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Connecting Markets East & West

Equity Research

Quantitative Equity Strategy


Quantitative Strategy

Inigo Fraser Jenkins NIplc

Alla Harmsworth NIplc

Paul Danis NIplc

Mark Diver NIplc

+44 20 7102 4658


inigo.fraser-jenkins@nomura.com

+44 20 7102 2219

+44 20 7102 3406

+44 20 7102 2987

alla.harmsworth@nomura.com

paul.danis@nomura.com

mark.diver@nomura.com

Gerard Alix Guerrini NIplc


+44 20 7102 8153
gerard.guerrini@nomura.com

Rohit Thombre

Robertas Stancikas NIplc

+91 22 305 32561


rohit.thombre@nomura.com

+44 20 7102 3127


robertas.stancikas@nomura.com

Quantitative Solutions Industry Specialists

Ethan Brodie NSI


+1 212 667 1076
ethan.brodie@nomura.com

Bhavik Shah NIplc


+44 20 7103 9988
bhavik.shah@nomura.com

Sarah McCarthy NIplc

Norman Pfeifer NIplc

+44 20 7103 9988


sarah.mccarthy@nomura.com

+44 20 7103 9988


norman.pfeifer@nomura.com

Rupal Agarwal
+91 22 6723 5436
rupal.agarwal@nomura.com

October 2014

See Appendix A-1 for analyst certification, important


disclosures and the status of non-US analysts.
Any authors named on this report are research
analysts unless otherwise indicated.

Introduction
Market outlook
Are earnings growing in Europe?
Global quant equity portfolio:

Tactical factor allocation: Buy growth over income as rates rise

Strategic quant trades

Long horizon concentrated strategies


Sector allocation and current trade ideas
Fund-management strategy
Is passive the new active?

Natural weighting

Cross-asset alternative beta/risk premia investing

EM country selection
Website, recommended strategy portfolio

Market outlook

European EPS and market multiple

European EPS and the market multiple


Ratio

23

Earnings
trough

Earnings
trough

Multiple
peak

Multiple peak

Multiple expansion following earnings troughs


Earnings
trough

Multiple
peak

Ratio

350

21
300
19
17

250

15
200
13

Multiple
peak

Multiple
change (PE
points)

Trailing earnings
30/06/1976

11.5

30/04/1979

10.30

35

-1.20

31/01/1984

12.9

31/01/1984

12.90

0.00

31/03/1993

14.7

31/01/1994

16.24

10

1.53

30/06/2003

12.6

27/02/2004

13.35

0.78

31/07/2009

12.6

30/09/2009

13.34

0.78

0.78

Forward Earnings

11

150

9
100

Market Multiple (LHS)

7
5
Jan-88

Earnings trough

Multiple at
earnings trough

Number of
months from
earnings trough
to multiple peak

Peak
multiple
attained

European EPS (RHS)


50
Jan-91

Jan-94

Jan-97

Jan-00

Source: Datastream, IBES, Nomura Strategy research

Jan-03

Jan-06

Jan-09

Median

Jan-12

European 10-year inflation-adjusted earnings and current


earnings

European and US Shiller P/E

Index

Ratio

115

50
US Shiller PE

45

110
Europe Shiller PE

40

105

35
100
30
95
25
90
Consensus
2015
forecast

20
85
15
80

10

75

5
0
Jan-1881

Jan-1905

Jan-1929

Source: Nomura Strategy research, Shiller database

Jan-1953

Jan-1977

Jan-2001

70
Jan-80

Current earnings

Jan-85

Jan-90

Jan-95

Jan-00

Jan-05

Jan-10
4

Earnings versus monetary policy: Drivers of eurozone


equities

Absolute equity returns

Equities Relative to Bonds

Coefficients

t Stat

Intercept

6.7

1.2

Fwd PE
12m fwd gth in trail
eps

-0.1

-0.3

0.2

Fed Dummy
Europe dummy

Absolute equity returns

Coefficients

t Stat

Coefficients

t Stat

Intercept

7.2

2.9

Intercept

11.8

1.9

-0.4

-0.9

4.0

ERP
12m fwd gth in trail
eps

-0.2

-0.5

3.9

Fwd PE
12m fwd gth in trail
eps

0.2

0.2

3.3

10.2

1.0

Fed Dummy

9.3

0.9

Fed rates

0.7

0.9

0.4

0.1

Europe dummy

0.2

0.0

Europe rates

-1.3

-2.1

Figure shows the result of a regression of 12-month forward equity returns and 12-month forward returns of equities relative to bonds on start-of-period valuations and monetary policy. In the two left
tables, the monetary policy is represented by a dummy variable that takes the value of 1 on the first hike of a cycle and zero otherwise, in the right panel we use the actual level of short-term rates.
In the US, we use Fed funds target rate, in the euro area before the introduction of the EUR we use an avg of the French and German short-term rates. Regression is run from 1989 to 2013 for the
dummy regressions and 1992 to 2013 for the short rate regressions.
Source: Nomura Strategy research

Flow-based sentiment indicators


Global mutual fund activity indicator*
4

Global net issuance and 12-month forward returns

Feb 1998
Aug 2014
Z-score

2.5
Strong flows indicative of bullish sentiment

12 month trailing
net issuance (%
mcap)

Global Net Issuance (LHS)

12 month forward
returns (%)

Global 12m Fwd Returns (RHS, inverted)

-70
-50

2.0

-30

1.5

-10
1.0

10

0.5
1

30

0.0
Jan-89

50
Jan-93

Jan-97

Jan-01

Jan-05

Jan-09

Jan-13

Source: SDC, Dealogic, Bloomberg, Datastream, Nomura Strategy research

Cross-border equity flows*


2.5
2.0

-1

Flows as % of
Market Cap,
3MMA

1.5
1.0
0.5

-2

0.0
-0.5
Weak flows indicative of bearish sentiment

-3
Feb-98

-1.0
-1.5

Feb-01

Feb-04

Feb-07

Feb-10

Feb-13

*Mutual fund net inflows are based on US net purchases of all equity mutual funds as well as net purchases of European, Japanese and
Global Emerging markets funds. US and Global Emerging market flows are measured as the 12-week moving average of flows
expressed as a percentage of US and GEM market capitalisation, while European and Japanese figures are measured in relation to
reported assets under management. Return series is 12-week forward local currency return of Datastream World Index. ** Z-score is
measured in standard deviation and is a rolling 2-year average. Japanese data prior to July 2005 is based on retail flows as a % a
Japanese market cap. Source: AMG, EPFR, Datastream, FTSE, Nomura Strategy research

-2.0
Jan-87

Jan-92

Jan-97

Jan-02

Jan-07

Jan-12

*Purchases of international equities by US, European & Japanese investors. Source: Nomura strategy research, US
Treasury, ONS, ECB (from Jan 1998), Bank of France, Bank of Japan, Bundesbank, Sveriges Riksbank. The latest data
point is estimated from weekly frequency data Source: EPFR, Nomura Strategy research

Cumulative net flows into European equity mutual funds & ETFs
USD bn

Equity holdings and total financial assets


USD trn

USD trn

0
Total Financial Assets (LHS)

160

Equity (RHS)

-20

35

140
30

-40

120
-60

25
100

-80

20
80

-100

15

60
-120

10

40
-140

20

Source: EPFR, Nomura Strategy research

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Jun-14

Dec-10

Jun-13

Jun-10

Jun-12

Dec-09

Jun-11

Jun-09

Jun-10

Dec-08

Jun-09

Jun-08

Jun-08

Dec-07

-180
Jun-07

Jun-07

-160

Chart shows aggregate holdings of equity and total financial assets of Households and Insurance
companies and pension funds domiciled in the US, eurozone, Japan and the UK. The equity aggregate
includes holdings of mutual funds, but excludes unquoted equity and other equity where possible.
Source: US Federal reserve, ECB, ONS, BOJ, Nomura Strategy research

Composite sentiment indicator

1 Year Z-score

2.0
Sentiment optimistic
Future market weakness

1.5
1.0
0.5

-0.6

0.0
-0.5
-1.0
-1.5

Sentiment pessimistic
Future market strength

Our composite sentiment indicator combines five different sentiment signals: Mutual flows, Nasdaq speculative positioning, Investors Intelligence survey, Put-call ratios and Implied to realised volatility.
Source: Nomura Strategy research

Jul-14

Jan-14

Jul-13

Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Jul-03

Jan-03

Jul-02

Jan-02

Jul-01

Jan-01

-2.0

Historical efficacy of the composite sentiment indicator

Index
400
350
300
250
200
150
100
50
0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

CSI - combines five different sentiment signals: Mutual flows, Nasdaq speculative positioning, Investors Intelligence survey, Put-call ratios and Implied to realised volatility.
Source: Nomura Quantitative Strategy research

2011

2012

2013

EM country correlation (rolling 6-month window, daily)

Correlation
0.6

6 month rolling correlation

3 month correlation

0.5
0.4
0.3
0.2
0.1
0.0
Aug-01

Aug-03

Aug-05

Aug-07

Aug-09

Aug-11

Aug-13

Daily average pairwise correlation between 14 MSCI EM country indices with a 130-day rolling window. Countries considered - Egypt, South Africa, Turkey, Czech Republic, India, Indonesia, Chile,
Poland, Hungary, Russia, Peru, Brazil, Thailand, South Korea. Source: Nomura Strategy research

10

EM flows
Monthly net purchases of global emerging market funds
(GEM)* and 12-month forward GEM returns relative to
developed markets, 1996 - Aug 2014

Difference between GEM flows and regional flows

2.5

Flows as % of
EM Market Cap,
12MMA Ann

2.5
GEM Flows

Region Flows

2.0

2.0

1.5

1.5

Flows as % of
GEM Market Cap,
12MMA Ann

Net Purchases of Global Emerging


Markets * (LHS)

-60

Global Emerging Market Return relative


to Developed (RHS, Inverted)

-40

1.0

-20
1.0

0.5
0.5

0.0
-0.5

0.0
20

-1.0
-0.5
-1.5

40
-1.0

-2.0
-2.5
Jan-96

Correl: -0.71

Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

Jan-14

Chart shows 12-month moving average of annualised monthly net purchases of GEM funds expressed as a percentage of
global emerging market capitalisation. The Region Flows line is the sum of dedicated regional Asia ex Japan, LatAm and
emerging EMEA flows on the same basis. Source: EPFR, FTSE, Nomura Strategy research

-1.5
Jan-96

60
Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

*Purchases of Global Emerging Market Equity Funds as a percentage of market capitalisation,


12 Month Moving Average.
Sources: EPFR, FTSE, Datastream, Nomura Strategy research

Jan-14

11

Reliability of GEM flow indicator

Fwd Relative Returns (EM-DM)


1m

2m

3m

ERP (%)
6m

9m

12m

EM

ERP spread
DM

EM-DM

31/10/2000

-1.8%

0.3%

11.9%

9.2%

9.0%

9.3%

4.5

1.8

2.7

31/12/2001

6.6%

9.9%

11.6%

12.5%

14.6%

15.9%

2.8

1.6

1.2

31/03/2003

-0.8%

0.5%

4.6%

13.7%

15.5%

23.9%

9.7

6.1

3.7

30/04/2007

2.4%

6.9%

14.2%

25.3%

19.2%

25.4%

4.7

4.7

0.0

31/10/2008

-0.9%

2.8%

5.5%

23.6%

33.3%

38.1%

14.6

11.4

3.2

30/12/2011

5.7%

6.9%

1.8%

-2.6%

-2.3%

0.4%

9.7

9.9

-0.2

31/01/2014

-1.6%

1.8%

1.0%

1.4%

4.2%

7.2%

13.6%

14.9%

18.8%

7.7

6.0

1.7

Average

Source: Nomura Quantitative strategy

12

Relative equity risk premium and relative forward returns

% yoy

Forward Excess Returns (RHS)

Relative ERP of EM relative to World (LHS)

60

50

40

30

20

10

-1

-10

-2

-20

-3
Jul-00

Jul-02

Jul-04

Jul-06

Jul-08

Jul-10

The equity risk premium is calculated as the difference between the market cap-weighted earnings yield and the real bond yield for both FTSE World and FTSE AW Emerging Markets.
Source: Factset, IBES, Datastream, FTSE, Bloomberg, Nomura Quantitative strategy

Jul-12

-30
Jul-14

13

Multi-asset correlation (90 day)

Index volatility - Factor volatility (Global)


%

Correlation
coefficient

0.7

5
0.6

4
3

0.5
2
1

0.4

0
0.3

-1
-2

0.2

-3
0.1

Weekly average of absolute pairwise-correlations between returns of different asset classes over a 90-day rolling
window. Asset classes considered - FTSE World Index (proxy for developed equities), FTSE EM Index (proxy for
EM equities), dollar spot, gold spot, US govt. 10y bond, commodity index, credit spread indices (investment
grade and high yield). Source: Nomura Quantitative strategy

Sep-14

Jul-14

May-14

Mar-14

Jan-14

Nov-13

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

Sep-05

-4

Chart shows 75 day rolling realised volatility of the FTSE World index less the average 75-day rolling
volatility of Value, Growth, Momentum, Risk and Quality for a global universe. Note that the underlying factor
indices are long-short $-neutral. Source: Nomura Quantitative strategy

14

Are earnings growing in Europe?

Micro to macro earnings indicator


European 12m forward EPS and European light commercial
vehicle sales
% y/y
40
30

European 12m forward EPS and Frankfurt airport freight


volumes

%
y/y

European 12-month fwd EPS (LS)


European new light commercial vehicle sales (Advanced
2-months, RS)

% y/y

Frankfurt airport air freight volumes (Advanced 4-months, RS)

40

25

20

15

10

-5

30

-15

-20
-25

-30

20

10

10

-10

-10

-20
-20

-30

-35

-40

-45
Apr-03

Apr-06

Apr-09

European 12-month fwd EPS (LS)

% y/y

European hotel occupancy rate (Advanced 3-months, RS)

40
30
20
10
0
-10
-20
-30
-40
Apr-00

Apr-03

Apr-06

Source: Datastream, IBES, Nomura Strategy research

-40
Apr-97

-30
Apr-00

Apr-03

Apr-06

Apr-09

Apr-12

Apr-12

European 12m forward EPS & European hotel occupancy rate

-50
Apr-97

30

20

-10

-50
Apr-00

% y/y

European 12-month fwd EPS (LS)

Apr-09

Apr-12

y/y chg
(%)

8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14

European 12m forward EPS and global oil & gas rig count
% y/y
40

% y/y
50

European 12-month fwd EPS (LS)


Global oil & gas rig count (RS)

30

40

20

30

10

20
10

-10

-10

-20

-20

-30

-30

-40

-40

-50
Apr-97

-50
Apr-00

Apr-03

Apr-06

Apr-09

Apr-12

16

Micro to macro earnings indicator


European 12m forward EPS and global steel production
% y/y
40

Regression statistics
% y/y

European 12-month fwd EPS (LS)

R2: 79%

35

Global steel production (advanced 5-months, RS)

30

25

Variable (months advanced)

Coefficient

t-stat

20
10
0
-10

15

European Hotel Occupancy (3m)

2.27

3.21

Frankfurt cargo volumes (4m)

2.16

3.37

World Steel Production (5m)

1.81

2.42

Global Oil/Gas rig count (0m)

2.98

3.03

Europe light commercial vehicle registrations (2m)

3.32

5.54

Constant

5.64

7.61

-5

-20

-15

-30
-25

-40
-50
Apr-97

-35
Apr-00

Apr-03

Apr-06

Apr-09

Apr-12

In the above table, we regress the y/y% change in European 12m fwd EPS on the Z-scores (expanding window
from Jan. 2000) of the y/y% change in European hotel occupancy rate, Frankfurt airport cargo volumes, World
Steel Production, Global Oil/Gas Rig count and European light commercial vehicle registrations advanced by 3, 4,
5, 0 and 2 months, respectively.

European 12m forward EPS and micro-macro indicator


40

% y/y

Z score

30

European 12-month fwd EPS (LS)

Micro-macro indicator*

20

10

0
-10

-1

-20

-2

-30

-3

-40
-50
Apr-97

-4
Apr-00

Apr-03

Apr-06

Apr-09

Apr-12

* Includes the European hotel occupancy rate, European light commercial vehicle sales, Frankfurt airport freight/mail volumes, global oil & gas rig count and global steel production.
Source: Datastream, IBES, Fraport, STR Global, Nomura Strategy research

17

Nomura medium-term macro model for European


earnings

% y/y

Europe 12m forward EPS level (LS)

Medium-term model* (R2 = 75%)

30
20
10
0
-10
-20
-30
-40
Jan-92

Jan-95

Jan-98

Jan-01

Jan-04

Jan-07

Jan-10

Jan-13

*Includes Spanish/German 10-year government bond yield spread, euro area M1 money supply, US corporate bond yield spread over Treasury, US unemployment initial claims, and global
semiconductor sales. R2 = 75%
Source: IBES, Datastream, Nomura Strategy research

18

European earnings and economic sentiment

Gap between economic sentiment indicator and earnings

Index

40

European consensus EPS revision balance* (LS)

125

EU economic sentiment indicator (RS)

20
15

20

115
10

105

5
0

-20

95
-5

-40

85

-10
-15

-60

75
-20

-80
Jan-88

65
Jan-92

Jan-96

Source: Nomura Strategy research

Jan-00

Jan-04

Jan-08

Jan-12

-25
Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12
19

Change in lending standards and subsequent loan growth


% y-o-y
Bank lending to non financial business (LS)

Strong European currencies are weighing on earnings


%
-30

20
Net change in lending standards to firms last quarter
(inverted, advanced 5-quarters, RS)

%
40

Market cap weighted European currency index* (RS)


European
currencies
weakening

-20
20

15

y/y %

European 12m fwd EPS revision balance* (LS)

20

-10
0
10

25

15
10

10
5
5

20

-20
0

30
0
40

-5

-40

-10

50
-5

European
currencies
strengthening

-60
60

-10
Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015

Source: Nomura Strategy research

70

-80
Jan-88

-15
-20

Jan-92

Jan-96

Jan-00

Jan-04

Jan-08

Jan-12

20

US pent-up capex: key potential positive


US private fixed investment in equipment and cost
average age: non-residential equipment/software

Rising US capacity utilisation

% y/y

US Capacity Utilisation Mfg- SA

25

85

Average age of non-resisdential equipment


(advanced 1-yr, RS)

20

80

Years

US private fixed investment in equipment (LS)

7.5

15

7.3

10

75

70

65

-5

7.1
6.9

-10

60

6.7

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

-15
6.5

-20
1991

1996

Capex intentions and policy uncertainty


50

2006

2011

Capex/depreciation for European sectors


Index

Philly Fed survey of capex intentions (LHS)

2001

Ratio

3.0

50

2.5

100

2.0

150

1.5

200

1.0

250

0.5

300

0.0
Jan-88

Capital Goods
Technology
Telecoms

US economic policy uncertainty (Inverted, RHS)


40

Consumer Cyclicals
Utilities

30
20
10
0
-10
-20
-30
Jan-85

Jan-89

Jan-93

Jan-97

Source: Bloomberg, Nomura Strategy research

Jan-01

Jan-05

Jan-09

Jan-13

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Jan-09

Jan-12

21

Consensus implies a large gap between US and


European margins: we think it might close

FY3

22%
Europe

FY2

US

21%
FY1

20%
19%

FY3
FY2

18%
17%

FY1

Source: IBES, Nomura Strategy research

Jul-14

Jan-14

Jul-13

Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

16%

22

US profit margins at a turning point?


US profit margins typically fall on the back of labour market
gains, with a lag
%

We are now past the point in the cycle when profit margins
begin to fall
%

US non financial corporate profit margins


US unemployment rate (advanced 2.5-years)

11

17

?
10
15
9
13

Mar-73

4.9

12.9

20

1.2

Sep-77

6.8

13.4

29

2.2

Jun-84

7.2

11.8

19

3.6

Sep-97

4.9

13.3

64

2.9

Sep-06

4.5

14.5

40

1.8

Average

5.7

13.2

34.4

2.34

Median

4.9

13.3

29

2.2

Current

6.3

14.9

55 (so far)

3.7 (so far)

11

6
9
5
7

5
Mar-70

Mar-80

Mar-90

Mar-00

Date of
profit
margin
peak

Months from the


Decline in
peak in the
unemployment
unemployment
rate
rate and the
experienced
Profit
subsequent
before profit
margin
US
peak in profit
margins
unemployment peak
margins*
peaked*
level
rate

Mar-10

*Non-financial profits (w/ inventory and CC adjustment) as a share of non financial gross product
Source: Datastream, Nomura Strategy research

23

Factor allocation and global quant equity portfolio

Global factor views

Long

Neutral

Short

Source: Bloomberg, Nomura Quantitative strategy

Growth (global)
Risk (global)
Large caps (Europe)
Gearing
Value (global)
Momentum (global)
Quality (global)
Dividend yield

25

European growth vs income and 5y5y inflation

Ratio

Growth/Income (LHS)

5y5y inflation (RHS)

110

2.3

105

2.2
2.2

100
2.1
95
2.1
90
2.0
85

2.0

80
Jan-14

1.9
Feb-14

Mar-14

Apr-14

Chart shows the relative performance of Growth over income (both long-short) and 5y5y inflation.
Source: Nomura Quantitative Strategy research

May-14

Jun-14

Jul-14

Aug-14

Sep-14

26

Growth has been de-rated...

Valuation of Global Composite Growth

Valuation of European Composite Growth

Ratio

Ratio

Global Composite
Growth - 12mth Fwd
P/E

5.0

Global Composite
Growth - Price/Book

4.5

Europe Composite Growth - 12mth Fwd P/E


Europe Composite Growth - Price/Book

4.0
3.5

3.0
3

2.5
2.0

2
1.5
1.0

0.5
0
Jan-90

Jan-94

Source: Nomura Strategy research

Jan-98

Jan-02

Jan-06

Jan-10

Jan-14

0.0
Jan-90

Jan-94

Jan-98

Jan-02

Jan-06

Jan-10

Jan-14

27

and expectations for growth companies have been


significantly cut

Long-term expected earnings growth for Global Composite


Growth Style

Earnings revisions for Global Composite Growth Style

25

Net earnings
revisions %,
(up -down) /
total, 3MMA

16

20

15

15

14
13

10

12
5

11
0

10
-5

9
-10

-15
-20
Jan-90

Jan-94

Source: Nomura Strategy research

Jan-98

Jan-02

Jan-06

Jan-10

Jan-14

6
Jan-90

Jan-94

Jan-98

Jan-02

Jan-06

Jan-10

Jan-1
28

US rates and factor performance

Rate cycles and factor performance

Growth relative to income and Fed funds rate


%
15

Income
31/03/1972
30/04/1976
31/08/1977
31/10/1980
30/03/1984
31/12/1986
31/03/1988
28/02/1994
30/06/1999
30/06/2004
Avg
Median
All period average

22.3%
9.1%
-24.8%
6.5%
4.6%
-1.8%
-2.9%
4.5%
-43.4%
4.5%
-2.1%
4.5%
-2.6%

Growth

9.6%
48.5%
-4.5%
17.9%
9.6%
1.9%

Momentum

Value

34.6%
3.1%
15.2%
10.4%
22.5%
17.6%
20.6%
-6.2% -0.2%
53.5% -46.0%
4.4% 17.8%
17.6% -9.5%
16.4% -0.2%
-0.9%
2.6%

Gearing

Quality

US Federal Funds Target Rate (LHS)

150

Growth-Income 2 yr (RHS)

Risk

10
100

5
-7.6%
-39.7%
8.9%
-12.8%
-7.6%
-1.0%

8.6%
-7.5%
-6.6%
-1.8%
-6.6%
1.2%

3.0%
25.0%
0.2%
9.4%
3.0%
4.9%

50
0
0
-5

-50
-10

-15
Dec-72
Shows one-yr fwd returns after the first hike in each cycle for our post-88 internal styles and the longer-term Ken
French styles. Avg and Median refer to the average and median of the one-yr fwd returns after the first hike while the
all period average refers to the average monthly returns of the respective series over the whole sample period
regardless of monetary policy. Source: Nomura Quantitative Strategy research

-100
Dec-78

Dec-84

Dec-90

Dec-96

Dec-02

Shows two-year returns from growth-income and changes in the Fed rate.
Source: Nomura Quantitative Strategy research

Dec-08

29

US rates and factor performance

Low-high yield and fed funds rate

Performance of momentum and fed funds rate

Index

Fed Fund
Rate, %

135

Fed Fund
Rate, %

Index
20

Low-high yield (LHS)

9065

High-low mtm (LHS)

12

US Federal Funds Target Rate (EP) (RHS)


18

US Federal Funds Target Rate (EP) (RHS)


125

8065

10

16
7065
115

14
6065
6

12

105

5065
10

4
4065

95

8
6

85

2
3065
0

2065

75
2
65
Dec-78

Dec-83

Dec-88

Dec-93

Dec-98

Dec-03

Dec-08

0
Dec-13

Chart shows the relative performance of low-high yield stocks (ie, the INVERSE of an income strategy) and the
Fed funds rate. Source: Nomura Quantitative Strategy research

-2

1065
65
Dec-85

-4
Dec-90

Dec-95

Source: Nomura Quantitative Strategy research

Dec-00

Dec-05

Dec-10
30

US GDP cycles and factor performance

Early recession
Style

Price to Book (cheap/expensive)


Momentum (high/low)
Price to Cashflow (cheap/expensive)
Dividend Yield (cheap/expensive)
PE, trailing (cheap/expensive)
Size (Large/Small)

Average
return all
periods, %pa
11.40
7.25
8.36
-0.14
7.11
-12.45

Return,
t-stat
%pa
7.98
15.41
15.72
10.76
15.71
10.46

1.14
2.50
3.65
2.41
3.63
1.24

Late recession
Return,
t-stat
%pa
7.90
-8.30
4.47
-1.16
2.90
-16.70

1.10
-1.47
1.08
-0.28
0.70
-2.20

Early expansion
Return,
t-stat
%pa
20.68
8.04
12.08
4.81
11.78
-15.86

4.50
2.18
5.19
1.84
5.04
-3.43

Mid expansion
Return,
t-stat
%pa
12.19
8.58
9.75
-3.54
8.25
-5.91

2.75
2.33
4.37
-1.41
3.70
-1.22

Late expansion
Return,
t-stat
%pa
11.38
14.89
4.20
-2.22
2.13
-7.39

2.59
3.93
1.94
-0.88
0.99
-1.54

Note: Shows the return to factor portfolios in different market environments from 1926 to 2013. Factor returns are the annualised spread in returns between top and bottom quintile on each of the factors shown sourced from
the Kenneth French data library available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/index.html. Periods of expansion and contraction are as defined by the NBER. Last recession ended in June 2009, so the
analysis has only been run until that point in time. Source: Kenneth French Data Library, NBER, Nomura Quantitative Strategy research

31

UK rate cycles and factor performance

30/06/1988
30/09/1994
31/10/1996
30/09/1999
27/02/2004
31/08/2006
Avg
Median
All period average

Income

Growth

Value

Gearing

Quality

Risk

-2.99%
-9.74%
13.36%
-17.35%
15.93%
-7.08%
-1.31%
-5.04%
3.40%

-0.20%
6.63%
-8.72%
17.18%
-9.71%
1.86%
1.17%
0.83%
1.03%

-9.07%
14.16%
-19.71%
25.24%
-3.87%
1.35%
-3.87%
1.92%

2.31%
-4.04%
-8.84%
0.01%
3.40%
-1.43%
0.01%
-1.55%

11.49%
11.17%
2.67%
4.40%
-5.54%
4.84%
4.40%
5.48%

-1.86%
-3.81%
1.94%
-12.01%
3.03%
-2.54%
-1.86%
0.35%

Shows one-yr fwd returns after the first hike in each cycle for our post-88 internal styles and the longer-term Ken French styles. Avg and median refer to the average and median of the one-yr fwd returns after the first hike while the
all period average refers to the average monthly returns of the respective series over the whole sample period regardless of monetary policy. Source: Nomura Quantitative Strategy research

32

Europe ex UK growth and income driven by valuation,


ECB and Fed

Europe ex UK income
R2
Intercept
PBK
12m fwd gth in trail eps
Fed rates
Europe rates

Source: Nomura Quantitative Strategy research

0.27
Coefficients
11.83
-18.13
0.03
-0.06
0.72

Europe ex UK Growth
R2
t Stat
2.70
-2.68
0.74
-0.13
1.67

Intercept
PBK
12m fwd gth in trail eps
Fed rates
Europe rates

0.60
Coefficients
14.40
-6.72
0.00
1.05
-0.78

t Stat
8.57
-9.79
-0.14
5.55
-4.47

33

Income strategies unattractive

Analyst revisions for income strategy


(global and Europe)

Valuation of global income strategy


Ratio
1.2

20
Global Dividend Yield - 12mth Fwd P/E

Net earnings
revisions %,
(up -down) /
total, 3MMA

Global Dividend Yield - Earning Rev. (3MMA)


Europe Dividend Yield - Earning Rev. (3MMA)

15

Global Dividend Yield - Price/Book


1.0

10
5

0.8

0
0.6

-5
-10

0.4

-15
-20

0.2
-25
0.0
Jan-90

Jan-94

Jan-98

Source: Nomura Quantitative Strategy research

Jan-02

Jan-06

Jan-10

Jan-14

-30
Jan-90

Jan-94

Jan-98

Jan-02

Jan-06

Jan-10

Jan-14
34

Dividend payout ratio for the highest yielding companies

Ratio
0.75
0.70

Global high dividend quartile: median payout for last constituents


Global high dividend quartile: median payout

0.65
0.60
0.55
0.50
0.45
0.40
0.35
Jan-90

Jan-93

Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

Note: The chart shows 12m trailing dividends as % of 12m forward EPS for the top quartile of dividend yield factor and for the current constituents of September 2014 back through time.
Source: FTSE, Worldscope, Nomura Quant research

Jan-11

Jan-14

35

Risk still attractive

Risk valuations
Ratio
3.0

Correlation between Risk and Growth


Europe Composite Risk - Price/Book

Correlation
1.2
Growth and Risk - Europe

US Composite Risk - Price/Book


Global Composite Risk - Price/Book

2.5

1.0

Growth and Risk - Global

0.8
0.6

2.0

0.4
0.2

1.5
0.0
-0.2
1.0
-0.4
0.5

-0.6
-0.8

0.0
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

-1.0
May-00

Source: Nomura Quantitative Strategy research

Figure shows rolling 90 day pairwise correlation coefficient between the styles.
Source: Nomura Quantitative Strategy research

May-03

May-06

May-09

May-12
36

Correlation of Momentum with other factors


Momentum global equity factor correlation (90 day)
Correlation
1.5
Val-mom

Mom-Risk

Mom-Quality

Mom-Size

0.5

-0.5

-1

-1.5
May-00

May-02

May-04

Rolling 90-day correlation between factor pairs. Source: Nomura Quantitative strategy

May-06

May-08

May-10

May-12

May-14

37

Sector exposure of styles

Composite growth
Global Europe US

UK

JP

Composite risk
A ex JP GEM

Global Europe US

UK

JP

Dividend yield
A ex JP GEM

Global Europe US

UK

JP

A ex JP GEM

Basic Industries

8%

4%

6%

-4%

10%

3%

-8%

1%

-3%

5%

2%

8%

10%

13%

2%

-5%

5%

-13%

6%

-0%

1%

Capital Goods

2%

2%

5%

-7%

-6%

4%

8%

-2%

-4%

-2%

-4%

4%

6%

5%

-4%

-5%

-8%

-3%

2%

-7%

-11%

Consumer Cyclicals

13%

21%

26% 37%

-2%

-1%

-2%

8%

14%

16%

7%

-18%

-3%

-4%

-11%

-15%

-4% -33% -10%

-5%

-15%

Consumer Staples

-2%

-9%

-5% -16%

0%

0%

-2%

-11%

-14%

-7% -12% -8%

5%

-3%

5%

-1%

10% 11%

2%

-4%

-7%

Energy

-4%

-4%

1%

0%

-4%

-10%

3%

-0%

11% 10%

2%

5%

-2%

7%

-6%

-3%

4%

1%

9%

Financials

-16%

-11%

0%

-11%

-3%

9%

24%

-4%

16% 10%

-15%

-7%

6%

7%

8%

21%

4%

18%

19%

Healthcare

4%

4%

6%

6%

-6%

6%

8%

-5%

-12%

-7%

-3%

-2%

-1%

-0%

-12%

-12%

-14%

0%

8%

-6%

-7%

Media

7%

2%

8%

3%

3%

-1%

2%

-2%

-3%

4%

1%

-4%

0%

1%

-1%

4%

-6%

3%

-2%

0%

-3%

Technology

10%

11%

-1%

3%

3%

8%

16%

10%

1%

3%

1%

6%

3%

4%

-14%

-9%

-10% -3% -10%

-2%

-8%

Telecoms

-3%

-2%

-2%

0%

0%

-1%

-10%

-3%

1%

-0%

0%

-2%

-5%

-11%

12%

9%

4%

6%

16%

-20%

-18%

-27% -10% -3%

-2%

0%

-10%

-5%

-18% -16%

8%

-1%

-4%

18%

21%

-8%

0%

4%

Utilities

3%

-18% -14%

-2%

Table shows the net exposure to sectors from taking long-short positions in top-quartile portfolios on the styles shown. Source: Nomura Quantitative strategy

4%

3%

21% 17%

38

Neutral Momentum

Global & Europe Composite Momentum - Price/Book

Impact of GDP cycle on Momentum returns (US, 1926-2013)

Ratio
5.0
Global Composite Momentum - Price/Book
4.5

Return, %pa

T-stat

Europe Composite Momentum - Price/Book

Average across periods

4.0

Early recession
3.5

Late recession
Early expansion

3.0

Mid expansion
2.5

Late expansion

7.25%
15.40%

2.5

-8.30%

-1.47

8.00%

2.18

8.60%

2.33

14.90%

3.93

2.0

1.5

1.0

0.5
Jan-90

Jan-94

Jan-98

Source: Nomura Quantitative strategy

Jan-02

Jan-06

Jan-10

Jan-14
39

Source: Nomura Quantitative strategy

Utilities

Telecoms

Technology

Media

Healthcare

January

Financials

Energy

Consumer Staples

Consumer Cyclicals

Capital Goods

Basic Industries

Momentum composition is changing


September

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

40

Value is not offering good value

Ratio

0.7

Global Composite Value - Price/Book

Global Composite Value - 12mth Fwd P/E

0.6
0.5
0.4
0.3
0.2
0.1
Jan-90

Jan-93

Jan-96

Jan-99

Relative price/book and PE of cheap/expensive stocks. Source: Nomura Quantitative strategy

Jan-02

Jan-05

Jan-08

Jan-11

Jan-14
41

and analysts are worryingly bullish on value


companies

10

Net earnings revisions


%, (up -down) / total

Europe Composite Value - Earning Rev. (3MMA)


Global Composite Value - Earning Rev. (3MMA)

5
0
-5
-10
-15
-20
-25
-30
Jan-90

Source: Nomura Quantitative strategy

Jan-93

Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

Jan-14

42

Divergence of factor valuations by region

US

Europe

Japan

Asia
Pacific

Value

-0.35

-0.64

-0.78

-0.21

-0.48

-0.43

Growth

-0.62

-1.32

-1.12

-0.71

-0.08

0.02

Risk

0.58

-0.80

-0.66

0.66

0.41

-0.44

Momentum

-1.06

-1.31

0.99

-0.38

-0.38

-0.55

ROE

0.89

2.05

0.97

0.55

0.89

0.99

As on Aug 31, 2014

Figure shows Z scores of the current price/book of top relative to bottom quartile of stocks for each factor within each region
Source: Nomura Strategy research

Emerging
Markets Australia

43

Price/book and P/E valuation of large/small cap stocks

Ratio
Europe Size - Price/Book

4.5

Global Size - Price/Book

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Jan-90
Source: Nomura Strategy research

Jan-94

Jan-98

Jan-02

Jan-06

Jan-10

Jan-14
44

Real time factor performance for all regions

Source: Bloomberg

45

Stable dividend strategy


Aim
There is a hunt for yield, but simply buying passive equities is not an optimal way to do that and buying the
highest yielding equities looks outright unattractive.
Instead we prefer to buy the next tranche of stocks down in terms of yield level, where the dividend is well
covered and an analysis of historical dividend policy implies that dividends are likely to grow or be stable.
Purely systematic.

Methodology
The stocks are ranked on the following five criteria on an equal-weighted composite basis.
Trailing last reported Dividend Yield.
Dividend Growth (Compounded Annual Growth Rate over the past five years), but with a knockout clause that
the stock gets excluded if in any given year that growth is negative.
Last reported FCF dividend cover.
Standard deviation of the annual dividend growth rate over the past five years.
The five-year Z score of the Fwd P/E.
We then create a combined rank and select the stocks that are in the top quartile based on this combination of
criteria. The investment universe is the top 500 stocks from the FTSE World and the FTSE Japan for our
Japanese version.
Source: Nomura Quantitative strategy

46

Stable dividend portfolio Global universe


Absolute return performance

Relative returns performance

1270

190
Stable Dividend

1070

170

Stable Dividend

FTSE WORLD

870

150

670

130

470

110

270

90

70
Dec-92

Dec-96

Dec-00

Dec-04

Dec-08

Dec-12

70
Dec-92

Dec-96

Dec-00

Dec-04

Dec-08

Dec-12

Relative return statistics

Absolute return statistics

Return, % pa

Annualised monthly
volatility

Annualised
monthly IR

1 yr

1.0

2.3

0.4

15.2

3 yr

1.6

3.8

0.4

15.6

12.7

5 yr

1.8

4.7

0.4

11.8

8.5

Whole Period

2.5

7.2

0.4

Return, % pa

Benchmark

1 yr

22.2

18.6

3 yr

18.0

5 yr
Whole Period

Source: Datastream, IBES, Nomura Strategy research

47

Global multifactor model


Aim

Our core purely systematic global stock-selection approach.


Has been published and hence live since July 2009, based on an initial European version first
published Sept 2008.
Objective is to find a combination of factors that works smoothly over the cycle, so one does not
need to dynamically allocate between factors.
A key differentiating aspect is that we include a non-linear combination of factors. The economic
interpretation of this is that it measures the level of agreement between factors.
So the model selects stocks that are attractive on factors that have worked within each sector
historically and gives extra score to those where the factors agree.
We choose to let the model use different factors within each sector to better capture different
accounting and business drivers within sectors.
Where possible, we guide the learning process to include at least one component from each of the
value, quality, momentum and growth factor groups.

Methodology

We use a learning-based model that identifies which factors are most effective within each sector.
This involves an expanding-window panel regression so there is no period that is just in-sample.
Although the factor coefficients evolve in the learning period, they have been fixed since 2003, so
this is a static multifactor model.
Based on the 500 largest companies in the developed world, it selects the most attractive top/bottom
quartiles; the long-only version just selects the top quartile of stocks within each sector.
The model does not take any sector views.

Source: Nomura Quantitative strategy

48

Non-linear global multifactor model


One of the key innovations over previous work is that we introduce a non-linear cross-term factor that
models the interaction of factors

The functional form of our multifactor model:

ri ,t:t + = + 1.Vi ,t + 2 .M i ,t + .(Vi ,t M i ,t )

Certain non-linear interaction functions can have the economic interpretation of measuring agreement.
Extra complexity should only be added with good reason, but we can show an empirical benefit to such a term.
To defend against a charge of data mining, we impose an a priori functional form that we believe is
defendable.
Non-linear interaction terms also have the benefit of lessening the impact of crowding if it brings together
factors in ways that are not usually practiced.

49

Non-linear global multifactor model

We use a cubic interaction factor as our favoured approach

Interaction Score

Alternative is a discontinuous interaction screen

Interaction Score

Increasing momentum
Cheaper

Source: Nomura Strategy research

Increasing momentum
Cheaper

50

Non-linear global multifactor model:


weights of factors by sector

Basic
Consumer
Industries Cyclicals
Value

Growth

Quality

Momentum

Interaction

Price/book
EV/EBITDA
PE (forward)
PE (trailing)
FCF Yield
Div Yld (b'back adjusted)

Healthcare

Media

Tech

Telecoms

Utilities

Financials

10

20
35

20
25

25

10

Interest Cover
Debt/EBITDA
Change in Shares
EBITDA Margin
ROE
ROCE
Accruals

Energy

25
20

(V+M)

Consumer
Staples

20

Internal Growth
Growth FY0-FY3
Long-Term Growth
Sales Growth (historical)

1m Price Momentum
9m Price Momentum
12m Price Momentum
Normalised 12m P Mtm
6m Earnings Momentum

Capital
Goods

20

30
20

25
15

20
35

25

10

10

20

15

25

20

30

35
10
-15

-25
25

-15
-10

-20
20

10

25

15

10
-5

-15

-20
15

-15

-5

-20

25
20
25
20

15

10

10

15

25

20

20

10

15

Source: Nomura Strategy research

51

Global multifactor model

Performance of Nomura global multifactor model

Value added from non-linearity

Dec 91 = 100

Dec 91 = 100

750
700

Whole Period
Dec 91 - Jun 04
Jun 04 - Present
July 09 - Present
Jan 10 - Present

650
600

Annualised
Return, monthly Annualised
% pa
volatility monthly IR
9.2
6.8
1.3
13.0
8.3
1.6
4.7
4.1
1.1
5.2
4.3
1.2
4.8
4.3
1.1

Live Period

Out of sample

125

120

Performance
Annualised
during live
Return, % monthly Annualised
period
pa
volatility monthly IR
Non-linear
model
5.2
4.3
1.2
Linear model

Start of
Length of
Drawdown Drawdown (Days)
10/10/2005
368
19/09/2007
135
13/10/2008
546
23/04/2010
173

550
500
450

4.4

4.1

Live Period
Out of sample

1.1

% Fall
-3.1
-2.9
-8.4
-3.4

115

400
110

350
300
250

105

200
150
100

Source: Nomura Strategy research

Relative performance of non-linear and linear versions of our global multifactor model.
Source: Nomura Strategy research

Dec-13

Dec-11

Dec-09

Dec-07

Dec-05

Dec-03

Dec-01

Dec-99

Dec-97

Dec-95

Dec-93

Dec-91

Dec-13

Dec-11

Dec-09

Dec-07

Dec-05

Dec-03

Dec-01

Dec-99

Dec-97

Dec-95

Dec-93

Dec-91

100

52

Global multifactor (long-only version)


Absolute return performance (out of sample period)

Relative returns performance (out of sample period)

320.0
GMF Long only Sector Weighted
FTSE WORLD

270.0
220.0
170.0
120.0
70.0
Jun-04

Jun-07

Jun-10

Jun-13

140
135
130
125
120
115
110
105
100
95
90
Jun-04

GMF Long only Sector Weighted

Jun-07

Jun-10

Jun-13

Relative return statistics

Absolute return statistics

Return, % pa

Annualised monthly
volatility

Annualised
monthly IR

1 yr

7.7

2.3

3.3

15.2

3 yr

3.3

3.4

1.0

16.0

12.7

5 yr

2.8

3.1

0.9

11.5

8.0

Out of sample
Period

3.2

3.2

1.0

Return, % pa

Benchmark

1 yr

30.1

18.6

3 yr

19.4

5 yr
Out of sample Period

Source: Datastream, IBES, Nomura Strategy research

53

The Nomura Global Equity Quant Recommended Portfolio

Strategic
trades

Tactical
trades

Trade

Bloomberg

1 month

YTD

1 year

2 year

3 year

1 year R/R

Global Multifactor Model

na

+1.4%

+4.7%

+12.9%

+7.1%

+5.7%

3.1

Equity Alternative Beta

na

+0.4%

+0.3%

+1.5%

+2.0%

+2.2%

0.7

Volatility Risk Premium

NMEDSVP1 & NMEDSVP2

+1.4%

+4.1%

+7.8%

+6.5%

+8.8%

3.5

Natural Index

na

+1.8%

+7.0%

+21.8%

+21.4%

+16.9%

2.5

Stable Dividends

NMRASDVD

+2.7%

+8.8%

+22.2%

+21.3%

+18.0%

2.4

Long Composite Risk

NMGLRISK

-0.9%

-2.2%

+0.3%

+3.3%

-2.1%

0.1

Long European cheap domestic

NMRDOMS

-2.5%

+9.0%

+9.4%

+18.5%

+1.1%

1.2

Short European Dividend Yield

NMRADVDL/NMRADVDS

+1.5%

-9.7%

-11.1%

-3.6%

-0.4%

1.9

+2.0%

-4.5%

-0.2%

+4.6%

+3.2%

0.0

+0.8%

+2.8%

+3.4%

-2.3%

+2.0%

0.8

+0.8%

+1.1%

+1.7%

+1.0%

+0.1%

1.0

1 month

YTD

YTD R/R

Recommended Quant Portfolio

+0.6%

+1.4%

1.1

HFR Market Neutral Index

+0.9%

+2.3%

1.1

Long Composite Growth


Long European Size

NMRASIZE

Long EM quant country selector Model

(As of end of Aug 2014)

Note: As of end-August 2014.


We established our Recommended Global Quant portfolio in August 2013 (see A portfolio of Quant Ideas August 27 2013). It uses a combination of strategic strategies that are long-term
core quant holdings and tactical ones that are a function of the cycle. The strategic and tactical components receive equal weighting and among the strategic quant trades we use equal risk
contribution weighting. This is an absolute return strategy, so the benchmark is cash or market neutral hedge fund strategies
Source: Bloomberg, Nomura Quantitative strategy

54

Long horizon concentrated strategies: a global recommended


quant stock portfolio

Return vs Risk for 3-year holding period P/E-based


strategies
13

Return
FWD PE + Q
FWD PE + Q

12

FWD PE + Q
FWD PE
FWD PE
FWD PE + M
FWD PE + M
FWD PE + M

FWD PE + Q

11

FWD PE
FWD PE + M
FWD PE

10
9
8

Top 500 ex Fin


Top 500
FTSE WORLD ex Fin
FTSE WORLD

7
6
14

15

16

17

18

19

20

21

Risk
Figure shows return vs risk for several 3-year holding period and quarterly rebalancing P/E-based strategies. The portfolios are long only and built as the aggregate of 3 shifted portfolios with a one year interval and
rebalanced every 3 years. The benchmark is the top-500 stocks in the FTSE World universe.
The screening details:
- The 3yr concentrated version is defined as the cheap top-20 stocks screened on their respective factor.
- In the 3yr holding sector-neutral version the screening is on a sector neutral basis and the sector weights match sector weights benchmark at the rebalancing period.
- The 3yr quartile version is defined as the cheap quartile stocks screened on their respective factor.
- The quarterly rebalancing version is defined as the cheap quartile stocks screened on their respective factor with a 3-month holding period.
The Value + Q or Value + M portfolios are screened using a composite ranking averaging value score with the quality or momentum score. Quality is defined on an equal weighted composite basis by EBITDA Margin,
ROE, tax/pre-tax income, credit rating and change in number of shares. Earnings momentum is defined as the percentage change in average consensus of the 12-month forward earnings over the past two quarters.
Source: Nomura Quantitative Strategy research

56

Global Recommended Portfolio


Aim
This is a blend of bottom-up systematic stock selection with top-down strategy views on regions and sectors.
The systematic stock selection uses our long-horizon quant stock selection model.
Note that the portfolio has always been a blend of quant and discretionary, but the long-horizon quant stock
selection model has only been used since we published it in 2013.
Portfolio has been run since 1997.

Source: Nomura Quantitative strategy

57

Global Recommended Portfolio


Absolute return performance
250

Relative returns performance

Portfolio performance index

Portfolio relative
performance Index
125

Benchmark performance
index

200

120
115

150

110
105

100

100
95

50

90
85

0
31/12/1999

31/12/2002

31/12/2005

31/12/2008

31/12/2011

80
31/12/1999

31/12/2002

31/12/2005

31/12/2008

31/12/2011

Relative return statistics

Absolute return statistics


Return, % pa

Benchmark, % pa

1yr

23.07

22.28

2yr

23.88

5yr
Since 2000

Rel Return, % pa

Tracking Error

IR

1yr

0.79

2.96

0.27

20.63

2yr

3.26

3.43

0.95

15.43

15.14

5yr

0.29

4.44

0.06

4.94

4.25

Since 2000

0.69

5.74

0.12

Note: Portfolio benchmark is FTSE All World Total Return index in USD terms
Source: Datastream, Nomura Strategy research

58

Global Quant Stock Portfolio


Sector

Stock

Currency

North America
Capital Goods
Consumer Cyclicals
Energy
Financials

Healthcare
Media
Technology

DEERE & CO
NORTHROP GRUMMAN CORP
GAP INC
CHEVRON CORP
AFLAC INC
ALLSTATE CORP
CANADIAN IMPERIAL BANK
DISCOVER FINANCIAL SVCS INC
MERCK & CO
PFIZER INC
DIRECTV
INTL BUSINESS MACHINES CORP
ORACLE CORP
SEAGATE TECHNOLOGY PLC

Energy
Financials

Telecoms

Media

Consumer Cyclicals
Telecoms

Capital Goods
Consumer Cyclicals
Energy
Financials

Healthcare
Technology
Telecoms

8.1
9.4
2.9
10.7
6.2
5.0
8.2
5.3
3.5
2.2
5.9
17.9
3.0
5.2

104.7
127.3
2559.7
119.2
229.8
28.6
65.7
172.2
24.9
15.0
200.5
82.4
15.3

96614.8
100884.0
17204.1
38748.2
6764.5
27354.5
133404.1
78387.7
47336.4
14993.3
29848.9
28185.5
27619.6

7.6
7.7
214.6
6.5
20.0
1.9
6.1
14.7
2.1
1.2
17.2
2.5
2.6

42.1
20.3
73.8
24.3
14.4

103165.6
41109.8
93106.6
117953.9
15146.2

13.0
21.1
16.5
28.8
66.4

Rel Perf. since

Rel Perf. Over

Analyst

Added2

week2

Rating6

6.8
10.1
3.3
11.3
6.5
5.7
8.7
5.6
3.6
2.2
6.4
19.8
3.3
5.6

12.3
12.7
13.9
11.4
9.5
10.7
11.2
11.1
16.8
13.2
13.4
9.7
12.5
10.9

6 Mar 14
6 Mar 14
31 Jul 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14

-10
-3
13
8
-11
6
9
1
0
-14
1
-3
0
18

-3
-1
6
0
0
0
1
0
0
1
0
0
0
1

Not Rated
Not Rated
Neutral
Not Rated
Not Rated
Not Rated
Not Rated
Buy
Not Rated
Not Rated
Neutral
Not Rated
Buy
Not Rated

8.3
9.5
108.7
9.8
24.4
2.6
6.6
7.2
1.9
2.1
5.2
7.1
2.1

7.5
7.2
145.8
10.3
61.3
2.8
7.2
15.0
2.4
1.6
23.7
11.1
1.7

13.9
17.6
17.6
11.6
3.7
10.2
9.1
11.5
10.4
9.4
8.4
7.4
9.1

6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14

-10
-10
1
0
-13
4
-3
-4
-7
-12
-9
-8
7

2
2
0
0
0
0
1
1
3
5
0
1
3

Neutral
Buy
Buy
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Reduce
Buy
Buy

3.0
1.9
6.7
2.2
0.5

4.0
2.0
7.3
1.9
0.8

4.0
2.2
6.4
1.8
0.9

10.5
9.1
11.5
13.2
15.9

6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14

4
-6
5
-17
-13

0
-1
3
2
0

Buy
Buy
Not Rated
Not Rated
Neutral

20135.9
30307.5
28573.7
18061.1
24578.6

1.0
2.7
1.6
0.6
3.7

1.6
2.7
2.1
0.5
3.6

1.7
2.2
1.8
1.2
4.0

7.5
9.4
9.2
23.6
16.6

6 Mar 14
6 Mar 14
6 Mar 14
31 Jul 14
6 Mar 14

-1
6
2
-2
12

0
-1
-1
1
-2

Buy
Buy
Buy
Buy
Buy

34.9

111862.1

2.2

3.6

2.7

12.9

6 Mar 14

-4

-3

Buy

2.9
31.0
4.7
71.4
224.8
59.0
5.4
162.2
0.5
0.7
17.6
0.8
1.0
0.7
52.7
2.2
1212.6
1.2
2.9

9866.8
1785.3
14893.3
6404.5
34471.9
15246.9
10034.8
4185.5
39275.2
26021.6
37191.9
181164.9
6727.8
58235.6
49906.0
3257.9
130106.2
37083.9
1525.2

0.3
4.2
0.3
8.6
19.8
6.5
0.5
N/A
0.1
0.1
1.0
0.1
0.1
0.1
4.5
0.1
104.2
0.1
0.3

0.4
5.0
0.4
5.7
27.8
8.3
0.7
39.7
0.1
0.1
1.2
0.1
0.1
0.1
5.0
0.1
87.7
0.1
0.3

0.4
3.6
0.4
5.3
31.1
9.4
1.0
25.5
0.1
0.1
1.2
0.1
0.2
0.1
5.4
0.1
151.8
0.1
0.3

7.3
8.7
13.2
13.6
7.2
6.3
5.6
6.4
6.0
5.2
14.5
6.0
5.3
6.2
9.8
16.6
8.0
13.1
8.3

31 Jul 14
31 Jul 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
31 Jul 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14
6 Mar 14

-5
-10
37
31
-8
6
-6
-16
16
20
40
14
17
-5
-1
-6
-9
20
4

-4
-2
5
1
1
-1
0
2
-2
-1
5
-2
-3
-1
-1
-2
-3
1
1

Neutral
Not Rated
Not Rated
Buy
Buy
Neutral
Reduce
Not Rated
Buy
Neutral
Not Rated
Neutral
Reduce
Buy
Not Rated
Buy
Buy
Not Rated
Not Rated

GBP
GBP
GBP
GBP
GBP

Overweight
ITOCHU CORP
MITSUBISHI CORP
MITSUI & CO
FUJI HEAVY INDS
NIPPON TEL&TEL CP

JPY
JPY
JPY
JPY
JPY

Underweight
BHP BILLITON LTD

AUD

Emerging Mkts
Basic Industries

9.1
8.4
2.7
11.1
6.2
5.7
8.1
5.0
3.5
2.2
5.2
16.3
2.9
5.3

Date
Added

Underweight
ROYAL DUTCH SHELL
STANDARD CHART PLC
ASTRAZENECA
GLAXOSMITHKLINE
BRITISH SKY BROADC

Asia Ex Japan
Basic Industries

29358.8
27327.9
11818.2
245590.5
26802.4
26703.5
38712.3
29539.3
173885.6
188232.5
43404.5
191787.1
144199.5
19155.2

EUR
EUR
DKK
EUR
EUR
NOK
EUR
EUR
EUR
EUR
EUR
CHF
EUR

Japan
Capital Goods

83.9
127.6
46.2
128.6
61.4
61.5
96.9
62.7
60.3
29.5
86.2
192.3
41.6
61.2

Price/ earnings
Dec 15 (x)

Neutral
BASF SE
SIEMENS AG
A.P. MOLLER-MAERSK
BAYER MOTOREN WERK
VOLKSWAGEN AG
STATOIL ASA
TOTAL
ALLIANZ SE
AXA
CREDIT AGRICOLE SA
MUENCHENER RUECKVE
SWISS RE AG
ORANGE

United Kingdom
Energy
Financials
Healthcare

Mkt Cap
US$m

USD
USD
USD
USD
USD
USD
CAD
USD
USD
USD
USD
USD
USD
USD

Europe Ex UK
Basic Industries
Capital Goods
Consumer Cyclicals

Calendarised EPS y/e Dec1


2013a
2014e
2015e

Price ($)
27 Aug 14

Underweight

Overweight
CHINA SHENHUA ENER
KUMBA IRON ORE LTD
ITAUSA INV ITAU SA
LG CORP
HYUNDAI MOTOR CO
KIA MOTORS CORP
CAIRN INDIA
SK HOLDINGS CO LTD
BANK OF CHINA LTD
BANK OF COMMUNICAT
BCO BRADESCO SA
CHINA CONST BK
CHINA MINSHENG BAN
IND & COM BK CHINA
TEVA PHARMA IND
INTOUCH HOLDINGS P
SAMSUNG ELECTRONIC
AMERICA MOVIL SAB
TURK TELEKOMUNIKAS

Portfolio perf. (US$ terms, %)3

Nomura Strategy Recommend Portfolio


FTSE All World Index

HKD
ZAR
BRL
KRW
KRW
KRW
INR
KRW
HKD
HKD
BRL
HKD
HKD
HKD
ILS
THB
KRW
MXN
TRY

1 WK

1.0
0.9

1 MTH

2.8
1.7

YTD

8.0
7.8

12 MTH

21.3
21.2

2013

2012

23.0
23.3

EPS Estimates are based on IBES Mean Consensus

Relative performance shown as total return performance less performance of FTSE All World total return index.

21.5
17.4

2011

-14.9
-7.3

2010

14.6
13.2

Return history presented as price return in US$ Terms from before 2006. Returns from 2007 to present are on a Total Return basis.

Starting 9th January 2009

Ending 12th September 2008

2009 4

55.9
35.8

2008 5

-16.1
-18.9

2007

6.9
12.8

2006

12.9
18.8

2005

11.1
8.9

2004

11.9
13.7

2003

33.7
31.0

2002

-23.8
-20.6

2001

-13.8
-17.5

2000

-2.8
-12.2

1999

40.8
24.2

1998

35.7
22.8

1997

20.1
13.6

EPS Estimates are based on IBES Mean


Consensus
2 Relative performance shown as total
return performance less performance of
FTSE All World total return index.
3 Analyst rating refers to Nomura research
department rating.
Past performance should not and cannot be
viewed as an indicator of future
performance. Complete record available
upon request
Source: Nomura Quantitative strategy

59

Sector allocation

Recommended sector weightings

Europe

Global
Benchmark

Recommended
Weighting

Recommendation

Energy

10

10

Neutral

Materials

Underweight

Industrials

10

14

Overweight

Consumer Discretionary

11

14

Overweight

Consumer Staples

Underweight

Healthcare

11

Underweight

Financials

22

30

Overweight

-Banks

11

19

Overweight

-Insurance

Neutral

-Other

Neutral

Information Technology

13

19

Overweight

Overweight

Telecom Services

Underweight

Underweight
Underweight

Utilities

Underweight

Benchmark

Recommended
Weighting

Recommendation

Basic Industries

10

10

Neutral

Capital Goods

12

Overweight

10

15

Overweight

Consumer Staples

13

Underweight

Energy

10

Neutral

Financials

22

31

Overweight

Banks

13

22

Overweight

Insurance

Underweight

Other

Overweight

Healthcare

12

Underweight

Media

Underweight

Technology

Telecoms
Utilities

4
4

2
0

Consumer Cyclicals

of which:

1Combination

of Cyclical Consumer Goods and Cyclical Services excluding Media


Source: Nomura Strategy research

61

Cyclical growth over stable growth

Valuation of Cyclical Growth/Stable Growth (P/E)

Valuation of Cyclical Growth/Stable Growth (PBK)

Ratio
1.8

Ratio
2.2
2.0

1.6
Cyclical
growth/stable
growth

1.4
1.2

1.8
1.6
Cyclical
growth/stable
growth

1.4
1.2

1.0

1.0
0.8

0.8

0.6

0.6
Jan-90

Jan-93

Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

Figure shows the relative valuation of high expected growth to high stable growth companies. The dot
at the end shows the same data for the subset of high expected growth companies from cyclical
sectors which constitute our Cyclical Growth basket. Source: Nomura Quantitative Strateg

Jan-14

0.4
Jan-90

Jan-93

Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

Figure shows the relative valuation of high expected growth to high stable growth companies. The dot
at the end shows the same data for the subset of high expected growth companies from cyclical
sectors which constitute our Cyclical Growth basket. Source: Nomura Quantitative Strategy

Jan-14

62

Cyclical growth basket


Company

Sector

Company

Sector

HOLCIM LTD.

Basic Industries

SOCIETE GENERALE S.A. CLASS A

Financials

SOLVAY SA

Basic Industries

SCHRODERS PLC

Financials

LAFARGE SA

Basic Industries

ASHTEAD GROUP PLC

Financials

COMPAGNIE DE SAINT-GOBAIN SA

Basic Industries

PRUDENTIAL PLC

Financials

HEIDELBERGCEMENT AG

Basic Industries

BANCO SANTANDER S.A.

Financials

AKZO NOBEL N.V.

Basic Industries

BANCO POPULAR ESPANOL SA

Financials

GLENCORE PLC

Basic Industries

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

Financials

SKF AB CLASS B

Capital Goods

BANCO DE SABADELL SA

Financials

AIRBUS GROUP NV

Capital Goods

CREDIT AGRICOLE SA

Financials

VOLVO AB CLASS B

Capital Goods

COMMERZBANK AG

Financials

SIEMENS AG

Capital Goods

BANKIA, S.A.

Financials

HEXAGON AB CLASS B

Capital Goods

KBC GROUPE SA

Financials

INTERNATIONAL CONSOLIDATED AIRLINES GROUP SA Consumer Cyclcials

DANSKE BANK A/S

Financials

EASYJET PLC

Consumer Cyclcials

CAIXABANK SA

Financials

CRH PLC

Consumer Cyclcials

INTESA SANPAOLO S.P.A.

Financials

VALEO SA

Consumer Cyclcials

JULIUS BAER GRUPPE AG

Financials

PORSCHE AUTOMOBIL HOLDING SE PREF

Consumer Cyclcials

UBS AG

Financials

RENAULT SA

Consumer Cyclcials

ILIAD SA

Technology

VOLKSWAGEN AG

Consumer Cyclcials

ASML HOLDING NV

Technology

WHITBREAD PLC

Consumer Cyclcials

UNITED INTERNET AG

Technology

RYANAIR HOLDINGS PLC

Consumer Cyclcials

ARM HOLDINGS PLC

Technology

ADECCO S.A.

Consumer Cyclcials

LM ERICSSON TELEFON AB CLASS B

Technology

ACCOR SA

Consumer Cyclcials

INFINEON TECHNOLOGIES AG

Technology

A.P. MOLLER - MARSK A/S CLASS B

Consumer Cyclcials

RANDSTAD HOLDING NV

Consumer Cyclcials

AEROPORTS DE PARIS SA

Consumer Cyclcials

PANDORA A/S

Consumer Cyclcials

Source: Nomura Strategy research

63

Avoid income stocks: underweight Insurance and Utilities

Earnings revisions of European


Insurance relative to the market

Free cash flow dividend cover Utilities

Long-term expected EPS growth rate for


Utilities and the market

Net earnings revisions %,


(up -down) / total, 3MMA

Ratio
18

2.5

20

15

16

2.0

10

Utilities

Market

14
1.5

12
1.0

10
0.5

-5

8
0.0

-10

6
-0.5

-15

-20
Mar-87

Mar-93

Mar-99

Source: Nomura Strategy research

Mar-05

Mar-11

-1.0
Jan-88

Jan-94

Jan-00

Jan-06

Jan-12

2
Apr-88

Apr-94

Apr-00

Apr-06

Apr-12
64

Buying Growth: Further increasing Tech overweight

P/E of European Tech relative to the market

Earnings revisions of European Tech relative to the market

Ratio
15

3.5

Net earnings
revisions %,
(up -down) /
total, 3MMA

10
3.0
5
2.5
0
2.0

-5
-10

1.5
-15
1.0
-20
0.5
Jan-88

Jan-92

Jan-96

Source: Nomura Strategy research

Jan-00

Jan-04

Jan-08

Jan-12

-25
Mar-87

Mar-91

Mar-95

Mar-99

Mar-03

Mar-07

Mar-11
65

Margin recovery plays


12m trailing EBITDA margins: Cyclicals /
defensives and EU economic sentiment
indicator
Ratio

0.90

12m trailing EBITDA margins:


Cyclicals / defensives (LS)
EU Economic sentiment indicator
(Advanced, RS)

Index

US/UK capex intentions composite and


Capital goods 12m fwd EBITDA margins
Index

US/UK capex intentions composite*


(Advanced, LS)

%
%

120

30

Capital goods 12m forward


EBITDA margins (RS)

115

ECB bank lending survey: Net change in firms


credit demand last quarter (Advanced, LS)
Bank 12m forward net profit margins (RS)

13.5

1.5

0.5

13.0

10

12.5

100

28

24

105
0.80

26

20

110
0.85

ECB bank lending survey and bank 12m


forward net profit margins

22
20

-0.5
-10
12.0

95
0.75
90

18
-20

-1.5

16

11.5
-30

85
0.70

-2.5

11.0

80
0.65
May-91

75
May-98

May-05

Source: Datastream, Nomura Strategy research

May-12

-3.5
Jan-07

10.5
Jan-10

Jan-13

*Includes Philly Fed capex intentions survey and BoE Agent scores
survey of manufacturing sector investment intentions. Source:
Datastream, Nomura Strategy research

14

-40

-50
Q2 2004

12
10
Q2 2007

Q2 2010

Source: Datastream, Nomura Strategy research

Q2 2013

66

Buy US capex exposure

US capex basket: median relative price/book and 12m fwd PE


Ratio
3.2

Ratio

US CAPEX basket: Median relative PBK (LHS)


US Capex basket: Median relative 12m FWD PE (RHS)

1.80
1.60

2.8

1.40
2.4
1.20
2.0

1.00
0.80

1.6

0.60
1.2
0.40
0.8

0.4
Jan-88

US capex-exposed companies (NMRAUSCX)

0.20

Company

Industry

Arcelormittal

Industrial Metals

BMW

Autos & parts

Clariant

Chemicals

CRH

Construction

Daimler

Autos & parts

Electrolux

Household goods

Fiat

Autos & parts

Heidelberg Cement

Construction

Hochtief

Construction

Philips

Industrials

Rexel

Electrical equipment

SAP

Technology

Siemens

Industrials

SSAB

Industrial Metals

0.00
Jan-92

Jan-96

Source: Nomura Strategy research

Jan-00

Jan-04

Jan-08

Jan-12

67

Price/tangible book and return on tangible equity for banks

Europe
30

Global

Ratio

4.0
3.5

25

30

Ratio

3.0

25

3.0
20

2.5

3.5

2.5
20
2.0

15

2.0

15
1.5

1.5

10

10
1.0

1.0
5

Return on tangible equity (LHS)

Price/tangible book (RHS)

Source: Nomura Strategy research

0.0
Jan-14

Jan-12

Jan-10

Jan-08

Jan-06

Jan-04

Jan-96

Jan-94

Jan-92

0
Jan-90

Jan-14

Jan-12

Jan-10

Jan-08

Jan-06

Jan-04

Jan-02

Jan-00

Jan-98

Jan-96

Jan-94

Jan-92

0.0
Jan-90

0.5

Price/tangible book (RHS)

Jan-02

0.5

Jan-00

Return on tangible equity (LHS)

Jan-98

68

Fund management strategy and minimum variance

Fundamental managers underperforming

Recent relative performance of active fundamental managers


has closely tracked momentum
102

106

101

104

100

102

Exclusively bottom up vs top down macro funds


Index
101.0

100.5

99
100
100.0

98
98
97
96

99.5

96
94
99.0

European Long-only fundamental


funds (LHS)

92

Source: Bloomberg, Nomura Strategy research

98.5

Aug-14

Jul-14

Jun-14

May-14

May-14

98.0
Apr-14

Sep-14

Aug-14

Jul-14

Jun-14

May-14

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

88
Sep-13

92
Aug-13

90

Jul-13

93

Mar-14

Composite Momentum: World (RHS)

Jan-14

94

Jan-14

95

70

Performance of unconstrained vs constrained managers

Concentrated fund performance and European cross-sectional


stock correlation
Correlation

3 Jan 05 = 100

Index

Up to 50 vs Up to 100 stocks performance (LHS)

115

101.0

0.60

Europe cross sectional stock correl (RHS)


113

100.8

0.50

111
100.6
109

0.40

100.4
107
100.2

0.30

105
100.0
103
99.8

0.20

101

99.6

99

Source: Nomura Quantitative strategy

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

0.00
Jan-05

Sep-14

Aug-14

Jul-14

Jun-14

May-14

Apr-14

95
Mar-14

99.2
Feb-14

97

Jan-14

99.4

0.10

Correlation is defined as 75 day rolling cross-sectional correlation between top 500 stocks in FTSE Europe
index. Source: Nomura Quantitative strategy

71

Asset share of fundamental managers with more than or


fewer than 100 stocks

25

2.5
Up to 100

>100

20

2.0

15

1.5

10

1.0

0.5

0
Jan-07

0.0
Jan-08

Source: Nomura Quantitative Strategy research

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

72

More active approaches gaining asset share

Cumulative asset shares of high- relative to low-TE funds, and


constrained relative to unconstrained funds

AUM share by tracking error bucket

180

3 Jan 05 = 100

Jan 05 = 100

Jan 05 = 100

140

180
0-4

160

High TE rel to low TE


(LHS)

130

140

Unconstrained vs
Constrained (RHS)

120

4 to 8
160

>8 (cap at 20)

120

140

110
100
100

120
80

90
60

100

80

40
80

70

20
60
Jan-05

Jan-07

Jan-09

Index of asset share of funds by tracking error range.


Source: Bloomberg, Nomura Strategy research

Jan-11

Jan-13

0
Jan-05

60
Jan-07

Jan-09

Source: Nomura Strategy research

Jan-11

Jan-13

73

Global equity mutual fund flows active passive

Share of passively-managed equities

USDbn

1500

32
Active

Passive

All funds

30

1000

28
500

26
24

22
-500

20
18

-1000
16
-1500

Source: EPFR, Nomura Quantitative strategy

Source: EPFR, Nomura Quantitative strategy

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

14

74

Distribution of active

Relationship of active share and tracking error

% of Total
Sample
25
Highly active

%
Active

Enhanced

Average Tracking Error (5yr)


Quant

Average Tracking Error (5yr) (Quant-only)

Fundamental

20

6
15

5
4

10
3
5

2
1

Source: Nomura Strategy research

20-30%

30-40%

40-50%

50-60%

60-70%

70-80%

80-90%

90-95%

>95%

0
0
Highly Active

Active

Enhanced

75

Active share

Highly active non quants and low active share quants


outperforming

Return and Risk for fund types

145.00
Highly active

Active

Enhanced

140.00
135.00

Highly
active

130.00

Active
3yr

125.00

Enhanced
5yr

120.00

Return

3.01

0.10

1.58

115.00

Risk

7.51

5.18

5.11

110.00

R/R

0.40

0.02

0.31

105.00
100.00

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

Dec-04

95.00

Highly active and active sample of non quant and quant funds, enhanced sample is purely quant funds. Source: Nomura Quantitative strategy research .

76

Active share and fees

Expense ratio by active share category

Active share and fee structure

Ratio
1.4

Highly active

Active

Enhanced

Management fee

1.13

0.98

0.46

Expense ratio

1.27

1.18

0.66

Front load

1.41

2.84

2.18

Back load

0.10

0.20

0.34

Performance fee

7.83

7.86

0.00

1.2

1.0

0.8

0.6

0.4

0.2

0.0
Highly active

Source: Quantitative Strategy research

Active

Enhanced

We define highly active as funds with an active share>80%, active as between 50 and 80% and
enhanced index as active shares<50%. Source: Nomura Quantitative strategy research

77

Quant market share

% of AUM
10.0

Paradiso??

Purgatorio

Inferno

9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

5.0

Note: Chart shows the asset share of quants as a proportion of total active equity AUM. Note that our sample of traditional quant funds is based on a survey that, although broad, is definitionally an under-representation of the true
size of quants, so we have scaled this up to set quant at 10% of active AUM in July 2007. We then add the asset share of our alternative beta sample to this, which is not scaled as we think that we have captured the bulk of listed
alternative beta assets. The Divine Comedy labels are, of course, just our own call. Source: Quantitative Strategy research

78

Performance of dynamic vs static quant funds


110

Share of AUM for dynamic and static quant funds

2 Jan 06 = 100

0.80
Static

108

Dynamic

0.70

106

0.60

104
0.50
102
0.40
100
0.30
98
0.20
96
0.10

94

Percentage AUM as a share of active equity funds


Source: Nomura Strategy research

May-14

Dec-13

Jul-13

Feb-13

Sep-12

Apr-12

Nov-11

Jun-11

Jan-11

Aug-10

Mar-10

Oct-09

May-09

Dec-08

Jul-08

Feb-08

Sep-07

Apr-07

Nov-06

Jun-06

Jul-14

Jan-14

Jul-13

Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Chart shows the performance of quant funds that use a dynamic factor allocation strategy relative to those that use a
static approach. Source: Nomura Strategy research

Jan-06

0.00

92

79

Performance of funds with and without discretion

Performance of funds with and without discretion


120

Index

Discretion on single
stocks/Pure quant
115

Asset share for funds with differing levels of discretion

Broad discretion/Pure
quant

0.70

Pure quant/systematic

0.60

Quant with discretionary


views on single stocks

110
0.50
105
0.40
100
0.30
95

Performance of funds that employ different levels of discretion relative to pure quant funds with no discretion.
Source: Nomura Strategy research

Percentage AUM as a share of active equity funds.


Source: Nomura Strategy research

May-14

Dec-13

Jul-13

Feb-13

Sep-12

Apr-12

Nov-11

Jun-11

Jan-11

Aug-10

Mar-10

Oct-09

May-09

Jul-08

Dec-08

Feb-08

Sep-07

Apr-07

0.00
Nov-06

80

Jun-06

0.10

Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13

85

Jan-06

0.20

90

80

Relative performance of inductive and deductive quants


Index

Relative asset share of inductive and deductive quants


%

115

0.8
Induction

0.7

deduction

110
0.6
105
0.5

100

0.4

0.3
95
0.2
90
0.1

85
Jan-06

Jan-08

Source: Quantitative Strategy research

Jan-10

Jan-12

Jan-14

0.0
Jan-06

Jan-08

Jan-10

Jan-12

Jan-14
81

Minimum variance flows and performance

Asset share of minimum variance

Relative performance of minimum variance strategies

%
0.45

31 Dec 10 =
100

Minimum variance funds and ETFs (asset share)


Minimum variance funds (asset share)

Minimum variance funds and ETFs (asset share)


Minimum variance funds (asset share)

0.40

115

0.35
0.30

110

0.25
0.20

105

0.15
0.10

100

0.05
0.00
Dec-09

Dec-10

Dec-11

Dec-12

Percentage AUM as a share of active equity funds. Source: Nomura Strategy research

Dec-13

95
Dec-10

Dec-11

Dec-12

Dec-13

MSCI minimum variance is relative to MSCI World. For the relative minimum variance funds index the
performance of funds is relative to their own funds benchmark as defined on Bloomberg. Source:
Bloomberg, Nomura Quantitative strategy research

82

Minimum variance: the volatility advantage and valuations

Relative volatility of low volatility companies

Relative price to book of the global minimum variance portfolio


Ratio

3.0

0.2

-0.3

2.5

-0.8

2.0

-1.3
1.5
-1.8

Volatility of the MSCI low volatility index less volatility of the MSCI World index, rolling 30-day periods. Source: Datastream, Bloomberg, Nomura Strategy research

Jan-14

Jan-12

Jan-10

Jan-08

Jan-06

Jan-04

Jan-02

Jan-00

0.0
Jan-98

Feb-14

Feb-13

Feb-12

Feb-11

Feb-10

Feb-09

Feb-08

Feb-07

Feb-06

-3.3

0.5

Jan-96

-2.8

Jan-94

Volatility of MSCI Min Vol vs MSCI World

Jan-92

-2.3

1.0

Jan-90

Volatility of Min Var Sample of funds vs


MSCI World

83

Multi-asset still a bright spot

AuM of multi-asset funds, USD million

Multi-asset performance

USD mn

1000000

200

1 Jan 04 =
100

900000
180
800000
700000

160

600000
140

500000
400000

120
300000
200000

100

100000

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Source: Nomura Quantitative strategy research

Jan-04

80

84

Performance and AuM of multi-asset funds by mandate


type

Performance by mandate type


110

1 Jan 04 = 100

AuM by mandate type

Defensive

Balanced

Flexible

Lifetime

Defensive/Cautious
Balanced
Flexible
Lifetime

Index

350

300

105

250

100

200
95
150
90
100
85

50

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Source: Nomura Quantitative strategy research

Jan-05

80

85

Is passive the new active?

Is passive the new active?


Passive used to mean tracking the cap-weighted index. This definition is now changing to include
alternative/smart beta and other factor strategies. We think that a few criteria are desired for such
strategies though:

generate smooth outperformance over time;

have no discretionary input;

not concentrated in terms of individual stock positions;

implementable in large size; and

do not require heavy transactions costs

We are seeing this in practice with:

in Japan the GPIF buying a quality-biased index; and


the UK government proposing that the 89 local authority pension schemes sell all their actively
managed fund positions and go fully passive, but the latter can include non market cap weighting.
This is also extending into alternatives eg the adoption of risk premia strategies by Scandinavian
pension funds.
87

Types of alternative beta


Alternative beta, ltntv / bit, noun
1.

A financial market investment strategy previously thought of as being active, but now more freely available
especially when pre-packaged, eg, in ETF or swap format.

2.

A non-traditional benchmark (eg, as opposed to market cap weighting), specifically that outperforms
traditional benchmarks by already incorporating characteristics that are generally agreed to add value in the
long term.

Cross Asset Class


Static

Dynamic

Source: Nomura Quantitative strategy

Nomura Cross Asset Model


Global Quantitative Monthly May 2013
issues, 9 May 2013

Intra Asset Class


Natural Weighting
Algorithmic Beta

Alternative Beta TAA

When does Quality matter?


Joseph J. Mezrich, 23 July 2013

Usually Long-short

Usually Long-only
88

Investor confidence and alternative beta preferences

Concentrated

Low

Return model confidence

High
Max Sharpe ratio

Risk model confidence

High

1/
[min var, risk parity,
max diversification ]

1/N
Low
Source: Nomura Quantitative strategy

89

An alternative beta taxonomy

Risk Confidence

1/N

Here one weights

Diversity
weighting

Cap weight index

Source: Nomura Quantitative strategy

Return confidence

Here one screens


Risk
parity

Max
diversification
Min Var

90

Natural weighting

Risk

Value
1/

Variance

Free Cash Flow


& Earnings

Tradability

Source: Nomura Quantitative strategy

Volume

ROE

Quality

91

Natural weighting

Why natural indexation is different from the competition:

It uses a range of variables to try to determine the natural weight of a stock in the index.
The approach is anchored in mean-reversion which is a powerful long-term tool, and measures this
with valuation, but this is offset with quality and risk measures. Meanwhile, the volume input
ensures that the strategy is tradable in size and is geared towards large companies.

The approach smoothly outperforms the cap weighted index, but without the extended periods of
underperformance associated with approaches that are essentially mono-factor such as minimum
variance and fundamental indexation.

There is a clear rationale for why this focused approach should work.

92

Performance of natural indexation and its peers

June 1995 = 100


170

Natural Index (1000 stocks)

Minimum Variance (240 stocks)

Fundamental Index (1000 stocks)

160
150
140
130
120
110
100
90
80
70
Jun-95

Jun-97

Jun-99

Jun-01

Jun-03

Jun-05

Jun-07

Jun-09

Jun-11

Jun-13

93
Source: Nomura Quantitative strategy

Performance of components (1,000 stocks)

Jun 95 = 100
310

260

Index

Risk Parity

Volume

Value

FCF

Earnings

ROE
210

160

110

60
Jun-95

Jun-97

Source: Nomura Quantitative strategy

Jun-99

Jun-01

Jun-03

Jun-05

Jun-07

Jun-09

Jun-11

Jun-13

94

Natural weighting

Performance statistics for natural indexation and its peers

Natural Index
(1000 stocks)

Minimum
Variance
(240 stocks)

Fundamental Index
(1000 stocks)

Returns

10.5

8.2

10.0

Volatility

15.3

11.1

16.3

Return/Risk

0.7

0.7

0.6

Returns

2.6

-0.5

2.2

Volatility

2.5

9.2

4.6

Return/Risk

1.0

-0.1

0.5

Performance statistics

Absolute
performance

Relative
performance

Source: Nomura Quantitative strategy

95

Cross-asset alternative beta/risk premia investing

Cross-asset alternative beta

Weighting scheme:

Equal
Risk parity
Minimum variance
Max diversification
Equal risk contribution
IR-based

Equity Strategies

Credit Strategies

Rates Strategies

Income

Carry

Carry

Value

Value

Value

Quality

Momentum

Momentum

Momentum

Source: Nomura Quantitative strategy

97

Performance of alternative beta portfolio combinations

Dec 92 =100
180
170
Equally Weighted Performance
160

Sharpe ratio Performance


Risk Parity Performance

150

ERC Performance
MinVar Performance

140

MaxDiv Performance

130
120
110
100
90

Chart shows the performance of different portfolio combinations applied to cross-asset alternative betas. Strategies are rebalanced annually.
Source: Nomura Quantitative strategy

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Jun-10

Dec-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Dec-05

Jun-05

Dec-04

Jun-04

Dec-03

Jun-03

Dec-02

Jun-02

Dec-01

Jun-01

Dec-00

Jun-00

Jun-99

Dec-99

Dec-98

Jun-98

Dec-97

Jun-97

Dec-96

Jun-96

Dec-95

Jun-95

Dec-94

Jun-94

Dec-93

Jun-93

Dec-92

80

98

Performance statistics for alternative beta portfolio


combinations

Stats

Risk
Parity

Minimum
Variance

Return

1.77%

Vol
Return/risk
Max drawdown
(%)

Sample run December 1992-April 2013.


Source: Nomura Quantitative strategy

ERC

Sharpe
Ratio

Max
Diversification

Equally
weighted

1.66%

1.77%

1.40%

1.78%

2.62%

1.28%

1.33%

1.28%

1.43%

1.36%

1.87%

1.38

1.25

1.38

0.98

1.31

1.40

-2.9%

-2.5%

-2.3%

-2.5%

-2.1%

-3.3%

99

The benefits of a cross-asset approach to alternative


beta portfolio construction

return
vol
R/R
MDD (%)

Risk Parity
4.35%
4.21%
1.03
-12.64%

Minimum
Variance
2.38%
4.27%
0.56
-16.52%

ERC
3.36%
3.96%
0.85
-15.48%

return
vol
Fixed Income
R/R
MDD (%)

1.36%
1.34%
1.02
-3.23%

1.49%
1.37%
1.09
-2.98%

1.48%
1.35%
1.10
-2.84%

1.30%
1.41%
0.92
-3.48%

1.56%
1.40%
1.12
-2.69%

1.43%
1.36%
1.05
-2.90%

Cross asset

return
vol
R/R
MDD (%)

1.77%
1.28%
1.38
-2.95%

1.66%
1.33%
1.25
-2.47%

1.77%
1.28%
1.38
-2.31%

1.40%
1.43%
0.98
-2.46%

1.78%
1.36%
1.31
-2.13%

2.62%
1.87%
1.40
-3.31%

Uplift in
return/risk

EQUITY
FIC

34%
36%

124%
15%

63%
26%

124%
6%

87%
17%

39%
32%

Model \ Strategy

Equity

Sharpe
Max
Ratio
Diversification
2.34%
2.88%
5.36%
4.10%
0.44
0.70
-18.55%
-12.80%

Equally
weighted
4.30%
4.29%
1.00
-10.15%

Figure shows return statistics for combinations of alternative betas within fixed income, within equities and across both asset classes. Bottom row shows the uplift in the return/risk ratio that results in
moving from a single asset to multi-asset approach. R/R is return/risk ratio and MDD is max drawdown. Sample run December 1992-April 2013.
Source: Nomura Quantitative strategy

100

Source: Nomura Quantitative strategy

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Apr-08

Jan-08

Oct-07

Jul-07

Apr-07

Jan-07

Oct-06

1.00

Jul-06

Apr-06

Correlation of alternative beta strategies

Correlation coefficient

0.80

0.60

0.40

0.20

0.00

-0.20

-0.40

-0.60
Average correlation (75days)

-0.80

-1.00

101

Equity alternative beta/risk premia


Aim
a long-short risk premium strategy;
offered to those who want a more transparent approach instead of usual alternatives; and
we also have a version where this is combined with credit and rates strategies to form a cross-asset risk
premium strategy.

Methodology
Our alternative beta strategy holds the following separate betas with static weights:

Income - Dividend yield + Net buy-back yield.


Value - Price to book.
Quality - Return on equity.
Momentum - Composite of Earnings and Price momentum.

The strategies are all applied to a global large-cap universe with a long-short construction. We then combine
these with a risk-parity weighting to form the final strategy.

Source: Nomura Quantitative strategy

102

Equity alternative beta/risk premia


Performance
270
250

Risk Parity

230
210
190
170
150
130
110
90
70
Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

Return statistics

Return, % pa

Annualised monthly
volatility

Annualised monthly IR

1 yr

2.9

1.7

1.7

3 yr

2.9

3.0

1.0

5 yr

2.7

2.6

1.0

Whole Period

4.3

4.2

1.0

Source: Datastream, IBES, Nomura Strategy research

103

Cross sectional & time series


Momentum

Income or carry

Index

330

Index

Index

115

450

Cross-sectional dividend yield (LHS)

Time series momentum (RHS)

113

400

Time series carry (RHS)

111

280

109
107

230

105
103

180

101
130
80
Dec-89

Index

Cross-sectional momentum (LHS)

Dec-97

Dec-01

Dec-05

Dec-09

105

300
250

100

200

95

150
100

97

50

Dec-13

110

350

99
95
Dec-93

115

0
Dec-89

90
85
Dec-93

Dec-97

Dec-01

Dec-05

Dec-09

Dec-13

Value or mean reversion


Index

Index

Cross-sectional price/book (LHS)

250

120

Time series mean-reversion (RHS)

115

200

110
150
105
100
100
50

Source: Nomura Quantitative strategy

0
Dec-89

95
90
Dec-93

Dec-97

Dec-01

Dec-05

Dec-09

Dec-13

104

Diversification benefit of time series and cross-sectional


factors

Value/Mean-reversion
CrossSectional

Carry/Income

Risk Parity
Time Series Combination

CrossSectional

Momentum

Risk Parity
Time Series Combination

CrossSectional

Risk Parity
Time Series Combination

Return

1.6%

0.4%

2.2%

5.3%

0.4%

4.4%

1.9%

0.5%

3.8%

Vol

12.0%

1.8%

9.2%

15.8%

2.0%

11.8%

15.7%

1.4%

12.8%

R/R

0.14

0.23

0.24

0.34

0.22

0.37

0.12

0.38

0.30

The table shows the return/risk of the cross-sectional factors defined as the top-bottom quartile portfolio from the Top 500 stocks FTSE World and the times series factors defined at the
index level. The Risk Parity portfolio is the risk weighted portfolio of the cross-sectional series with the volatility leveraged times series. The data are calculated using monthly returns from
Dec-89.
Source: Nomura Quantitative strategy

105

Possible implementation channels for alternative beta


Characteristic

Futures

ETFs

Stocks

Swaps

Certificates

Classification

Exchange listed derivative contracts


(un-funded)

Exchange Traded Fund


UCITs compliant for European
listings
(funded)

Physical Holding of Stock


Basket / (funded)

OTC Derivative
(un-funded)

Notes
(funded)

Fees

Commission paid per contract. eg, 1


EUR per lot (minimal cost for index
such as SX5E)

Management fee paid to ETF issuer


Broker Commission

Broker Commission
Borrow fee for shorts
positions

Financing Spread over Libor


Broker Commission

Management fee and/or


Broker Commission

Liquidity

Some contracts are very liquid on


exchange, otherwise determined by
cash market liquidity

Primary: Determined by underlying


liquidity
Secondary: On exchange trading
with market makers

Depending on underlying
Borrow cost for short
positions

Depending on underlying
Borrow cost for short
positions

Depending on underlying
Borrow cost for short
positions

Counterparty Risk

None. Client faces the exchange


and only posts small initial margin to
their clearer

Physical ETFs: Counterparty risk


owing to stock lending
Synthetic ETFs: The fund enters
into a swap with credit institution (s)
which are fully collateralized

None

Client faces the swap


counterparty and has risk to
the relevant institution (which
will be collateralized)

Client buys funded note from


the counterparty with full
counterparty risk in case of
default

Customize to get
exposure to theme

No

Ask ETF provider to create ETF due diligence process required

Yes

Yes

Yes

Ongoing
management /
operational effort

Requires cash management


Rolling futures
Daily margining

Custodian will take care of day-today management


Accounting is relatively simple

Custodian will take care of


day-to-day management

Requires cash management


Collateral management
needed on both sides

Custodian will take care of


day-to-day management

Market Making

On screen with anonymous


counterparty during opening times of
the exchange
Off screen with counterparty

On screen with anonymous


counterparty during opening times
of the exchange
Directly with market maker OTC

On Exchange

Trading with initial


counterparty, but can be
economically closed out with
third counterparty at any time

Trading only with initial


counterparty

Leverage

Yes

In general no (only a small number


of ETFs give leverage)

No

Yes

Yes

Shorting

Yes

L-S ETFs are possible , though


short ing ETFs can be hard in
individual cases of poor liquidity

Yes

Yes

Yes

Source: Nomura Quantitative strategy

106

EM country selection

Signal 1 Valuations performance of


forward P/E selection strategy relative to
the benchmark
July 00 =100

July 00 =100

107

July 00 =100

107

106

106

105
104

106

104
0.4%

102

Tracking Error

0.9%

0.5

101

% outperformance

55%

Signal 3 Sentiment performance of fund


flows momentum strategy relative to the
benchmark

104

Excess Returns

0.3%

106

Tracking Error

1.1%

105

0.3

% outperformance

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

101

104

52%

103

102

July 00 =100

Info Ratio

103

104

Signal 4 Growth performance of yield


curve steepening strategy relative to the
benchmark

July 00 =100

105

Jan-02

Jul-13

Jul-12

Jul-11

Jul-10

Jul-09

Jul-08

Jul-07

Jul-06

Jul-05

Jul-04

Jul-03

Jul-02

Jul-01

Jul-00

Jan-01

100

98

103

Source: Nomura Strategy research

0.4%

Tracking Error

0.9%

Tracking Error

1.0%

Info Ratio

0.4

% outperformance

50%

Mar-05

99
Mar-04

44%

May-13

May-12

May-11

May-10

May-08

May-07

May-06

May-05

May-04

May-03

0.4%

0.4

% outperformance

May-02

100

Mar-03

Info Ratio

May-01

Jul-13

Jul-12

Jul-11

Jul-10

Jul-09

Jul-08

Jul-07

Jul-06

Jul-05

Jul-04

Jul-03

99

99
Jul-02

100
Jul-01

100
Jul-00

101

Excess Returns

May-14

102

101

May-09

102

Excess Returns

Mar-14

55%

105

0.5

Mar-13

% outperformance

Info Ratio

Mar-12

100

Excess Returns

Mar-11

Info Ratio

103

Mar-10

0.9%

Mar-09

0.5%

Tracking Error

Mar-08

Excess Returns

Mar-07

102

Mar-06

108

Signal 5 Risk: Performance of CDS 12month change Strategy Relative to the


Benchmark

Signal 2 Earnings performance of earn


rev strategy relative to the benchmark

108

Model recommendations for August 2014

% overweight/underweight recommendations relative to


benchmark
India

4.56%

Taiwan

3.51%

Turkey

2.96%

China

1.75%

Chile

1.16%

Brazil

1.07%

Czech Rep

Neutral

Hungary

Neutral

Indonesia

Neutral

Malaysia

Neutral

Philippines

Neutral

Thailand

Neutral

Mexico

-1.05%

Korea

-1.36%

Poland

-1.73%

Russia

-2.29%

South Africa

-4.20%

Israel

-4.37%

The model recommendations for overweighting and underweighting the regions given above are based
on a limit of 15% total deviation from the benchmark weight for the overweights and underweights.
Source: Nomura Strategy research

Performance of EM country selection model relative to the


benchmark
135

130

Excess Returns

2.0%

Tracking Error

2.1%

Info Ratio

0.96

% outperformance

56%

125

120

115

110

105

100
2000

2002

2004

2006

2008

2010

2012

Chart shows the performance of the strategy derived by ranking countries as under/over
weight based on variables that capture relative valuations, earnings, sentiment, growth
and risk. We also impose a limit of 15% total deviation from the benchmark weight for
the overweights and underweights. Source: FTSE, Datastream, EPFR, Worldscope,
IBES, Factset, Bloomberg, Nomura strategy research

2014

109

Custom product services, website, Bloomberg access to models, data and


Recommended Portfolio

European Recommended Portfolio

Sector
Basic Industries

Capital Goods

Consumer Cyclicals

Consumer Staples

Energy

Financials - Banks

Financials - Insurance

Financials - Other
Healthcare

Media
Technology

Telecoms

Stock
BHP BILLITON
CRH PLC
HEIDELBERGCEMENT
RIO TINTO
SYNGENTA
ABB
PHILIPS
SCHNEIDER ELECTRIC
SIEMENS AG
SKF
A.P MOELLER-MAERSK
BMW
DEUTSCHE LUFTHANSA
DEUTSCHE POST
DSV
KERING
LVMH
RANDSTAD HOLDING
HENKEL
WM MORRISON
RECKITT BENCKISER
TESCO
BG GROUP PLC
GALP ENERGIA
TOTAL
BANCO SANTANDER
BARCLAYS PLC
BNP PARIBAS
CREDIT SUISSE
DANSKE BANK
DEUTSCHE BANK
PKO BANK
SOCIETE GENERALE
UNICREDITO ITALIANO
AVIVA PLC
AXA
PRUDENTIAL PLC
BLACKROCK
SCHRODERS PLC
MERCK KGAA
NOVARTIS
SANOFI
PUBLICIS
ALCATEL-LUCENT
INFINEON TECHNOLOGIES
SAP AG
ARM HOLDINGS
BT GROUP

Portfolio perf. (Euro Return, %)3


Nomura Strategy Recommend Portfolio
FTSE-World Europe Index
1
2
3
4

1 WK
2.9
2.3

Currency
GBP
EUR
EUR
GBP
CHF
SEK
EUR
EUR
EUR
SEK
DKK
EUR
EUR
EUR
DKK
EUR
EUR
EUR
EUR
GBP
GBP
GBP
GBP
EUR
EUR
EUR
GBP
EUR
CHF
DKK
EUR
PLN
EUR
EUR
GBP
EUR
GBP
USD
GBP
EUR
CHF
EUR
EUR
EUR
EUR
EUR
GBP
GBP
1 MTH
6.2
5.6

YTD
4.0
9.4

12 MTH
25.4
23.5

Price (LC)

Mkt Cap

4 Sep 14
19.05
18.58
58.36
32.42
326.10
163.50
23.65
65.50
98.59
164.00
14620.00
91.54
13.60
25.68
174.70
165.40
137.60
37.73
81.95
1.74
53.65
2.29
12.33
13.66
51.77
7.89
2.31
54.30
26.32
162.00
27.00
40.01
41.00
6.40
5.34
19.55
14.55
331.73
24.55
66.93
87.10
85.75
58.31
2.66
8.99
59.99
9.66
3.90

US$m
65,975
17,812
10,641
66,315
32,156
53,615
28,008
46,363
101,338
9,660
17,115
38,585
4,037
31,657
5,215
15,812
44,683
5,278
18,441
6,168
56,753
30,229
68,809
6,691
136,362
120,347
62,034
68,761
45,155
22,198
48,288
10,672
37,949
36,950
25,764
48,088
60,879
41,504
4,549
11,211
218,015
127,261
13,927
9,441
13,073
69,525
50,354

2013
29.3
20.0

2012
26.2
18.8

2011
-16.6
-8.5

2010
5.3
11.7

Calendarised EPS y/e Dec1


2014e
2.4
0.8
3.9
5.3
17.8
1.3
1.3
3.4
5.6
2.0
909.6
8.1
0.7
1.7
8.9
9.8
7.1
2.6
3.7
-0.1
2.6
0.2
0.6
0.4
6.1
0.5
0.2
5.0
1.8
12.9
2.3
2.7
3.9
0.3
0.4
1.8
0.5
19.2
1.5
4.6
5.3
5.2
3.5
0.0
0.5
3.4
0.2
2009
49.4
33.2

2008 4
-20.7
-20.4

2015e
2.7
1.1
4.9
5.7
18.3
1.5
1.3
3.6
7.3
10.9
866.4
8.3
1.1
1.7
8.9
9.7
7.1
3.1
4.1
0.1
2.7
0.2
1.1
0.5
6.6
0.6
0.3
5.5
2.8
15.0
3.3
3.2
4.8
0.5
0.5
2.0
1.0
21.5
1.7
4.9
5.8
5.7
3.4
0.2
0.6
3.7
0.3
2007
-4.5
3.6

2016e
2.8
1.4
6.0
6.2
22.2
1.7
1.8
4.0
8.2
12.5
1072.1
8.5
2.5
1.8
11.4
10.7
7.9
3.6
4.7
0.2
2.9
0.2
1.2
0.6
6.7
0.7
0.3
6.3
3.2
16.5
4.1
3.7
5.4
0.7
0.5
2.1
1.1
24.7
1.9
5.1
6.2
6.3
3.6
0.3
0.6
4.1
0.3
2006
20.9
17.2

2005
21.7
23.0

Price/
earnings

Date

Rel Perf.
since

Rel Perf.
Over

Analyst

Dec 15 (x)
7.1
16.6
11.8
5.7
17.8
107.0
17.5
18.0
13.5
15.1
16.9
11.1
12.4
14.7
19.7
17.1
19.3
12.0
20.0
13.5
19.7
10.4
10.8
27.5
7.9
13.3
8.5
10.0
9.3
10.8
8.2
12.6
8.6
12.6
11.7
10.0
14.9
15.5
14.0
13.8
14.9
14.9
17.3
16.8
14.4
16.2
14.9

Added
28 Jan 14
31 Aug 12
26 Nov 13
28 Jan 14
19 May 14
6 Feb 13
5 Nov 12
26 Nov 13
14 Oct 11
26 Nov 13
19 May 14
27 Nov 12
26 Nov 13
26 Nov 13
26 Nov 13
16 Jun 14
16 Jun 14
19 May 14
2 Jul 14
2 Jul 14
2 Jul 14
2 Jul 14
27 Nov 12
27 Nov 12
18 Jul 13
18 Oct 13
4 Nov 11
16 Apr 10
8 Apr 13
1 Apr 14
1 May 13
30 Aug 13
5 Nov 12
16 Apr 10
31 Jul 09
9 Jan 09
18 Jul 13
18 Jul 13
12 Dec 13
4 Sep 09
26 Nov 13
26 Nov 13
27 Nov 12
26 Nov 13
27 Nov 12
23 Oct 09
09-Sep-14
13 Apr 12

Added
-12
3
-5
-2
-8
-8
-8
-2
-9
-18
8
12
-21
-11
-2
1
-7
-9
-6
-4
6
-20
-6
-12
17
10
0
-33
-12
0
-37
-9
37
-103
38
-33
23
4
-5
60
16
2
5
-24
23
24
N/A
55

week
1
1
-1
-1
-4
1
-1
-1
1
-1
0
0
-1
0
-2
1
2
1
0
-9
1
-9
1
0
2
2
1
3
0
-1
1
2
4
6
1
2
-1
0
0
-1
4
2
0
0
-1
-1
N/A
-1

Rating2
Buy
Not Rated
Not Rated
Buy
Buy
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Neutral
Buy
Buy
Buy
Buy
Not Rated
Buy
Buy
Buy
Neutral
Neutral
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Neutral
Not Rated
Buy
Buy
Buy
Buy
Buy
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Neutral
Buy
Not Rated
Buy
Not Rated
Buy

2004
7.7
9.4

2003
22.5
12.6

2002
-34.0
-31.7

2001
-21.2
-17.3

2000
14.7
-2.9

1999
67.4
25.4

1998
26.4
18.6

1997
43.2
40.5

1996
35.7
24.7

1995
17.8
11.2

Source: Nomura Strategy research

EPS estimates are based on Nomura estimates (for stocks under coverage), IBES (for stocks not currently under coverage)
Analyst rating refers to Nomura research department rating
Return history presented as price return in euro terms from before 2006. Returns from 2007 to present are on a total return basis.
Ending 12 September 2008

Please turn to the back for an explanation of Nomura's rating system.


Past performance is not a guarantee of future results.
We are adding ARM Holdings PLC (GBP 9.66, Not Rated) to our European recommended portfolio.

111

European Recommended Portfolio relative performance index

Dec 06 = 100
115
110
105
100
95
90
85
80
Dec-06

Dec-07

Dec-08

Dec-09

Performance of Nomura European strategy recommended portfolio relative to the FTSE World Europe index.
Source: Nomura Strategy research

Dec-10

Dec-11

Dec-12

Dec-13

112

StrategyInsight https://apps.nomuranow.com/EQS

Source: Nomura Strategy research

113

Global valuation and profitability


12 month Forward PE

Current Values

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Market

Post 1990 Average


US Eur ex UK
14.0
11.2
16.6
15.3
15.9
14.8
17.3
13.0
17.3
18.6
16.4
17.5
13.7
11.3
14.8
18.2
13.4
15.6
16.0
14.5
15.4
14.2

UK Japan Asia ex Jp3 Emerging World


10.4 10.5
15.3
7.3
13.0
11.7 13.4
13.2
12.3
14.8
14.9 13.4
15.7
13.8
15.2
15.1 12.2
15.6
11.9
14.9
16.5 19.3
17.2
21.0
17.7
17.1 25.1
20.8
15.9
16.9
11.3 12.9
13.9
8.8
12.7
26.9 17.1
17.3
12.1
14.5
20.2 15.0
16.3
14.8
15.1
15.2 17.9
13.7
11.8
15.3
13.3 14.2
14.5
10.9
14.6

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Market

US Eur ex UK
15.3
12.4
15.1
12.5
15.8
13.0
17.5
14.7
14.7
16.6
17.5
17.5
12.1
12.5
20.2
21.1
16.6
16.0
13.2
13.9
15.5
13.9

UK Japan Asia ex Jp3 Emerging World


13.6 30.0
14.3
13.8
14.4
11.6
9.0
12.9
10.7
14.5
11.6 28.8
15.4
13.3
16.3
14.3 48.0
17.5
11.5
17.4
13.0 29.5
15.8
16.1
15.2
16.7 23.5
20.6
14.4
17.8
12.2 34.7
12.8
15.2
14.2
20.5 29.9
16.7
16.3
20.8
13.7 26.1
15.1
14.7
15.5
10.2 27.2
13.6
13.2
13.8
12.6 28.3
13.9
12.5
15.7

Enterprise Value / Sales


Current Values

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2,4
Information Tech
Telecom Services
Utilities
Market ex Financials

Post 1990 Average


US Eur ex UK UK Japan Asia ex Jp
1.6
0.8
0.7
0.3
1.9
2.0
1.3
1.0
0.9
2.5
2.1
1.1
1.4
1.0
1.2
1.8
1.2
1.5
0.8
1.9
1.4
1.5
1.9
0.9
0.8
2.1
3.8
3.9
1.3
4.5
NA
NA
NA
NA
NA
2.8
1.9
8.5
0.9
3.5
2.4
1.9
1.4
1.8
3.2
2.9
1.0
1.6
1.4
3.2
2.0
1.4
1.3
0.9
1.7

Emerging World
0.8
1.2
1.3
1.4
0.9
1.4
1.2
1.4
1.5
1.4
3.3
2.4
NA
NA
1.0
1.9
2.1
2.1
2.0
1.7
1.2
1.6

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Market ex Financials

US Eur ex UK UK Japan Asia ex Jp3 Emerging World


1.3
1.0
1.1
0.5
2.5
1.1
1.1
1.5
1.0
1.4
1.1
1.8
1.7
1.3
1.8
0.8
0.9
0.8
1.5
1.2
1.1
1.4
0.8
1.2
0.8
2.3
2.0
1.1
1.7
1.1
1.3
0.7
0.9
1.6
1.3
2.3
2.9
3.7
1.7
2.7
3.2
2.5
NA
NA
NA
NA
NA
NA
NA
2.6
1.6
2.8
0.9
1.6
1.8
1.8
2.9
2.4
2.7
1.7
4.1
4.6
2.4
2.2
1.3
1.6
2.3
4.1
3.6
1.8
1.8
1.1
1.3
0.9
1.9
1.8
1.3

Enterprise Value / EBITDA


Current Values

Post 1990 Average


US

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Market ex Financials

Eur ex UK UK

Japan Asia ex Jp3 Emerging World

7.3
9.8
11.9
10.8
11.4
12.7

3.9
9.3
9.2
8.0
11.1
13.6

6.1
7.1
8.7
10.4
10.7
10.3

5.7
7.2
8.7
7.1
8.0
10.6

13.1
7.3
10.0
11.8
10.5
18.3

5.0
8.2
10.8
7.9
13.7
14.4

6.5
8.6
10.4
9.2
11.0
12.7

NA
10.4
6.5
9.2
10.1

NA
11.7
5.7
4.9
8.0

NA
11.8
4.8
8.5
8.0

NA
7.2
5.9
10.8
7.8

NA
17.8
8.9
14.2
10.0

NA
5.8
6.2
7.9
7.2

NA
8.9
6.1
7.8
9.0

US
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2
Information Tech
Telecom Services
Utilities
Market ex Financials

Eur ex UK UK

Japan Asia ex Jp3 Emerging World

7.5
8.4
10.1
9.2
10.5
12.5

5.3
6.1
6.7
6.2
8.9
10.8

7.0
6.9
6.6
8.6
8.5
11.3

8.3
9.7
11.6
8.4
9.1
9.3

6.5
7.6
8.0
13.8
9.2
13.3

11.2
10.2
8.3
10.5
10.4
12.5

6.7
7.7
9.3
8.3
9.6
11.8

NA
12.1
6.9
7.4
9.5

NA
10.6
5.7
6.0
6.7

NA
14.2
6.6
6.3
7.2

NA
8.1
5.3
11.0
9.3

NA
11.5
9.3
11.5
9.1

NA
10.3
9.0
9.3
8.9

NA
10.7
6.2
7.4
8.5

1Ratios

reflect Earnings Before Goodwill Amortisation


excluding Real Estate
3Asia ex Japan = Australia, Hong Kong, New Zealand
& Singapore
Source: Worldscope, FTSE, I/B/E/S, Nomura Strategy
research
2Financials

114

Global valuation and profitability


6
6
Return on Capital Employed (ROE Financials)

Current Values

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2,4
Information Tech
Telecom Services
Utilities
Market ex Financials

Post 1990 Average


US Eur ex UK
11.3
10.0
9.2
7.0
8.4
9.3
11.7
7.9
14.3
10.7
14.7
15.1
10.6
7.6
19.4
8.8
7.5
9.6
5.9
5.8
11.5
9.1

UK Japan Asia ex Jp3 Emerging World


12.9
4.5
4.7
9.3
10.5
7.0
3.9
9.3
4.5
6.8
15.6
5.3
6.9
4.3
7.6
14.4
5.8
11.4
10.6
9.3
13.1
7.4
9.3
13.6
12.1
21.5
8.4
16.8
12.3
14.7
7.2
10.3
11.0
14.9
9.8
13.9
6.1
10.4
13.0
15.5
19.4
7.2
15.9
12.4
11.2
9.7
0.4
8.3
5.5
5.2
13.8
5.1
8.3
8.5
9.8

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2,4
Information Tech
Telecom Services
Utilities
Market ex Financials

US Eur ex UK
12.4
12.6
9.0
8.8
9.3
8.4
8.1
7.8
17.8
11.7
17.7
13.2
14.6
10.9
14.2
11.4
9.3
9.7
7.5
7.8
10.9
9.4

UK Japan Asia ex Jp3 Emerging World


12.5
3.9
11.4
13.9
11.6
10.8
4.2
11.3
9.0
7.9
10.4
3.7
8.1
6.9
6.9
11.2
4.4
8.4
8.4
7.0
12.8
4.8
9.6
12.3
13.4
28.2
7.7
11.3
12.9
16.2
12.2
1.7
11.5
12.0
11.1
12.8
4.1
13.1
10.8
10.1
10.4
6.8
19.1
12.6
9.2
8.3
3.3
14.9
5.6
6.7
11.2
4.1
9.6
9.3
8.8

Enterprise Value / Capital Employed (P/BV Financials)


Current Values

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2,5
Information Tech
Telecom Services
Utilities
Market ex Financials

Post 1990 Average


US Eur ex UK UK Japan Asia ex Jp3 Emerging World
1.7
1.1
1.2
0.7
1.3
0.8
1.5
2.1
1.5
1.3
0.9
1.6
1.0
1.4
1.9
1.7
2.5
1.0
1.1
0.9
1.5
2.4
1.4
2.4
1.0
2.0
1.3
1.7
2.9
2.1
2.6
1.4
1.7
2.3
2.4
2.6
3.0
3.7
1.5
4.3
2.2
2.7
1.4
1.0
1.2
1.0
1.5
1.4
1.3
2.9
2.3
6.2
1.2
2.8
1.5
2.2
1.9
1.2
0.7
1.3
2.4
1.8
1.4
1.3
0.9
1.7
0.9
1.5
1.0
1.1
2.2
1.6
1.6
1.1
1.4
1.2
1.7

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials 2,5
Information Tech
Telecom Services
Utilities
Market ex Financials

US Eur ex UK UK Japan Asia ex Jp3 Emerging World


2.1
1.6
1.9
0.9
1.5
1.8
1.8
1.7
1.3
1.5
1.2
1.7
1.2
1.4
1.7
1.3
1.4
1.1
1.1
1.1
1.4
1.8
1.2
1.9
1.1
1.7
1.3
1.4
3.4
2.1
1.9
1.3
1.6
2.0
2.4
3.4
2.5
5.5
1.7
2.4
2.2
3.1
2.0
1.7
1.7
2.0
1.5
2.1
1.8
3.3
2.6
4.9
1.2
2.1
2.0
2.5
1.8
1.4
1.4
1.4
3.2
2.3
1.5
1.2
1.2
1.1
1.2
2.1
1.2
1.2
2.1
1.5
1.6
1.2
1.5
1.4
1.6

1Ratios

reflect Earnings Before Goodwill Amortisation


1
excluding Real Estate
3Asia ex Japan = Australia, Hong Kong, New Zealand & Singapore
4Return on Equity used for Financials.
5Price to Book Value used for Financials.
6ROE and RoCE calculated pre goodwill and pre exceptionals.
Source: Worldscope, FTSE, I/B/E/S, Nomura Strategy research
2Financials

115

Appendix A-1
Any Authors named on this report are Research Analysts unless otherwise indicated
Analyst Certification
We, Inigo Fraser-Jenkins and Alla Harmsworth, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers
referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part
of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures
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Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne.
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The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking
activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and
may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDPI) and Nomura International plc. (NIplc) are registered with the Commodities Futures Trading Commission and the
National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.
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responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear.
Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
47% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*.
43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura
Group*.
10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 24% of companies with this rating are investment banking clients of the Nomura
Group*.
As at 30 June 2014. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013
The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analysts target price
is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted
cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current
price)/current price.
STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with
the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that
the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as
'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows:
United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the
valuation methodology; Japan: Russell/Nomura Large Cap.

116

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line
with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not
rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets
ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the
Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation
indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential
downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain
circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or
shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such
securities and/or companies.
SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most
stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the
weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by
other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
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