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CICC - Watch Out For Negative Surprises

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					                                                                              Strategy Weekly

 July 16, 2012                                Overseas Markets                                              RESEARCH
Zhiyong LI
SFC CE Ref: AVR401
lizy@cicc.com.cn
                                                     Watch Out For Negative Surprises
Di JIAO
jiaodi@cicc.com.cn

                       Highlights
                       European sovereign debt crisis not under the spotlight in the near term: The unexpected
                       consensus reached during the recent Eurozone summit is a so-called “heart disease pill”. We believe
                       any progress being made is of a two-steps-forwards-and-one-step-back kind, and market participants
                       should not expect too much in the near term.

                       The global economic slowdown is now the biggest concern: Market participants have reached a
                       consensus that the Eurozone has slipped back into a moderate recession, the US has seen mixed
                       economic data recently, and emerging economies may suffer a further economic slowdown. Against
                       the backdrop of the global economic slowdown, both developed and emerging economies have been
                       sending signals of easing their monetary policies since April. However, global markets have not
                       rebounded, but declined after such policies were unveiled, indicating investors expect something even
                       worse to happen going forwards.

                       Watch out for negative surprises: 1) Corporate earnings are likely to slow at a sharper than
                       expected pace in 2Q12, and the future earnings recovery may also be weaker-than-expected amid the
                       global economic slowdown. That said, we can not get the big picture as the earnings season has just
                       started; 2) Market concerns about the next year’s US “fiscal cliff” may come earlier than expected: It
                       is almost certain that the US fiscal stimulus package may not be passed amid the political deadlock
                       before the completion of the US presidential election. In addition, the US Fed has not decided whether
                       it will embark on a third rebound of quantitative easing. The market hates uncertainty, and is worried
                       that the economic growth will likely weaken in 2H12.

                       Maintain our view that the global markets may rebound in 3Q12, but watch out for negative
                       surprises: Overall, the economic fundamentals stayed weak recently, but it is not significantly worse
                       than previously expected. The actual performance of the economic surprise index suggests that the
                       global markets have already started beating the market consensus, although the sustainability remains
                       fragile and still needs to be monitored. On the other hand, the anemic economic data once again
                       sparked market expectations for QE3. Some European Central Bank officials showed their support for
                       a zero-interest rate policy, saying it is technically feasible for the ECB to lower its deposit facility rate
                       to 0%. In addition, emerging economies have more room to maneuver. In the immediate future,
                       corporate earnings may be the dominant force driving stock markets if economic data is mediocre.
                       However, if the economic data is negative, it may help increase expectation for fresh stimulus
                       policies, lending support to the stock markets. That said, investors should stay alert to the
                       abovementioned three risks: a continued economic slowdown; earnings misses; and,
                       earlier-than-expected “fiscal cliff” fears.




                     Please read carefully the important disclosures at the end of this report
                                                                                                                          CICC Research: July 16, 2012

                                                           Important legal disclosures
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