Citigroup Asia ex-Japan Equity Strategy - Excess Liquidity Continues To Decelerate

v From liquidity- to earnings-driven cycle — Our excess liquidity indicator for Asiaex continues to decelerate. Having peaked at 23% in March 2009, the latest reading shows growth of a mere 2%. This confirms our thesis that market direction
is now all about earnings; the baton has passed from liquidity to earnings.

v Phase 2 of the market cycle, the one we are in, is all about earnings — At the same time as excess liquidity is decelerating, so the earnings revisions ratio is rolling over. Fear not, analysts are not cutting their earnings forecasts, but they no longer are revising up as furiously. Phase 2 of the market cycle, the one we are in, is all about earnings. Delivery is critical for the well-being of markets.

v Continue to focus on markets/sectors offering earnings reliability — Asian markets
have rallied off the lows, which has been nice. But with earnings revisions remaining weak, liquidity decelerating and leading indexes rolling over, the concern is that this rally will prove unsustainable. We continue to advise that investors focus on markets/sectors most likely to deliver earnings, and where valuations still make sense and USD strength has less of an impact. Underweight China, India and ASEAN, real estate, industrials and materials. See stock lists at the end of this report.