based on available I/B/E/S consensus. ** Revision Index is defined as: for FY2 (next fiscal year) sum of no. of analysts making upward revisions / sum of no. of analysts making downward revisions. Source: Bloomberg, Thomson Reuters Datastream, I/B/E/S, Nomura Quantitative Strategies

Country Indexuniverse* 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F Apr-10

Australia AOI 14.0 11.7 1.9 1.8 9.5 8.1 1.5 1.4 0.9 China CSI 300 15.4 12.7 2.3 2.1 10.4 7.9 1.2 1.1 1.5 Hong Kong HSI 13.2 11.3 1.7 1.6 8.5 7.8 2.3 2.1 1.2

HSCCI 13.6 12.3 2.0 1.9 7.4 6.6 2.2 2.0 0.7 HSCEI 11.7 10.0 2.1 1.9 8.2 7.4 1.1 0.9 1.5 HSCI 14.0 11.9 1.8 1.7 8.8 8.5 1.9 1.7 1.4

India SENSEX 16.2 13.6 2.7 2.3 11.0 9.4 1.9 1.7 1.3 Indonesia JCI 14.9 12.7 3.1 2.8 10.2 9.3 2.1 1.8 1.2 Korea KOSPI 9.7 8.9 1.3 1.2 6.8 6.4 0.8 0.8 1.6 Malaysia KLCI 15.5 13.8 2.1 1.9 9.1 8.2 1.9 1.8 2.2 Philippines PASHR 13.3 11.8 1.8 1.7 8.1 7.6 1.7 1.5 5.7 Singapore FSTAS 14.2 12.8 1.6 1.5 9.8 8.7 1.3 1.2 2.3 Taiwan TWSE 14.3 12.3 1.8 1.7 8.3 7.9 0.9 0.8 2.3 Thailand SET 11.1 9.5 1.6 1.5 6.7 6.1 0.7 0.7 1.2

Country Indexuniverse* 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Australia AOI 21.3 19.4 4.0 4.6 13.6 15.2 9.4 12.3China CSI 300 28.7 20.4 2.3 2.7 15.8 17.7 7.5 7.9Hong Kong HSI 21.4 17.4 3.4 3.9 13.3 14.8 7.3 7.8

HSCCI 13.1 9.9 2.9 3.1 15.6 15.7 9.4 9.7HSCEI 24.9 18.5 3.3 4.0 18.3 20.2 6.5 7.1HSCI 24.7 17.2 2.8 3.3 13.2 14.7 7.1 7.6

India SENSEX 17.2 18.8 1.6 1.6 17.4 17.5 8.1 10.6Indonesia JCI 24.8 19.3 2.6 3.2 22.5 23.6 8.4 12.8Korea KOSPI 43.9 9.1 2.0 2.4 14.2 14.1 8.3 8.2Malaysia KLCI 27.4 12.4 3.4 3.8 13.0 13.9 6.6 6.9Philippines PASHR 20.6 12.9 3.2 3.5 14.0 15.0 5.2 7.5Singapore FSTAS 20.0 10.8 3.0 3.2 10.3 10.8 5.8 5.9Taiwan TWSE 59.4 14.6 4.1 4.7 13.0 14.2 9.1 9.5Thailand SET 18.3 16.8 4.3 4.8 14.9 15.9 8.0 9.2

Revision index **

EPS growth (%) Dividend yield (%) ROE (%) ROA (%)

P/S (x)P/CF (x)PBV (x)PER (x)



Appendix VI: Recent fundflow trend In 2009, emerging markets (EM) saw solid net inflows while developed markets (DM) saw

the opposite, resulting in much superior equity market performance among EM. Early this year, we flag concerns that there may be a switch away from EM amid DM

economic recovery (APxJ negatively impacted as a result). YTD, both EM and DM regions recorded net inflows with EM continued to lead DM. In Asia Pacific, we note Japan and Korea are the two markets seeing consistent net inflows

via mutual fund and foreign investors. Thus, it is perhaps not surprising to see the two markets have performed well so far year-to-date.

Source: Bloomberg, EPFR Global, Nomura Quantitative Strategies

Investment flows at a glance (US$mn)

US$m n US$m n US$m n US$m n US$m n US$m n US$m n US$m n4-w eek 12-w eek YTD FY2009 4-w eek 12-w e ek YTD FY2009 4-w eek 12-w eek YTD FY2009

Deve loped Marke ts (3,264) 20,614 2,126 (24,602) - - - - 0.1 5.1 (1.1) 27.3Em erging Marke ts 4,173 14,192 15,018 64,383 - - - - (4.6) 6.3 (1.1) 72.9Asia ex Ja pan 1,427 4,149 4,026 19,109 4,573 24,895 21,544 59,985 (5.4) 7.6 (1.5) 68.4Deve loped Europe (5,684) (11,139) (11,082) 2,506 - - - - (9.3) (2.4) (11.7) 31.2EMEA 1,168 2,860 3,372 2,017 - - - (9.0) 2.8 (1.6) 73.8Japan 860 2,700 3,742 (5,461) 7,904 16,860 34,298 17,668 (1.5) 5.8 6.7 4.4Latin Am e rica (1,004) (647) (722) 8,786 - - - - (9.3) 3.4 (6.2) 98.1US 15 17,264 (3,743) (44,349) - - - - (1.8) 9.0 4.5 24.2Austra lia 518 1,533 1,400 5,301 - - - - (7.5) 7.7 (3.0) 68.8China 1,589 2,212 1,461 12,195 - - - - (8.6) 2.9 (6.6) 58.8Hong Kong (401) 668 401 1,418 - - - - (7.5) 2.9 (3.5) 55.2India 366 1,207 1,149 5,667 1,110 7,009 6,261 17,591 (4.6) 11.4 2.1 100.5Indonesia 257 1,103 1,044 3,975 (10) 790 516 1,382 (2.1) 15.2 9.9 120.8Korea 771 1,784 2,173 5,017 2,672 9,470 9,656 24,816 (0.7) 14.1 6.3 69.4Malaysia 52 103 169 457 - - - - (0.7) 13.1 10.2 47.8New Zea la nd 1 4 5 11 - - - - (0.8) 6.7 (5.2) 43.0Philippine s 4 137 64 99 175 299 373 137 (3.1) 12.6 3.7 60.2Singapore (74) (210) (452) 1,091 - - - - (3.6) 5.1 (2.3) 67.3Ta iw an (66) 248 254 3,423 1,012 5,904 3,603 14,922 (4.0) 4.0 (5.6) 75.1Tha iland 348 617 476 1,172 (386) 1,422 1,135 1,136 2.5 23.4 14.5 70.0

Perform ance (%)Mutua l Fund Net Inflow s Fore ign Net Inflow s



Appendix VII: Technicals highlightsMedium-term Technical Resistance / Support Levels

Next Primary Primary NextCountries/Indices Code Resistance Resistance Current Support Support Technicals CommentAustra liaS&P/ASX200 Index AS51 5,025 4,805 4,600 4,427 4,079 W eakening momentumChina

CSI 300 Index SHSZ300 3,350 3,095 2,858 2,795 2,685Dow nw ard channel remained intact for past seven months

Hang Seng China Enterprises Index HSCEI 13,864 13,164 11,717 10,919 10,612Trading above the 104-w eek moving average line

ishares A50 China Tracker-ETF 2823 HK 13.80 12.74 12.22 11.74 10.50

Similar to the CSI300, dow nw ard channel remained intact for seven months

Hong Kong

Hang Seng Index HSI 23,100 22,389 20,427 19,423 18,837Trading above the 104-w eek moving average line

IndiaSensex 30 Index SENSEX 20,238 18,895 17,331 15,651 13,219 W eakening volume momentumNifty Index NIFTY 6,012 5,545 5,194 4,675 3,919 W eakening volume momentumKorea

KOSPI Composite Index KOSPI 1,902 1,758 1,678 1,519 1,4671,519-1,758 has been a trading range for the past nine months

Malaysia

FTSE Bursa Malaysia KLCI Index FBMKLCI 1,525 1,450 1,334 1,302 1,224

Head to test the recent high as resistance w ith improving momentum

Singapore

FTSE STI FSSTI 3,602 3,270 2,880 2,666 2,425W eakening price and volume momentum

Taiw an

Taiwan TAIEX Index TW SE 8,396 8,191 7,665 7,080 6,611Recent se lling pressure has been lighter than that in January

Note : Pr icing as at 10 M ay 2010Source s : Nom ura Inte rnational (HK) Ltd- Quantitative Strate gie s



Investors’ initial reaction to a share buyback announcement is positive – those markets that require pre-disclosure see greater impact.

The wider the B/P spread between the buyback stocks and the market, the greater the potential outperformance of a share buyback strategy. Hence a buyback stock is more likely to outperform when its market valuation is also inexpensive.

Appendix VIII: Event-driven research – Buyback

(1)

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Note: Chart shows the average price performance over benchmark for days preceding and following a share buyback announcement. Source: Nomura Quantitative Strategies

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Cumulative performance of buyback stocks grouped by valuation

Performance of share buyback events (Asia including Japan)

Note: Chart shows the cumulative return over benchmark for buying stocks with share buyback announcement in the previous month for two groups based on B/P. Portfolio is rebalanced monthly. Source: Nomura Quantitative Strategies



Appendix IX: Organization of Nomura Global Quant Strategy

Equity Quantitative Strategy Group

Equity Strategy and Quantitative Research Team

Quantitative Research Dept.

Quantitative Research Center

Equity Quantitative Research Dept.

Tokyo Hong Kong London New York

Index Products Group

Corporate Finance Research Group

Derivative Products

Research Group

Trading Research Group

Hiromichi Tamura (12)Tomonori UchiyamaYoko IshigeOsamu ShintaniMakoto FurukawaMami OdeAkihiro MurakamiTomoyo IzumiTakumi HayashiNaoko KatoThomas ChanYusuke Takimoto

Sandy Lee (6)Kenneth ChanTacky ChengRico KwanYasuhiro ShimizuDesmond Chan

Inigo Fraser-Jenkins (9)Ian Scott (strategist)Shanthi NairJane PearceMark DiverRishav DevSaurabh KatiyarArjun BhattacharyaMaureen Hughes

Joseph J Mezrich (5)Yasushi IshikawaAntonio OrtegaJunbo FengAki Matsui

Asia Quantitative Research Dept.

Hiromichi Tamura (35)



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Distribution of Ratings:Nomura Global Equity Research has 1,884 companies under coverage48% have been assigned a Buy rating which, for the purposes of mandatory disclosures, as classified as a Buy rating: 34% of companies with this rating are investment banking clients of Nomura Group*36% have been assigned a Neutral rating which, for the purposes of mandatory disclosures, is classified as a Hold rating: 46% of companies with this rating as investment banking client of the Nomura Group*14% have been assigned a Reduce rating which, for the purposes of mandatory disclosures, are classified as a Sell rating: 8% of companies with this rating are investment banking clients of the Nomura Group*As at 31st March 2010

*The Nomura Group as defined in the Disclaimer section at the end of this report.



Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008:The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc.

Stocks:

• A rating of "1", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.• A rating of "2", or "Neutral", indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.• A rating of "3", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.• A rating of "RS-Rating Suspended", ” indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.

Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research); Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.

Sectors:

A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.

Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX® 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

Explanation of Nomura’s equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009:Stocks:

Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target – Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analyst’s 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.

• A "Buy" recommendation indicates that potential upside is 15% or more.• A "Neutral" recommendation indicates that potential upside is less than 15% or downside is less than 5%.• A "Reduce" recommendation indicates that potential downside is 5% or more.• A rating of "RS" or "Rating Suspended" indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.• Stocks labelled as "Not rated" or shown as "No rating" are not in Nomura's regular research coverage.

Sectors:

A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation.A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation.A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.



Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008):Stocks:• A rating of "1", or "Strong buy", indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months.• A rating of "2", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months.• A rating of "3", or "Neutral", indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months.• A rating of "4", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months.• A rating of "5", or "Sell", indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.• Stocks labeled "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein.Sectors:A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector — Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008:Stocks:Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation.• A "Strong buy" recommendation indicates that upside is more than 20%.• A "Buy" recommendation indicates that upside is between 10% and 20%.• A "Neutral" recommendation indicates that upside or downside is less than 10%.• A "Reduce" recommendation indicates that downside is between 10% and 20%.• A "Sell" recommendation indicates that downside is more than 20%.Sectors:A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation.A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation.A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

Price targetsPrice targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.



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