Global Quantitative Research Monthly

EQUI TY RESEARCH
Quant sentiment
Forecasting earnings changes
Using capital flows in China
US stagflation?
Global Quantitative Research Monthly
See Appendix A-1 for analyst
certification and important
disclosures. Analysts
employed by non-US affiliates
are not registered or qualified
as research analysts with
FINRA in the US.
May 23, 2011
Nomura | EMEA Global Quantitative Research Monthly May 23, 2011

2
Content

Chapter I Quant Sentiment: A view from Europe
4
We report on the sentiment and views of clients attending our quant conference in London and other
European cities in May.
The overall tone was bullish. A majority of quant managers have seen positive returns in the past 12 months, a
majority have won net new mandates and there was a skew to having a positive outlook for quant.
The strongest demand for allocation of new capital into quant was for Emerging Markets followed by global
approaches. Europe and Japan were not seen as being in demand by many managers, while no one saw
demand for new capital flows into US quant.
Discretion should have a role to play anywhere in the quant investment process was a clearly held view.
Inigo Fraser-Jenkins - European Head of Quantitative Strategy
Chapter II Projecting revisions for stocks with unchanged consensus forecasts 10
The 11/3 results season is under way for companies with a March fiscal year-end. While these results are
likely to attract attention as a means of assessing the impact of the Great East Japan Earthquake, some
companies have chosen not to announce earnings guidance for the current fiscal year. In addition, many
analysts have been holding off from making major revisions to their earnings forecasts since the earthquake,
and there are also substantial differences between individual analysts forecasts. This reflects the current
difficulty in projecting earnings and may well reduce the reliability of investment strategies based on earnings
forecasts.
Hence, we consider a method of estimating future revisions for stocks for which the consensus earnings
forecast has been left unchanged. For each company, we estimate the revision factor for each of its business
segments (the segment revision factor). We then add up all these segment revision factors, giving them a
weighting in line with the proportion of the companys total sales accounted for by each segment. We calculate
segment revision factors from the revision factors for companies that specialize in the segment in question and
have recently had their consensus earnings forecast revised.
The results of our analysis indicate that it might be possible to estimate future revisions using the aggregate
revision factor, which is based on data for companies in the same business. We provide an investment
strategy based on this factor that is effective. Most companies have refrained from issuing guidance along with
their 11/3 results. We think the strategy we introduce in this report might be useful at a time such as this, when
earnings are difficult to project.
Hiromichi Tamura - Japan Head of Equity Quantitative Research
Chapter III Herding in China: capital inflows
18
In this report, we review factor performance for the China CSI 300 universe, and observe a herd-like behaviour
exhibits in the China domestic market.
We introduce the capital inflows ratio, which utilizes capital inflows data sourced from Wind Info. The factor
distinguishes trading activities from institutional investors and individual investors. Stocks with a high capital
inflows ratio are those stocks that institutional investors (or informed investors) are buying.
Our correlation analysis shows that stocks with a high capital inflows ratio tend to maintain high money inflows
for the following days, and have a higher future return.
We construct a hypothesis portfolio consisting of top capital inflows ratio stocks, and back-test the
effectiveness of the factor since January 2010. Up to 30 April 2011, the portfolio has delivered an absolute
return of 45.8%, outperforming the CSI 300 Index by 60.5%.
Sandy Lee - Head of Equity Quantitative Strategies, Asia ex-Japan
Chapter IV Stagflation priced in the market?
27
In this section we revisit the question of whether the market is pricing in stagflation.
Inflation expectations priced in bonds have risen briskly to pre-Lehman levels, while long-term earnings growth
is now priced as negligible. Inflation expectations are certainly not yet very high, but this divergence of growth
and inflation pricing is not a good sign for the markets. The market currently seems to be pricing in what could
be regarded as early signs of stagflation.
Joseph J. Mezrich - Head of US Quantitative Research

3
Foreword

This month we offer our readers four quite different topics. We recently held our series of
annual quant conferences in European cities. We analyse the views of European quant
fund managers, including their recent performance and asset flows.
An issue in analysing Japanese stocks at present is the absence of up-to-date earnings
forecasts for many stocks in the wake of the earthquake and associated uncertainty over
earnings prospects. We offer a technique for forecasting earnings changes.
Our Asian section focuses on the Chinese market. We show the propensity for herding
behaviour in factor returns for that market. We also introduce a capital flow indicator and
test its ability to discriminate between stocks.
In the US we test the question of whether the market is now pricing in a stagflationary
environment.

Inigo Fraser-Jenkins Hiromichi Tamura
European Head of Quantitative Strategy Japan Head of Equity Quantitative
Research

Sandy Lee Joseph J. Mezrich
Head of Equity Quantitative Strategy Head of US Quantitative Research
Asia ex-Japan


4
Quant Sentiment: A view from Europe

We report on the sentiment and views of clients attending our quant conference in
London and other European cities in May.
The overall tone was bullish. A majority of quant managers have seen positive returns
in the past 12 months, a majority have won net new mandates and there was a skew to
having a positive outlook for quant.
The strongest demand for allocation of new capital into quant was for Emerging
Markets, followed by global approaches. Europe and Japan were not seen as being in
demand by many managers, while no one saw demand for new capital flows into US
quant.
Discretion should have a role to play anywhere in the quant investment process was a
clearly held view.

We held our annual quant conference in London and other European cities last week. As
part of this we asked the attendees a series of questions on how they perceive the
outlook for quant, recent performance and where they see demand for new products.
The mood was upbeat. Performance has been good and new mandates are being won.
This is perhaps a sign of confidence returning to quant fund managers. Many of these
results mesh with the output from our models, so in this report we present the key
findings of the survey and our thoughts on the issues discussed. The first part of this
report covers performance and asset flow of quant managers overall. In the second part
we delve into some of the specific issues that we think are of current interest to quants.
First, quants have seen good performance recently. There was a clear skew of results
towards positive relative returns over the past 12 months, with 30% having beaten the
market by between 2% and 5%, and another 30% having beaten the market by more
than 5%.
Fig. 1: How did your quant funds perform over the last 12 months?*

Relative to the market if a run a long-only fund, or absolute return in the case of long-short). (1 = less than -5%, 2 = -5% to
-2%, 3 = -2% to +2%, 4 = +2% to +5%, 5= > +5%)
Source: Nomuras Quantitative Survey

1 1
17
13 13
0
2
4
6
8
10
12
14
16
18
1 2 3 4 5
Inigo Fraser-Jenkins
+44 20 7102 4658
Inigo.fraser-
jenkins@nomura.com
A majority of quant fund
managers in our survey had
seen positive returns over the
past 12 months

5
This accords with the finding from our quant benchmark index shown in Figure 2, which
has shown good returns recently. It is still early days in terms of a recovery in
performance, but the rally this year has been reasonably significant.
Fig. 2: Quant benchmark index

Figure shows the performance of equal-weighted and asset-weighted quant fund indices relative to the global market .
Source: Bloomberg, Nomura Equity Strategy research
We published a positive view on quant as part of our outlook for this year.1 It turns out that
18 January marked the low-point for quants and, according to our benchmark index, they
have outperformed the market by 1.2% since then. The reason for our positive view and
hence the Dante-esque labelling of Figure 2 is that correlations between stocks are low
and the dispersion of growth expectations across the market is wide. This positive view
was also shared by the attendees at the conference. The modal result was neutral, but
38% were positive to varying degrees, while only 8% were negative (Figure 3).
Fig. 3: How would you rate the outlook for quant over the next 12 months?

On a scale of 1-5, where 1 was the worst ever period of quant returns and 5 the best
The positive returns do seem to be starting to show up in asset flows. A majority of
attendees had won net new mandates over the past year. Also, when we asked about
the ease of marketing quant now compared with a year ago, there was a skew towards
managers finding it easier to market quant.

1
Please see Quant Outlook 2011, 16 January 2011
95
97
99
101
103
105
107
109
111
113
J
a
n
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A
p
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1
equal-weighted relative
asset weighted relative
2 Jan 06 = 100
Inferno Purgatorio Paradiso??
1
3
27
17
2
0
5
10
15
20
25
30
1 2 3 4 5
The more positive recent returns
also contribute to a more
positive outlook for quant funds

6
Fig. 4: Have you won NET new mandates over the past year?

To present a balanced picture of flows, we have, however, yet to see this show up as an
increase in the AUM of funds in our quant benchmark index (see Figure 5).
Fig. 5: AUM share of quant funds

Figure shows the quant share of AUM for active equity funds that are global or benchmarked against a US, European or
Australian index. Source: Bloomberg, Nomura Equity Strategy research, EPFR
The appetite for where new quant capital is being allocated is far from uniform. Emerging
markets are by far the most popular area for new funds being put to work. Only 13% of
respondents thought that Europe was where their clients were most interested in
allocating new capital to quant, only 8% cited Japan and not a single respondent cited
the US. This fits with feedback that we have had from recent marketing trips. There have
been significant outflows from emerging market mutual funds (that is all funds, not just
quant) in recent months and we expect that there will be further outflows over the rest of
the year. Despite this, however, there are reasons why the dynamic may be different for
quant funds. Emerging markets are still perceived as an area where quants are relatively
under-exploited, and there is now enough data for many of these markets for some kind
of backtesting. There is also a perception that quant approaches have a lot to offer for
these markets. While we agree with this, we would sound one note of caution, which is
that implementing a backtest for these markets raises some challenging data questions.
Not least among these is the proper treatment of differing accounting standards and
changes in those standards for these markets.

21
26
0
5
10
15
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25
30
No Yes
0.50
0.60
0.70
0.80
0.90
1.00
1.10
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1.30
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p
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1
constant sample
as %

7
Fig. 6: Which region do you see the most client interest in allocating new capital to
quant strategies?

There are other areas on ongoing debate in the quant world that we found interesting.
There is the discussion on the role for discretionary inputs or overlays for quant models.
The answer to our survey question was unambiguous; discretion should be allowed at
any stage in the quant investment process (see Figure 7). Only 6% of respondents
thought that discretion had no role to play in the quant investment process.
Fig. 7: To what extent do you think that a discretionary overlay has a place in the quant
investment process?

We found that many attendees had seen demand for a model that could systematically
adjust the risk budget of a quant model in a systematic way. This is a concept that we
find appealing and our meta model
2
offers one such approach for this.

We find pervasive
evidence that the performance of quants in aggregate is related to correlations (both
between stocks and factors) and also to the dispersion of factor values across the
market. We have been surprised that it has not been taken up by more quants. However,
the response to the survey suggests that there is now a demand for such models.
There are signs that quants are changing data providers more than they did some years
ago. The cost of changing data provider is high, so the fact that 30% of respondents had
changed data sources in the past year is highly significant. We find that quant fund
managers are increasingly willing to use the newer alternative sources of estimates and
accounting data. These are areas where we think that real competition does now exist in
a way that it did not four years ago. For our review of these data sources please see
Quant Data Manual.
3

2
Please see Quant Outlook 2011, 16 January 2011
3
Please see Quant Data Manual, 9 October 2009
5
16
3
10
4
0
0
2
4
6
8
10
12
14
16
18
Europe EM Japan Global Asia ex Japan US
13
3
7
3
24
0
5
10
15
20
25
30
It can be used to
add/eliminate
individual securities
It can be used to
change factor views
It has a place in the
development stage
of creating a new
model/investment
process
It has no place It can have a place
anywhere in the
quant investment
process
Emerging markets are the
regions most in demand for new
capital being allocated to quant
funds

8
Fig. 8: For inputs that you use in your models, have you changed the data provider for
any of them in the last year?

The topic of alternative data sources is also related to the question of exploiting new
factors. Although the modal response to our question on the number of new alpha
sources was that no new factors were used, respondents indicated that new factors are
being used to some degree. The most popular types of new factor to use are stock-
specific factors (Figure 9). These are in some cases factors that are specific to individual
industries and in other cases alternative factors based on fundamental data. The second
most common type of factor was macro-economic, with technical factors in third place.
Fig. 9: If you have added new factors, what types of factors are these

Overall, these responses show a quant investment community that is somewhat more
confident than it was a year ago. Quants are continuing to innovate and experiment with
new factors, new data sets and new markets. Discretion also now firmly has a place in
many quant approaches.

36
14
0
5
10
15
20
25
30
35
40
No Yes
12
4
18
10
0
2
4
6
8
10
12
14
16
18
20
Macro-economic factors Fixed income factors Stock-specific factors Technical factors
Despite the costs inherent in
moving data provider, we are
seeing increasing numbers of
quant investors willing to make a
switch as there is now more
competition among providers of
key data sources

9
Projecting revisions for stocks with
unchanged consensus forecasts
The 11/3 results season is underway for companies with a March fiscal year-end. While
these results are likely to attract attention as a means of assessing the impact of the
Great East Japan Earthquake, some companies have chosen not to announce
earnings guidance for the current fiscal year. In addition, many analysts have been
holding off from making major revisions to their earnings forecasts since the
earthquake, and there are also substantial differences between individual analysts
forecasts. This reflects the current difficulty in projecting earnings and may well reduce
the reliability of investment strategies based on earnings forecasts.
Hence, we consider a method of estimating future revisions for stocks for which the
consensus earnings forecast has been left unchanged. For each company, we estimate
the revision factor for each of its business segments (the segment revision factor). We
then add up all these segment revision factors, giving them a weighting in line with the
proportion of the companys total sales accounted for by each segment. We calculate
segment revision factors from the revision factors for companies that specialize in the
segment in question and have recently had their consensus earnings forecast revised.
The results of our analysis indicate that it might be possible to estimate future revisions
using the aggregate revision factor, which is based on data for companies in the same
business. We provide an investment strategy based on this factor that is effective. Most
companies have refrained from issuing guidance along with their 11/3 results. We think
the strategy we introduce in this report might be useful at a time such as this, when
earnings are difficult to project.
1. Earnings are difficult to forecast at present
The 11/3 results season is underway for companies with a March fiscal year-end. While
these results are likely to attract attention as a means of assessing the impact of the
Great East Japan Earthquake, some companies have chosen not to announce earnings
guidance for the current fiscal year. In addition, many analysts have been holding off on
making major revisions to their earnings forecasts since the earthquake, and there are
also substantial differences between individual analysts forecasts. This reflects the
current difficulty in projecting earnings and may well reduce the reliability of investment
strategies based on earnings forecasts.
1.1 The current tendency is for consensus forecasts to be unchanged
Let us start by looking into the number of stocks for which the latest consensus forecasts
have not changed. Our analysis criteria are as follows.
The universe is TSE-1 stocks for which I/B/E/S forecasts are available, and the sample
period is December 2003 through 26 April 2011. Figure 10 shows the 12-month moving
average of the proportion of stocks in the universe for which the consensus earnings
forecast, at the beginning of the month in question, had not changed over the preceding
month. The shaded area indicates the period after the Great East Japan Earthquake.
The results of our analysis show that the percentage of stocks for which the consensus
earnings forecast was unchanged had already been rising since 2010 H2, but has risen
even more since the earthquake. It is possible that consensus forecasts have not yet
fully factored in the impact of the earthquake.

Hiromichi Tamura NCS
+813 3274 1079
Tamura-0d2v@jp.nomura.com

Akihiro Murakami NSC
+813 3274 1079
Murakami-
0h14@jp.nomura.com

Please see full report published
12 May 2011


10
Fig. 10: Percentage of stocks for which consensus forecast is unchanged

Note: Universe is TSE-1 stocks for which I/B/E/S forecasts are available; sample period is December 2003 through 26 April
2011. We count the number of stocks for which, at the beginning of each month, the consensus earnings forecast had not
been revised during the preceding month, and then calculate this as a proportion of the total number of stocks in the
universe.
Source: Nomura
1.2 There is also substantial divergence within consensus forecasts
Figure 11 shows the divergence of analysis forecasts within the consensus forecast for
each stock.
Our analysis criteria are as follows. The universe and sample period are the same as in
section 1.1. For each stock, we calculate the divergence of I/B/E/S recurring profit
forecasts at the beginning of each month. We define the divergence of forecasts for each
stock, which is based on the gap between the most bullish analyst forecast and the most
bearish analyst forecast, as follows.
Figure 11 shows the 12-month moving average of the mean divergence of forecasts for
all stocks in the universe. The shaded area indicates the period after the Great East
Japan Earthquake.
The results of our analysis show that, as in section 1.1, the divergence of analyst
forecasts has increased even more since the earthquake. When there is a substantial
divergence between individual analyst forecasts within the consensus forecast, this
might have a negative impact on the accuracy of a revision factor that is based on
consensus forecasts.
20
25
30
35
40
45
03/12 04/12 05/12 06/12 07/12 08/12 09/12 10/12
% of stocks with no change to
consensus forecast is rising
(%)
(yy/m)
% of stocks for which consensus forecast is unchanged
from previous month (12-M mov avg)
% of stocks with no change to current-FY forecast
% of stocks with no change to next-FY forecast
Divergence of forecasts =
most bullish analyst forecast most bearish analyst forecast
x 2
|most bullish analyst forecast| +| most bearish analyst forecast|


11
Fig. 11: Divergence within consensus forecasts

Note: Universe is TSE-1 stocks for which I/B/E/S forecasts are available; sample period is December 2003 through 26 April
2011. For each stock, we calculated the divergence of I/B/E/S recurring profit forecasts at the beginning of each month, on
the basis of the gap between the most bullish analyst forecast and the most bearish analyst forecast.
Source: Nomura
2. Projecting future revisions for stocks with unchanged
consensus forecasts
In this chapter, we look at ways of estimating the revision factor for stocks for which
there has been no change to the consensus earnings forecast. Specifically, we break
down each companys sales into sales in each business segment, and estimate the
revision factor for each segment, which we call the segment revision factor. We then add
up all these segment revision factors, in line with the proportion of the companys total
sales accounted for by each segment. The results of our analysis show that it might be
possible to use this estimated aggregate revision factor, which is based on the sum of
the revision factors for each segment, to project the future revision factor.
2.1 Calculating the aggregate revision factor
In this section, we introduce a method of estimating the revision factor for stocks for
which the consensus earnings forecast did not change during the preceding month,
based on the method set out in Lou and Cohen (2011). The details of the analysis
method are as follows.
First, for each stock for which the consensus earnings forecast did not change during the
preceding month, we calculate its sales breakdown by business segment (Figure 12,
Step 1).
From all listed stocks, we pick out companies that specialize in a particular segment, and
then calculate the average revision for those stocks within this group for which the
consensus earnings forecast changed during the preceding month (Figure 12, Step 2).
We call this the segment revision factor. We define specialist companies as companies
for which one business segment accounts for 80% or more of total sales. For segments
where there are no specialist companies, or where there are no specialist companies for
which the consensus earnings forecast changed during the preceding month, the
segment revision factor is zero.
Segment revision factor:
Scg_Rc:
s
=
1
N
s

Rc:
k
N
s
k=1

0
1
2
3
4
5
6
7
8
9
10
03/12 04/12 05/12 06/12 07/12 08/12 09/12 10/12
Divergence within consensus
forecasts is increasing
(%)
(yy/m)
Divergence within consensus forecasts (12-M mov avg)
Current-FY forecasts
Next-FY forecasts

12
We calculate Rev
k
defined as the revision to the consensus earnings forecast over the
preceding month for the k
th
specialist stock in the S
th
segment, where N
s
is the number of
specialist stocks in the same segment as follows.

Revision over preceding month =
latest I/B/E/S consensus recurring profit forecast for current fiscal year
I/B/E/S consensus recurring profit forecast for current fiscal year one month previously
|I/B/E/S consensus recurring profit forecast for current fiscal year one month previously|
Lastly, we define the aggregate revision factor (AggRev ) as the weighted average of the
segment revision factors (Seg_Rev) for each segment, as calculated in Step 2, with the
weighting calculated on the basis of the proportion of the companys total sales
accounted for by each segment (Step 3).

Fig. 12: Aggregate revision factor calculation method

Source: Nomura
2.2 Segment data
Next, we give a simple explanation of the segment data used in the previous section.
For each company, we calculate the proportion of its total sales accounted for by each
business segment on the basis of Toyo Keizai business breakdown data and Nomura's
237 subsector categories.
Out of all listed companies, we regard a total of 2,366 as specialist companies as of the
beginning of April 2011. In addition, at the same time there was a total of 1,444
companies that we do not regard as specialist companies (ie, there were 1,444
companies for which there was no business segment that accounted for 80% or more of
total sales).

[Step 1] [Step 2] [Step 3]
Calculate segment revision factors Calculate aggregate revision factor
Average revision for specialist
system support companies
Seg_Rev
1
pharmaceutical companies
Seg_Rev
2
fine chemicals companies
Seg_Rev
3
synthetic fiber companies
Seg_Rev
4
Estimate business portfolio for each company for
which consensus earnings forecast has not
h d
54%
23%
17%
6%
Synthetic fibers
System support
services
Fine chemicals /
processed
resins
Pharmaceuticals
w
1
w
2
w
3
w
4
Business portfolio of company A
(sales weighting)
A
g
g
r
e
g
a
t
e

r
e
v
i
s
i
o
n

f
a
c
t
o
r
,

w
e
i
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e
d
i
n

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i
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e

w
i
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h

e
a
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h

s
e
g
m
e
n
t
'
s

s
a
l
e
s

w
e
i
g
h
t
i
n
g

Aggregate revision factor:
AggRc:
i
= w
s
Scg_Rc:
s
S=1


13
3. Strategy based on aggregate revision factor
In this chapter, we confirm the predictive power of the aggregate revision factor with
respect to future returns on stocks for which the consensus earnings forecast has not
changed. In our view, the use of data for other companies in the same business might
make it possible for a revision-based strategy to be effective even in an environment in
which it is difficult to forecast earnings.
3.1 The predictive power of the aggregate revision factor with respect to future
return
In this section, we look at the effectiveness of an investment strategy based on the
aggregate revision factor. Figure 13 shows our analysis criteria.
We look at stocks in the TSE-1 for which, at each point in time, there had been no
change to the consensus earnings forecast over the preceding month (ie, the historical
one-month revision is zero). The sample period is June 2011 through 26 April 2011. For
each month, we divide the universe into five groups on the basis of the value of the
aggregate revision factor for each stock at the beginning of the month, and construct five
equally weighted portfolios, one for each group. We then calculate the performance of
each portfolio over one month.
Fig. 13: Grouping simulation analysis criteria

Universe Stocks in TSE-1 with no change to consensus earnings forecast over preceding month
Sample period 01/611/4/26
Method
Grouping simulation
Universe is divided into five groups on the basis of the historical one-month aggregate revision factor
(AggREV) for the past month for each stock at the beginning of the month, and measure the monthly
performance of each group.
Weighting Equal
Rebalancing Monthly
Benchmark Universe (equal weighted)
Factor Historical one-month aggregate revision factor (AggRev)

Source: Nomura
3.2 Analysis results
The results of our analysis are shown in Figures 14 and 15. Figure 14 shows the
performance of each group, where the universe is divided into five groups of stocks on
the basis of the value of the aggregate revision factor for each stock. Figure 15 shows
the difference between the return on group #5 (the group of stocks with the highest
aggregate revision factors) and group #1 (the group of stocks with the lowest aggregate
revision factors).
First, as Figure 14 shows, the average annual return on group #1, the group with the
lowest aggregate revision factors, is -2.37%, the standard deviation is 3.92%, and the t-
value is -1.91, indicating a statistically significant negative return. Meanwhile, the
average annual return on group #5, the group with the highest aggregate revision
factors, is 4.33%, the standard deviation is 3.80%, and the t-value is 3.59, indicating a
statistically significant positive return.
The difference between group #5 and group #1 is 6.75% in terms of average annual
return, 6.36% in terms of the standard deviation, and 3.33% in terms of the t-value,
indicating that the aggregate revision factor is effective in predicting future return (Figure
15).


14
Fig. 14: Results of grouping simulation (return on each group)

Statistical data for monthly return (annualised)
#1 #2 #3 #4 #5
Average -2.37 -1.74 -0.96 0.74 4.33
Standard deviation 3.92 3.58 3.39 3.50 3.80
t-value -1.91* -1.53 -0.89 0.67 3.59***
Average/standard deviation -0.61 -0.49 -0.28 0.21 1.14

Note: Universe is stocks in TSE-1 for which, at each point in time, there was no change to the consensus forecast over the
preceding month. Sample period is June 2011 through 26 April 2011. At the beginning of each month, we divide the
universe into five groups on the basis of the level of the aggregate revision factor for each stock, and then construct five
equally weighted portfolios, one for each group. Figure shows statistical data for cumulative return (top) and monthly return
(bottom) if each portfolio is held for one month. t-values are for the null hypothesis in which the average monthly return is
zero. *** indicates significance of 1%, ** indicates significance of 5%, and * indicates significance of 10%.
Source: Nomura

Fig. 15: Grouping simulation results (return on group #5 return on group #1)

Statistical data for monthly return (annualized)
Period Average Standard deviation t-value Average/standard deviation
01/711/4 6.75 6.36 3.33*** 1.06
08/111/4 6.60 6.11 3.39*** 1.08
Note: Universe is stocks in TSE-1 for which, at each point in time, there was no change to the consensus earnings forecast
over the preceding month. Sample period is June 2011 through 26 April 2011. At the beginning of each month, the
universe is divided into five groups on the basis of the level of aggregate revision factor for each stock. Figure shows
cumulative return (top) and monthly return (bottom) on strategy of going long on group of stocks with highest values of
aggregate revision factor and short on group of stocks with lowest values of aggregate revision factor. t-values are for the
null hypothesis in which the average monthly return is zero. *** indicates significance of 1%, ** indicates significance of 5%,
and * indicates significance of 10%.
Source: Nomura

Reference
Lou, D. and L. Cohen, Complicated Firms, 2011, AFA 2011 Denver Meetings Paper
-40
-30
-20
-10
0
10
20
30
40
50
01/6 02/6 03/6 04/6 05/6 06/6 07/6 08/6 09/6 10/6
Cumulative
return
(yy/m)
(end-01/6 = 0%)
#5
#4
#3
#2
#1
-20
0
20
40
60
80
100
01/6 02/6 03/6 04/6 05/6 06/6 07/6 08/6 09/6 10/6
(end-01/6 = 0%)
(yy/m)
Cumulative return

15
Factor review
Investors started to focus on large caps, while stocks undervalued in terms of B/P
underperformed
Large caps performed well on the relatively flat Japanese equity market in April, while
stocks undervalued in terms of P/B underperformed. Figure 16 summarizes the
performance of 14 quant factors, which come under the categories of size, reversal,
valuation, growth, revision, financial indicators, and risk indicators, while Figure 17
shows the aggregate performance of each factor. Although small caps and high B/P
stocks were selected soon after the earthquake, investors started to focus on the stocks
shunned in March. The quant factors that underperformed after the earthquake have
been recovering. Based on the past 1-month return, there seems to be a reversal
tendency in prices. The return on high ROE stocks also recovered to be positive from its
plunge in March.
The improvement in performance of high E/P stocks
There was also a notable rise in the effectiveness of forecast E/P this month. The
deteriorated performances of high E/P stocks in March appear to be the result of
investors shunning stocks that had been bought on the basis of earnings growth
expectations. The improved performance of forecast E/P in April looks to be basically
supported by the tendency that investors started to pay attention to earnings forecasts
again. More emphasis looks to have been put on earnings information given by
companies recently. We will be able to gauge the effectiveness of earnings forecast-
based factors in May, when data will reflect analyst revisions in the wake of the latest
annual results.
Fig. 16: Factor performance summary

Note: (1) For each factor, we calculated return spreads for portfolios in quintiles based on factor size. (2) Returns include dividends and are not annualized. (3) Universe is TOPIX
(excluding financials for EBITDA/EV). (4) Effectiveness evaluation based on cross-sectional (factor return ranking or positive/negative spread for month in question) or time-series
(past return ranking) comparison; and = positive effect, = neutral, and x and xx = negative effect. (5) For factor definitions, see note to Figure 17.
Source: Nomura

Spread
Effectiveness
evaluation
Spread
Effectiveness
evaluation
Spread,
average
Standard
deviation
% % %
Size Log market cap Smalllarge -2.64 x 10.37 0.53 5.95
Past one-month return 4.42 1.98 0.87 5.08
Past three-month return 3.8 2.42 0.51 6.23
B/P -3.4 xx 10.37 1.39 4.24
Forecast E/P 2.24 -2.73 x 1.36 3.06
D/P -1.37 x 2.21 0.5 3.38
EBITDA/EV (ex financials) 0.5 1.92 0.86 3.59
Current/next FY forecast profit growth -0.76 x -4.27 xx 0.1 2.44
ROE 4.97 -7.42 xx 0.11 4.27
Revision Analyst revision Highlow 1.63 -4.2 xx 1.34 2.66
Shareholders equity ratio 0.99 0.96 0.11 3.44
Default probability 1.8 -2.62 x -0.21 7.37
Monthly (60-month) 1.15 -0.85 0.07 6.49
Foreign sensitivity 0.34 -2.27 x 0.42 3.47
Past (1995/12011/3)
Factor Spread calculation
2011/4 Previous month
Financial indicators Highlow
Risk indicators Highlow
Reversal Lowhigh
Valuation
Undervalued
overvalued
Growth Highlow
Hiromichi Tamura - NSC
+81 3 3274 1079
tamura-0d2v@jp.nomura.com

Yoko Ishige NSC
+81 3 3274 1079
arai-1ms4@jp.nomura.com

16
Fig. 17: Return spreads, monthly

Note: (1) Each graph shows cumulative return spreads for portfolios in quintiles based on each factors size, indexed to end-December 2004 = 100. (2) Universe is TOPIX
(excluding financials for EBITDA/EV). (3) Shading indicates months in which factor returns evaluated as effective. (4) Factor definitions as follows. Size = log market cap. B/P =
adjusted shareholders equity market cap. Forecast E/P = next-FY forecast net profits market cap. D/P = total dividends market cap. EBITDA/EV = EBITDA (recurring profits
+ depreciation + interest paid) EV (market cap + debt - cash & short-term securities). Current-/next-FY forecast profit growth = (next-FY forecast recurring profits current-FY
forecast recurring profits - 1) x 100. Analyst revision = rate of change (from average of past 3 months) in forecast recurring profits. Shareholders equity to total assets = adjusted
shareholders equity total assets. Default probability = estimated default risk based on Merton option model. Monthly (60-month) = monthly returns (60-month rolling)
calculated for TOPIX and individual stocks. Foreign sensitivity = BARRA JP3 model estimates. (5) Earnings forecasts by Nomura, supplemented by Toyo Keizai where
necessary.
Source: Nomura

70
80
90
100
110
120
130
140
04 05 06 07 08 09 10
Size
(CY-end)
(end-Dec 2004 = 100)
Size (small large)
70
75
80
85
90
95
100
105
110
04 05 06 07 08 09 10
Reversal
(CY-end)
(end-Dec 2004 = 100)
Past 1-M return
Past 3-M return
50
70
90
110
130
150
170
190
210
230
250
270
290
04 05 06 07 08 09 10
(CY-end)
(end-Dec 2004 = 100)
Forecast E/P
B/P
Valuation (1)
80
100
120
140
160
180
200
04 05 06 07 08 09 10
(CY-end)
(end-Dec 2004 = 100)
EBITDA/EV (ex financials)
Dividend yield
Valuation (2)
50
60
70
80
90
100
110
120
130
04 05 06 07 08 09 10
Growth
(CY-end)
(end-Dec 2004 = 100)
ROE
Current-/next-FY forecast profit growth
50
70
90
110
130
150
170
190
210
230
250
04 05 06 07 08 09 10
Revision
(CY-end)
(end-Dec 2004 = 100)
Analyst revision
0
20
40
60
80
100
120
140
160
180
04 05 06 07 08 09 10
(CY-end)
(end-Dec 2004 = 100)
Shareholders' equity to total assets
Default probability
Financial indicators
40
60
80
100
120
140
160
180
04 05 06 07 08 09 10
(CY-end)
(end-Dec 2004 = 100)
Foreign sensitivity
Monthly (60-month)
Risk indicators

17
Herding in China: capital inflows
In this report, we review factor performance for Chinas CSI 300 universe, and observe
that a herd-like behaviour exhibits in its domestic market.
We introduce the capital inflows ratio, which utilises capital inflows data sourced from
Wind Info. The factor distinguishes trading activities from institutional investors and
individual investors. Stocks with a high capital inflows ratio are those stocks that
institutional investors (or informed investors) are buying.
Our correlation analysis shows that stocks with a high capital inflows ratio tend to
maintain high money inflows for the following days, and have a higher future return.
We construct a hypothesis portfolio consisting of top capital inflows ratio stocks, and
back-test the effectiveness of the factor since January 2010. Up to 30 April 2011, the
portfolio has delivered an absolute return of 45.8%, outperforming the CSI 300 Index by
60.5%.

Analysing capital flow data in Chinas domestic market
Chinas CSI 300 Index moved from the regions best performing benchmark for 2009, to
the regions worst performing local index in 2010, as Chinese mainland accelerated
monetary tightening amid rising inflationary pressures. Similarly, we have seen
significant changes in style leadership in recent years. In this report, we review the
performance of quant factors in the CSI 300 universe. We observe a strong herd
momentum phenomenon in Chinas domestic market, suggesting that capital flow signals
by large institutions may have an implication for future stock performance. We conduct
an initial study on capital flow data provided by a local Chinese data vendor and evaluate
the potential of the factor in higher frequency trading.
Chinas domestic factor performance hearing the herd
We review factor performance for Chinas CSI 300 universe in Figure 18. Looking at the
results for the whole period under observation, it is clear that both valuation and revision-
related factors produce consistent risk-adjusted performance on a long-term basis. 2009
saw a strong risk-relief value recovery post the credit crisis. In 2010, consistency of
factor performance was affected by negative market sentiment and rising risk aversion.
Performance of valuation factors tends to decline when risk aversion is high and interest
rates are rising. As the Chinese mainland accelerated its flight against inflation via
tightening banks lending rules and increasing interest rates, value factors suffered, while
growth and high-ROE stocks with positive earnings revisions outperformed.
Sandy Lee
+852 2252 2101
sandy.lee@nomura.com

Rico Kwan, CFA
+852 2252 2102
rico.kwan@nomura.com

19 May 2011

We review the performance of
quant factors in the CSI 300
universe, and conduct an initial
study on capital flow data
In 2010, value factors suffered,
while growth and high-ROE
stocks with positive earnings
revisions outperformed

18
Fig. 18: Factor performance summary CSI 300 universe

Note: Return figures are annualised performance; long-term performance figures are from May 2005 to April 2011; R/R refers to the average return/standard deviation
and rank is based on R/R. Factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest one-third
and short the one-third with the lowest scores (rebalanced monthly), except for the factors marked with *, which are reverse-based. See Figure 31 for factor definition.
Source: Worldscope, I/B/E/S, StarMine, Nomura Quantitative Strategies
Chinas domestic market has priced in a lot of market concern and expectation of growth
disappointment in 2010. YTD in 2011, value factors seem to be recovering but on risk-
adjusted performance, revision-related indicators including a change in earnings yield
and StarMine predicted surprise have fared the best. Inflation is still a major concern in
the near term and we believe the stock market will continue to feel the pressure from
policy tightening. We believe earnings outlook and liquidity, as well as the valuations for
equities, will likely be the fundamental return drivers for Chinas domestic A-shares
equities in 2011.
Fig. 19: Earnings momentum index CSI 300 universe

Note: Earnings momentum index is defined as: % of companies with +ve Revi,t / %
of companies with -ve Revi,t.
Source: I/B/E/S, Nomura Quantitative Strategies
Fig. 20: Proportion of total no. of accounts holding tradable
market value of A-shares by capital level

Note: Data as of 31 March. Capital level is in RMB. The statistics dont include the
market value of non-tradable shares (restricted shares) hold by each account.
Source: Wind, Nomura Quantitative Strategies

Return R/R Rank Return R/R Rank Return R/R Rank Return R/R Rank
Market cap * 13.7 0.8 8 27.3 2.4 2 10 1.2 7 7.7 0.8 11
Price momentum (1M) -10.6 -0.7 20 -14.1 -1.4 19 -7.3 -0.7 16 -17.9 -2.5 19
Price momentum (12M -1M) -6.7 -0.5 19 -30.5 -2.5 21 11.9 1.2 6 -20 -1.8 17
Volume turnover ratio 6.4 0.4 12 22.9 1.4 5 14.3 1.2 4 -21.3 -2.3 18
Dividend yield 2 0.2 14 -1.5 -0.1 12 -6.3 -1.3 18 21.8 2.1 9
Earnings yield 11 0.9 5 15.9 1.5 4 -4.5 -0.5 15 28.3 2.9 5
B/P 9.9 0.7 9 8.2 0.9 7 -25.3 -2.6 21 38.9 2.8 8
Cashflow yield 8.3 0.9 4 10.1 1.2 6 -12.1 -1.6 19 16.6 1.7 10
EBITDA/EV 10.4 1 3 19.1 2.7 1 -14.3 -1.8 20 37.8 2.9 4
Revision index 5.1 0.8 6 -5.5 -1.1 17 6.6 1.2 5 4.1 2.9 6
Change in earnings yield 13.3 1.3 1 -3 -0.3 13 17.3 1.8 3 30.1 6.2 1
StarMine predicted surprise 7 0.8 7 -1.9 -0.3 14 3.3 0.8 8 6.4 6.1 2
Normalised E/P 9.9 1.1 2 9.9 0.9 8 0.6 0.1 12 19.7 2.8 7
Sales growth (FY2) 4.2 0.5 11 -4.1 -0.5 15 15.8 2.5 1 -5.3 -0.8 13
EPS growth (FY2) 0 0 16 -5.7 -0.9 16 3.8 0.5 10 -9.4 -3.6 21
Return on equity 1.9 0.1 15 5.3 0.5 9 20.8 2.3 2 -13.5 -2.9 20
Shareholders equity ratio -7.3 -1.1 21 1.5 0.2 11 -8 -1.1 17 -8 -1.5 16
Pretax profit margin -2.8 -0.3 17 -10.7 -1.1 18 -3.2 -0.4 14 -6.3 -0.8 14
Volatility 8.3 0.6 10 33.1 1.9 3 10.1 0.7 9 -11.5 -0.9 15
Estimate dispersion 3.2 0.3 13 5.4 0.4 10 0.6 0.1 11 7.1 3.3 3
Default probability * -4.7 -0.4 18 -22.5 -1.5 20 -3.4 -0.3 13 0.4 0.1 12
Long-term: CSI 300 Year 2009: CSI 300 Year 2010: CSI 300 YTD 2011: CSI 300
0.0
0.5
1.0
1.5
2.0
2.5
A
p
r
-
0
5
O
c
t
-
0
5
A
p
r
-
0
6
O
c
t
-
0
6
A
p
r
-
0
7
O
c
t
-
0
7
A
p
r
-
0
8
O
c
t
-
0
8
A
p
r
-
0
9
O
c
t
-
0
9
A
p
r
-
1
0
O
c
t
-
1
0
A
p
r
-
1
1
0
10
20
30
40
50
60
< 10K 10-
100K
100-
500K
500-
1000K
1-5M 5-10M > 10M
% of total no. of account by capital level
We believe earnings outlook and
liquidity, as well as the
valuations for equities will likely
be the fundamental return
drivers

19
One interesting observation we have in Chinas domestic market is a strong herd
momentum phenomenon. Both on a long-term basis and since 2010, earnings-revision
indicators have a consistent impact on the CSI 300 universe. Such kind of typical
following the flock and herd-like behaviour is quite common in a market dominated by
retail and small investors (Figure 20). This suggests short-term liquidity and money flows
by large institutions or super funds may have implications for future stock performance.
In the next section, we introduce capital flow data provided by Wind Info, a China
domestic data vendor. We conduct an initial study attempt to quantify the potential of the
factor in higher frequency trading.
Money flow data in China domestic market
Money flow in technical analysis is regarded as a measure of the strength of money
going in and out of a security, and has been studied intensively by international
researchers and investors. A traditional money flow indicator such as the Money Flow
Index (MFI) analyses the price and volume of a stock, and is generally considered a
dollar-volume momentum indicator to determine the conviction in a current trend. When
the price of a stock rises, the traded value over the rising period represents the
enthusiasm of buyers (positive money flow). When the price of a stock drops, the traded
value over the dropping period represents the enthusiasm of sellers (negative money
flow). Money flow, in this case, is a ratio between the enthusiasm of buyers and sellers
over the measuring period.

However, traditional money flow calculation does not distinguish the trading activities
from institutional investors and individual investors. As institutional investors are superior
to individual investors in the acquisition of firm-specific and private information,
institutional investors are more homogeneous and tend to trade more on particular
stocks or particular groups of stocks to take advantage of information asymmetry
(Campbell, Grossman, and Wang, 1993; Harris and Raviv, 1993). In contrast, less
informed individual investors are likely to react to changes in volume and price as this
may reflect material information. This suggests money flow from institutional investors
may exhibit a herd-like behaviour, and sequentially lead to a momentum effect in
individual investors.
With the launch of the Level-2 market data services by the Shanghai Stock Exchange
(August 2006) and the Shenzhen Stock Exchange (January 2010), real-time tick-by-tick
data is available to the public in Chinas domestic market, where money flow information
by investors is calculated and introduced by Chinas domestic data providers.
Figure 21 shows the additional information available in the Level-2 market data when
comparing with the existing Level-1 market data.
Fig. 21: Additional information available in the Level-2 market data

Source: Shanghai Stock Exchange

Value-added information Description
Transaction details Dynamic number of transactions
Tick by tick data
Order information Total instructed quantities
Weighted average bid/offer price
Quantity of each of the top 50 orders at the best bid/offer price
Quantities of orders at the 10 best prices
Order cancellation information Top 10 stocks in terms of cancelled order quantities
Ranking Real-time trading value of each sector
Real-time ranking of top 5 stocks of each sector in terms of traded value
Percentage of trading value of each sector in the total turnover value.
Yield rate on bonds Real-time yield-to-maturity of bonds
flow money negative flow money positive
flow money positive
Index Flow Money
+
= 100
Following the flock and herd-
like behaviour is pronounced in
China

Money flow is a measure of the
strength of money going in and
out of a security

Traditional money flow
calculation does not distinguish
the trading activities from
institutional investors and
individual investors
Money flow by investors is
introduced after the launch of
the Level-2 market data services
in Chinas domestic market

20
Introduction of capital inflows ratio
In this report, we study the capital inflows data provided by Wind Info, a China domestic
data vendor, and investigate the potential of the factor in predicting future stock
performance. According to Wind Info, capital inflows are calculated by re-assembling the
tick-by-tick trades into estimated buy and sell orders for each investor. The estimated
buy and sell orders are then categorised into four classes by order size: super fund
(>RMB 1mn), large-sized investor (RMB 200K-RMB1mn), medium-sized investor
(RMB 40K-RMB 200K), and small-sized investor (RMB 0-RMB 40K). Net capital inflows
for each investor class is the difference between the sum of the estimated buy orders
and the sum of the estimated sell orders. Net capital inflows of a stock is calculated as
the net capital inflows from super fund and large-sized investor, minus the net capital
inflows from medium- and small-sized investors.

We then normalise the factor for stock comparison by dividing the net capital inflows of a
stock by the total traded value of the stock during the same period.
Hence, stocks with a high capital inflows ratio are those stocks that institutional investors
(or informed investors) are buying, and in our hypothesis, are expected to induce further
capital inflows and generate positive impact to future stock performance.
Correlation analysis with stock performance
We run correlation analysis to analyse the relationships between the capital inflows ratio
and stock performance in Chinas domestic market. We retrieve daily net capital inflows
data from Wind Terminal for each stock in the CSI 300 universe, and calculate the
capital inflows ratio using different formation periods (1 to 20 trading days). Our sample
range starts from January 2010 to April 2011, when real-time Level-2 market data is
available to the public in the Shenzhen Stock Exchange.
Figure 22 displays the correlations between the capital inflows ratio and the past price
return of the stocks. We note that performance of the stocks move in line with the capital
inflows ratio; that is, stocks tend to perform better when there are institutional investors
buying in Chinas domestic market.
Fig. 22: Correlations between capital inflows ratio and past stock performance

Testing days (past stock performance)
1 2 3 4 5 6 7 8 9 10 15 20
F
o
r
m
a
t
i
o
n

d
a
y
s

(
c
a
p
i
t
a
l

i
n
f
l
o
w
s

r
a
t
i
o
)

1 0.66 0.55 0.48 0.45 0.40 0.38 0.36 0.34 0.32 0.30 0.23 0.19
2 0.47 0.67 0.62 0.57 0.52 0.49 0.46 0.44 0.41 0.39 0.30 0.24
3 0.36 0.54 0.67 0.63 0.59 0.56 0.53 0.50 0.47 0.45 0.35 0.28
4 0.31 0.46 0.58 0.67 0.64 0.61 0.58 0.55 0.52 0.50 0.39 0.32
5 0.28 0.41 0.51 0.59 0.67 0.65 0.62 0.59 0.56 0.54 0.43 0.35
6 0.25 0.37 0.46 0.54 0.61 0.67 0.65 0.62 0.60 0.57 0.46 0.38
7 0.23 0.34 0.42 0.50 0.56 0.62 0.67 0.65 0.63 0.60 0.49 0.40
8 0.22 0.32 0.40 0.46 0.52 0.57 0.62 0.66 0.65 0.63 0.51 0.43
9 0.20 0.30 0.37 0.44 0.49 0.54 0.59 0.63 0.66 0.65 0.54 0.45
10 0.19 0.28 0.36 0.41 0.47 0.51 0.56 0.59 0.63 0.66 0.56 0.47
15 0.16 0.23 0.29 0.34 0.38 0.42 0.46 0.49 0.52 0.54 0.64 0.57
20 0.13 0.19 0.24 0.29 0.33 0.36 0.40 0.42 0.45 0.47 0.56 0.63
Note: Our sample range starts from 1 January, 2010 to 30 April, 2011. Universe is based on constituents in the CSI 300 Index.
Source: Wind, Datastream, Nomura Quantitative Strategies

clas s investor cl ass i nvest or cl ass inves tor
values order sell total values order buy total Inflows Capital Net =
) (
) (
inves tor s mall investor medium
i nvestor l arge f und super
Inflows Capital Net Inflows Capital Net
Inflows Capital Net Inflows Capital Net
Inflows Capital Net
+
+
=
days of no n where value traded total Inflows Capital Net Ratio Inflows Capital
n
i
i
n
i
i n
. , /
1 1
= =

= =
1
6
15
0.0
0.2
0.4
0.6
0.8
1
2
3
4
5
6
7
8
9
10
15
20
testing days
(stock return)
C
o
r
r
e
l
a
t
i
o
n

c
o
e
f
f
i
c
i
e
n
t
formation days (capital inflows ratio)
Tick-by-tick trades are re-
assembled into estimated buy
and sell orders for each investor
by Wind Info
We normalise the net capital
inflows data from Wind for stock
comparison
Stock return is highly correlated
with the capital inflows ratio

21
Figure 23 shows the correlations between the current capital inflows ratio and the lagged
capital inflows ratio. From the results, we note that stocks with a high capital inflows ratio
tend to maintain high money inflows for the following days. However, the effect decays
as we study for a longer formation and testing period. This implies the phenomenon that
institutional investors take several days to complete their trades, or there is herd-like
behaviour among institutional investors as they share the same information.
Fig. 23: Correlations between current capital inflows ratio and lagged capital inflows ratio

Testing days (lagged capital inflows ratio)
1 2 3 4 5 6 7 8 9 10 15 20
F
o
r
m
a
t
i
o
n

d
a
y
s

(
c
a
p
i
t
a
l

i
n
f
l
o
w
s

r
a
t
i
o
)

1 0.29 0.28 0.28 0.26 0.25 0.24 0.24 0.23 0.22 0.21 0.18 0.15
2 0.28 0.29 0.29 0.27 0.27 0.26 0.25 0.24 0.23 0.22 0.19 0.16
3 0.28 0.29 0.29 0.28 0.27 0.27 0.26 0.24 0.23 0.22 0.19 0.16
4 0.26 0.28 0.28 0.28 0.27 0.26 0.25 0.24 0.23 0.22 0.19 0.16
5 0.25 0.27 0.28 0.27 0.26 0.26 0.24 0.23 0.23 0.22 0.19 0.15
6 0.25 0.27 0.27 0.26 0.26 0.25 0.24 0.23 0.22 0.21 0.19 0.15
7 0.24 0.26 0.26 0.25 0.25 0.24 0.23 0.22 0.22 0.21 0.18 0.14
8 0.23 0.25 0.25 0.24 0.24 0.23 0.22 0.22 0.21 0.20 0.17 0.13
9 0.22 0.24 0.24 0.23 0.23 0.22 0.22 0.21 0.20 0.20 0.16 0.12
10 0.21 0.23 0.23 0.23 0.22 0.22 0.21 0.20 0.20 0.19 0.16 0.12
15 0.18 0.20 0.20 0.20 0.19 0.19 0.18 0.17 0.16 0.16 0.12 0.09
20 0.15 0.16 0.17 0.16 0.16 0.15 0.14 0.13 0.12 0.12 0.09 0.06

With the above results, we expect a positive correlation between the capital inflows ratio
and future stock returns. Figure 24 shows the correlations between the capital inflows
ratio and future stock returns.
Fig. 24: Correlations between capital inflows ratio and future stock returns

Testing days (future stock return)
1 2 3 4 5 6 7 8 9 10 15 20
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1 0.07 0.05 0.06 0.06 0.06 0.06 0.07 0.07 0.06 0.06 0.05 0.05
2 0.05 0.05 0.06 0.06 0.06 0.07 0.07 0.06 0.06 0.06 0.05 0.04
3 0.05 0.05 0.06 0.06 0.07 0.07 0.07 0.07 0.06 0.06 0.05 0.04
4 0.05 0.05 0.06 0.06 0.07 0.07 0.07 0.07 0.06 0.06 0.05 0.03
5 0.05 0.05 0.06 0.06 0.07 0.07 0.07 0.07 0.06 0.06 0.05 0.03
6 0.04 0.06 0.06 0.06 0.07 0.07 0.07 0.07 0.06 0.06 0.05 0.02
7 0.05 0.06 0.06 0.06 0.06 0.07 0.07 0.07 0.06 0.06 0.04 0.01
8 0.05 0.05 0.06 0.06 0.06 0.06 0.07 0.06 0.06 0.06 0.04 0.01
9 0.04 0.05 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.05 0.03 0.00
10 0.04 0.05 0.06 0.06 0.06 0.06 0.06 0.06 0.05 0.05 0.03 0.00
15 0.04 0.04 0.05 0.05 0.05 0.05 0.05 0.04 0.04 0.03 0.00 -0.01
20 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.01 0.01 0.01 -0.01 -0.02

As shown in Figure 24, stocks with a higher capital inflows ratio tend to have a higher
future return. We note that the capital inflows factor calculated using a 5 to 8 trading-day
window gives the highest correlation coefficient to future stock returns. In the next
section, we will study a simple short-term trading strategy using a 5-day capital inflow
ratio factor.
Back-testing portfolio performance using the capital inflows factor
Based on the findings outlined in the previous section, we construct a portfolio consisting
of top capital inflows ratio A shares, and back-test the performance of this portfolio since
January 2010. Every day, we rank the stocks in the CSI 300 universe by the 5-day
capital inflows ratio factor after market close. The top 30 stocks by the capital inflows
factor are to be included in the portfolio. Those stocks in the portfolio that fall outside the
top-30 rank are to be removed. We rebalance the portfolio daily and track the equal-
weighted performance of the constituents.
1
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Stocks with high capital inflows
ratio tend to maintain the high
money inflows in short term
Positive correlations exhibit
between the capital inflows
factor and future stock returns
Portfolio with top capital inflows
ratio stocks has outperformed
the CSI 300 Index since 2010


22
Fig. 25: Portfolio return of the top 30 A Shares by capital
inflows ratio


Fig. 26: Relative performance of the capital inflows ratio
portfolios over CSI 300 Index

Figures 25 and 26 display the absolute and relative performances of the portfolio versus
the CSI 300 Index. We show in the charts the returns for which we assume we trade at
the same day close prices (day T) as we rank the stocks and the returns we assume we
trade at the next day close prices (day T+1). This back test is an initial analysis to check
the effectiveness of the capital inflows factor, and does not consider turnover and
transaction costs. Investors looking to use the result in high frequency trading should
consider these issues in designing an executable strategy.
Up to 30 April, 2011, the portfolios have delivered an absolute return of 45.8 % (day T),
and 15.1% (day T+1), outperforming the CSI 300 Index by 60.5% and 26.7%,
respectively.
Performance comparison with price momentum factor
Is the capital inflows ratio a more effective factor to predict future stock returns than a
pure price momentum factor in Chinas domestic market? While the capital inflows ratio
is highly correlated with stock performance over the same period, it is interesting to
compare the factor effectiveness in predicting future stock returns of the two factors.
Figure 27 displays the correlations between past stock performance and future stock
returns. Figures 28 and 29 show the comparison of time series performance of the
portfolio consisting of the top 30 stocks by the 5-day capital inflows ratio and the 5-day
price momentum factor, assuming we trade on the same day close (day T) as we rank
the stocks. Statistically, the capital inflows ratio has a higher correlation coefficient to
future stock returns than the price momentum factor does. In terms of stock
performance, the portfolio of high capital inflows stocks has outshone the portfolio of high
price momentum stocks, generating an outperformance of 68.0% since 2010.

60
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Top 30 stocks portfolio (trade on day T+1)
CSI 300 Index
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Top 30 stocks portfolio (trade on day T)
Top 30 stocks portfolio (trade on day T+1)
Comparing with a pure price
momentum factor, the capital
inflows ratio is more effective in
predicting short-term return

23
Fig. 27: Correlations between past stock performance and future stock return

Testing days (future stock return)
1 2 3 4 5 6 7 8 9 10 15 20
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1 0.04 0.01 0.03 0.02 0.01 0.01 0.03 0.02 0.01 0.02 0.01 0.01
2 0.01 0.02 0.02 0.01 0.00 0.02 0.02 0.01 0.02 0.01 0.01 0.00
3 0.03 0.02 0.02 0.01 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.00
4 0.02 0.01 0.01 0.01 0.01 0.02 0.02 0.01 0.01 0.02 0.00 -0.02
5 0.01 0.00 0.02 0.01 0.01 0.02 0.02 0.02 0.02 0.02 0.00 -0.03
6 0.01 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.00 -0.04
7 0.03 0.02 0.02 0.02 0.02 0.02 0.03 0.02 0.02 0.02 0.00 -0.05
8 0.02 0.01 0.02 0.01 0.02 0.02 0.02 0.02 0.02 0.01 -0.01 -0.06
9 0.01 0.01 0.01 0.01 0.02 0.02 0.02 0.02 0.01 0.01 -0.02 -0.07
10 0.01 0.01 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.01 -0.03 -0.07
15 0.01 0.01 0.01 0.01 0.00 0.00 0.00 -0.01 -0.02 -0.03 -0.07 -0.09
20 0.00 -0.01 -0.01 -0.02 -0.03 -0.04 -0.05 -0.06 -0.07 -0.07 -0.08 -0.09

Source: Datastream, Nomura Quantitative Strategies

Fig. 28: Comparison between portfolio returns of capital
inflows ratio and price momentum factors


Fig. 29: Relative return of the capital inflows ratio portfolio
over price momentum portfolio

Conclusion
To conclude, we observe herd-like behaviour in Chinas domestic market. Short-term
money flow by large institutions or super funds are proven to be an effective factor to
predict future stock performance. We introduce the capital inflows ratio that utilises
capital inflows data sourced from Wind Info, a China domestic data vendor. We show in
correlation analysis that stocks with a high capital inflows ratio tend to have further
money flow by institutional investors, and at the same time, have a higher future price
return. Through back-testing the portfolio performance of top capital inflows ratio A-
shares, we demonstrate a simple high frequency trading strategy that generates short-
term alpha in Chinas domestic market. Figure 30 reveals a quantitative screen on the
top 30 companies in the CSI 300 universe with a high capital inflows ratio.

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We present a stock list based on
high capital inflows ratio factor

24
Fig. 30: Quantitative screen on top 30 companies in CSI 300 universe with high capital inflows ratio

Note: Data as of 17 May, 2011. Selection of stocks screened from the CSI 300 universe

Market
Bloomberg
code
Name Sector
Market Cap
(US$mn)
Avg daily t/o
(US$mn)
5-day Capital
Inflows Ratio
(%)
China A 000927 CH Tianjin Faw Xiali Automobi-A Consumer Discretionary 1,922 6.85 19.93
China A 600208 CH Xinhu Zhongbao Co Ltd-A Financials 4,711 22.08 14.95
China A 600239 CH Yunnan Metro Real Estate-A Financials 1,573 29.13 14.89
China A 600657 CH Cinda Real Estate Co Ltd -A Financials 1,727 18.64 14.60
China A 600220 CH Jiangsu Sunshine-A Consumer Discretionary 1,530 27.76 13.26
China A 600804 CH Chengdu Dr Peng Telecom-A Telecommunication Services 1,794 30.81 12.21
China A 600143 CH Kingfa Sci.& Tech Co Ltd-A Materials 3,782 25.69 11.71
China A 000031 CH Cofco Property Group Co-A Financials 1,773 11.65 10.23
China A 601668 CH China State Construction -A Industrials 18,399 76.65 10.17
China A 600196 CH Shanghai Fosun Pharmaceuti-A Health Care 3,492 24.52 9.67
China A 002128 CH Huolinhe Opencut Coal Ind -A Energy 4,476 17.44 9.24
China A 600519 CH Kweichow Moutai Co Ltd-A Consumer Staples 27,219 85.05 8.42
China A 000895 CH Henan Shuanghui Investment-A Consumer Staples 5,662 35.96 8.40
China A 601988 CH Bank Of China Ltd-A Financials 146,154 22.44 8.26
China A 600598 CH Heilongjiang Agriculture-A Consumer Staples 3,899 35.94 7.47
China A 000858 CH Wuliangye Yibin Co Ltd-A Consumer Staples 19,284 115.13 7.44
China A 600062 CH Beijing Double Crane Pharm-A Health Care 2,281 13.84 7.36
China A 000725 CH Boe Technology Group Co Lt-A Information Technology 5,343 52.73 7.04
China A 000402 CH Financial Street Holding-A Financials 3,569 41.60 6.91
China A 600600 CH Tsingtao Brewery Co Ltd-A Consumer Staples 7,461 25.01 6.42
China A 600703 CH Sanan Optoelectronics Co L-A Information Technology 4,175 28.89 5.91
China A 000538 CH Yunnan Baiyao Group Co Ltd-A Health Care 6,322 29.57 5.87
China A 600588 CH Ufida Software Co Ltd-A Information Technology 2,570 9.78 5.56
China A 600481 CH Shuangliang Eco-Energy Sys-A Materials 1,849 15.48 5.37
China A 600601 CH Founder Technology Group -A Information Technology 1,420 16.55 4.93
China A 600216 CH Zhejiang Medicine Co Ltd-A Health Care 2,369 43.22 4.73
China A 600276 CH Jiangsu Hengrui Medicine C-A Health Care 5,633 27.05 4.61
China A 601268 CH China Erzhong Group Deyang-A Industrials 2,818 24.20 4.55
China A 600266 CH Beijing Urban Construction-A Financials 2,026 32.97 4.43
China A 600500 CH Sinochem Intl Corp-A Industrials 2,462 28.10 4.41

25
Definition of factors
Fig. 31: Factor definitions

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

Factor Definition
1 Market cap * Log of US$ market cap
2 Price momentum (1M) Past 1-month local currency return
3 Price momentum (3M) Past 3-month local currency return
4 Price momentum (6M -1M) Last 6-month return less the last 1-month return in local currency
5 Price momentum (12M -1M) Last 12-month return less the last 1-month return in local currency
6 Long term price momentum Past 36-month local currency return
7 Volatility Past 36-month price return volatility
8 Average daily traded value Monthly traded value in USD / number of traded days
9 Trade momentum (3M) Past 1-month trading volume - previous 3-month average trading volume
10 Volume turnover ratio Past 1-month trading volume / shares outstanding at month-end
11 Dividend yield F12-month DPS / stock price
12 Dividend Payout Actual dividends / actual net profit before extraordinary items
13 Earnings yield F12-month EPS / stock price
14 B/P Actual BPS / stock price
15 Sales/Price F12-month sales per share / stock price
16 Cashflow yield F12-month cashflow per share / stock price
17 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 estimate
20 Earnings revision indicator (FY2) FY2 EPS / previous 3-month average FY2 EPS
21 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 in the 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 EPS
25 Consensus rating * I/B/E/S consensus analyst rating
26 Change in ROE (FY1) FY1 ROE - actual ROE
27 Change in ROE (FY2) FY2 ROE - FY1 ROE
28 Sales growth (1Y) Actual sales / previous year actual sales
29 Sales growth (FY1) FY1 sales / actual sales
30 Sales growth (FY2) FY2 sales / FY1 sales
31 EPS growth (FY1) FY1 EPS / actual EPS
32 EPS growth (FY2) FY2 EPS / FY1 EPS
33 Return on assets Actual net profit / actual total assets
34 Return on equity F12-month net profit / actual shareholders equity
35 Shareholders equity ratio Actual shareholders equity / actual total assets
36 Trailing profit margin Actual net profit / actual sales
37 Pretax profit margin F12-month pretax profit / F12-month sales
38 Asset turnover Actual sales / actual total assets
39 Capex to assets Actual capital expenditure / actual total assets
40 Capex to sales Actual capital expenditure / actual sales
41 Default probability * Default probability estimated using Merton model

26
Stagflation priced in the market?
In this section we revisit the question of whether the market is pricing in stagflation.
Inflation expectations priced in bonds have risen briskly to pre-Lehman levels, while
long-term earnings growth is now priced as negligible. Inflation expectations are
certainly not yet very high, but this divergence of growth and inflation pricing is not a
good sign for the markets. The market currently seems to be pricing in what could be
regarded as early signs of stagflation.

Last November, when the Feds QE2 program began, we observed that stocks and
bonds could be seen as beginning to price stagflation as a consequence of the Feds
activities (see Do bonds lead stocks, or is stagflation priced? 2 November 2010). Now,
as QE2 is set to wind down, we revisit our metrics. We think the evidence for stagflation
being priced in stocks and bonds has become clearer.
Fig. 32: Stagflation seems to be priced in the market

Notes: Shows the implied long-term earnings growth (LTG) of S&P500 (dark blue line) and implied ten-year
inflation rate (light blue line). Implied LTG (from FY1 to FY5) is derived by assuming a static risk premium, 2.8%,
which is a historical average of the implied risk premium since December 1987, based on a residual income model
and I/B/E/S forecasted earnings. Implied inflation rate is calculated by subtracting the real yield of the inflation
linked maturity from the yield of the closest nominal Treasury maturity. Last data points are as of 18 May 2011.
Source: Nomura Securities International, Inc, I/B/E/S, S&P, Compustat, IDC, Bloomberg.
Overshoot and undershoot of implied earnings growth
The S&P500 has been hunting for the correct pricing of long-term earnings growth since
the financial crisis erupted in the fourth quarter of 2008 (see last section of report for
details of implied earnings growth estimation). Our analysis shows that market-implied
earnings growth for the S&P500 dropped from a historically realistic 8% per year before
the fourth quarter of 2008 to a virtual doomsday pricing of negative growth by the end of
the first quarter of 2009. We think the rally in stocks that lasted for about a year after the
March 2009 bottom was basically a re-pricing of earnings growth from a too-pessimistic
depression-like scenario. The rally of 2009 produced an overshoot of implied earnings
growth to a too-high level of over 10% growth. That overshoot, in turn, led to a ratcheting
down of growth expectations, with implied earnings growth going negative again by early
summer 2010. The rally that began at summers end in 2010 appears to have been,
once again, a re-pricing of too-pessimistic earnings growth expectations. That uptick in
pricing of earnings growth stalled in February 2011, heading back down again. The
S&P500 is currently pricing only slightly positive earnings growth over the next five
years. The implied earnings growth gyrations of the past few years are illustrated by the
dark blue line in Figure 32.

0
0.5
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1.5
2
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2004 2005 2006 2007 2008 2009 2010 2011
I
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(
%
)
Implied long-term earnings growth rate
Implied 10-year inflation rate
Historical average of LTG
since World War II (6.6%)

We revisit the question of
whether the market is pricing
stagflation
Over the past several years, the
stock market has been moved
by shifts in implied earnings
growth, which has gyrated from
overly pessimistic to overly
optimistic
Joseph Mezrich
+1 212 667 9316
joseph.mezrich@nomura.com

Yasushi Ishikawa
+1 212 667 1562
yasushi.ishikawa@nomura.com

10 May 2011


27
Inflation pricing
The earnings growth priced in equities bundles inflation expectations and economic
growth expectations together. Inflation expectations can be measured in several ways,
courtesy of the bond market. Here we use the 10-year breakeven inflation rate,
subtracting the real yield of the inflation-linked maturity from the yield of the closest
nominal Treasury maturity (the so-called breakeven inflation rate as calculated by
Bloomberg). In Figure 32, the light blue line displays the bond markets 10-year
breakeven inflation rate since the beginning of 2004.
As Figure 32 shows, inflation expectations priced in bonds (light blue line) and earnings
growth expectations priced in stocks (dark blue line) have generally moved together, with
notable exceptions. The divergent paths of inflation priced in bonds and earnings growth
priced in stocks emerged with the European debt crisis in early 2010. Inflation
expectations dropped, but not as severely as expectations for earnings growth. And,
importantly, inflation expectations priced in bonds have risen briskly to pre-Lehman
levels, while long-term earnings growth is now priced as negligible. The current situation,
circled in Figure 33, is what matters now.
Fig. 33: Pricing of growth and inflation divergent path of stocks and bonds

Notes: Shows the implied long-term earnings growth (LTG) of S&P500 (dark blue line) and implied 10-year inflation rate
(light blue line). Implied LTG (from FY1 to FY5) is derived by assuming a static risk premium, 2.8%, which is a historical
average of the implied risk premium since December 1987, based on a residual income model and I/B/E/S forecasted
earnings. Implied inflation rate is calculated by subtracting the real yield of the inflation linked maturity from the yield of the
closest nominal Treasury maturity. Last data points are as of 18 May 2011.
Source: Nomura Securities International, Inc, I/B/E/S, S&P, Compustat, IDC, Bloomberg.
Figure 33 expands the view of Figure 32 back to 1998. As we have previously reported,
the implied earnings growth in stocks was far too high before the tech bubble, and
settled in to a historically realistic 8% level after the 2001 recession and until the recent
crisis (the historical average of five-year earnings growth has been 6.6% since World
War II). Starting at the left side of Figure 33, we see that Inflation expectations oscillated
between zero and about 2.5% until around 2003.
Given the longer-term view of Figure 33, the divergence of inflation pricing in bonds and
earnings growth pricing in stocks that emerged in 2010, with inflation turning higher and
growth turning lower, is even more striking. Inflation expectations are certainly not yet
very high, but the divergence of growth and inflation pricing is not a good sign for the
markets. This pattern of divergence is a new and potentially ominous signal we see in
the data. To be clear, zero earnings growth with 2.3% inflation which is what the
market is pricing is a corrosive mix. Of course, stocks could, once again, realize that
almost zero earnings growth over the next five years is too pessimistic a view to be
pricing. That realization could produce a rally. But the market isnt yet as pessimistic
about growth as it was in the first quarter of 2009 or the third quarter of 2010. In the
meantime, the widening inflation vs. growth divergence priced in bonds and stocks raises
a concern. The market currently seems to be pricing in what could be regarded as early
signs of stagflation.
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0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
I
m
p
l
i
e
d

1
0
-
y
e
a
r

i
n
f
l
a
t
i
o
n

r
a
t
e

(
%
)
I
m
p
l
i
e
d

l
o
n
g
-
t
e
r
m

e
a
r
n
i
n
g
s

g
r
o
w
t
h

r
a
t
e

(
%
)
Implied long-term earnings growth rate
Implied 10-year inflation rate
Historical average of LTG
since World War II (6.6%)
Earnings growth priced in
equities bundles both inflation
expectations and economic
growth expectations
Inflation expectations are now
priced higher than before the
Lehman bankruptcy, while long-
term earnings growth is now
priced as negligible
Inflation expectations are
certainly not yet very high, but
the current divergence of higher
inflation pricing in bonds and
lower earnings growth pricing in
stocks is not a good sign the
market currently seems to be
pricing in what could be
regarded as early signs of
stagflation
After the 2001 recession,
implied earnings growth in
stocks settled in to a historically
realistic 8% level until the
recent crisis

28
How we calculate implied long-term earnings growth
Our estimate of the markets implied earnings growth uses a residual income model. The
classic Residual Income Model (RIM) values a company based on its current book value
plus an infinite sum of discounted residual income. Conceptually, residual is the return
generated by a firm over and above the firms cost of capital. Over the years, there have
been many approaches to derive and utilize RIM, e.g. Preinreich (1938), Edwards and
Bell (1961), Peasnell (1982), Bernard (1994), Ohlson (1990, 1995). Our approach most
closely follows Frankel and Lee (1997, 1998) as well as Lee et al (1999). A theoretical
value for the S&P500 is generated based on a bottom-up analysis of discounted cash
flow for S&P500 constituents. The market capitalization of each stock is aggregated to
produce a capitalization for the market, which we assume to be equal to model-
estimated value for the S&P500. A two-stage valuation approach is calculated from
(Compustat and I/B/E/S) financial statements to generate each firms value V as follows:

(1)

where NI
i
= net income at time i,
r = cost of capital,
B
i-1
= book value of firm at time i-1,
ROE
i
= return on equity at time i,
V = estimated market cap based on model.

Stage 1: i = years 1 to 5
NI
1
= I/B/E/S consensus estimate for FY1 net income,
NI
2
= I/B/E/S consensus estimate for FY2 net income,
NI
3
and NI
4
are estimated by linear extrapolation from NI
2
through NI
5
, as shown in
Equations (2), (3).

(2)
(3)

NI
5
was calculated using NI
1
and the long-term growth rate
(4)

=
+
+
+ =
6
1
5
1
1
0
) 1 (
) (
) 1 (
i
i
i i
i
i
i i
r
B r ROE
r
rB NI
B V
3 1 ) (
2 5 2 3
+ = NI NI NI NI
3 2 ) (
2 5 2 4
+ = NI NI NI NI

4
1 5
) 1 ( LTG NI NI + =

29

=
+
+
+ =
100
6
1
5
1
1
0
) 1 (
) (
) 1 (
i
i
i i
i
i
i i
r
B r ROE
r
rB NI
B V

p f
r r r + =
Stage 2: i = years 6 to
ROE
i
r is estimated using an exponential decay process with decay constant . The
half ROE
i
r is life of is assumed to be 10 years (the 10th year into the second stage):

,
(5)

A firms life is assumed to be 100 years so Equation (1) becomes:

(6)

where

(7)

and POR is a dividend payout ratio based on the past 5 years.
The cost of capital r consists of two parts:
(8)

where
r
f
= risk free rate
r
p
= market risk premium, assumed the same for all firms.
We use the 10-year t-bond yield for the risk free rate and calculate the risk premium r
p
by
plugging all of our parameters into equation (6) using the current market cap for V and
I/B/E/S consensus estimates for long-term earnings growth for LTG and solve for r
p
.
We calculate the historical average of r
p
, and plug this parameter back into equation (6)
to solve for the markets implied long-term growth rate (LTG). That is what we plot in
Figures 32 and 33 in this report.

t
i
e r ROE r ROE

= ) (
5
( )
10
2
1
ln
=
1 2 1
) 1 (

+ =
i i i
E POR B B

30
References
Victor L. Bernard, Accounting-based valuation methods, determinants of book-to-
market ratios, and implications for financial statement analysis, Working paper,
University of Michigan, (1994).
Edgar O. Edwards and Philip W. Bell, The Theory and Measurement of Business
Income, University of California Press, (1961).
Eugene F. Fama and Kenneth R. French, Industry costs of equity. Journal of Financial
Economics, Vol. 43 (1997), pp. 153-193.
Richard Frankel and Charles M.C. Lee, Accounting diversity and international
valuation, Working paper, University of Michigan and Cornell University, (1997).
Richard Frankel and Charles M.C. Lee, Accounting valuation, market expectation, and
cross-sectional stock returns, Journal of Accounting and Economics, Vol. 25 (1998),
pp. 283-319.
Charles M.C. Lee, James Myers and Bhaskaran Swaminathan, What is the Intrinsic
Value of the Dow? Journal of Finance, Vol. 54, No. 5 (1999), pp.1693-1741.
Bruce N. Lehman, Earnings, dividend policy, and present value relations: building
blocks of dividend policy invariant cash flows, Review of Quantitative Finance and
Accounting, Vol. 3 (1993), pp. 263-282.
James A. Ohlson, A synthesis of security valuation theory and the role of dividends,
cash flows, and earnings, Contemporary Accounting Research, Vol. 6 (1990), pp. 648-
676.
James A. Ohlson, Earnings, Book Values, and Dividends in Security Valuation,
Contemporary Accounting Research, Vol. 11 (1995), pp. 661-687.
K.V. Peasnell, Some formal connections between economic values and yields and
accounting numbers, Journal of Business Finance and Accounting, (1982), pp. 361-
381.
Gabriel A.D. Preinreich, Annual survey of economic theory: the theory of depreciation,
Econometrica, Vol. 6 (1938), pp. 219-241.


31
Nomura Global Quant Team

EQUITY RESEARCH
London
Ian Scott +44 207 102 2959 ian.scott@nomura.com
Inigo Fraser-Jenkins +44 207 102 4658 inigo.fraser-jenkins@nomura.com
Shanthi Nair +44 207 102 4518 shanthi.nair@nomura.com
Mark Diver +44 207 102 2987 mark.diver@nomura.com
Saurabh Katiyar +44 207 102 1935 saurabh.katiyar@nomura.com
Rohit Thombre +91 22 3053 2561 rohit.thombre@nomura.com
Maureen Hughes +44 207 102 4659 maureen.hughes@nomura.com
New York
Joseph J Mezrich +1 212 667 9316 joseph.mezrich@nomura.com
Yasushi Ishikawa +1 212 667 1562 yasushi.ishikawa@nomura.com
Junbo Feng +1 212 667 9016 junbo.feng@nomura.com
Aki Matsui +1 212 667 9403 aki.matsui@nomura.com
Gan Jiang +1 212 667 1073 gang.jiang@nomura.com
Tokyo
Hiromichi Tamura +81 3 6703 1680 tamura-0d2v@jp.nomura.com
Tomonori Uchiyama +81 3 6703 1741 uchiyama-0dk1@jp.nomura.com
Yoko Ishige +81 3 6703 3914 arai-1ms4@jp.nomura.com
Akihiro Murakami +81 3 6703 1746 murakami-0h14@jp.nomura.com
Mami Ode +81 3 6703 1743 ohde-2zrz@jp.nomura.com
Naoko Kato +81 3 6703 3912 katou-2zw8@jp.nomura.com
Hong Kong
Sandy Lee +852 2252 2101 sandy.lee@nomura.com
Yasuhiro Shimizu +852 2252 2107 yasuhiro.shimizu@nomura.com
Kenneth Chan +852 2252 2104 kenneth.chan@nomura.com
Rico Kwan, CFA +852 2252 2102 rico.kwan@nomura.com
Tacky Cheng +852 2252 2105 tacky.cheng@nomura.com
Desmond Chan +852 2252 2110 desmond.chan@nomura.com
Vasant Naik +44 20 7102 2813 vasant.naik@nomura.com
Mukundan Devarajan +44 20 7102 9033 mukundan.devarajan@nomura.com
Tom Andrews +44 20 7102 8670 thomas.andrews@nomura.com
London
Wing Cheung +44 20 7103 2448 wing.cheung@nomura.com
Ashish Gupta +44 20 7103 2448 ashish.gupta@nomura.com
New York
Amit Manwani +1 212 667 9809 amit.manwani@nomura.com
London
Ronny Fereisen +44 20 710 32698 ronny.feiereisen@nomura.com
Bhavik Shah +44 20 710 39988 bhavik.shah@nomura.com
Paola Papacosta +44 20 710 39988 paola.papacosta@nomura.com
Norman Pfeifer +44 20 710 39988 norman.pfeifer@nomura.com
New York
William O'Brien +1 212 667 2081 bill.obrien@nomura.com
Ethan Brodie +1 212 667 2123 ethan.brodie@nomura.com
Gregory Giordano +1 212 667 9408 gregory.giordano@nomura.com
Anushree Laturkar +1 212 667 9806 anushree.laturkar@nomura.com
Tokyo
Aaron Kugan +81 3 3272 7996 aaron.kugan@nomura.com
Sachiko Nagase +81 3 3213 9616 sachiko.nagase@nomura.com
FIXED INCOME RESEARCH
LIQUID MARKET ANALYTICS
QUANT SOLUTIONS GROUP

32


33
Appendix A-1
Analyst Certification
We, Inigo Fraser-Jenkins, Hiromichi Tamura, Sandy Lee and Joseph Mezrich, hereby certify (1) that the views expressed in this
Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this
Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations
or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking
transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Industry Specialists are senior employees within Nomura who are responsible for the sales and trading effort in the sector for
which they have coverage.


34
Important Disclosures
Online availability of research and additional conflict-of-interest disclosures
Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and
THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and
BLOOMBERG.
Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or
requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport-
eu@nomura.com for technical assistance.

The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities.

Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the
sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of
research reports in which their names appear.
Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily
responsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also
contribute to research reports in which their names appear and publish research on their sector.

Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this
rating are investment banking clients of the Nomura Group*.
40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with
this rating are investment banking clients of the Nomura Group*.
11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 31 March 2011.
*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 target price 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 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.
A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.
A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.
A rating of '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 (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price 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 '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.
Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity
identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or
companies.

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.

35
A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative

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

Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price 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.


36
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