BarCap Credit Research 110312

CROSS-ASSET RESEARCH
11 March 2012
GLOBAL PORTFOLIO MANAGERS DIGEST

Proceed With Caution Issues to Keep on Your Radar
Signs that global growth is recovering from recent dip. However, the threat of a jump in oil prices will keep financial markets and policymakers watchful. More so, the risk of a disruptive euro break-up has receded, but the currency bloc is likely to be an ongoing source of turbulence (see Economics Outlook). What to watch with oil. It is not the level of prices but the rate of increase that impacts economic activity (see Asset Allocation Snapshot). As oil prices affect inflation, it is interesting to note that the choke point for consumer spending is reached when quarterly inflation exceeds 9% (see Chart of the Week). All eyes on Portugal. Portugal is under close market scrutiny, given fears of contagion. However, a PSI is seen as unlikely in 2012 (see Euro Themes). Bank funding still an issue. As 3-year LTROs take funding risk for banks off the table near term, longer term funding issues remain a concern due to rising balance sheet encumbrance (see Over Promising). Sector changes in Europe. We upgrade Utilities, which are expected to benefit from the contraction in credit yields. Industrials are downgraded due to unattractive valuations and emerging tactical macro risks (see EMEA Equity Strategy). Positioning in dividends. Dividend strategies outperform in weak markets and economic states (see U.S. Equity Strategy). The Data Miner highlights a list of high dividend yield stocks removed of unintended exposures. This helps control risk. Credit derivative spreads are still wider than their 2011 lows, while equities are near multi-year highs. We believe long credit, short equity trades are likely to outperform and recommend using options, which also monetizes the dislocation in the volatility premium in credit and equity options (see Cross Asset Volatility).
Best of Barclays
The Data Miner Dissecting dividends Removing unintended exposures 4 Asset Allocation Snapshot The oil factor Euro Themes: Portugal PSI unlikely in 2012, despite concerns about solvency European Banks Over promising: Encumbrance at European banks US Index and Options Cross-asset volatility relative value 6
8 9
Global Strategy & Economic Outlook

Equity Strategy US: April Showers EMEA: Plugging into lower credit yields Credit Strategy Americas: Shifting Concerns Europe: Technicals are overwhelming a challenging fundamental picture for the moment 13 10 12
15
Asia ex-Japan: Soft China data no match for strong technicals 17 Economic Outlook Nervous energy 19
Chart of the Week Inflation Choke Point and Consumer Spending

80 60 40 20 0 -20 -40 -60 -80 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Recession dates CPI 3 m % chg (saar) Real PCE durable goods (3 m% chg saar) "Choke point" -10 -15 5 0 -5 Gulf War Hurricane Katrina 2008 oil rally 15 10
Key Inflection Points

Credit Select Rating Changes: Merck 23
Macro Select Forecast Changes: Japan 2012 GDP growth to 2.4% from 2% ECB rates on hold until at least end of 2012 24
Regulars
Barclays Macro, Commodities & FX Forecasts 2 Barclays Events Summary of equity rating changes Summary of credit rating changes All research referenced herein has been previously published. You can view the full reports, including analyst certifications and other required disclosures, by clicking the hyperlinks in this publication or by going to our Research portal on Barclays Capital Live. 3 21 22
Source: Barclays Capital Research, (see Asset Allocation Snapshot The Oil Factor, 6-March-2012)
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. FOR ANALYST CERTIFICATION(S), PLEASE SEE PAGE 26. FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 26. FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 28.
Barclays Capital | Global Portfolio Managers Digest
BARCLAYS MACRO, COMMODITIES AND FX FORECASTS

More detailed global macro, commodities and FX forecasts can be viewed on the Global Forecasts page on Barclays Capital Live.
Real GDP
2010 US Brazil Japan China India Euro area United Kingdom Russia 3.0 7.5 4.4 10.5 8.4 1.8 2.1 4.3 2011 1.7 2.7 -0.7 9.2 7.1 1.5 0.8 4.3 2012 2.5 3.3 2.4 8.1 6.9 -0.4 0.9 4.3
Central Bank Rates

Current Fed funds rate BoJ overnight rate ECB main refinancing rate BOE bank rate China: Working capital rate India: Repo rate Brazil: SELIC rate Russia: Refi rate 0-0.25 0.1 1.0 0.5 6.6 8.5 9.8 8.0 1Q 12 0-0.25 0-0.10 1.0 0.5 6.6 8.5 9.8 8.0 2Q 12 0-0.25 0-0.10 1.0 0.5 6.6 8.0 9.0 7.5 3Q 12 0-0.25 0-0.10 1.0 0.5 6.6 7.5 9.0 7.5
Consumer Prices
2010 US Brazil Japan China India Euro area United Kingdom Russia 1.6 5.0 -1.0 3.3 9.6 1.6 3.3 6.9 2011 3.2 6.6 -0.2 5.4 9.4 2.7 4.5 8.6 2012 2.8 5.6 -0.3 3.2 7.1 2.4 2.9 4.8
Global Bond Yields

Q1 12 US 10y US 10y RY Euro Govt. 10y Euro Govt. 10y RY UK 10y UK 10y RY Japan 10y Japan 10y RY 2.3 0.0 2.0 0.1 2.4 -0.4 1.2 1.0 Q2 12 2.0 -0.4 2.1 0.2 2.5 -0.6 1.2 1.0 Q3 12 2.0 -0.3 2.2 0.2 2.8 -0.4 1.1 0.9 Q4 12 2.0 -0.1 2.3 0.2 3.0 -0.1 1.1 0.9
Commodity Prices
2010 Brent (US$/bbl) WTI (US$/bbl) US Natural Gas (US$/mmbtu) Coal API2 (US$/t) Carbon (EUA) (/t) Gold (US$/oz) Copper (US$/t) Corn (Usc/bushel) 80 80 4.4 93 15 1226 7533 427 2011 111 95 4.0 123 13 1571 8813 680 2012 115 110 3.1 102 8 1875 9000 618
Foreign Exchange
Spot EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD USD/CNY USD/BRL 1.32 82 1.58 0.91 0.99 1.06 6.31 1.76 1 Month 6 Month 1.32 78 1.57 0.93 1.00 1.07 6.28 1.74 1.25 82 1.52 1.04 0.96 1.09 6.17 1.71 1 Year 1.20 84 1.50 1.08 0.95 1.10 6.08 1.70
Source: Barclays Capital Numbers in bold indicate forecasts; non-bold numbers are actuals.
11 March 2012
BARCLAYS EVENTS
Conference Calls & Webcasts
Date Time Call/Webcast Please click on the links to view details of forthcoming conference calls and webcasts 12 March 13 March 13 March 4.30pm EST 7:45am EST / 12:45 GMT 9:00 and 12:00 GMT Barclays Capital Bi-Weekly Equity Trading Call Barclays Capital Tuesday Credit Call BarcapLive WebEx Enhanced Portfolio Web Bench
Conferences & Special Events

Date Event Location Please contact your Barclays Capital Sales representative for availability. 13 March 13 March 13 14 March 13 15 March 14 March 15 March 16 March 19 23 March 22 23 March 25 27 March 27 28 March 28 29 March 29 March, 2 3 April 9 11 April 12 April 24 25 April 3 May 10 May 15 16 May 21 May 21 22 May 22 23 May 29 30 May 31 May Barclays Capital Third Annual Bank Loan Conference Barclays Capital Internet Connect Conference 2012 Global Healthcare Conference 2012 Spring Oilfield Tour hosted by James West US Utilities: Exploring the Power Grid Municipal Credit Conference Geneva Energy Day European & Russian Banks China Machinery Tour Shanghai & Changzhou High Yield Bond and Syndicated Loan Conference 2012 Power and Utilities Going to California Field Trip Barclays Emerging Payments Forum Barclays High Grade Credit Conference Barclays Capital Healthcare Facilities/Services 12 Annual Nashville Bus Tour 2012 North American Small and Mid-Cap Energy Forum 2012 Retail and Restaurants Conference Chemical ROC Stars Conference Global Therapeutics Symposium Americas Select Franchise Conference 2012 Barclays Capital European Credit Conference Barclays Select: Asia Property Conference 2012 Barclays Global Technology, Media and Telecommunications Conference Clean Solutions Conference UK Savings: New World, New Model
th
New York New York Miami Houston Zurich New York Geneva Eastern Europe and Russia Shanghai and Changzhou Phoenix, Arizona San Francisco and Pasadena New York Boston, New York and Chicago Nashville, Tennessee New York New York New York Boston London, England London Hong Kong New York New York London
Replays from the Past Week

Date Conference Call/Webcast/Conference Please click on the links for select conference call replays and webcasts/podcasts from the past week. 8 March 6 March 6 March 5 March 5 March Global Energy Outlook Barclays Capital Tuesday Credit Call: No Leap into QE3 Global Emerging Markets Banks: Safety Shows up in the most unlikely places Coal to Gas Switching Barclays Capital European Credit Call: Still waiting for a near-term resolution as Greece endgame approaches
11 March 2012
THE DATA MINER: DISSECTING DIVIDENDS REMOVING UNINTENDED EXPOSURES

Gavin Smith, +1 212 528 6139, gavin.smith@barcap.com, BCI, New York The recent months have been a volatile period for dividend-based strategies. As documented in this weeks note from the U.S. Portfolio Strategy team, a typical dividend yield strategy underperformed from the start of the year up to early February, before recovering through to late February. For those investors with a longer-term (possibly bearish outlook) - or for those simply wanting exposure to dividends - such short-term volatility can be painful. One issue that exacerbates the volatility of a typical dividend strategy is unintended exposures to other factors such as beta, size, value and sector effects. A consequence of this, for example, is that a dividend yield strategy can leave you concentrated in high yielding, low beta, large-cap stocks from defensive industries. To mitigate risk of investing in dividends, we present a list of names that have been cleaned of beta, size, value and sector effects using a regression methodology. This approach allows investors to better understand and control their exposures. In the regression Beta is estimated using two years of weekly return data; Size is the log of market capitalization; and Value is the log of price-to-book. We define sectors using the 2-digit GICS codes. Please note, for consistency with the analysis from our U.S. Portfolio Strategy colleagues, our universe for this regression is the S&P500. From this regression the residual is the component of dividend yield that is not explained by beta, size, value and sector effects. We subsequently rank our universe by the residual and take the 40 names with the highest residual. Figure 1 details the individual names that are the product of this screen. Figure 1: Highest Pure Dividend Yielding Stocks
Ticker CVC HRB LEG LTD WYNN AVP MO RAI SVU COP DO SE WMB CINF FII HCBK HCN Company Name Cablevision Systems Corp H&R Block Inc Leggett & Platt Inc Ltd Brands Inc Wynn Resorts Ltd Avon Products Inc Altria Group Inc Reynolds American Inc SUPERVALU Inc ConocoPhillips Diamond Offshore Drilling Inc Spectra Energy Corp Williams Cos Inc/The Cincinnati Financial Corp Federated Investors Inc Hudson City Bancorp Inc Health Care REIT Inc Sector Consumer Discretionary Consumer Discretionary Consumer Discretionary Consumer Discretionary Consumer Discretionary Consumer Staples Consumer Staples Consumer Staples Consumer Staples Energy Energy Energy Energy Financials Financials Financials Financials Dividend Yield 4.2% 4.4% 5.0% 8.3% 5.7% 5.0% 5.2% 5.2% 5.4% 3.4% 5.0% 3.4% 3.5% 4.6% 4.9% 4.8% 5.4% Beta 1.1 0.8 1.2 1.2 1.4 1.0 0.6 0.6 1.2 1.0 1.0 0.9 1.3 0.9 1.0 1.1 0.9 Market Capitalization ($MM) 3963 4615 3120 13748 12397 7848 62106 24336 1363 99035 9657 20446 17517 5636 2023 3463 11484 Price-toBook 4.5 7.8 2.4 26.5 7.4 5.0 16.9 3.9 1.8 1.5 2.2 2.5 9.8 1.1 3.7 0.8 1.7
11 March 2012
Figure 1: Highest Pure Dividend Yielding Stocks (continued)

Ticker HCP NYX PBCT VTR BMY LLY MRK PFE PBI RRD WM ADP LLTC MCHP MOLX PAYX VRSN FCX MWV NUE FTR EXC POM Company Name HCP Inc NYSE Euronext People's United Financial Inc Ventas Inc Bristol-Myers Squibb Co Eli Lilly & Co Merck & Co Inc Pfizer Inc Pitney Bowes Inc RR Donnelley & Sons Co Waste Management Inc Automatic Data Processing Inc Linear Technology Corp Microchip Technology Inc Molex Inc Paychex Inc VeriSign Inc Freeport-McMoRan Copper & Gold Inc MeadWestvaco Corp Nucor Corp Frontier Communications Corp Exelon Corp Pepco Holdings Inc Sector Financials Financials Financials Financials Health Care Health Care Health Care Health Care Industrials Industrials Industrials Information Technology Information Technology Information Technology Information Technology Information Technology Information Technology Materials Materials Materials Telecommunication Services Utilities Utilities Dividend Yield 5.0% 4.2% 5.1% 5.3% 4.1% 5.0% 4.2% 3.8% 8.5% 8.0% 4.9% 3.4% 2.9% 3.9% 2.9% 4.0% 7.6% 3.8% 3.2% 3.5% 15.1% 5.5% 5.6% Beta 0.9 1.3 0.9 0.9 0.6 0.6 0.8 0.8 0.9 1.2 0.8 0.9 1.1 1.0 1.3 0.8 0.8 1.6 0.8 1.2 1.0 0.7 0.7 Market Capitalization ($MM) 15990 7457 4478 16130 55471 45488 114850 162154 3512 2296 16088 26648 7534 6881 4386 11286 5763 37460 5278 13157 4353 25563 4420 Price-toBook 1.8 1.1 0.8 1.7 3.5 3.4 2.1 2.0 4.0 2.2 2.6 4.3 12.4 3.5 2.0 7.2 3.8 2.4 1.7 2.1 1.0 1.8 1.0
Source: Barclays Capital, Bloomberg. This screen only takes into account the factors expressly stated above and does not necessarily represent the fundamental views of the analysts. For more details on our analyst views on individual names please find the latest research on Barclays Capital Live or contact the relevant analyst. Please contact the U.S. Equity Product Management Group if you are interested in any customized revisions to the criteria used.
11 March 2012
BEST OF BARCLAYS: ASSET ALLOCATION SNAPSHOT
The oil factor

ASSET ALLOCATION RESEARCH Sreekala Kochugovindan +44 (0)20 7773 2234 sreekala.kochugovindan@barcap.com
Excerpted from Asset Allocation Snapshot, published on March 6, 2012 The risk asset rally has wobbled this week as the combination of the Greek debt deadline, weaker euro area data and high oil prices fuelled investor fears. As Brent and retail gasoline prices hover near the highs reached during the Middle East volatility last year, a growing number of investors voiced concerns that energy prices could derail the risk asset rally. We think not, but remain humble to the fact that it is not a risk that can simply be ignored, as the probability of deterioration in the political situation, albeit low, is still positive. Thus, we outline the asset allocation implications of an unexpected spike in oil prices. As we have discussed previously, it is not necessarily the oil price itself that can pose a threat to economic growth but the pace of its growth that is more important. It is the sudden surge in oil prices that leads to an abrupt shock to consumer spending and economic growth. There are three occasions in which oil price spikes fed into sizable spikes in headline inflation, which in turn hit the economy via consumer spending. Consumer durable spending, the most sensitive component of spending, fell sharply when the 3-month annualised change in headline inflation exceeded 9%. In each case, the price of oil rallied in excess of 40% over a 3-month period. In contrast, the latest geopolitical fears have, so far, led to a 20% rally in oil. As outlined above, we do not expect the current oil situation to derail global growth as yet. Given that our more constructive global growth view (Global outlook, 8 December 2011) was based partly upon US growth prospects, it is worth examining the response of the US consumer to energy prices. Our economists view the effect of the retail gasoline price rise to be much smaller this year than in 2011. The rate of change so far does not imply strong headline inflation, while the improving labour market backdrop suggests a less significant effect on real consumption. However, perception, as they say, is reality. Investors do not necessarily wait for evidence of a growth effect to materialise in the data before speculative flows shift to price concerns. The very fear of rising oil prices slowing consumption and growth may be enough to trigger short-term jitters across financial markets. Figure 1 illustrates the market reaction to the 1990 Gulf War. Equity markets sold off immediately on news of Iraqs invasion on Kuwait, and implied volatility spiked higher with oil. We do not believe the risk of higher oil prices justifies strategic shifts in asset allocation; however, implementing cheap tactical hedges may help protect any temporary escalation in fears surrounding oil. Figure 1: Equity volatility potentially a strong hedge
45 40 35 30 25 20 15 10 5 0 Dec-89 Feb-90 Apr-90 Jun-90 Aug-90 Oct-90 Dec-90 Feb-91 Apr-91
Brent $/brl (LHS)
VIX index (RHS)
Source: Bloomberg
11 March 2012
BEST OF BARCLAYS: EURO THEMES - PORTUGAL
PSI unlikely in 2012, despite concerns about solvency

ECONOMICS RESEARCH
Antonio Garcia Pascual +44 (0)20 3134 6225 antonio.garciapascual@barcap.com Piero Ghezzi +44 (0)20 3134 2190 piero.ghezzi@barcap.com Fabio Fois +44 (0)20 3134 1136 fabio.fois@barcap.com
Excerpted from Euro Themes: Portugal: PSI unlikely in 2012, despite concerns about solvency, published on Month 7, 2012 The hard default imposed on Greek sovereign debt, with a NPV haircut of about 75% (by our estimates), has left European government bond investors wondering whether PSIs will be imposed in other euro area countries in the future; but eurozone policymakers have insisted that Greece is unique. Portugal is under close market scrutiny, given fears of contagion. The large stock of public debt, lack of growth and unresolved macroeconomic imbalances cast doubts over the sovereigns solvency and the viability of its adjustment programme. Also, regaining competitiveness through a process of internal devaluation looks to be a daunting task, especially as the public and private sectors are deleveraging. The government, thus far, has a good implementation track record under the EU-IMF programme, but low productivity and deep-rooted structural problems are unlikely to be resolved by 2013-14. Public debt looks unlikely to stabilize by the time Portugal is due to return to the markets in H2 2013, and probably not in the medium-to-long term either. The country may not necessarily be insolvent, but in our view optimistic assumptions would likely be required to avoid such a scenario. The majority of Portuguese debt would be senior, non defaultable by the end of the EU-IMF programme. Official funds, rather than a catalyst to attract private investors, subordinate existing bondholders and tend to dissuade future PGBs investors. Consequently, it is hard to envisage Portugals return to the markets in H2 2013. Since IMF involvement requires 12-month ahead funding assurances, euro area countries may need to decide by mid-2012 whether to commit additional financial resources (so that Portugal would not have to access the markets) until structural problems are addressed, or to let the country restructure. We strongly believe the euro areas strong rhetoric in support of Portugal (eg, Greece is unique and PSI wont be replicated in Portugal or any other euro area countries), and concern about potential contagion to other peripherals, considerably reduce the likelihood of a Portugal PSI in 2012.
11 March 2012
BEST OF BARCLAYS: EUROPEAN BANKS
Over promising: Encumbrance at European banks

EQUITY RESEARCH European Banks 2-NEUTRAL Simon Samuels +44 (0)20 3134 3364 simon.samuels@barcap.com Barclays Capital, London Mike Harrison +44 (0)20 3134 3056 mike.harrison@barcap.com Barclays Capital, London Nimish Rajkotia +44 (0)20 3134 3719 nimish.rajkotia@barcap.com Barclays Capital, London
Excerpted from Over Promising: Encumbrance at European Banks, published on March 8, 2012 Who cares about funding anymore? While 1trn of 3-year LTROs takes funding risk off the table near term and helps buy time in managing the European sovereign debt crisis, we think there remain several reasons to stay concerned about bank funding longer term. A rising trend of encumbrance: Even before the LTROs, a growing feature in Europe was rising balance sheet encumbrance the pledging of collateral to one group of creditors at the expense of another. The most obvious example of this is the rise in covered bonds, accounting for 40% of debt issuance in 2011. The LTRO exacerbates this trend. Post LTRO, several banking systems now have encumbered over 15% of their balance sheets. Declining bondholder recovery rates keep funding costs high: Bondholders face increasing subordination from this balance sheet encumbrance, reinforced by depositor preference laws (in some countries) and imminent legislation on bail-in bonds. Combining these factors suggests that unsecured funding cost for banks will remain high potentially too high for some business models to make economic sense. What can the banks do?: If funding costs cant come down to economic levels, banks will either have to look for other sources of funding, or shrink. Alternative funding sources could include further covered bond issuance (encumbering balance sheets further) or aggressive growth of deposit franchises (thereby shrinking lending margins). What can policymakers do?: One offset to lower recovery rates is to reduce the probability of default. It is unclear whether Basel 3 compliance does enough to re-assure funding markets. If not, we may need further ECB measures to support banks now that the precedent of the 3-year LTRO has been set. This increases the perception of the nationalisation of funding structures. Figure 1: Proportion of banking system balance sheets encumbered, current
40% 35% 30% 25% 20% 15% 10% 5% 0% Greece France Germany Benelux Italy Spain Ireland UK Portugal Finland Austria
Source: ECB, ECBC, Barclays Capital.
11 March 2012
BEST OF BARCLAYS: US INDEX AND OPTIONS
Cross-asset volatility relative value

Shobhit Gupta +1 212 412 2056 shobhit.gupta@barcap.com Eric Gross +1 212 412 7997 eric.gross@barcap.com
Excerpted from U.S. Credit Alpha, published on March 9, 2012 Despite generic deterioration in credit market liquidity (see Liquidity Preference and Liquidity in CDS Markets), index and index option volumes have proven resilient. Indeed, volumes in CDX indices remain strong, with the on-the-run CDX.IG and CDX.HY indices trading at weekly averages of approximately $96bn and $21bn, respectively, year-to-date. While these volumes represent a slight year-over-year increase, the index options market has had substantial growth, making it one of the only areas of genuine growth in credit derivatives. Moreover, a varied base of credit option participants, including real-money accounts looking for hedges and investors implementing pure volatility strategies, has led to growth in index swaption notionals and volumes. That market depth has, in turn, enabled a legitimate credit volatility market to develop, attracting attention from investors in more established volatility markets.
Long and Short Equity, in Index and in Volatility

Despite having tightened significantly over the past few months, credit derivative spreads are still trading wider than their 2011 lows in spread. Indeed, while the IG index is ~50bp tighter over the past three months, it is about 20bp wide of the 2011 tights. The same is true for the CDX HY index; while it is up about $8, to $97, since November, it remains significantly lower than the 2011 highs of $105. The difference can be explained in part by constituent differences: the $105 highs were reached in February 2011 for series 15. That said, even adjusting for constituent differences, the HY17 index is about 2pts lower than we estimate it would have reached in February 2011. In contrast, the S&P 500 index, having rallied more than 16% since late-November 2011, reached its highest level in over three years earlier this month. While it is slightly lower now, it is still trading at its 2011 highs. In addition to the obvious constituent mismatch between the credit and equity indices, the one big difference in sector composition is banks (Figure 8). Banks (including diversified financials) are nearly 8.5% of the S&P index but are not included in the CDX indices. However, bank equities have underperformed the rest of the S&P 500 index, and ex-fins the S&P 500 is nearly 2% higher than the 2011 highs. Thus, given the underperformance of credit (CDX IG and HY indices) relative to equity, we believe that long credit, short equity trades are likely to outperform. We recommend expressing this view using options, which also monetizes the dislocation in the volatility premium in credit and equity options mentioned above. Specifically, we believe that selling S&P500 calls vs. either buying an IG receiver or a HY call option appears attractive at current levels. The strikes and relative notionals of the two legs can be adjusted based on investors view, but we highlight two constructs in IG and HY below. The two trades are set up to be costless but are net short the market at inception. Market-neutral versions of these trades can be implemented by selling a lower notional of the SPY call although they will have an upfront cost. Buy Jun 20 2012, 105 Strike IG Receiver, Sell Jun 16 2012, 136 Strike SPY Calls (no delta) Buy Jun 20 2012, $96 Strike HY Call, Sell Jun 16 2012, 136 Strike SPY Calls (no delta)
11 March 2012
U.S. EQUITY STRATEGY
April showers
Barry Knapp +1 212 526 5313 barry.knapp@barcap.com BCI, New York Eric Slover, CFA +1 212 526 6426 eric.slover@barcap.com Michael Keller, CFA +1 212 526 2404 michael.keller@barcap.com BCI, New York Adam Sussi +1 212 526 9778 adam.sussi@barcap.com BCI, New York
Excerpted from U.S. Portfolio Strategy Weekly, published on March 9, 2012 The period of major central bank easing into an improving economic outlook is winding down. It might take some time for the momentum to completely dissipate, but we would be cutting risk.
Were not gonna party like its 1995

Weve argued throughout the post-crisis period that the U.S. growth outlook is the most important driver of equity markets, not domestic monetary strategy, public policy or external factors. Even last fall, when the European experiment seemed to be crumbling, improving data in the U.S., following a spike in market implied recession risk, pushed stocks erratically higher. While we see numerous constraints to continued improvement in domestic growth -- the U.S. data surprise has been falling and 1Q12 GDP forecasts are at risk -- the relatively robust labor, auto and chain store sales reports have kept a positive bias to the market implied outlook. An early Easter probably ensures at least another month of decent retail sales and, consistent with the last couple of years, the labor data have started strong, but in 2010 and 2011 it began to soften in the 2nd quarter, implying the outlook isnt likely to soften much until April. Longer term, we believe household balance sheet deleveraging and bottoming in the housing market, as evidenced by negative regional house price correlation, provide strong underlying support for U.S. growth. However, while the housing market is stabilizing, household deleveraging still has progress to make, and there are several remaining near-term restraints on both macro and equity market fundamentals: Energy prices, public policy, earnings season, monetary policy and Europe. A common denominator in several of these broad areas of risk is the month of April. With the markets sending numerous signals that 2012 is not 1995weakening relative performance of small caps and cyclical sectors, gold falling, energy prices increasing and real 10 year treasury rates risingwe believe the period of major central bank easing into an improving economic outlook is winding down. It might take some time for the momentum to completely dissipate, but we would be cutting risk.
There are several near-term restraints on both macro and equity market fundamentals.
Figure 2: While the housing market is stabilizing, household deleveraging still has progress to go
% 80 70 60 50 40 30 20 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Mortgage Debt / Nominal GDP
Source: FRB, Haver, Barclays Capital
Figure 3: Higher energy prices are offsetting the decline in the household financial obligations ratio ,,,,,
% 16 14 12 10 8 6.0 4.8 3.6 2.1 6 4 2 0 Lo 2 3 4 Hi 2010: $2.60 avg price
Source: BLS, EIA, Haver, Barclays Capital
75
14.6
Gasoline & Motor Oil / Income Before Tax Household Income Quintiles
64 57
10.2 8.5 6.8 5.2 2.9
44
2012e: $4.00 avg price
11 March 2012
10
DIVIDENDS
Dissecting dividends: Signpost for a market drop?

U.S. Portfolio Strategy Eric Slover, CFA +1 212 526 6426 eric.slover@barcap.com BCI, New York U.S. Equity Product Management Gavin Smith +1 212 528 6139 gavin.smith@barcap.com BCI, New York
The outperformance of dividend yield strategies is consistent with a falling stock market, rising volatility, and a deteriorating macro outlook. Dividend yield strategies are trending toward positive correlation with returns, a signpost for caution. We recommend paring risk and legging into dividend yield exposure. Historically, periods of profitable dividend yield strategies (e.g., buying the top 20% of high yielding stocks and selling the bottom 20%) are consistent with a falling stock market, rising volatility, and a deteriorating macro outlook. Despite the underperformance of dividend indices and the highest yielding stocks, dividend yield strategies are trending toward positive correlation with returns, consistent with underperformance of other market measures, such as small caps and cyclical sector. Along with the rising price of oil and gasoline, these signals in early 1Q11 and 2Q11 served as signposts for the deteriorating market conditions, which ultimately led to strong outperformance from dividend yield strategies. Figure 1: Legging into dividend yield exposure seems attractive. Dividend yielding strategies that limit unintended exposures to other factors such as beta, size, value and sector effects would reduce short-term volatility effects
Normalized slope coefficients, 20dma 0.20 0.15 0.10 0.05 0.00 -0.05 -0.10 -0.15 -0.20 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Div Yld (L) Jan-12 Div Yld, Earnings Yld, Book/Mkt, Size, Sector (L) Index, 20dma 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 Apr-12 S&P 500 (R)
These signals served as signposts in early 1Q11 and 2Q11, for the deteriorating market conditions, which ultimately led to strong outperformance from dividend yield strategies
Source: FactSet, Barclays Capital. Note: twenty day moving average of daily returns
We would be wary of a pattern similar to early 2011 when dividend strategies quietly outperformed as the S&P 500 traded in a range for nearly two quarters, failing to break the top-end of the range and ultimately falling to 1100.
We recommend paring back risk and legging into dividend yield exposure
With performance of dividend yield strategies added to the list of cautious signals from the market, mixed macro data and a pause in monetary policy accommodation expectations, we recommend paring risk, legging into dividend yield exposure seems attractive. Dividend yielding strategies that limit unintended exposures to other factors such as beta, size, value and sector effects would reduce short-term volatility effects.
11 March 2012
11
EMEA EQUITY STRATEGY
Plugging into lower credit yields

Edmund Shing, Ph.D +44 (0)20 7773 4307 edmund.shing@barcap.com Barclays Capital, London Dennis Jose +44 (0)20 3134 3777 dennis.jose@barcap.com Barclays Capital, London Yu-chieh Chiang, CFA +44 (0)20 3134 4217 yu-chieh.chiang@barcap.com Barclays Capital, London
Excerpted from European Strategy Elements: Plugging into lower credit yields, published on March 9, 2012 Value rebound in the offing: Value stocks tend to outperform growth stocks as economic indicators, such as the German IFO, stabilise. We believe this is because value stocks tend to be cyclical in nature, and an improvement in the economic outlook leads to a reduction in the earnings risk premium that may currently be priced in. Therefore, we think that, at least tactically, value can outperform growth. We see the key value sectors within Europe as Utilities, Telecoms and Insurance. Upgrade Utilities to Marketweight: This is a highly leveraged (2012 Net Debt to EBITDA of 2.4x) value sector, which stands well poised to benefit from the contraction in credit yields witnessed over the past couple of months. In addition, both German and UK power prices are starting to pick up, which could support earnings. Downgrade Industrials to Marketweight: While this is one of our preferred sectors on a structural basis, tactically we downgrade the sector, since current valuations are no longer particularly attractive and tactical macro risks are fast emerging. Close out Sweden (OMX) vs Europe (SX5E) recommendation: In conjunction with our downgrade of European Industrials, we close our Long OMX, Short SX5E recommendation. Riksbank estimates for real GDP growth in Sweden have become increasingly pessimistic, with a contraction expected in Q4 2012. In addition, Swedish new orders, after picking up since last November 2011, have started to moderate. Figure 1: Utilities equities led by credit historically, could it happen again?
130 120 110 100 90 80 70 60 50 40 2007 7 2008 2009 2010 2011 2012 6 4 5 European Utilities Equity (SX6P) European Utilities Credit (redemption yield, inverted, rhs) 3 2
Source: Barclays Capital, DataStream
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AMERICAS CREDIT STRATEGY
Shifting concerns
Jeffrey Meli +1 212 412 2127 jeff.meli@barcap.com Bradley Rogoff, CFA +1 212 412 7921 bradley.rogoff@barcap.com
Excerpted from U.S. Credit Alpha, published on March 9, 2011 Credit suffered through one of its tougher days of 2012 on Tuesday, and despite better sentiment later in the week, it is wider w/w ahead of Fridays payroll number. Europe was once again at the forefront of investor concerns, but the exact source of those worries shifted somewhat. Greece looks set to execute its PSI debt swap successfully, as it has ~85% of participants on board. Assuming that it uses the collective action clauses to bind the remaining holders, a CDS trigger is likely. The Greece debt swap may serve only to escalate questions about Portugal, which is now trading at extremely stressed levels. Our economics team does not expect PSI for Portugal in 2012 (see Portugal: PSI unlikely in 2012, despite concerns about solvency), but the question is becoming increasingly relevant. Perhaps more concerning over the long term is the performance of Spain. Deficit numbers were poor for 2011, at 8.5%, and forecasts for 2012 were dialed back to a 5.8% deficit. 10y government bond yields at ~5% are not yet alarming, but CDS is now wide to Italy and breached 400bp (Figure 2). The better tone as the week progressed was tied to continued strong data domestically and a story in the Wall Street Journal that the Fed may be considering sterilized bond purchases as a means of adding additional liquidity to the markets (Sterilized Bond Buying an Option in Arsenal, Wall Street Journal, March 7, 2012). This seemingly addressed the concerns we raised last week that markets are increasingly reliant on central bank liquidity. This weeks modest sell-off does not change our view that as long as the system is flush with liquidity, the catalyst for a down trade is not obvious. However, it did reinforce our view that positioning that is, at first glance, neutral but long convexity can perform well. For example, on Tuesday, we witnessed material underperformance from more liquid securities, including some of the higher dollar-priced call-constrained high yield bonds that we have highlighted recently as popular ETF bonds. This week, we look at dispersion in both the Investment Grade and High Yield sections and find that the number of credits that are near the market spread is much lower than during similar spread regimes in the past. This forces
Figure 1: Weekly Index Changes

Last Week Close 166 94.0 102.31 97.91 93.80 98.50
Figure 2: Spain and Italy 5y CDS (bp)

575 525
Wednesday Close Credit Index (bp) CDX.IG.17 (bp) High-Yield Index ($ Price) CDX.HY.17 ($ Price) Leveraged Loan Index ($ Price) LCDX.17 ($ Price) 171 97.0 101.49 96.63 93.74 98.00
4-week Average 173 96.6 101.61 97.47 93.67 94.61
475 425 375 325 1-Jan
16-Jan
31-Jan Spain
15-Feb Italy
1-Mar
Source: Barclays Capital
Source: Bloomberg, Barclays Capital
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many investors into a barbell approach if they want to earn a market yield. Based on our somewhat cautious view for lower quality credits, we are more comfortable with this approach in investment grade than high yield. Continuing with the theme of owning downside protection while staying invested in a market with very strong technicals, this weeks focus article looks at the relative value of credit and equity options. We highlight CDX and options as one of the only areas of the market where liquidity has remained strong or improved in the past year. The better liquidity in options has enticed investors to examine cross-asset volatility. We convert credit volatility from spread into price terms to make it more equivalent to equity volatility and find that equity volatility has recently become rich to credit volatility. We suggest trades in the IG and HY CDX options market versus S&P options.
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EUROPEAN CREDIT STRATEGY
Technicals are overwhelming a challenging fundamental picture for the moment

Sherif Hamid +44 (0)20 7773 5259 sherif.hamid@barcap.com
Excerpted from European Credit Alpha, published on March 9, 2012 Volatility remained high this week as the Greece endgame quickly approaches. Concerns that all could go horribly awry gave way on Thursday to belief that events will likely be able to progress with limited disruption to the broader markets. For the week ended Wednesday, iTraxx Main, Crossover, and Senior Fin were 7bp, 24bp, and 11bp wider, respectively, though markets rallied somewhat on Thursday on the back of positive headlines regarding participation in the proposed Greece PSI. With respect to the Greece PSI, headlines emerged over the course of the week regarding bondholder participation. At last count, per press statements on Thursday, over 60% of private creditors had express interest in participating in the PSI (Bloomberg). Importantly, on Tuesday, the Greek Ministry of Finance released a statement confirming that if Greece receives sufficient consent to the proposed amendments of the Greek law governed bonds to make the amendments effective, it will do so and bind all holders of the domestic law bonds into the proposed restructuring. We would highlight once again that per the Greek Bondholder Act, at least 50% of holders must respond and 66% of respondents must agree to the proposed amendments in order for Greece to make the amendments effective. Given recent headlines, it appears increasingly likely that Greece will reach the necessary hurdle and be able to implement the CACs. We continue to believe using the CACs to bind all holders of domestic law bonds into the restructuring will likely trigger a CDS credit event. We expect further headlines on this front on Friday. There has been significant continued focus on the potential implications of a CDS credit event for the broader market. We continue to be of the view that as long as CDS works as expected (ie, triggering if it should trigger and vice versa), sovereign CDS will continue to be viewed as a useful hedging tool. At the same time, in the case where CDS does trigger, we do not expect a rash of counterparty risk issues, given that the net notional of CDS
Figure 1: Key indices weekly performance

Wednesday close PE IG Corp iTraxx Main iTraxx SenFin iTraxx SubFin PE HY Corp iTraxx XO 237 136 217 358 677 591 Wednesday last week close 240 129 206 355 666 567 Four-week average 248 134 217 366 690 584
Figure 2: PEHY ex Fin Index pro forma for EDNIM inclusion, ranked by par outstanding (bn equivalent)
10 9 8 7 6 5 4 3 2 1 0 LGFP FIAT HEIGR ELEPOR PEUGOT PORTEL WINDIM HTOGA RENAUL CONGR MWDP UPCB ARGID FIIM F LHAGR UNITY ZIGGO INEGRP EDNIM
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outstanding is relatively small (USD3bn) and the vast majority of CDS in the market is subject to daily marking to market and margin requirements, both of which limit the amount of counterparty risk exposure. Indeed, we expect the vast majority of cash that would need to change hands related to a Greece CDS event has already done so given that Greek CDS is currently trading at ~75pts upfront (ie, trading to a 25% recovery). That said, we expect markets to remain concerned about this issue until it is proved that no major counterparties experience significant problems due to CDS triggering. We would point investors to Euro Themes: Implications of Greece restructuring for banks and CDS, 3 June 2011, and Greece CDS update: Voluntary or binding on all? The key question for Greece CDS holders, 27 October 2011, for further detail. Away from Greece, the ECB and BOE both held rates constant this week. President Draghi cited the benefits of the recent LTRO to market liquidity but, notably, continued to express concern about the growth outlook, as the ECB continues to expect weakness in 2012. He also stated that the ECB expects inflation to remain above 2% for most of the year, though he was more sanguine about inflation expectations, which are still viewed as well contained. Incremental macro data this week have, on balance, been negative, reinforcing the ECBs concerns, as evidenced by weak German factory orders and weak EC PMI data. From a more fundamental perspective, earnings were, on balance, disappointing relative to expectations as well. Notably, investment grade issuers Carrefour, Air France, and Enel reported relatively weak operating results. Enel also joined the fray of downgrade activity, as the company was cut to BBB+ at S&P following results and guidance. Also downgraded was Italian electricity name Edison SpA. Edison was downgraded to BB+ by S&P, which joined Fitch in rating the company below investment grade. After this downgrade, Edison joins the growing list of fallen angels entering our high yield indices and becomes the 20th largest issuer by par in our high yield index ex-financials (EUR1.8bn, Figure 2). We expect this trend of downgrade activity to continue, with varying consequences across the credit markets. Overall, at current valuations, we continue to believe investors should tread lightly. The volatility exhibited already around the Greece PSI process highlights how skittish sentiment can be. At the same time, despite the seemingly overwhelming technicals, the fundamental picture continues to deteriorate across European credit. While this tension between technicals and fundamentals could continue for quite some time, risk/reward has become skewed to the downside, in our view. We believe investors should remain disciplined about relative value and look for relatively cheap/convex ways to position for a correction across our market. We highlight a variety of ideas along these lines in our trade blotter section. Along the same lines, in our high yield section, we highlight that 63% of our PE HY index ex fins is now trading above par, and 85% is trading above 90 on a price basis. With prices as high as they are, large parts of the market have become quite negatively convex. Ultimately, we believe the right risk/reward trade for high yield investors from a portfolio perspective is to move underweight beta in general; at the same time, we believe investors should move more of their exposure into the less negatively convex parts of the market, much of which is in the single B space. Please see our high yield section for further discussion.
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ASIA CREDIT STRATEGY
Soft China data no match for strong technicals

Krishna Hegde +65 6308 2979 krishna.hegde@barcap.com Avanti Save +65 6308 3116 avanti.save@barcap.com
Excerpted from Asia Credit Alpha, published on March 9, 2012 Asia credit is flat to stronger w/w after trading softer midweek on worries about the response to the Greece PSI. Asia outperformed versus US/Europe, with iTraxx Asia IG hitting new tights for the series. This week, USD2.15bn was priced, and the pipeline of new issues has continued to grow in line with expectations. Not surprisingly, Greece remained on the radar as the PSI deadline approached. Bloomberg has reported today that participation had reached over 85.8% (total of EUR172bn bonds tendered) and participation will be 95.7% (EUR197bn) after the CACs are triggered. The ISDA determination committee is expected to meet today to decide whether this triggers CDS contracts. The hard default imposed on Greece has left investors wondering whether PSIs will be utilised for other euro area countries in the future. Consequently, Portugal is now under close market scrutiny and is trading at stressed levels (10y bonds at 13.9%). Despite Portugal's economic challenges and deteriorating debt dynamics, our economists believe that the euro area's rhetorical support and anxiety about contagion considerably reduce the likelihood that European policymakers will impose PSI in 2012 (see Portugal: PSI unlikely in 2012, despite concerns about solvency, 7 March 2012). Strong technicals continue to support the markets. Despite USD26.7bn of YTD gross issuance, we believe dealer inventories are not yet heavy and investors cash levels continue to be replenished by inflows. Given this backdrop, we recommend a tactically cautious stance stay invested in better-quality credits and keep macro hedges in place. In our focus piece we suggest a variety of trades across the high grade and high yield segments, with a fair proportion being relative value in nature. In Korea, 5y CCS has moved almost 30bp over the past 2 weeks. Since the Korean onshore investor base uses spread in KRW terms (after CCS) as a metric for buying USD bonds, a sharp upward move in CCS provides additional support for Korean USD bonds. Korea CCS is currently at levels last seen in September 2011, and further normalisation of the markets/upward movement in USTs could push it higher. We continue to recommend an overweight in Korea investment grade credit and believe there is potential for 8-10bp of further outperformance. Figure 1: Korea 5y CDS (bp) vs 5y KRW USD cross-currency basis swaps (bp)
250 225 200 175 150 125 100 75 50 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 -50 Mar-12 -150 -100 -250 -200 5 yr CDS 5yr CCS Swaps -300
Stay invested in better-quality credits and keep macro hedges in place
Korea CCS move is likely to support Korean bonds We recommend an overweight in Korea investment grade credit
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Rotate out of longer-tenor Indian bonds into 14s and 15s. Continue to recommend overweight while cutting duration exposure
India credit lagged last week, following election results that were perceived to be negative for the prospects for reforms and fiscal consolidation. Investors will have a chance to gauge the governments commitment to fiscal consolidation when the budget is released on 16 March. Ahead of the budget, we continue to advocate rotating out of longer-tenor Indian bonds into the 14s and 15s, given the relative flatness of the curve. In our view, the spread of the sector makes an above-benchmark weight appropriate, despite the strong performance that has already occurred YTD. Recent Chinese macro- and micro-level data have been mixed. The Chinese Minister of Commerce was quoted saying that January-February exports only grew 7% y/y, which implies 20% y/y growth in February below the consensus forecast of 30%. Also, our equity analysts highlight that Chinese steel mills have been suffering from a weak recovery in demand from domestic and export markets, sluggish steel prices, high raw material costs and overcapacity. Chinas data releases on 9-10 March will be an important indicator of the extent of the slowdown in growth. China activity data released on Friday surprised to the downside in aggregate. Retail sales and IP were lower than expected while fixed asset investment came in ahead of forecasts. CPI at 3.2% printed slight lower than consensus of 3.4%.
Global markets have not yet fully factored in the possibility of a sharper-than-expected slowdown in China. Overweight Hong Kong IG against underweight China IG
We believe developments in China warrant a cautious stance, especially because global markets have not yet fully factored in the possibility of a sharper-than-expected slowdown in China. This is evident in the way risk assets, especially commodities, weakened when China cut this years GDP growth target to 7.5% from 8%, which was well telegraphed in advance, according to regional economists. That said, there is a risk markets look through poor data in the expectation of policy easing. We suggest overweighting Hong Kong investment grade versus underweighting China investment grade to maintain exposure to greater China. In Indonesia, our economists see an increased likelihood of a fuel price increase leading to higher inflation. We have changed our view on Indonesia credit (in the context of an EM sovereign portfolio) to neutral (see Indonesia credit: Finding safety in the off-the run bonds, 8 March 2012). We reiterate our underweight on Indonesia sovereign bonds versus an Asian credit benchmark.
Indonesia neutral sovereign against EM sovereign benchmark, and underweight credit against Asian credit benchmark
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ECONOMIC OUTLOOK
Nervous energy
Simon Hayes +44 (0)20 7773 4637 simon.hayes@barcap.com
Excerpted from Global Economics Weekly, published on March 9, 2012 Recent activity data have brought further signs that global growth is recovering from its recent dip. At the same time, however, the threat of a jump in oil prices is likely to keep financial markets and policymakers watchful, even as euro risks recede. The Barclays Capital global business confidence index registered another significant improvement in February (Figure 1), recording its largest one-month increase since October 2009 and its fourth consecutive monthly rise. The service sector has been the main source of improvement, implying solidifying domestic demand across a range of economies, while mixed movements in manufacturing confidence indicate some residual fragility in international trade. Although the improvement in confidence was widespread, there have been some striking regional divergences. The turnaround in the US has been the most convincing, and the solid payrolls gain in February suggests the recovery there retains momentum. Euro area confidence, by contrast, remains notably sub par (Figure 2). This pattern accords with our view that the euro area is in the midst of a mild recession whereas other economies have steered clear of a double dip. We expect global GDP growth to rise to 3.5% q/q (saar) in Q1, from 2.8% in Q4 11. The economic ramifications of last years earthquake continue to keep Japanese data volatile, but this week brought some positive news. The sharp upward revision to Q4 GDP growth, to -0.7% q/q (saar) from the initial estimate of -2.3%, has led us to raise our 2012 growth forecast to 2.4% from 2.0% previously. Underpinning this is a marked upward revision to our Q1 forecast, to 2.6% from 1.5% previously, reflecting upgrades to our views of household consumption and export demand. In tune with this improving outlook, February saw a jump in the expectations index in the Economy Watchers Survey, rising above the 50 no-change mark for the first time in nearly five years. Even so, investors continue to question the sustainability of global demand. Certainly, complications in adjusting for the Chinese New Year make us slightly cautious about the recent readings of our business confidence index. However, we were not so perturbed by
Global business confidence registered another significant improvement in February
The US turnaround has been the most convincing, while European confidence remains decidedly sub par
We have revised up our forecast for Japanese GDP growth in 2012
Figure 1: Global business confidence and GDP growth

% q/q saar 8 6 4 2 0 -2 -4 -6 -8 98 Global real GDP growth (BarCap series, LHS) Global business confidence (BarCap series, RHS) 00 02 04 06 08
Improvement continues
Figure 2: Business confidence in the US, euro area and ROW

normalized diffusion index, 3mma 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 99 US business confidence Euro area business confidence ROW business confidence (BarCap aggregate) 01 03 05 07 09 11
normalized diffusion index, 3mma BarCap est. for Q4 112.0 Q1 12 global GDP 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5
10
12
Source: Haver Analytics, Barclays Capital
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other developments that appeared to discompose markets. In particular, the lowering of the official Chinese growth target for 2012 to 7.5% has not led us to revise our forecast of 8.1% growth. It is not unusual for growth outturns to be higher than the official targets, and we view the change more as a signal of a shift in policy priority away from absolute growth towards structural adjustment a shift we had already factored in.
We do not see the recent rise in the oil price as a material threat to global activity
There is also increasing anxiety that the recovery could founder on higher oil prices. The popular headline is that the price of Brent crude is at a record high in euro terms. However, it is not so much the level of prices that matters for economic activity as the rate of increase: sudden surges in oil prices can have very disruptive effects. For example, over the past 25 years periods of major oil-related disruption were associated with oil price surges of 50% or more over a six-month period (Figure 3). Against this benchmark the recent moves have been unremarkable and are unlikely to pose a material threat to global economic activity. A sharp jump in oil prices would be another matter altogether, however. If the US recovery were threatened, the likelihood of QE3 would increase dramatically. However, the greater concern would surround the effects in Europe. As well as being a larger net importer of oil than the US, Europe has fewer alternative sources of energy, so the potential long-run effect on real activity is likely to be greater. In addition, the ECB has shown itself reluctant to look through the first-round effects of higher oil prices on inflation: indeed, in light of this weeks upward revision to the ECBs inflation forecast for 2012 we no longer expect a rate cut in Q2 and now think the policy rate is likely to be held at 1% until at least the end of 2013. If policy were to be unsupportive, the resultant squeeze on growth could be a serious hindrance to the necessary fiscal and economic adjustment in the region. Lastly, another year of sticky inflation in the UK could unhinge inflation expectations, constraining the MPCs ability to provide support. As the oil risk moves up investors list of concerns, the threat of a disruptive euro break-up continues to recede. Italian bonds have been particular beneficiaries of the recent calming of market concerns, with the 10y yield dropping to about 5% and back close to that of Spain (Figure 4). However, although contagion from the somewhat untidy Greek PSI deal has been contained, the euro area continues to face immense challenges, and the currency bloc is likely to be an ongoing source of financial market turbulence (see our article Portugal PSI unlikely in 2012, despite concerns about solvency, 7 March 2012).
However, given the firmer inflation outlook we now expect the ECB to hold the policy rate until at least the end of 2013
The risk of a disruptive euro break-up has receded but the currency bloc is likely to be an ongoing source of turbulence
Figure 3: Brent oil price

6m change, % 120 100 80 60 40 20 0 -20 -40 -60 -80 90 92 94 96 98 00 02 04 06 08 10 12
Figure 4: 10y government bond yields

% 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Spain Italy
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EQUITIES: SUMMARY OF RATING CHANGES

Rating Changes
Security
Basic Industries Minmetals Resources Ltd. Energy CGGVeritas Trilogy Energy Corp. Financial Services New China Life Insurance Co. Ltd. SulAmrica Healthcare Halozyme Therapeutics Inc. Industrials Air China Cathay Pacific Airways China Eastern Airlines China Southern Airlines Power & Utilities Covanta Holding Corp. Real Estate Campus Crest Communities, Inc. Retail Express Inc. Herbalife Ltd. Weight Watchers International Inc. Technology NEXON Telecommunications Belgacom BCOM.BR Michael Bishop European Telecom Services 3-Neg 5-Mar-12 2-EW 3-UW 3659.T Haruka Mori Japan Interactive Software 2-Neu 6-Mar-12 NA 1-OW EXPR HLF WTW Stacy Pak Brian Wang, CFA Brian Wang, CFA U.S. Retail Softlines U.S. Food & Drug Retailing U.S. Food & Drug Retailing 2-Neu 2-Neu 2-Neu 6-Mar-12 9-Mar-12 9-Mar-12 1-OW NA NA 2-EW 1-OW 1-OW CCG Ross L. Smotrich U.S. REITs 2-Neu 9-Mar-12 NA 2-EW CVA Gregg Orrill U.S. Power 2-Neu 5-Mar-12 2-EW 1-OW 0753.HK 0293.HK 0670.HK 1055.HK Patrick Xu, CFA Patrick Xu, CFA Patrick Xu, CFA Patrick Xu, CFA Asia ex-Japan Airlines Asia ex-Japan Airlines Asia ex-Japan Airlines Asia ex-Japan Airlines 2-Neu 2-Neu 2-Neu 2-Neu 7-Mar-12 7-Mar-12 7-Mar-12 7-Mar-12 NA NA NA NA 2-EW 3-UW 2-EW 3-UW HALO Ying Huang, Ph.D. U.S. Biotechnology 2-Neu 8-Mar-12 NA 1-OW 1336.HK Mark Kellock Hong Kong/China Insurance Latin America Diversified Financials 1-Pos 2-Neu 8-Mar-12 9-Mar-12 NA 1-OW 2-EW 3-UW GEPH.PA TET.TO Mick Pickup Grant Hofer, CFA European Oil Services & Drilling Canadian Oil & Gas: E&P (Mid-Cap) 1-Pos 1-Pos 2-Mar-12 6-Mar-12 1-OW 2-EW 2-EW 1-OW 1208.HK Ephrem Ravi Asia ex-Japan Metals & Mining 1-Pos 4-Mar-12 NA 2-EW
Ticker
Analyst
Sector
Sector View
Date
Old Rating
New Rating
SULA11.SA Henrique Caldeira, CFA
Sector View Changes

SubSector Japan Display & Lighting Asia ex-Japan Airlines Analyst Yuji Fujimoro Patrick Xu, CFA Date 6-Mar-12 7-Mar-12 Old 1-Positive 0-Not Rated New 2-Neutral 2-Neutral
Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative For a definition of our rating system, please see the equity disclosure section at the end of this report.
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CREDIT: SUMMARY OF RATING CHANGES

US High Grade
Sector Media Retail Technology Issuer Interpublic Group Macys IBM From Overweight Overweight Overweight To Market Weight Market Weight Market Weight Date Changed 6-Mar-12 5-Mar-12 6-Mar-12
US High Yield
Sector Metals & Mining Issuer Patriot Coal Security 7.375% and 7.625% senior notes From Market Weight To Underweight Date Changed 7-Mar-12
Europe High Grade

Sector Pharmaceuticals Utilities Utilities Issuer Merck Edison SpA RWE AG From Underweight Market Weight Overweight To Market Weight Underweight Underweight Date Changed 7-Mar-12 7-Mar-12 7-Mar-12
Europe High Yield

Sector Paper & Packaging Paper & Packaging Paper & Packaging Issuer Ardagh Packaging Ardagh Packaging Ardagh Packaging Security 9.25% notes 2016 & 7.375% notes 2017 New 7.375% notes 2017 9.125% notes 2020 From Overweight Initiating Coverage Initiating Coverage To Market Weight Market Weight Overweight Date Changed 8-Mar-12 8-Mar-12 8-Mar-12
Asia Ex-Japan
Sector Industrials & Resources Industrials & Resources Issuer Berau Coal 2017 bonds China Oriental CHOGRP 15s From Initiating Coverage Market Weight To Market Weight Underweight Date Changed 9-Mar-12 7-Mar-12
For a definition of our ratings system, please see fixed income disclosure section at the end of this report.
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CREDIT: SELECT RATING CHANGES

Relative Value
Merck Robust results, reassuring outlook upgrade to Market Weight

From a valuation perspective, we would note that Merck cash has underperformed our wider industrial universe in the recent rally over the last rolling quarter (see European High Grade Industrial Excess Returns - February 2012). Accordingly given management's focus on deleveraging in 2012, the relatively re-assuring outlook and the guidance from management that deals will be small and bolt-on in nature, we move to a Market Weight position in cash. Similarly, we now view CDS as fairly valued.
7 March 2012 Darren Hook, Nick Macdonald
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MACRO: SELECT FORECAST CHANGES

Japan 2012 GDP growth to 2.4% from 2%
Japan Could Outpace G7 Peers from Q2

9 March 2012 Kyohei Morita Yuichiro Nagai James Barber, CFA
The sharp upward revision to Q4 GDP growth, to -0.7% q/q (saar) from the initial estimate of -2.3%, has led us to raise our 2012 growth forecast to 2.4% from 2.0% previously. Underpinning this is a marked upward revision to our Q1 forecast, to 2.6% from 1.5% previously, reflecting upgrades to our views of household consumption and export demand.
ECB rates on hold until at least end of 2012
Greece Drama close to an end (at least for now)

9 March 2012 Fabio Fois Antonio Garcia Pascual
The ECB has shown itself reluctant to look through the first-round effects of higher oil prices on inflation: indeed, in light of this weeks upward revision to the ECBs inflation forecast for 2012 we no longer expect a rate cut in Q2 and now think the policy rate is likely to be held at 1% until at least the end of 2013. If policy were to be unsupportive, the resultant squeeze on growth could be a serious hindrance to the necessary fiscal and economic adjustment in the region.
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PRODUCT MANAGEMENT GROUP
Equities
Penn Egbert Head of U.S. Equity Product Management +1 212 526 0685 penn.egbert@barcap.com Rob Bate Head of European Equity Product Management +44 (0)20 777 33576 rob.bate@barcap.com Marcus Gunn Head of Asia Equity Product Management +852 290 34620 marcus.gunn@barcap.com Gavin Smith U.S. Equity Product Management +1 212 528 6139 gavin.smith@barcap.com Joshika Bhasin European Equity Product Management +44 (0)20 355 52530 Joshika.bhasin@barcap.com Sue Ho Asia Equity Product Management +852 290 34518 sue.ho@barcap.com Rex Feng U.S. Equity Product Management +1 212 526 6114 rex.feng@barcap.com Chris Stevens European Equity Product Management +44 (0)20 313 45749 chris.stevens@barcap.com Terence Malone U.S. Equity Product Management +1 212 526 7578 terence.malone@barcap.com
Credit
Joanie Genirs Head of Global Credit Product Management +1 212 412 7678 joan.genirs@barcap.com Katie Tomlinson European Credit Product Management +44 (0)20 777 37865 katie.tomlinson@barcap.com
Macro
Namita Dhariwal Macro Research Product Management +44 (0)20 313 44212 namita.dhariwal@barcap.com
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ANALYST(S) CERTIFICATION(S) I, Gavin Smith, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Each research publication excerpted herein was certified under Reg AC by the analyst primarily responsible for such report as follows: I hereby certify that: 1) the views expressed in this research report accurately reflect my personal views about any or all of the subject securities referred to in this publication and; 2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURES: FIXED INCOME RESEARCH For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgibin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the firm) regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firms proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firms fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firms fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. In order to access Barclays Capitals Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-researchdissemination.html. Explanation of the High Grade Sector Weighting System Overweight: Expected six-month excess return of the sector exceeds the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Market Weight: Expected six-month excess return of the sector is in line with the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Underweight: Expected six-month excess return of the sector is below the six-month expected excess return of the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index, as applicable. Explanation of the High Grade Research Rating System The High Grade Research rating system is based on the analysts view of the expected excess returns over a six-month period of the issuers index-eligible corporate debt securities relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index or the EM Asia USD High Grade Credit Index, as applicable. Overweight: The analyst expects the issuers index-eligible corporate bonds to provide positive excess returns relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Market Weight: The analyst expects the issuers index-eligible corporate bonds to provide excess returns in line with the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Underweight: The analyst expects the issuers index-eligible corporate bonds to provide negative excess returns relative to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating. For Australia issuers, the ratings are relative to the Barclays Capital U.S. Credit Index or Pan-European Credit Index, as applicable. Explanation of the High Yield Sector Weighting System Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. 11 March 2012 26
IMPORTANT DISCLOSURES CONTINUED: FIXED INCOME RESEARCH Explanation of the High Yield Research Rating System The High Yield Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to either some or all of the companys debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertain the application of the rating system to that company. Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating.
11 March 2012
27
IMPORTANT DISCLOSURES: EQUITY RESEARCH For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firms total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays Capital policy prohibits them from accepting payment or reimbursement by any covered company of the their travel expenses for such visits. In order to access Barclays Capitals Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Other Material Conflict(s) Barclays Capital is providing investment banking services to Ventas, Inc. (VTR) in connection with its acquisition of Cogdell Spencer Inc. (CSA). Barclays Capital is providing investment banking services to ACCO Brands Corporation (ABD) in its proposed merger with MeadWestvaco Corporation's (MWV) Consumer & Office Products business. All ratings, price targets and estimates (as applicable) on ACCO Brands (ABD) and MeadWestvaco (MWV) issued by the Firm's Research Department have been temporarily suspended due to Barclays Capital's role in this potential transaction. Barclays Capital is acting as financial advisor to Exelon Corporation in the potential acquisition of Constellation Energy. The rating, price target and estimates on Exelon Corporation have been temporarily suspended due to Barclays Capital's role. The rating, price target and estimates on Constellation Energy have also been suspended. Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the sector coverage universe). In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating. Distribution of Ratings: Barclays Capital Inc. Equity Research has 2232 companies under coverage. 42% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of companies with this rating are investment banking clients of the Firm. 42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Firm. 13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 39% of companies with this rating are investment banking clients of the Firm. 11 March 2012 28
Barclays Capital | Global Portfolio Managers Digest Guide to the Barclays Capital Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analysts expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analysts price target over the same 12-month period. Barclays Capital offices involved in the production of equity research: London Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) So Paulo Banco Barclays S.A. (BBSA, So Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCC, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Capital Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)
11 March 2012
29
DISCLAIMER This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority (FSA) and member of the London Stock Exchange. Barclays Capital Inc., U.S. registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019. Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. Barclays Bank PLC, Paris Branch (registered in France under Paris RCS number 381 066 281) is regulated by the Autorit des marchs financiers and the Autorit de contrle prudentiel. Registered office 34/36 Avenue de Friedland 75008 Paris. This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca). Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital. In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutional investors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143. Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queens Road Central, Hong Kong. This material is issued in Taiwan by Barclays Capital Securities Taiwan Limited. This material on securities not traded in Taiwan is not to be construed as recommendation in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade in such securities. This material may not be distributed to the public media or used by the public media without prior written consent of Barclays Capital. This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch. All equity research material is distributed in India by Barclays Securities (India) Private Limited (SEBI Registration No: INB/INF 231292732 (NSE), INB/INF 011292738 (BSE), Registered Office: 208 | Ceejay House | Dr. Annie Besant Road | Shivsagar Estate | Worli | Mumbai - 400 018 | India, Phone: + 91 22 67196363). Other research reports are distributed in India by Barclays Bank PLC, India Branch. Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin). This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd. 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Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi). Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLC-QFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. Related financial products or services are only available to Business Customers as defined by the Qatar Financial Centre Regulatory Authority. This material is distributed in the UAE (including the Dubai International Financial Centre) and Qatar by Barclays Bank PLC. This material is distributed in Saudi Arabia by Barclays Saudi Arabia (BSA). It is not the intention of the Publication to be used or deemed as recommendation, option or advice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al Faisaliah Tower, Level 18, Riyadh 11311, Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number: 1010283024. This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21. This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583. Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at wholesale clients as defined by Australian Corporations Act 2001. IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Barclays Capital is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference. Copyright Barclays Bank PLC (2012). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request.

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CROSS-ASSET RESEARCH

GLOBAL PORTFOLIO MANAGERS DIGEST

Global Strategy & Economic Outlook

Chart of the Week Inflation Choke Point and Consumer Spending

Key Inflection Points

Barclays Capital | Global Portfolio Managers Digest

BARCLAYS MACRO, COMMODITIES AND FX FORECASTS

Central Bank Rates

Global Bond Yields

Barclays Capital | Global Portfolio Managers Digest

Conferences & Special Events

Replays from the Past Week

Barclays Capital | Global Portfolio Managers Digest

THE DATA MINER: DISSECTING DIVIDENDS REMOVING UNINTENDED EXPOSURES

Barclays Capital | Global Portfolio Managers Digest

Figure 1: Highest Pure Dividend Yielding Stocks (continued)

Barclays Capital | Global Portfolio Managers Digest

BEST OF BARCLAYS: ASSET ALLOCATION SNAPSHOT

The oil factor

Brent $/brl (LHS)

VIX index (RHS)

Barclays Capital | Global Portfolio Managers Digest

BEST OF BARCLAYS: EURO THEMES - PORTUGAL

PSI unlikely in 2012, despite concerns about solvency

Barclays Capital | Global Portfolio Managers Digest

BEST OF BARCLAYS: EUROPEAN BANKS

Over promising: Encumbrance at European banks

Source: ECB, ECBC, Barclays Capital.

Barclays Capital | Global Portfolio Managers Digest

BEST OF BARCLAYS: US INDEX AND OPTIONS

Cross-asset volatility relative value

Long and Short Equity, in Index and in Volatility

Barclays Capital | Global Portfolio Managers Digest

U.S. EQUITY STRATEGY

Were not gonna party like its 1995

10.2 8.5 6.8 5.2 2.9

2012e: $4.00 avg price

Barclays Capital | Global Portfolio Managers Digest

Dissecting dividends: Signpost for a market drop?

Barclays Capital | Global Portfolio Managers Digest

EMEA EQUITY STRATEGY

Plugging into lower credit yields

Source: Barclays Capital, DataStream

Barclays Capital | Global Portfolio Managers Digest

AMERICAS CREDIT STRATEGY

Figure 1: Weekly Index Changes

Figure 2: Spain and Italy 5y CDS (bp)

4-week Average 173 96.6 101.61 97.47 93.67 94.61

475 425 375 325 1-Jan

Source: Barclays Capital

Source: Bloomberg, Barclays Capital

Barclays Capital | Global Portfolio Managers Digest

Barclays Capital | Global Portfolio Managers Digest

EUROPEAN CREDIT STRATEGY

Technicals are overwhelming a challenging fundamental picture for the moment

Figure 1: Key indices weekly performance

Source: Barclays Capital

Source: Barclays Capital

Barclays Capital | Global Portfolio Managers Digest

Barclays Capital | Global Portfolio Managers Digest

ASIA CREDIT STRATEGY

Soft China data no match for strong technicals

Stay invested in better-quality credits and keep macro hedges in place