CROSS-ASSET RESEARCH 11 March 2012 GLOBAL PORTFOLIO MANAGER’S DIGEST Proceed With Caution – Issues to Keep on Your Radar Best of Barclays Signs that global growth is recovering from recent dip. However, the threat of a The Data Miner Dissecting dividends – Removing unintended jump in oil prices will keep financial markets and policymakers watchful. More so, exposures 4 the risk of a disruptive euro break-up has receded, but the currency bloc is likely to Asset Allocation Snapshot be an ongoing source of turbulence (see Economics Outlook). The oil factor 6 What to watch with oil. It is not the level of prices but the rate of increase that Euro Themes: Portugal impacts economic activity (see Asset Allocation Snapshot). As oil prices affect PSI unlikely in 2012, despite concerns inflation, it is interesting to note that the choke point for consumer spending is about solvency 7 reached when quarterly inflation exceeds 9% (see Chart of the Week). European Banks Over promising: Encumbrance at European All eyes on Portugal. Portugal is under close market scrutiny, given fears of banks 8 contagion. However, a PSI is seen as unlikely in 2012 (see Euro Themes). US Index and Options Bank funding still an issue. As 3-year LTROs take funding risk for banks off the Cross-asset volatility relative value 9 table near term, longer term funding issues remain a concern due to rising balance sheet ‘encumbrance’ (see Over Promising). Global Strategy & Economic Outlook Equity Strategy Sector changes in Europe. We upgrade Utilities, which are expected to benefit from US: April Showers 10 the contraction in credit yields. Industrials are downgraded due to unattractive EMEA: Plugging into lower credit yields 12 valuations and emerging tactical macro risks (see EMEA Equity Strategy). Credit Strategy Positioning in dividends. Dividend strategies outperform in weak markets and Americas: Shifting Concerns 13 economic states (see U.S. Equity Strategy). The Data Miner highlights a list of high Europe: Technicals are overwhelming a dividend yield stocks removed of unintended exposures. This helps control risk. challenging fundamental picture for the Credit derivative spreads are still wider than their 2011 lows, while equities are moment 15 Asia ex-Japan: Soft China data no match for near multi-year highs. We believe long credit, short equity trades are likely to strong technicals 17 outperform and recommend using options, which also monetizes the dislocation in the volatility premium in credit and equity options (see Cross Asset Volatility). Economic Outlook Nervous energy 19 Chart of the Week – Inflation “Choke Point” and Consumer Spending Key Inflection Points 80 Hurricane Katrina 2008 oil rally 15 Gulf War 60 Credit 10 Select Rating Changes: Merck 23 40 5 20 Macro 0 0 Select Forecast Changes: Japan 2012 GDP growth to 2.4% from 2% -20 -5 ECB rates on hold until at least end of 2012 24 -40 -10 -60 Regulars -80 -15 Barclays Macro, Commodities & FX Forecasts 2 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Barclays Events 3 Recession dates Real PCE durable goods (3 m% chg saar) CPI 3 m % chg (saar) "Choke point" Summary of equity rating changes 21 Source: Barclays Capital Research, (see Asset Allocation Snapshot – The Oil Factor, 6-March-2012) Summary of credit rating changes 22 Barclays Capital does and seeks to do business with companies covered in its research reports. As a All research referenced herein has been result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity previously published. You can view the full of this report. reports, including analyst certifications and Investors should consider this report as only a single factor in making their investment decision. other required disclosures, by clicking the This research report has been prepared in whole or in part by equity research analysts based outside the US hyperlinks in this publication or by going to who are not registered/qualified as research analysts with FINRA. our Research portal on Barclays Capital Live. FOR ANALYST CERTIFICATION(S), PLEASE SEE PAGE 26. FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 26. FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 28. Barclays Capital | Global Portfolio Manager’s Digest BARCLAYS MACRO, COMMODITIES AND FX FORECASTS More detailed global macro, commodities and FX forecasts can be viewed on the Global Forecasts page on Barclays Capital Live. Real GDP Central Bank Rates 2010 2011 2012 Current 1Q 12 2Q 12 3Q 12 US 3.0 1.7 2.5 Fed funds rate 0-0.25 0-0.25 0-0.25 0-0.25 Brazil 7.5 2.7 3.3 BoJ overnight rate 0.1 0-0.10 0-0.10 0-0.10 Japan 4.4 -0.7 2.4 ECB main refinancing rate 1.0 1.0 1.0 1.0 China 10.5 9.2 8.1 BOE bank rate 0.5 0.5 0.5 0.5 India 8.4 7.1 6.9 China: Working capital rate 6.6 6.6 6.6 6.6 Euro area 1.8 1.5 -0.4 India: Repo rate 8.5 8.5 8.0 7.5 United Kingdom 2.1 0.8 0.9 Brazil: SELIC rate 9.8 9.8 9.0 9.0 Russia 4.3 4.3 4.3 Russia: Refi rate 8.0 8.0 7.5 7.5 Consumer Prices Global Bond Yields 2010 2011 2012 Q1 12 Q2 12 Q3 12 Q4 12 US 1.6 3.2 2.8 US 10y 2.3 2.0 2.0 2.0 Brazil 5.0 6.6 5.6 US 10y RY 0.0 -0.4 -0.3 -0.1 Japan -1.0 -0.2 -0.3 Euro Govt. 10y 2.0 2.1 2.2 2.3 China 3.3 5.4 3.2 Euro Govt. 10y RY 0.1 0.2 0.2 0.2 India 9.6 9.4 7.1 UK 10y 2.4 2.5 2.8 3.0 Euro area 1.6 2.7 2.4 UK 10y RY -0.4 -0.6 -0.4 -0.1 United Kingdom 3.3 4.5 2.9 Japan 10y 1.2 1.2 1.1 1.1 Russia 6.9 8.6 4.8 Japan 10y RY 1.0 1.0 0.9 0.9 Commodity Prices Foreign Exchange 2010 2011 2012 Spot 1 Month 6 Month 1 Year Brent (US$/bbl) 80 111 115 EUR/USD 1.32 1.32 1.25 1.20 WTI (US$/bbl) 80 95 110 USD/JPY 82 78 82 84 US Natural Gas (US$/mmbtu) 4.4 4.0 3.1 GBP/USD 1.58 1.57 1.52 1.50 Coal API2 (US$/t) 93 123 102 USD/CHF 0.91 0.93 1.04 1.08 Carbon (EUA) (€/t) 15 13 8 USD/CAD 0.99 1.00 0.96 0.95 Gold (US$/oz) 1226 1571 1875 AUD/USD 1.06 1.07 1.09 1.10 Copper (US$/t) 7533 8813 9000 USD/CNY 6.31 6.28 6.17 6.08 Corn (Usc/bushel) 427 680 618 USD/BRL 1.76 1.74 1.71 1.70 Source: Barclays Capital Numbers in bold indicate forecasts; non-bold numbers are actuals. 11 March 2012 2 Barclays Capital | Global Portfolio Manager’s Digest BARCLAYS EVENTS Conference Calls & Webcasts Date Time Call/Webcast Please click on the links to view details of forthcoming conference calls and webcasts 12 March 4.30pm EST Barclays Capital Bi-Weekly Equity Trading Call 13 March 7:45am EST / 12:45 GMT Barclays Capital Tuesday Credit Call 13 March 9:00 and 12:00 GMT BarcapLive WebEx – Enhanced Portfolio Web Bench Conferences & Special Events Date Event Location Please contact your Barclays Capital Sales representative for availability. 13 March Barclays Capital Third Annual Bank Loan Conference New York 13 March Barclays Capital Internet Connect Conference New York 13 – 14 March 2012 Global Healthcare Conference Miami 13 – 15 March 2012 Spring Oilfield Tour hosted by James West Houston 14 March US Utilities: Exploring the Power Grid Zurich 15 March Municipal Credit Conference New York 16 March Geneva Energy Day Geneva 19 – 23 March European & Russian Banks Eastern Europe and Russia 22 – 23 March China Machinery Tour – Shanghai & Changzhou Shanghai and Changzhou 25 – 27 March High Yield Bond and Syndicated Loan Conference Phoenix, Arizona 27 – 28 March 2012 Power and Utilities ‘Going to California’ Field Trip San Francisco and Pasadena 28 – 29 March Barclays Emerging Payments Forum New York 29 March, 2 – 3 April Barclays High Grade Credit Conference Boston, New York and Chicago th 9 – 11 April Barclays Capital Healthcare Facilities/Services 12 Annual Nashville Bus Tour Nashville, Tennessee 12 April 2012 North American Small and Mid-Cap Energy Forum New York 24 – 25 April 2012 Retail and Restaurants Conference New York 3 May Chemical ROC Stars Conference New York 10 May Global Therapeutics Symposium Boston 15 – 16 May Americas Select Franchise Conference 2012 London, England 21 May Barclays Capital European Credit Conference London 21 – 22 May Barclays Select: Asia Property Conference 2012 Hong Kong 22 – 23 May Barclays Global Technology, Media and Telecommunications Conference New York 29 – 30 May Clean Solutions Conference New York 31 May UK Savings: New World, New Model London Replays from the Past Week Date Conference Call/Webcast/Conference Please click on the links for select conference call replays and webcasts/podcasts from the past week. 8 March Global Energy Outlook 6 March Barclays Capital Tuesday Credit Call: No Leap into QE3 6 March Global Emerging Markets Banks: Safety Shows up in the most unlikely places 5 March Coal to Gas Switching 5 March Barclays Capital European Credit Call: Still waiting for a near-term resolution as Greece endgame approaches 11 March 2012 3 Barclays Capital | Global Portfolio Manager’s Digest THE DATA MINER: DISSECTING DIVIDENDS – REMOVING UNINTENDED EXPOSURES Gavin Smith, +1 212 528 6139, email@example.com, BCI, New York The recent months have been a volatile period for dividend-based strategies. As documented in this week’s note from the U.S. Portfolio Strategy team, a typical dividend yield strategy underperformed from the start of the year up to early February, before recovering through to late February. For those investors with a longer-term (possibly bearish outlook) - or for those simply wanting exposure to dividends - such short-term volatility can be painful. One issue that exacerbates the volatility of a typical dividend strategy is unintended exposures to other factors such as beta, size, value and sector effects. A consequence of this, for example, is that a dividend yield strategy can leave you concentrated in high yielding, low beta, large-cap stocks from defensive industries. To mitigate risk of investing in dividends, we present a list of names that have been cleaned of beta, size, value and sector effects using a regression methodology. This approach allows investors to better understand and control their exposures. In the regression Beta is estimated using two years of weekly return data; Size is the log of market capitalization; and Value is the log of price-to-book. We define sectors using the 2-digit GICS codes. Please note, for consistency with the analysis from our U.S. Portfolio Strategy colleagues, our universe for this regression is the S&P500. From this regression the residual is the component of dividend yield that is not explained by beta, size, value and sector effects. We subsequently rank our universe by the residual and take the 40 names with the highest residual. Figure 1 details the individual names that are the product of this screen. Figure 1: Highest “Pure” Dividend Yielding Stocks Market Dividend Price-to- Ticker Company Name Sector Beta Capitalization Yield Book ($MM) CVC Cablevision Systems Corp Consumer Discretionary 4.2% 1.1 3963 4.5 HRB H&R Block Inc Consumer Discretionary 4.4% 0.8 4615 7.8 LEG Leggett & Platt Inc Consumer Discretionary 5.0% 1.2 3120 2.4 LTD Ltd Brands Inc Consumer Discretionary 8.3% 1.2 13748 26.5 WYNN Wynn Resorts Ltd Consumer Discretionary 5.7% 1.4 12397 7.4 AVP Avon Products Inc Consumer Staples 5.0% 1.0 7848 5.0 MO Altria Group Inc Consumer Staples 5.2% 0.6 62106 16.9 RAI Reynolds American Inc Consumer Staples 5.2% 0.6 24336 3.9 SVU SUPERVALU Inc Consumer Staples 5.4% 1.2 1363 1.8 COP ConocoPhillips Energy 3.4% 1.0 99035 1.5 DO Diamond Offshore Drilling Inc Energy 5.0% 1.0 9657 2.2 SE Spectra Energy Corp Energy 3.4% 0.9 20446 2.5 WMB Williams Cos Inc/The Energy 3.5% 1.3 17517 9.8 CINF Cincinnati Financial Corp Financials 4.6% 0.9 5636 1.1 FII Federated Investors Inc Financials 4.9% 1.0 2023 3.7 HCBK Hudson City Bancorp Inc Financials 4.8% 1.1 3463 0.8 HCN Health Care REIT Inc Financials 5.4% 0.9 11484 1.7 11 March 2012 4 Barclays Capital | Global Portfolio Manager’s Digest Figure 1: Highest “Pure” Dividend Yielding Stocks (continued) Market Dividend Price-to- Ticker Company Name Sector Beta Capitalization Yield Book ($MM) HCP HCP Inc Financials 5.0% 0.9 15990 1.8 NYX NYSE Euronext Financials 4.2% 1.3 7457 1.1 PBCT People's United Financial Inc Financials 5.1% 0.9 4478 0.8 VTR Ventas Inc Financials 5.3% 0.9 16130 1.7 BMY Bristol-Myers Squibb Co Health Care 4.1% 0.6 55471 3.5 LLY Eli Lilly & Co Health Care 5.0% 0.6 45488 3.4 MRK Merck & Co Inc Health Care 4.2% 0.8 114850 2.1 PFE Pfizer Inc Health Care 3.8% 0.8 162154 2.0 PBI Pitney Bowes Inc Industrials 8.5% 0.9 3512 4.0 RRD RR Donnelley & Sons Co Industrials 8.0% 1.2 2296 2.2 WM Waste Management Inc Industrials 4.9% 0.8 16088 2.6 ADP Automatic Data Processing Inc Information Technology 3.4% 0.9 26648 4.3 LLTC Linear Technology Corp Information Technology 2.9% 1.1 7534 12.4 MCHP Microchip Technology Inc Information Technology 3.9% 1.0 6881 3.5 MOLX Molex Inc Information Technology 2.9% 1.3 4386 2.0 PAYX Paychex Inc Information Technology 4.0% 0.8 11286 7.2 VRSN VeriSign Inc Information Technology 7.6% 0.8 5763 3.8 FCX Freeport-McMoRan Copper & Gold Inc Materials 3.8% 1.6 37460 2.4 MWV MeadWestvaco Corp Materials 3.2% 0.8 5278 1.7 NUE Nucor Corp Materials 3.5% 1.2 13157 2.1 FTR Frontier Communications Corp Telecommunication Services 15.1% 1.0 4353 1.0 EXC Exelon Corp Utilities 5.5% 0.7 25563 1.8 POM Pepco Holdings Inc Utilities 5.6% 0.7 4420 1.0 Source: Barclays Capital, Bloomberg. This screen only takes into account the factors expressly stated above and does not necessarily represent the fundamental views of the analysts. For more details on our analyst views on individual names please find the latest research on Barclays Capital Live or contact the relevant analyst. Please contact the U.S. Equity Product Management Group if you are interested in any customized revisions to the criteria used. 11 March 2012 5 Barclays Capital | Global Portfolio Manager’s Digest BEST OF BARCLAYS: ASSET ALLOCATION SNAPSHOT The oil factor ASSET ALLOCATION RESEARCH Excerpted from Asset Allocation Snapshot, published on March 6, 2012 Sreekala Kochugovindan +44 (0)20 7773 2234 The risk asset rally has wobbled this week as the combination of the Greek debt deadline, firstname.lastname@example.org weaker euro area data and high oil prices fuelled investor fears. As Brent and retail gasoline prices hover near the highs reached during the Middle East volatility last year, a growing number of investors voiced concerns that energy prices could derail the risk asset rally. We think not, but remain humble to the fact that it is not a risk that can simply be ignored, as the probability of deterioration in the political situation, albeit low, is still positive. Thus, we outline the asset allocation implications of an unexpected spike in oil prices. As we have discussed previously, it is not necessarily the oil price itself that can pose a threat to economic growth but the pace of its growth that is more important. It is the sudden surge in oil prices that leads to an abrupt shock to consumer spending and economic growth. There are three occasions in which oil price spikes fed into sizable spikes in headline inflation, which in turn hit the economy via consumer spending. Consumer durable spending, the most sensitive component of spending, fell sharply when the 3-month annualised change in headline inflation exceeded 9%. In each case, the price of oil rallied in excess of 40% over a 3-month period. In contrast, the latest geopolitical fears have, so far, led to a 20% rally in oil. As outlined above, we do not expect the current oil situation to derail global growth as yet. Given that our more constructive global growth view (Global outlook, 8 December 2011) was based partly upon US growth prospects, it is worth examining the response of the US consumer to energy prices. Our economists view the effect of the retail gasoline price rise to be much smaller this year than in 2011. The rate of change so far does not imply strong headline inflation, while the improving labour market backdrop suggests a less significant effect on real consumption. However, perception, as they say, is reality. Investors do not necessarily wait for evidence of a growth effect to materialise in the data before speculative flows shift to price concerns. The very fear of rising oil prices slowing consumption and growth may be enough to trigger short-term jitters across financial markets. Figure 1 illustrates the market reaction to the 1990 Gulf War. Equity markets sold off immediately on news of Iraq’s invasion on Kuwait, and implied volatility spiked higher with oil. We do not believe the risk of higher oil prices justifies strategic shifts in asset allocation; however, implementing cheap tactical hedges may help protect any temporary escalation in fears surrounding oil. Figure 1: Equity volatility potentially a strong hedge 45 40 35 30 25 20 15 10 5 0 Dec-89 Feb-90 Apr-90 Jun-90 Aug-90 Oct-90 Dec-90 Feb-91 Apr-91 Brent $/brl (LHS) VIX index (RHS) Source: Bloomberg 11 March 2012 6 Barclays Capital | Global Portfolio Manager’s Digest BEST OF BARCLAYS: EURO THEMES - PORTUGAL PSI unlikely in 2012, despite concerns about solvency ECONOMICS RESEARCH Excerpted from Euro Themes: Portugal: PSI unlikely in 2012, despite concerns about Antonio Garcia Pascual solvency, published on Month 7, 2012 +44 (0)20 3134 6225 email@example.com The hard default imposed on Greek sovereign debt, with a NPV haircut of about 75% (by our estimates), has left European government bond investors wondering whether PSIs Piero Ghezzi will be imposed in other euro area countries in the future; but eurozone policymakers +44 (0)20 3134 2190 have insisted that Greece is unique. firstname.lastname@example.org Portugal is under close market scrutiny, given fears of contagion. The large stock of Fabio Fois public debt, lack of growth and unresolved macroeconomic imbalances cast doubts over +44 (0)20 3134 1136 the sovereign’s solvency and the viability of its adjustment programme. Also, regaining email@example.com competitiveness through a process of internal devaluation looks to be a daunting task, especially as the public and private sectors are deleveraging. The government, thus far, has a good implementation track record under the EU-IMF programme, but low productivity and deep-rooted structural problems are unlikely to be resolved by 2013-14. Public debt looks unlikely to stabilize by the time Portugal is due to return to the markets in H2 2013, and probably not in the medium-to-long term either. The country may not necessarily be insolvent, but in our view optimistic assumptions would likely be required to avoid such a scenario. The majority of Portuguese debt would be “senior, non defaultable” by the end of the EU-IMF programme. Official funds, rather than a catalyst to attract private investors, subordinate existing bondholders and tend to dissuade future PGBs investors. Consequently, it is hard to envisage Portugal’s return to the markets in H2 2013. Since IMF involvement requires 12-month ahead funding assurances, euro area countries may need to decide by mid-2012 whether to commit additional financial resources (so that Portugal would not have to access the markets) until structural problems are addressed, or to let the country restructure. We strongly believe the euro area’s “strong rhetoric” in support of Portugal (eg, “Greece is unique and PSI won’t be replicated in Portugal or any other euro area countries”), and concern about potential contagion to other peripherals, considerably reduce the likelihood of a Portugal PSI in 2012. 11 March 2012 7 Barclays Capital | Global Portfolio Manager’s Digest BEST OF BARCLAYS: EUROPEAN BANKS Over promising: Encumbrance at European banks EQUITY RESEARCH Excerpted from Over Promising: Encumbrance at European Banks, published on March 8, European Banks 2012 2-NEUTRAL Who cares about funding anymore? While €1trn of 3-year LTROs takes funding risk off the Simon Samuels table near term and helps buy time in managing the European sovereign debt crisis, we +44 (0)20 3134 3364 think there remain several reasons to stay concerned about bank funding longer term. firstname.lastname@example.org Barclays Capital, London A rising trend of encumbrance: Even before the LTROs, a growing feature in Europe was rising balance sheet ‘encumbrance’ – the pledging of collateral to one group of creditors at Mike Harrison the expense of another. The most obvious example of this is the rise in covered bonds, +44 (0)20 3134 3056 accounting for 40% of debt issuance in 2011. The LTRO exacerbates this trend. Post LTRO, email@example.com several banking systems now have encumbered over 15% of their balance sheets. Barclays Capital, London Declining bondholder recovery rates keep funding costs high: Bondholders face increasing Nimish Rajkotia subordination from this balance sheet encumbrance, reinforced by depositor preference +44 (0)20 3134 3719 laws (in some countries) and imminent legislation on bail-in bonds. Combining these firstname.lastname@example.org factors suggests that unsecured funding cost for banks will remain high – potentially too Barclays Capital, London high for some business models to make economic sense. What can the banks do?: If funding costs can’t come down to economic levels, banks will either have to look for other sources of funding, or shrink. Alternative funding sources could include further covered bond issuance (encumbering balance sheets further) or aggressive growth of deposit franchises (thereby shrinking lending margins). What can policymakers do?: One offset to lower recovery rates is to reduce the probability of default. It is unclear whether Basel 3 compliance does enough to re-assure funding markets. If not, we may need further ECB measures to support banks now that the precedent of the 3-year LTRO has been set. This increases the perception of the ‘nationalisation’ of funding structures. Figure 1: Proportion of banking system balance sheets encumbered, current 40% 35% 30% 25% 20% 15% 10% 5% 0% Greece France Benelux Italy Germany UK Spain Ireland Finland Austria Portugal Source: ECB, ECBC, Barclays Capital. 11 March 2012 8 Barclays Capital | Global Portfolio Manager’s Digest BEST OF BARCLAYS: US INDEX AND OPTIONS Cross-asset volatility relative value Shobhit Gupta Excerpted from U.S. Credit Alpha, published on March 9, 2012 +1 212 412 2056 Despite generic deterioration in credit market liquidity (see Liquidity Preference and email@example.com Liquidity in CDS Markets), index and index option volumes have proven resilient. Indeed, volumes in CDX indices remain strong, with the on-the-run CDX.IG and CDX.HY indices Eric Gross trading at weekly averages of approximately $96bn and $21bn, respectively, year-to-date. +1 212 412 7997 While these volumes represent a slight year-over-year increase, the index options market firstname.lastname@example.org has had substantial growth, making it one of the only areas of genuine growth in credit derivatives. Moreover, a varied base of credit option participants, including real-money accounts looking for hedges and investors implementing pure volatility strategies, has led to growth in index swaption notionals and volumes. That market depth has, in turn, enabled a legitimate credit volatility market to develop, attracting attention from investors in more established volatility markets. Long and Short Equity, in Index and in Volatility Despite having tightened significantly over the past few months, credit derivative spreads are still trading wider than their 2011 lows in spread. Indeed, while the IG index is ~50bp tighter over the past three months, it is about 20bp wide of the 2011 tights. The same is true for the CDX HY index; while it is up about $8, to $97, since November, it remains significantly lower than the 2011 highs of $105. The difference can be explained in part by constituent differences: the $105 highs were reached in February 2011 for series 15. That said, even adjusting for constituent differences, the HY17 index is about 2pts lower than we estimate it would have reached in February 2011. In contrast, the S&P 500 index, having rallied more than 16% since late-November 2011, reached its highest level in over three years earlier this month. While it is slightly lower now, it is still trading at its 2011 highs. In addition to the obvious constituent mismatch between the credit and equity indices, the one big difference in sector composition is banks (Figure 8). Banks (including diversified financials) are nearly 8.5% of the S&P index but are not included in the CDX indices. However, bank equities have underperformed the rest of the S&P 500 index, and ex-fins the S&P 500 is nearly 2% higher than the 2011 highs. Thus, given the underperformance of credit (CDX IG and HY indices) relative to equity, we believe that long credit, short equity trades are likely to outperform. We recommend expressing this view using options, which also monetizes the dislocation in the volatility premium in credit and equity options mentioned above. Specifically, we believe that selling S&P500 calls vs. either buying an IG receiver or a HY call option appears attractive at current levels. The strikes and relative notionals of the two legs can be adjusted based on investors’ view, but we highlight two constructs in IG and HY below. The two trades are set up to be costless but are net short the market at inception. Market-neutral versions of these trades can be implemented by selling a lower notional of the SPY call although they will have an upfront cost. Buy Jun 20 2012, 105 Strike IG Receiver, Sell Jun 16 2012, 136 Strike SPY Calls (no delta) Buy Jun 20 2012, $96 Strike HY Call, Sell Jun 16 2012, 136 Strike SPY Calls (no delta) 11 March 2012 9 Barclays Capital | Global Portfolio Manager’s Digest U.S. EQUITY STRATEGY April showers Barry Knapp Excerpted from U.S. Portfolio Strategy Weekly, published on March 9, 2012 +1 212 526 5313 The period of major central bank easing into an improving economic outlook is winding email@example.com down. It might take some time for the momentum to completely dissipate, but we would BCI, New York be cutting risk. Eric Slover, CFA +1 212 526 6426 We’re not gonna’ party like it’s 1995 firstname.lastname@example.org We’ve argued throughout the post-crisis period that the U.S. growth outlook is the most important driver of equity markets, not domestic monetary strategy, public policy or external Michael Keller, CFA factors. Even last fall, when the European experiment seemed to be crumbling, improving data +1 212 526 2404 in the U.S., following a spike in market implied recession risk, pushed stocks erratically higher. email@example.com While we see numerous constraints to continued improvement in domestic growth -- the U.S. BCI, New York data surprise has been falling and 1Q12 GDP forecasts are at risk -- the relatively robust labor, auto and chain store sales reports have kept a positive bias to the market implied outlook. An Adam Sussi early Easter probably ensures at least another month of decent retail sales and, consistent with +1 212 526 9778 the last couple of years, the labor data have started strong, but in 2010 and 2011 it began to firstname.lastname@example.org soften in the 2nd quarter, implying the outlook isn’t likely to soften much until April. BCI, New York Longer term, we believe household balance sheet deleveraging and bottoming in the housing market, as evidenced by negative regional house price correlation, provide strong underlying There are several near-term support for U.S. growth. However, while the housing market is stabilizing, household restraints on both macro and deleveraging still has progress to make, and there are several remaining near-term restraints equity market fundamentals. on both macro and equity market fundamentals: Energy prices, public policy, earnings season, monetary policy and Europe. A common denominator in several of these broad areas of risk is the month of April. With the markets sending numerous signals that 2012 is not 1995—weakening relative performance of small caps and cyclical sectors, gold falling, energy prices increasing and real 10 year treasury rates rising—we believe the period of major central bank easing into an improving economic outlook is winding down. It might take some time for the momentum to completely dissipate, but we would be cutting risk. Figure 2: While the housing market is stabilizing, household Figure 3: Higher energy prices are offsetting the decline in deleveraging still has progress to go the household financial obligations ratio ,,,,, % % Gasoline & Motor Oil / Income Before Tax 80 75 16 14.6 Household Income Quintiles 14 70 64 12 10.2 60 57 10 8.5 50 8 6.8 6.0 6 4.8 5.2 40 44 3.6 4 2.9 2.1 30 2 20 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Lo 2 3 4 Hi Mortgage Debt / Nominal GDP 2010: $2.60 avg price 2012e: $4.00 avg price Source: FRB, Haver, Barclays Capital Source: BLS, EIA, Haver, Barclays Capital 11 March 2012 10 Barclays Capital | Global Portfolio Manager’s Digest DIVIDENDS Dissecting dividends: Signpost for a market drop? U.S. Portfolio Strategy The outperformance of dividend yield strategies is consistent with a falling stock Eric Slover, CFA market, rising volatility, and a deteriorating macro outlook. Dividend yield strategies +1 212 526 6426 are trending toward positive correlation with returns, a signpost for caution. We email@example.com recommend paring risk and legging into dividend yield exposure. BCI, New York Historically, periods of profitable dividend yield strategies (e.g., buying the top 20% of high U.S. Equity Product yielding stocks and selling the bottom 20%) are consistent with a falling stock market, rising Management volatility, and a deteriorating macro outlook. Despite the underperformance of dividend Gavin Smith indices and the highest yielding stocks, dividend yield strategies are trending toward +1 212 528 6139 positive correlation with returns, consistent with underperformance of other market firstname.lastname@example.org measures, such as small caps and cyclical sector. Along with the rising price of oil and BCI, New York gasoline, these signals in early 1Q11 and 2Q11 served as signposts for the deteriorating market conditions, which ultimately led to strong outperformance from dividend yield strategies. These signals served as signposts Figure 1: Legging into dividend yield exposure seems attractive. Dividend yielding in early 1Q11 and 2Q11, for the strategies that limit unintended exposures to other factors such as beta, size, value and deteriorating market conditions, sector effects would reduce short-term volatility effects which ultimately led to strong outperformance from dividend Normalized slope coefficients, 20dma Index, 20dma yield strategies 0.20 1.0 0.15 0.8 0.6 0.10 0.4 0.05 0.2 0.00 0.0 -0.05 -0.2 -0.4 -0.10 -0.6 -0.15 -0.8 -0.20 -1.0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Div Yld, Earnings Yld, Book/Mkt, Size, Sector (L) Div Yld (L) S&P 500 (R) Source: FactSet, Barclays Capital. Note: twenty day moving average of daily returns We would be wary of a pattern similar to early 2011 when dividend strategies quietly outperformed as the S&P 500 traded in a range for nearly two quarters, failing to break the top-end of the range and ultimately falling to 1100. With performance of dividend yield strategies added to the list of cautious signals from the We recommend paring back risk market, mixed macro data and a pause in monetary policy accommodation expectations, and legging into dividend yield we recommend paring risk, legging into dividend yield exposure seems attractive. Dividend exposure yielding strategies that limit unintended exposures to other factors such as beta, size, value and sector effects would reduce short-term volatility effects. 11 March 2012 11 Barclays Capital | Global Portfolio Manager’s Digest EMEA EQUITY STRATEGY Plugging into lower credit yields Edmund Shing, Ph.D Excerpted from European Strategy Elements: Plugging into lower credit yields, published +44 (0)20 7773 4307 on March 9, 2012 email@example.com Value rebound in the offing: Value stocks tend to outperform growth stocks as economic Barclays Capital, London indicators, such as the German IFO, stabilise. We believe this is because value stocks tend to be cyclical in nature, and an improvement in the economic outlook leads to a reduction Dennis Jose in the earnings risk premium that may currently be priced in. Therefore, we think that, at +44 (0)20 3134 3777 least tactically, value can outperform growth. We see the key value sectors within Europe firstname.lastname@example.org as Utilities, Telecoms and Insurance. Barclays Capital, London Upgrade Utilities to Marketweight: This is a highly leveraged (2012 Net Debt to EBITDA of Yu-chieh Chiang, CFA 2.4x) value sector, which stands well poised to benefit from the contraction in credit yields +44 (0)20 3134 4217 witnessed over the past couple of months. In addition, both German and UK power prices email@example.com are starting to pick up, which could support earnings. Barclays Capital, London Downgrade Industrials to Marketweight: While this is one of our preferred sectors on a structural basis, tactically we downgrade the sector, since current valuations are no longer particularly attractive and tactical macro risks are fast emerging. Close out Sweden (OMX) vs Europe (SX5E) recommendation: In conjunction with our downgrade of European Industrials, we close our Long OMX, Short SX5E recommendation. Riksbank estimates for real GDP growth in Sweden have become increasingly pessimistic, with a contraction expected in Q4 2012. In addition, Swedish new orders, after picking up since last November 2011, have started to moderate. Figure 1: Utilities equities led by credit historically, could it happen again? 130 European Utilities Equity (SX6P) 2 120 European Utilities Credit (redemption yield, inverted, rhs) 110 3 100 4 90 80 5 70 60 6 50 40 7 2007 2008 2009 2010 2011 2012 Source: Barclays Capital, DataStream 11 March 2012 12 Barclays Capital | Global Portfolio Manager’s Digest AMERICAS CREDIT STRATEGY Shifting concerns Jeffrey Meli Excerpted from U.S. Credit Alpha, published on March 9, 2011 +1 212 412 2127 Credit suffered through one of its tougher days of 2012 on Tuesday, and despite better firstname.lastname@example.org sentiment later in the week, it is wider w/w ahead of Friday’s payroll number. Europe was once again at the forefront of investor concerns, but the exact source of those worries Bradley Rogoff, CFA shifted somewhat. Greece looks set to execute its PSI debt swap successfully, as it has +1 212 412 7921 ~85% of participants on board. Assuming that it uses the collective action clauses to bind email@example.com the remaining holders, a CDS trigger is likely. The Greece debt swap may serve only to escalate questions about Portugal, which is now trading at extremely stressed levels. Our economics team does not expect PSI for Portugal in 2012 (see “Portugal: PSI unlikely in 2012, despite concerns about solvency”), but the question is becoming increasingly relevant. Perhaps more concerning over the long term is the performance of Spain. Deficit numbers were poor for 2011, at 8.5%, and forecasts for 2012 were dialed back to a 5.8% deficit. 10y government bond yields at ~5% are not yet alarming, but CDS is now wide to Italy and breached 400bp (Figure 2). The better tone as the week progressed was tied to continued strong data domestically and a story in the Wall Street Journal that the Fed may be considering sterilized bond purchases as a means of adding additional liquidity to the markets (“‘Sterilized’ Bond Buying an Option in Arsenal,” Wall Street Journal, March 7, 2012). This seemingly addressed the concerns we raised last week that markets are increasingly reliant on central bank liquidity. This week’s modest sell-off does not change our view that as long as the system is flush with liquidity, the catalyst for a down trade is not obvious. However, it did reinforce our view that positioning that is, at first glance, neutral but long convexity can perform well. For example, on Tuesday, we witnessed material underperformance from more liquid securities, including some of the higher dollar-priced call-constrained high yield bonds that we have highlighted recently as popular ETF bonds. This week, we look at dispersion in both the Investment Grade and High Yield sections and find that the number of credits that are near the market spread is much lower than during similar spread regimes in the past. This forces Figure 1: Weekly Index Changes Figure 2: Spain and Italy 5y CDS (bp) Last 575 Wednesday Week 4-week Close Close Average 525 Credit Index (bp) 171 166 173 CDX.IG.17 (bp) 97.0 94.0 96.6 475 High-Yield Index ($ Price) 101.49 102.31 101.61 CDX.HY.17 ($ Price) 96.63 97.91 97.47 425 Leveraged Loan Index ($ Price) 93.74 93.80 93.67 375 LCDX.17 ($ Price) 98.00 98.50 94.61 325 1-Jan 16-Jan 31-Jan 15-Feb 1-Mar Spain Italy Source: Barclays Capital Source: Bloomberg, Barclays Capital 11 March 2012 13 Barclays Capital | Global Portfolio Manager’s Digest many investors into a barbell approach if they want to earn a market yield. Based on our somewhat cautious view for lower quality credits, we are more comfortable with this approach in investment grade than high yield. Continuing with the theme of owning downside protection while staying invested in a market with very strong technicals, this week’s focus article looks at the relative value of credit and equity options. We highlight CDX and options as one of the only areas of the market where liquidity has remained strong or improved in the past year. The better liquidity in options has enticed investors to examine cross-asset volatility. We convert credit volatility from spread into price terms to make it more equivalent to equity volatility and find that equity volatility has recently become rich to credit volatility. We suggest trades in the IG and HY CDX options market versus S&P options. 11 March 2012 14 Barclays Capital | Global Portfolio Manager’s Digest EUROPEAN CREDIT STRATEGY Technicals are overwhelming a challenging fundamental picture for the moment Sherif Hamid Excerpted from European Credit Alpha, published on March 9, 2012 +44 (0)20 7773 5259 Volatility remained high this week as the Greece endgame quickly approaches. Concerns firstname.lastname@example.org that all could go horribly awry gave way on Thursday to belief that events will likely be able to progress with limited disruption to the broader markets. For the week ended Wednesday, iTraxx Main, Crossover, and Senior Fin were 7bp, 24bp, and 11bp wider, respectively, though markets rallied somewhat on Thursday on the back of positive headlines regarding participation in the proposed Greece PSI. With respect to the Greece PSI, headlines emerged over the course of the week regarding bondholder participation. At last count, per press statements on Thursday, over 60% of private creditors had express interest in participating in the PSI (Bloomberg). Importantly, on Tuesday, the Greek Ministry of Finance released a statement confirming that if Greece receives sufficient consent to the proposed amendments of the Greek law governed bonds to make the amendments effective, it will do so and bind all holders of the domestic law bonds into the proposed restructuring. We would highlight once again that per the Greek Bondholder Act, at least 50% of holders must respond and 66% of respondents must agree to the proposed amendments in order for Greece to make the amendments effective. Given recent headlines, it appears increasingly likely that Greece will reach the necessary hurdle and be able to implement the CACs. We continue to believe using the CACs to bind all holders of domestic law bonds into the restructuring will likely trigger a CDS credit event. We expect further headlines on this front on Friday. There has been significant continued focus on the potential implications of a CDS credit event for the broader market. We continue to be of the view that as long as CDS works as expected (ie, triggering if it “should” trigger and vice versa), sovereign CDS will continue to be viewed as a useful hedging tool. At the same time, in the case where CDS does trigger, we do not expect a rash of counterparty risk issues, given that the net notional of CDS Figure 1: Key indices weekly performance Figure 2: PEHY ex Fin Index pro forma for EDNIM inclusion, ranked by par outstanding (€bn equivalent) Wednesday Wednesday last Four-week 10 close week close average 9 PE IG Corp 237 240 248 8 iTraxx Main 136 129 134 7 iTraxx SenFin 217 206 217 6 5 iTraxx SubFin 358 355 366 4 PE HY Corp 677 666 690 3 iTraxx XO 591 567 584 2 1 0 FIAT PEUGOT UNITY HTOGA UPCB LGFP MWDP INEGRP ZIGGO WINDIM FIIM EDNIM ARGID PORTEL RENAUL F HEIGR ELEPOR CONGR LHAGR Source: Barclays Capital Source: Barclays Capital 11 March 2012 15 Barclays Capital | Global Portfolio Manager’s Digest outstanding is relatively small (USD3bn) and the vast majority of CDS in the market is subject to daily marking to market and margin requirements, both of which limit the amount of counterparty risk exposure. Indeed, we expect the vast majority of cash that would need to change hands related to a Greece CDS event has already done so given that Greek CDS is currently trading at ~75pts upfront (ie, trading to a 25% recovery). That said, we expect markets to remain concerned about this issue until it is proved that no major counterparties experience significant problems due to CDS triggering. We would point investors to Euro Themes: Implications of Greece restructuring for banks and CDS, 3 June 2011, and Greece CDS update: Voluntary or binding on all? The key question for Greece CDS holders, 27 October 2011, for further detail. Away from Greece, the ECB and BOE both held rates constant this week. President Draghi cited the benefits of the recent LTRO to market liquidity but, notably, continued to express concern about the growth outlook, as the ECB continues to expect weakness in 2012. He also stated that the ECB expects inflation to remain above 2% for most of the year, though he was more sanguine about inflation expectations, which are still viewed as well contained. Incremental macro data this week have, on balance, been negative, reinforcing the ECB’s concerns, as evidenced by weak German factory orders and weak EC PMI data. From a more fundamental perspective, earnings were, on balance, disappointing relative to expectations as well. Notably, investment grade issuers Carrefour, Air France, and Enel reported relatively weak operating results. Enel also joined the fray of downgrade activity, as the company was cut to BBB+ at S&P following results and guidance. Also downgraded was Italian electricity name Edison SpA. Edison was downgraded to BB+ by S&P, which joined Fitch in rating the company below investment grade. After this downgrade, Edison joins the growing list of fallen angels entering our high yield indices and becomes the 20th largest issuer by par in our high yield index ex-financials (EUR1.8bn, Figure 2). We expect this trend of downgrade activity to continue, with varying consequences across the credit markets. Overall, at current valuations, we continue to believe investors should tread lightly. The volatility exhibited already around the Greece PSI process highlights how skittish sentiment can be. At the same time, despite the seemingly overwhelming technicals, the fundamental picture continues to deteriorate across European credit. While this tension between technicals and fundamentals could continue for quite some time, risk/reward has become skewed to the downside, in our view. We believe investors should remain disciplined about relative value and look for relatively cheap/convex ways to position for a correction across our market. We highlight a variety of ideas along these lines in our trade blotter section. Along the same lines, in our high yield section, we highlight that 63% of our PE HY index ex fins is now trading above par, and 85% is trading above 90 on a price basis. With prices as high as they are, large parts of the market have become quite negatively convex. Ultimately, we believe the right risk/reward trade for high yield investors from a portfolio perspective is to move underweight beta in general; at the same time, we believe investors should move more of their exposure into the less negatively convex parts of the market, much of which is in the single B space. Please see our high yield section for further discussion. 11 March 2012 16 Barclays Capital | Global Portfolio Manager’s Digest ASIA CREDIT STRATEGY Soft China data no match for strong technicals Krishna Hegde Excerpted from Asia Credit Alpha, published on March 9, 2012 +65 6308 2979 Asia credit is flat to stronger w/w after trading softer midweek on worries about the email@example.com response to the Greece PSI. Asia outperformed versus US/Europe, with iTraxx Asia IG hitting new tights for the series. This week, USD2.15bn was priced, and the pipeline of new issues Avanti Save has continued to grow in line with expectations. +65 6308 3116 firstname.lastname@example.org Not surprisingly, Greece remained on the radar as the PSI deadline approached. Bloomberg has reported today that participation had reached over 85.8% (total of EUR172bn bonds tendered) and participation will be 95.7% (EUR197bn) after the CACs are triggered. The ISDA determination committee is expected to meet today to decide whether this triggers CDS contracts. The hard default imposed on Greece has left investors wondering whether PSIs will be utilised for other euro area countries in the future. Consequently, Portugal is now under close market scrutiny and is trading at stressed levels (10y bonds at 13.9%). Despite Portugal's economic challenges and deteriorating debt dynamics, our economists believe that the euro area's rhetorical support and anxiety about contagion considerably reduce the likelihood that European policymakers will impose PSI in 2012 (see Portugal: PSI unlikely in 2012, despite concerns about solvency, 7 March 2012). Stay invested in better-quality Strong technicals continue to support the markets. Despite USD26.7bn of YTD gross credits and keep macro hedges issuance, we believe dealer inventories are not yet heavy and investors’ cash levels continue in place to be replenished by inflows. Given this backdrop, we recommend a tactically cautious stance – stay invested in better-quality credits and keep macro hedges in place. In our focus piece we suggest a variety of trades across the high grade and high yield segments, with a fair proportion being relative value in nature. Korea CCS move is likely to In Korea, 5y CCS has moved almost 30bp over the past 2 weeks. Since the Korean onshore support Korean bonds investor base uses spread in KRW terms (after CCS) as a metric for buying USD bonds, a sharp upward move in CCS provides additional support for Korean USD bonds. Korea CCS is currently We recommend an overweight in at levels last seen in September 2011, and further normalisation of the markets/upward Korea investment grade credit movement in USTs could push it higher. We continue to recommend an overweight in Korea investment grade credit and believe there is potential for 8-10bp of further outperformance. Figure 1: Korea 5y CDS (bp) vs 5y KRW USD cross-currency basis swaps (bp) 5 yr CDS 5yr CCS Swaps 250 -300 225 -250 200 175 -200 150 125 -150 100 -100 75 50 -50 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Source: Barclays Capital 11 March 2012 17 Barclays Capital | Global Portfolio Manager’s Digest Rotate out of longer-tenor Indian India credit lagged last week, following election results that were perceived to be negative bonds into ’14s and ’15s. for the prospects for reforms and fiscal consolidation. Investors will have a chance to gauge Continue to recommend the government’s commitment to fiscal consolidation when the budget is released on 16 overweight while cutting March. Ahead of the budget, we continue to advocate rotating out of longer-tenor Indian duration exposure bonds into the ’14s and ’15s, given the relative flatness of the curve. In our view, the spread of the sector makes an above-benchmark weight appropriate, despite the strong performance that has already occurred YTD. Recent Chinese macro- and micro-level data have been mixed. The Chinese Minister of Commerce was quoted saying that January-February exports only grew 7% y/y, which implies 20% y/y growth in February – below the consensus forecast of 30%. Also, our equity analysts highlight that Chinese steel mills have been suffering from a weak recovery in demand from domestic and export markets, sluggish steel prices, high raw material costs and overcapacity. China’s data releases on 9-10 March will be an important indicator of the extent of the slowdown in growth. China activity data released on Friday surprised to the downside in aggregate. Retail sales and IP were lower than expected while fixed asset investment came in ahead of forecasts. CPI at 3.2% printed slight lower than consensus of 3.4%. Global markets have not yet fully We believe developments in China warrant a cautious stance, especially because global factored in the possibility of a markets have not yet fully factored in the possibility of a sharper-than-expected slowdown sharper-than-expected in China. This is evident in the way risk assets, especially commodities, weakened when slowdown in China. Overweight China cut this year’s GDP growth target to 7.5% from 8%, which was well telegraphed in Hong Kong IG against advance, according to regional economists. That said, there is a risk markets look through underweight China IG poor data in the expectation of policy easing. We suggest overweighting Hong Kong investment grade versus underweighting China investment grade to maintain exposure to greater China. Indonesia – neutral sovereign In Indonesia, our economists see an increased likelihood of a fuel price increase leading to against EM sovereign higher inflation. We have changed our view on Indonesia credit (in the context of an EM benchmark, and underweight sovereign portfolio) to neutral (see Indonesia credit: Finding safety in the off-the run bonds, credit against Asian credit 8 March 2012). We reiterate our underweight on Indonesia sovereign bonds versus an Asian benchmark credit benchmark. 11 March 2012 18 Barclays Capital | Global Portfolio Manager’s Digest ECONOMIC OUTLOOK Nervous energy Simon Hayes Excerpted from Global Economics Weekly, published on March 9, 2012 +44 (0)20 7773 4637 Recent activity data have brought further signs that global growth is recovering from its email@example.com recent dip. At the same time, however, the threat of a jump in oil prices is likely to keep financial markets and policymakers watchful, even as euro risks recede. Global business confidence The Barclays Capital global business confidence index registered another significant registered another significant improvement in February (Figure 1), recording its largest one-month increase since October improvement in February 2009 and its fourth consecutive monthly rise. The service sector has been the main source of improvement, implying solidifying domestic demand across a range of economies, while mixed movements in manufacturing confidence indicate some residual fragility in international trade. The US turnaround has been the Although the improvement in confidence was widespread, there have been some striking most convincing, while European regional divergences. The turnaround in the US has been the most convincing, and the solid confidence remains payrolls gain in February suggests the recovery there retains momentum. Euro area decidedly sub par confidence, by contrast, remains notably sub par (Figure 2). This pattern accords with our view that the euro area is in the midst of a mild recession whereas other economies have steered clear of a double dip. We expect global GDP growth to rise to 3.5% q/q (saar) in Q1, from 2.8% in Q4 11. We have revised up our forecast The economic ramifications of last year’s earthquake continue to keep Japanese data for Japanese GDP growth volatile, but this week brought some positive news. The sharp upward revision to Q4 GDP in 2012 growth, to -0.7% q/q (saar) from the initial estimate of -2.3%, has led us to raise our 2012 growth forecast to 2.4% from 2.0% previously. Underpinning this is a marked upward revision to our Q1 forecast, to 2.6% from 1.5% previously, reflecting upgrades to our views of household consumption and export demand. In tune with this improving outlook, February saw a jump in the expectations index in the Economy Watchers’ Survey, rising above the 50 no-change mark for the first time in nearly five years. Even so, investors continue to question the sustainability of global demand. Certainly, complications in adjusting for the Chinese New Year make us slightly cautious about the recent readings of our business confidence index. However, we were not so perturbed by Figure 1: Global business confidence and GDP growth Figure 2: Business confidence in the US, euro area and ROW % q/q saar normalized diffusion index, 3mma normalized diffusion index, 3mma 8 BarCap est. for Q4 11- 2.0 2.5 Q1 12 global GDP 1.5 2.0 6 1.0 1.5 4 0.5 1.0 2 0.0 0.5 -0.5 0.0 0 -0.5 -1.0 -2 -1.5 -1.0 -2.0 -1.5 -4 Global real GDP growth Improvement (BarCap series, LHS) continues -2.5 -2.0 -6 US business confidence Global business confidence -3.0 -2.5 Euro area business confidence -8 (BarCap series, RHS) -3.5 -3.0 ROW business confidence (BarCap aggregate) 98 00 02 04 06 08 10 12 99 01 03 05 07 09 11 Source: Haver Analytics, Barclays Capital Source: Haver Analytics, Barclays Capital 11 March 2012 19 Barclays Capital | Global Portfolio Manager’s Digest other developments that appeared to discompose markets. In particular, the lowering of the official Chinese growth target for 2012 to 7.5% has not led us to revise our forecast of 8.1% growth. It is not unusual for growth outturns to be higher than the official targets, and we view the change more as a signal of a shift in policy priority away from absolute growth towards structural adjustment – a shift we had already factored in. We do not see the recent rise in There is also increasing anxiety that the recovery could founder on higher oil prices. The the oil price as a material threat popular headline is that the price of Brent crude is at a record high in euro terms. However, to global activity it is not so much the level of prices that matters for economic activity as the rate of increase: sudden surges in oil prices can have very disruptive effects. For example, over the past 25 years periods of major oil-related disruption were associated with oil price surges of 50% or more over a six-month period (Figure 3). Against this benchmark the recent moves have been unremarkable and are unlikely to pose a material threat to global economic activity. However, given the firmer A sharp jump in oil prices would be another matter altogether, however. If the US recovery inflation outlook we now expect were threatened, the likelihood of QE3 would increase dramatically. However, the greater the ECB to hold the policy rate concern would surround the effects in Europe. As well as being a larger net importer of oil until at least the end of 2013 than the US, Europe has fewer alternative sources of energy, so the potential long-run effect on real activity is likely to be greater. In addition, the ECB has shown itself reluctant to “look through” the first-round effects of higher oil prices on inflation: indeed, in light of this week’s upward revision to the ECB’s inflation forecast for 2012 we no longer expect a rate cut in Q2 and now think the policy rate is likely to be held at 1% until at least the end of 2013. If policy were to be unsupportive, the resultant squeeze on growth could be a serious hindrance to the necessary fiscal and economic adjustment in the region. Lastly, another year of “sticky” inflation in the UK could unhinge inflation expectations, constraining the MPC’s ability to provide support. The risk of a disruptive euro As the oil risk moves up investors’ list of concerns, the threat of a disruptive euro break-up break-up has receded but the continues to recede. Italian bonds have been particular beneficiaries of the recent calming of currency bloc is likely to be an market concerns, with the 10y yield dropping to about 5% and back close to that of Spain ongoing source of turbulence (Figure 4). However, although contagion from the somewhat untidy Greek PSI deal has been contained, the euro area continues to face immense challenges, and the currency bloc is likely to be an ongoing source of financial market turbulence (see our article Portugal – PSI unlikely in 2012, despite concerns about solvency, 7 March 2012). Figure 3: Brent oil price Figure 4: 10y government bond yields 6m change, % % 7.5 Spain 120 7.0 Italy 100 80 6.5 60 6.0 40 5.5 20 0 5.0 -20 4.5 -40 -60 4.0 -80 3.5 90 92 94 96 98 00 02 04 06 08 10 12 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Source: Haver Analytics, Barclays Capital Source: Barclays Capital 11 March 2012 20 Barclays Capital | Global Portfolio Manager’s Digest EQUITIES: SUMMARY OF RATING CHANGES Rating Changes Sector Old New Security Ticker Analyst Sector View Date Rating Rating Basic Industries Minmetals Resources Ltd. 1208.HK Ephrem Ravi Asia ex-Japan Metals & Mining 1-Pos 4-Mar-12 NA 2-EW Energy CGGVeritas GEPH.PA Mick Pickup European Oil Services & Drilling 1-Pos 2-Mar-12 1-OW 2-EW Trilogy Energy Corp. TET.TO Grant Hofer, CFA Canadian Oil & Gas: E&P (Mid-Cap) 1-Pos 6-Mar-12 2-EW 1-OW Financial Services New China Life Insurance Co. Ltd. 1336.HK Mark Kellock Hong Kong/China Insurance 1-Pos 8-Mar-12 NA 2-EW SulAmérica SULA11.SA Henrique Caldeira, CFA Latin America Diversified Financials 2-Neu 9-Mar-12 1-OW 3-UW Healthcare Halozyme Therapeutics Inc. HALO Ying Huang, Ph.D. U.S. Biotechnology 2-Neu 8-Mar-12 NA 1-OW Industrials Air China 0753.HK Patrick Xu, CFA Asia ex-Japan Airlines 2-Neu 7-Mar-12 NA 2-EW Cathay Pacific Airways 0293.HK Patrick Xu, CFA Asia ex-Japan Airlines 2-Neu 7-Mar-12 NA 3-UW China Eastern Airlines 0670.HK Patrick Xu, CFA Asia ex-Japan Airlines 2-Neu 7-Mar-12 NA 2-EW China Southern Airlines 1055.HK Patrick Xu, CFA Asia ex-Japan Airlines 2-Neu 7-Mar-12 NA 3-UW Power & Utilities Covanta Holding Corp. CVA Gregg Orrill U.S. Power 2-Neu 5-Mar-12 2-EW 1-OW Real Estate Campus Crest Communities, Inc. CCG Ross L. Smotrich U.S. REITs 2-Neu 9-Mar-12 NA 2-EW Retail Express Inc. EXPR Stacy Pak U.S. Retail Softlines 2-Neu 6-Mar-12 1-OW 2-EW Herbalife Ltd. HLF Brian Wang, CFA U.S. Food & Drug Retailing 2-Neu 9-Mar-12 NA 1-OW Weight Watchers International Inc. WTW Brian Wang, CFA U.S. Food & Drug Retailing 2-Neu 9-Mar-12 NA 1-OW Technology NEXON 3659.T Haruka Mori Japan Interactive Software 2-Neu 6-Mar-12 NA 1-OW Telecommunications Belgacom BCOM.BR Michael Bishop European Telecom Services 3-Neg 5-Mar-12 2-EW 3-UW Sector View Changes SubSector Analyst Date Old New Japan Display & Lighting Yuji Fujimoro 6-Mar-12 1-Positive 2-Neutral Asia ex-Japan Airlines Patrick Xu, CFA 7-Mar-12 0-Not Rated 2-Neutral Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative For a definition of our rating system, please see the equity disclosure section at the end of this report. 11 March 2012 21 Barclays Capital | Global Portfolio Manager’s Digest CREDIT: SUMMARY OF RATING CHANGES US High Grade Sector Issuer From To Date Changed Media Interpublic Group Overweight Market Weight 6-Mar-12 Retail Macy’s Overweight Market Weight 5-Mar-12 Technology IBM Overweight Market Weight 6-Mar-12 US High Yield Sector Issuer Security From To Date Changed Metals & Mining Patriot Coal 7.375% and 7.625% senior notes Market Weight Underweight 7-Mar-12 Europe High Grade Sector Issuer From To Date Changed Pharmaceuticals Merck Underweight Market Weight 7-Mar-12 Utilities Edison SpA Market Weight Underweight 7-Mar-12 Utilities RWE AG Overweight Underweight 7-Mar-12 Europe High Yield Sector Issuer Security From To Date Changed Paper & Packaging Ardagh Packaging 9.25% notes 2016 & 7.375% notes 2017 Overweight Market Weight 8-Mar-12 Paper & Packaging Ardagh Packaging New 7.375% notes 2017 Initiating Coverage Market Weight 8-Mar-12 Paper & Packaging Ardagh Packaging 9.125% notes 2020 Initiating Coverage Overweight 8-Mar-12 Asia Ex-Japan Sector Issuer From To Date Changed Industrials & Resources Berau Coal – 2017 bonds Initiating Coverage Market Weight 9-Mar-12 Industrials & Resources China Oriental – CHOGRP ‘15s Market Weight Underweight 7-Mar-12 For a definition of our ratings system, please see fixed income disclosure section at the end of this report. 11 March 2012 22 Barclays Capital | Global Portfolio Manager’s Digest CREDIT: SELECT RATING CHANGES Relative Value Merck – Robust results, reassuring outlook – upgrade to Market Weight From a valuation perspective, we would note that Merck cash has underperformed our wider industrial universe in the recent rally over the last rolling quarter (see European High Grade Industrial Excess Returns - February 2012). Accordingly given management's focus 7 March 2012 on deleveraging in 2012, the relatively re-assuring outlook and the guidance from Darren Hook, Nick Macdonald management that deals will be small and bolt-on in nature, we move to a Market Weight position in cash. Similarly, we now view CDS as fairly valued. 11 March 2012 23 Barclays Capital | Global Portfolio Manager’s Digest MACRO: SELECT FORECAST CHANGES Japan 2012 GDP growth to 2.4% from 2% Japan Could Outpace G7 Peers from Q2 9 March 2012 The sharp upward revision to Q4 GDP growth, to -0.7% q/q (saar) from the initial estimate Kyohei Morita of -2.3%, has led us to raise our 2012 growth forecast to 2.4% from 2.0% previously. Yuichiro Nagai Underpinning this is a marked upward revision to our Q1 forecast, to 2.6% from 1.5% James Barber, CFA previously, reflecting upgrades to our views of household consumption and export demand. ECB rates on hold until at least end of 2012 Greece Drama close to an end (at least for now) 9 March 2012 The ECB has shown itself reluctant to “look through” the first-round effects of higher oil Fabio Fois prices on inflation: indeed, in light of this week’s upward revision to the ECB’s inflation Antonio Garcia Pascual forecast for 2012 we no longer expect a rate cut in Q2 and now think the policy rate is likely to be held at 1% until at least the end of 2013. If policy were to be unsupportive, the resultant squeeze on growth could be a serious hindrance to the necessary fiscal and economic adjustment in the region. 11 March 2012 24 Barclays Capital | Global Portfolio Manager’s Digest PRODUCT MANAGEMENT GROUP Equities Penn Egbert Gavin Smith Rex Feng Terence Malone Head of U.S. Equity Product U.S. Equity Product U.S. Equity Product U.S. Equity Product Management Management Management Management +1 212 526 0685 +1 212 528 6139 +1 212 526 6114 +1 212 526 7578 firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com Rob Bate Joshika Bhasin Chris Stevens Head of European Equity European Equity Product European Equity Product Product Management Management Management +44 (0)20 777 33576 +44 (0)20 355 52530 +44 (0)20 313 45749 firstname.lastname@example.org Joshika.email@example.com firstname.lastname@example.org Marcus Gunn Sue Ho Head of Asia Equity Product Asia Equity Product Management Management +852 290 34620 +852 290 34518 email@example.com firstname.lastname@example.org Credit Joanie Genirs Head of Global Credit Product Management +1 212 412 7678 email@example.com Katie Tomlinson European Credit Product Management +44 (0)20 777 37865 firstname.lastname@example.org Macro Namita Dhariwal Macro Research Product Management +44 (0)20 313 44212 email@example.com 11 March 2012 25 Barclays Capital | Global Portfolio Manager’s Digest ANALYST(S) CERTIFICATION(S) I, Gavin Smith, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Each research publication excerpted herein was certified under Reg AC by the analyst primarily responsible for such report as follows: I hereby certify that: 1) the views expressed in this research report accurately reflect my personal views about any or all of the subject securities referred to in this publication and; 2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURES: FIXED INCOME RESEARCH For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi- bin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the “firm”) regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm’s proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm’s fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm’s fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Capital’s Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research- dissemination.html. Explanation of the High Grade Sector Weighting System Overweight: Expected six-month excess return of the sector exceeds the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Market Weight: Expected six-month excess return of the sector is in line with the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Underweight: Expected six-month excess return of the sector is below the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Explanation of the High Grade Research Rating System The High Grade Research rating system is based on the analyst’s view of the expected excess returns over a six-month period of the issuer’s index-eligible corporate debt securities relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index or the EM Asia USD High Grade Credit Index, as applicable. Overweight: The analyst expects the issuer’s index-eligible corporate bonds to provide positive excess returns relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Market Weight: The analyst expects the issuer’s index-eligible corporate bonds to provide excess returns in line with the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Underweight: The analyst expects the issuer’s index-eligible corporate bonds to provide negative excess returns relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating. For Australia issuers, the ratings are relative to the Barclays Capital U.S. Credit Index or Pan-European Credit Index, as applicable. Explanation of the High Yield Sector Weighting System Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. 11 March 2012 26 Barclays Capital | Global Portfolio Manager’s Digest IMPORTANT DISCLOSURES CONTINUED: FIXED INCOME RESEARCH Explanation of the High Yield Research Rating System The High Yield Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to either some or all of the company’s debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertain the application of the rating system to that company. Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating. 11 March 2012 27 Barclays Capital | Global Portfolio Manager’s Digest IMPORTANT DISCLOSURES: EQUITY RESEARCH For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm’s total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays Capital policy prohibits them from accepting payment or reimbursement by any covered company of the their travel expenses for such visits. In order to access Barclays Capital’s Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Other Material Conflict(s) Barclays Capital is providing investment banking services to Ventas, Inc. (VTR) in connection with its acquisition of Cogdell Spencer Inc. (CSA). Barclays Capital is providing investment banking services to ACCO Brands Corporation (ABD) in its proposed merger with MeadWestvaco Corporation's (MWV) Consumer & Office Products business. All ratings, price targets and estimates (as applicable) on ACCO Brands (ABD) and MeadWestvaco (MWV) issued by the Firm's Research Department have been temporarily suspended due to Barclays Capital's role in this potential transaction. Barclays Capital is acting as financial advisor to Exelon Corporation in the potential acquisition of Constellation Energy. The rating, price target and estimates on Exelon Corporation have been temporarily suspended due to Barclays Capital's role. The rating, price target and estimates on Constellation Energy have also been suspended. Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sector coverage universe”). In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating. Distribution of Ratings: Barclays Capital Inc. Equity Research has 2232 companies under coverage. 42% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of companies with this rating are investment banking clients of the Firm. 42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Firm. 13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 39% of companies with this rating are investment banking clients of the Firm. 11 March 2012 28 Barclays Capital | Global Portfolio Manager’s Digest Guide to the Barclays Capital Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst’s expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst’s price target over the same 12-month period. Barclays Capital offices involved in the production of equity research: London Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) São Paulo Banco Barclays S.A. (BBSA, São Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCC, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Capital Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore) 11 March 2012 29 DISCLAIMER This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. 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