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1/16

Quadrant Asia

INVESTMENT PRODUCTS: NOT FDIC INSURED NOT CDIC INSURED NOT GOVERNMENT INSURED NO BANK GUARANTEE MAY LOSE VALUE

May 10, 2012

Whos driving?

What should we worry about more: default risk in

Europe or decelerating growth in Asia? Dont look

to the market for guidance; it simply does not know.

During April, the MSCI Asia ex Japan Index barely

moved, shedding just 1% as the money market stress

eased by the European Central Banks long-termrefinancing operations initiative surrendered to a

confluence of global sell catalysts.

The net effect of these countervailing forces has resulted

in a lack of conviction by investors that has prevented

the market moving meaningfully in either direction

we suspect this will shortly pass. Later in the issue we

highlight two usually reliable sell indicators: seasonal

risk-off behavior and equitybond switch signals.

In a market where correlations dominate, fundamentals

can be relegated in importance, as demonstrated by the

markets strangely muted reaction to Chinas first quarter

economic data. In fact, Chinas equity market appears

more focused on global risk and eurozone risk metrics

in particular, and is currently moving in step with the euro.

When inter-market correlations are running hot, our

research suggests that asset allocation (or non stock

specific factors) can account for an extraordinary 60%

of movement in Asian stock prices. During such periods,

investors may find diversified index-based strategies

out-performing single stock ideas. As always, timing is key.

In the face of these uncertainties, we believe the mostappropriate response is to leave our overall underweight

position in equities unchanged. Acknowledging the likely

positive effect policy easing will have in India, we have

reduced our very underweight to just underweight

(this is funded by reducing our very overweight position

in Japan to simply overweight). All other positions remain

unchanged.

Asset classes

2 1 0 1 2

Core equities

Japan

Far East Asia ex Japan

Hong Kong

Singapore

Emerging Asia

China

Taiwan

India

Indonesia

South Korea

Malaysia

The Philippines

Thailand

Aust ralasia

Aust ralia

New Zealand

Core fixed income

Asia investment grade USD

Asia loca l currency

Asia high yield

Focus investment views

Defensive equities

Cyclical equities

Large cap equities

Asia ex Japan REITs

Coal theme

Japan equities, reconstruction

Arrows indicate changes from the allocations made on February 29, 2012.

2 = very underweight; 1 = underweight; 0 = neutral

1 = overweight; 2 = very overweight

John Woods, Chief Investment Strategist, Asia PacificJack Siu, Senior Analyst


2/16

2 Quadrant Asia May 10, 2012

Whos driving?

What should we worry about more: default risk in Europe or decelerating

growth in Asia? Dont look to the market for guidance; it simply does not

know. During April, the MSCI Asia ex Japan Index barely moved,

shedding just 1% as the money market stress eased by the European

Central Banks long-term refinancing operations initiative surrendered to

a confluence of global sell catalysts.

These catalysts included renewed concerns over recession in the eurozone,

a stubbornly high oil price, renewed concerns over slowdown in the US, and

a generally bearish response among investors to Chinas gross domestic

product (GDP) figures for the first quarter of 2011. Indications that first quarter

2012 earnings growth in developed markets might outperform local indices

also caused local investors to pause.

Its apparent that investors are reducing their allocations to Asias risky assets.For example, the week ending April 20 was the seventh consecutive week

of capital outflows from Asia, actually bringing to zero the net new money

entering the region since the start of the year. We should not really be

surprised. The fickle nature of capital flows has proved to be no different from

previous times, reversing quickly as more attractive risk-adjusted opportunities

present elsewhere.

In fact, we suspect investor paralysis will shortly pass, and cite two (generally)

reliable signals as evidence. First, theres the seasonal aspect. Since 1995, on

average, the MSCI Asia ex Japan Index has posted negative gains in May and

June equivalent to 65 basis points (bps). Since 2000, this combined loss has

amounted to 93 bps (see the charts below).

Figure 1. Asia seasonality: average monthly returns Figure 2. G7 seasonality: average monthly returns

Source: Citi Private Bank using Bloomberg, as at April 26, 2012. YTD = year to date. Source: Citi Private Bank using Bloomberg, as at April 26, 2012.

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MSCI Asia ex Japan Index: average mo nthly return (1995 to 2012 YTD)

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MSCI G7 Countries Index: average monthly retur n (1995 to 2012 YTD)

Dont look to the market

for guidance; it simply does

not know

Investors are reducing theirallocations to Asias risky assets


3/16

Quadrant Asia May 10, 2012 3

In other words there has been a consistent sell in May and go away feature

to the markets for the past 12 years, which has seen negative returns two-

thirds of the time. Intriguingly, we note a similar, but even stronger, seasonal

trend evident among developed markets, suggesting that a pull-back at this

time of the year would not be entirely unexpected.

The second signal we monitor is Asias bondequity total return ratio which

has generally been a reliable indicator of relative market change. When

investors are fearful, they favor bonds over equities and vice versa. This bond

equity allocation trend is best monitored by the bondequity total return ratio

using the weekly moving average convergence divergence (MACD) cross

signal. See Figure 3, when the (grey) MACD Line crosses above the (black)

MACD signal line, as suitable, investors should consider switching from bonds

to equities and vice versa when the MACD line crosses back below the MACD

signal line.

Following this signal would typically earn Asian investors positive absolute total

return potentials. For example, if an investor started following this signal fromJanuary 1, 2000 to May 1, 2012, the strategy would have generated an

annualized return of 9% with 7 out of 10 trades made being profitable.

Its shortcoming is the signals inability to capture extreme tail events like the

one witnessed during the second half of 2008, when both Asian bonds and

equities suffered losses. (Please keep in mind that the example given is for

illustrative purposes only and not intended to project the performance of a

specific investment.)

Unless Asias markets rebound dramatically in the next couple of days, it would

appear the Asia ratio is due to signal a regime change. Indeed, Asia may well

be leading a reallocation from equity to bonds at the global level, given a

similar signal appears imminent in Europe, and, possibly some weeks later,in the US (see Figures 3 and 4 overleaf).

Sell in May and go away?

Asias bondequity total return

ratio has proven to be a reliable

indicator of relative market

change

Asia may well be leading

a reallocation from equity

to bonds at the global level


4/16


Figure 3. Asia bondequity MACD switch signal Figure 4. Global bondequity MACD switch signal

Source: Citi Private Bank using Bloomberg and HSBC, as at April 26, 2012. MACD = moving

average convergence/divergence, a technical analysis indicator used to measure price

momentum. Asias equitybond ratio = MSCI Asia ex Japan Total Return Index multiplied

by 0.5 and divided by HSBC Asia US Dollar Bond Total Return Index. FOR ILLUSTRATIVE

PURPOSES ONLY.

Source: Citi Private Bank using Bloomberg, as at April 26, 2012. Europe equitybond ratio =

MSCI Europe ex UK Total Return Index multiplied by 0.7 and divided by EFFAS Bond Indices

German Government 710-year Total Return. US equitybond ratio = MSCI US Total Return

Index multiplied by 0.7 and divided by iBoxx USD Treasuries 10-year plus Total Return Index.

FOR ILLUSTRATIVE PURPOSES ONLY.

A longer-term view, provided by Asia's cyclically adjusted price-to-earnings

ratios (CAPEs) suggests as much value as it does fear. Over the past 20 years,

Asian CAPEs have averaged 20x and currently measure 15x (see Figure 5).

Indeed, Asian CAPEs are at levels last seen during the Asian crisis of 1998

and its five-year aftermath. Current levels are even cheaper than those seenduring the depths of the global financial crisis in 2008.

Over past five years, from super-expensive levels, Asian CAPEs have

normalized in absolute and relative terms (see Figure 6). And while a mid-year

risk-off event could see both measures become cheaper still, to the extent that

they are at or below 20-year averages, suggests limited substantive downside

price action is unlikely.

200

300

400

500

600

700 MSCI Asia ex Japan Index

-0.25

-0.15

-0.05

0.05

0.15

'09 '10 '11 '12

Asia equitybond ratio weekly MACD

Asia equitybond ratio weekly MACD signal line

Buy equityReturn+54% Buy equityReturn+6%Buy bondsReturn+11% Buy bondsReturn+6% Buy equityReturn+9%

Switchsoon?

-2

-1

0

1

2 US bondequity ratio weekly MACD

US bondequity ratio weekly MACD signal line

-2

-1

0

1

2

'09 '10 '11 '12

Europe bondequity ratio weekly MACD

Europe bondequity ratio weekly MACD signal line

Switch

soon?

Over the past 20 years, Asian

CAPEs have averaged 20x and

currently measure 15x


5/16


Figure 5. Absolute CAPE: Asia ex Japan Figure 6. Relative CAPE: Asia ex Japan versus the US

Source: Citi Private Bank using Bloomberg as at April 30, 2012. Source: Citi Private Bank using Bloomberg as at April 30, 2012.

Divergences

In a market where correlations are high, fundamentals can be relegated in

importance and no more was this evident than during April. So misplaced was

investor attention that a series of important market-moving actions were

ostensibly overlooked; namely, the Reserve Bank of Indias decision to cut

rates by a larger-than-expected 50 bps; the Monetary Authority of Singapores

decision to narrow its trading band for the Singapore dollar; and the Peoples

Bank of Chinas decision to widen its trading band for the Chinese renminbi.

In normal market environments, these apparently conflicting signals would

have been interpreted as evidence of how complex and challenging Asias

operating environment had become for policymakers, and how important

relative value trading opportunities were, given economic cycles were diverging.

But in periods of elevated correlations, domestic drivers give way to global

concerns.

As such, investors may have missed Aprils most important domestic economic

datum Chinas first quarter GDP figure which missed expectations,

measuring 8.1% year-on-year, slowing from 8.9% in the fourth quarter of last

year, had little effect on its equity markets.

Ironically, Chinas equity markets appear less focused on whether their

economy is heading for a soft or hard landing, than they are concerned with

global risk in general and eurozone risk metrics in particular. A quick glance at

Figures 7 and 8 reveals that Chinas (retail-dominated) benchmark equity index,

the Shanghai composite, has initially been much more correlated with

movements in the three-month euro basis swap rate (that is, the rate banks

pay to convert euro payments into dollars), and, latterly, the euro itself.

0

10

20

30

40

50

60

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Asia ex Japan CAPE

Asia ex Japan 20-year average CAPE

-30

-20

-10

0

10

20

30

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Asia ex Japan CAPE minus US CAPE

When technicals dominate,

fundamentals are often

overlooked

Chinas GDP for the first quarter

measured 8.1%

Chinas equity markets appear

less focused on whether their

economy is heading for a soft

or hard landing


6/16


The co-movement makes intuitive sense. As far back as the third quarter

of 2010, the euro basis swap rate was identified as the principal indicator

of global risk, to the extent that eurozone banks, unable to fund themselves,

would have faced liquidity challenges with systemic implications. Apparently,

Chinas investors agreed, and the direction of their marketfor much of lastyeartracked and reflected the funding stresses among Europes financial

institutions.

The correlation broke down immediately after the European Central Banks

long-term refinancing operations (LTRO) resolved the funding crisis in

December 2012, at which point concerns shifted to the implications of fiscal

austerity, default risks and economic recession. These broader concerns and

their global effects are better reflected in the euro. Given that the European

Union is Chinas largest trading partner, it should come as little surprise that

subsequently the euro and the Shanghai composite were correlated.

Absent a compelling domestic (buy or sell) catalyst, it is likely co-movement

will continue. Ostensibly market-moving data releases in China, such asPurchasing Managers Index (PMI) readings, may cause needles to flicker,

but, as we saw with Aprils HSBC PMI, for as long as global risk sentiment

dominates, local data will enjoy a relegated importance. This is likely to remain

the case until China cuts rates, which it is expected to do in the second half

of 2013.

Figure 7. Bank funding stress dominated in 2011 Figure 8. Growth risks dominate in 2012

Source: Citi Private Bank using Bloomberg as at April 26, 2012. LHS = left-hand side;

RHS = right-hand side.

Source: Citi Private Bank using Bloomberg as at April 26, 2012.

-170

-120

-70

-20

30

2000

2200

2400

2600

2800

3000

3200

3400

Sep'10 Mar'11 Sep'11 Mar'12

Shanghai Composite Index (LHS)

EURUSD three-month cross currency basis swap (RHS)

Correlation

break down

1.25

1.30

1.35

1.40

1.45

1.50

1.55

2000

2200

2400

2600

2800

3000

3200

3400

Sep'10 Mar'11 Sep'11 Mar'12

Shanghai Composite Index (LHS)

EURUSD FX spot rate (RHS)

Correlationengaged

Absent a compelling domestic

(buy or sell) catalyst, it is likelythat China risk will co-move with

global risk measures


7/16


Anothers drum

As we suggested earlier in this piece, the importance of local macro events

tend to diminish in importance when global or inter-market correlations are high.

For example, China may be cheap but if Europes banking system is facing afunding crisis; almost certainly, it will get cheaper still.

The correlation phenomenon has dogged Asias investors for decades. When

you depend on the dollar invested by a foreigner to set market prices, then you

should not be too surprised that in the event that that dollar is removed, prices

fall. Put another way, when correlations are running hot, it appears as if very

little of what happens in Asia actually affects its markets.

But so what, you might say. Asias markets are used to being framed by

outside forces and its risk appetite buffeted by global sentiment. With the

region geared to selling goods and services to the West, its hardly a surprise

that its equity and/or bond markets share the same moods as their developed

market cousinsboth highs and lows.

Timing is key. Our research suggests if investments are made when inter-

market correlations are low, there is a greater chance that a single stocks

idiosyncratic risks and characteristics are reflected in the price. The reverse

is equally true.

We observed equity price movements in two discrete periods: from January

2001 to August 2007 (a low correlation environment prior to the global financial

crisis); and August 2007 to the present (an elevated correlation environment)

(see Figure 9).

Post the global financial crisis, inter-market equity correlations have been

consistently elevated. Risks in one index have become common to others;co-movement among indices has increased; and a markets individual trading

characteristics have diminished. In such an environment, where systemic risk

dominates, idiosyncratic (or stand-alone) risk is diminished in relative terms,

and the price movement of an individual stock is better explained by the

influence of the general stock market and sector.

Our research suggests that in periods of heightened correlations asset

allocation (or non stock-specific factors) can account for up to 60% of the

movement in Asian stock prices. During such periods, single stock ideas will

struggle to outperform (see Figure 10).

Conversely, during periods of low correlation, systemic influences can fall

to as much as 30% (that is, a stocks idiosyncratic characteristics account for

70% of its price movement).

All this is a way of saying that, depending on market dynamicsor more

accurately a markets correlation signaturesingle stock selection can be

either effective or not. Similarly, investing in a manner similar to exchange

traded funds may potentially produce attractive results when correlations are

high and beta dominates returns.

The importance of local macro

events tend to diminish in

importance when global or inter-market correlations are high

Co-movement among indices

has increased. And a marketsindividual trading characteristics

have diminished

In periods of heightened

correlations asset allocation can

account for up to 60% of the

movement in Asian stock prices


8/16


Figure 9. Asian equity correlation: two periods Figure 10. Importance of allocation during high correlation

Source: Citi Investment Research & Analysis, as at March 30, 2012. GFC= global financial

crisis. Cross correlation is the mean pairwise correlation between rolling one-month returns

of all the possible pairs of index constituents in the MSCI Asia Pacific ex Japan Index.

For important disclosures regarding companies covered by Citis equity research analysts,

please refer to www.citigroupgeo.com/geopublic/Disclosures/index_a.html. For details on Citi

Investment Research ratings system, please refer to

www.citigroupgeo.com/geopublic/Disclosures/disclratings.pdf.

Source: Citi Private Bank using Citi Investment Research & Analysis and Bloomberg,

as at April 26, 2012. Movement in stock prices expressed by asset allocation percentages are

calculated using a multi-factor linear regression model with weekly data of MSCI World Index,

MSCI Asia Pacific ex Japan Index, MSCI country indices, MSCI Asia Pacific ex Japan sector

indices and 35 selected MSCI Asia Pacific ex Japan Index constituents representing the index.

For important disclosures regarding companies covered by Citis equity research analysts,

please refer to www.citigroupgeo.com/geopublic/Disclosures/index_a.html. For details on Citi

Investment Research ratings system, please refer to

www.citigroupgeo.com/geopublic/Disclosures/disclratings.pdf.

While the asset allocation versus correlation subject is well discussed for

developed markets, it is not the case here in Asia. Asian investors are still

focused on security selection more than asset allocation, and therefore,

correlation in Asia Pacific, relative to the rest of the world, is still substantially

low despite its increase. Five-year average pair-wise correlation in Asia is only

0.25 whereas Europe and US are approximately 0.4, 60% higher.

We expect that the continuous development of ETF/index financial products,

which started much later here in Asia, will make asset allocation become ever

more important than before.

0.05

0.1

0.15

0.2

0.25

May'02 May'04 Apr'06 Apr'08 Apr'10 Mar'12

MSCI Asia Pacific ex Japan Index cross correlation 200-day moving average

MSCI Asia Pacific ex Japan Index cross correlation 200-day moving average

Pre-GFCPeriod of low correlation

Post-GFCPeriod of high correlation

30%

35%

40%

45%

50%

55%

60%

65%

4% 6% 8% 10% 12% 14% 16% 18% 20%

Pricemovementexpressedbyassetallocation

Average Asia Pacific ex Japan cross correlation

2001

2004

2003

20022005

2006

2007

2008

2009

2010 2011

Post-GFC: asset allocationgrowingimportance

Pre-GFC: asset allocationless important

Asian investors are still focused

on security selection more than

asset allocation


9/16


Notes


10/16


Asia Pacific portfolio allocations

This section shows the strategic and tactical allocations for risk level 3 set by Citi Private Banks Global Investment

Committee on April 23, 2012.

Risk level 3

Risk level 3 is designed for investors with a blended objective who require a mix of assets and seek a balance between

investments that offer income and those positioned for a potentially higher return on investment. Risk level 3 may be

appropriate for investors willing to subject their portfolio to additional risk for potential growth in addition to a level of

income reflective of his/her stated risk tolerance.

Classification Strategic (%) Tactical (%) Active (%)

Cash and fixed income 35.0 45.0 10.0

Cash and currencies 5.0 5.0 0.0

Investment grade 10.0 17.0 7.0High yield 10.0 11.0 1.0

Local currency debt 10.0 12.0 2.0

Equities 55.0 45.0 10.0

Japan 15.0 16.0 1.0

Far East Asia ex Japan 5.0 5.0 0.0

Hong Kong 3.0 2.5 0.5

Singapore 2.0 2.5 0.5

Emerging Asia 23.5 17.5 6.0

China 6.5 5.0 1.5

Taiwan 4.5 3.0 1.5

India 3.0 2.0 1.0

Indonesia 1.0 0.5 0.5

South Korea 6.0 3.5 2.5Malaysia 1.5 3.5 2.5

The Philippines 0.5 0.0 0.5

Thailand 0.5 0.0 0.5

Australasia 11.5 6.5 5.0

Australia 11.0 6.5 4.5

New Zealand 0.5 0.0 0.5

Hedge funds 10.0 10.0 0.0

Source: Citi Private Bank showing Office of the CIOs asset allocation for Asia as at last Global Investment Committee, April 23, 2012. Strategic = benchmark;

tactical = the Citi Private Bank Global Investment Committees current view; and active = the difference between strategic and tactical. All allocations are subject to change

at discretion of the OCIO of the Citi Private Bank.


11/16


Risk level 3: tactical allocations

Asia Paci fic equi ties

Strategic = benchmark; tactical = the Citi Private Bank Global Investment Committees current view; and active = the difference

between strategic and tactical. All allocations are subject to change at discretion of the OCIO of the Citi Private Bank.

Asian fi xed inco me

Hedge funds

Commodities

Cash and Asia Pacific currencies

Figures in brackets are the difference versus the

strategic benchmark

Core positions

In the face of seasonal sell behavior, equitybond switching signalsand elevated global correlations, we believe that the most appropriate

response is to leave our overall underweight position in equities

unchanged.

Acknowledging the likely positive effect policy easing will have in India,we have reduced our very underweight to just underweight (we have

funded this by reducing our very overweight position in Japan to simply

overweight. All other positions remain unchanged.

Our overweight position in Malaysian equities has worked well, comfortablyoutperforming local markets during the last two monthsMalaysia being

the principal beneficiary of high oil prices in Asia.

Similarly, our underweight positions in India, China, Korea and Taiwan also

performed well with all four markets posting losses of 08% over the sameperiod.

To confirm, we maintain our overweight positions in Asian fixed income,particularly in long-dated investment grade credit, for as long as risk

remains off.

Cash and currencies(0.0%)

5.0%

Investment grade(7.0%)10.0%

High yield(1.0%)

10.0%

Local currency debt(2.0%)

10.0%Japan equities(1.0%)

15.0%

Far East Asia exJapan equities

(0.0%)5.0%

Emerging Asiaequities(-6.0%)23.5%

Australasia equities(-5.0%)11.5%

Hedge funds(0.0%)

10.0%


12/16


Notes


13/16


Asset allocation definitions

Asset classes Benchmarked against

Global equities MSCI All Country World Index, which represents 48 developed and emerging equity markets. Index components

are weighted by market capitalization.

Global bonds Barclays Capital Multiverse (Hedged) Index, which contains the government-related portion of the Multiverse Index,

and accounts for approximately 14% of the larger index.

Hedge funds HFRX Global Hedge Fund Index, which is designed to be representative of the overall composition of the hedge fund

universe. It comprises all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed

securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage and relative value arbitrage.

The strategies are asset-weighted based on the distribution of assets in the hedge fund industry.

Commodities Dow Jones-UBS Commodity Index, which is composed of futures contracts on physical commodities traded on US

exchanges, with the exception of aluminium, nickel and zinc, which trade on the London Metal Exchange (LME). The major

commodity sectors are represented including energy, petroleum, precious metals, industrial metals, grains, livestock, softs,

agriculture and ex-energy.

Cash 3-Month LIBOR, which is the interest rates that banks charge each other in the international inter-bank market for three-

month loans (usually denominated in Eurodollars).

Equities

Developed market

large cap

MSCI World Large Cap I ndex, which is free-float adjusted and weighted by market capitalization. The index is designed to

measure the equity market performance of the large cap st ocks in 23 developed markets. Large cap is defined as stocks

representing roughly 70% of each markets capitalization.

US Standard & Poors 500 I ndex, which is a capitalization-weighted index that includes a representative sample of 500 leading

companies in leading industries of the US economy. Although the S&P 500 focuses on the large cap segment of the

market, with over 80% coverage of US equities, it is also an ideal proxy for the total market.

Europe ex UK MSCI Europe ex UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index

is designed to measure large cap stock performance in each of Europes developed markets, except for the UK.

UK MSCI UK Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed

to measure large cap stock performance in the UK.

Japan MSCI Japan Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index is designed

to measure large cap stock performance in Japan.

Asia Pacific ex Japan MSCI Asia Pacific ex Japan Large Cap Index, which is free-float adjusted and weighted by market capitalization. The index

is designed to measure t he performance of large cap stocks in Australia, Hong Kong, New Zealand and Singapore.

Developed market small

and mid cap (SMID)

MSCI World Small Cap Index, which is a capitalization-weighted index that measures small cap stock performance in

23 developed equity markets.

Emerging market MSCI Emerging Markets Index, which is free-float adjusted and weighted by market capitalization. The index is designed

to measure equity market performance of 22 emerging markets.

Bonds

Developed sovereign Citi World Government Bond Index (WGBI), which consists of the major global investment grade government bond markets

and is composed of sovereign debt, denominated in the domestic currency. To join the WGBI, the m arket must satisfy size,

credit and barriers-to-entry requirements. In order to ensure that the W GBI remains an investment grade benchmark,

a minimum credit quality of BBB/Baa3 by either S&P or Moody's is imposed. The index is rebalanced monthly.

Emerging sovereign Citi Emerging Market Sovereign Bond Index (ESBI), which includes Brady bonds and US dollar-denominated emerging

market sovereign debt issued in the global, Yankee and Eurodollar markets, excluding loans. It is composed of debt in

Afr ica, Asia , Europe and Latin Amer ica. We classify an emerging market as a sove reign wi th a maximum f oreign debt rat ing

of BBB+/Baa1 by S&P or Moody's. Defaulted issues are excluded.

Supranationals Citi World Broad Investment Grade Index (WBIG)Government Related, which is a subsector of t he WBIG. The index

includes fixed rate investment grade agency, supranational and regional government debt, denominated in the domestic

currency. The index is rebalanced monthly.

Corporate investment

grade

Citi World Broad Investment Grade Index (WBIG)Corporate, which is a subsector of the WBIG. The index includes fixed

rate global investment grade corporate debt within the finance, industrial and utility sectors, denominated in the domestic

currency. The index is rebalanced monthly.

Corporate high yield Barclays Global High Yield Corporate Index. Provides a broad-based measure of the global high-yield fixed-income

markets. It is also a component of the Multiverse Index and the Global Aggregate Index.

Securitized Citi World Broad Investment Grade Index (WBIG)Securitized, which is a subsector of the WBIG. The index includes

global investment grade collateralized debt denominated in the domestic currency, including mortgage-backed securities,

covered bonds (Pfandbriefe) and asset-backed securities. The index is rebalanced monthly.


14/16

14 Quadrant Asia April 27, 2012

Disclosures

This document is for informational purposes only and does not constitute a solicitation to buy or sell securities. The views expressed in thisdocument by the Global Investment Committee do not constitute research, investment advice or trade recommendations, and are not tailored to

meet the individual investment circumstances or objectives of any investor. Recipients of this document should not rely on the views expressedor the information included in this document as the primary basis for any investment decision. Investors are urged to consult with their financialadvisors before buying or selling securities. Some or all of the content of this document, including expressions of opinion and data, may beprovided to other businesses within Citigroup Inc. or affiliates of Citigroup Inc. for their own use and benefit or for the benefit of their customersprior to dissemination to the recipients of this document. If such other businesses and affiliates act on the information before the recipients of thisdocument, the actions of these businesses may minimize or negate certain investment opportunities of the recipients of this document. Otherbusinesses within Citigroup Inc. and affiliates of Citigroup Inc. may give advice, make recommendations, and take action in the interest of theirclients, or for their own accounts, that may differ from the views expressed in this document. All expressions of opinion are current as of the dateof this document and are subject to change without notice. Citigroup Inc. is not obligated to provide updates or changes to the informationcontained in this document. The expressions of opinion are not intended to be a forecast of future events or a guarantee of future results. Pastperformance is not a guarantee of future results. Real results may vary. Although information in this document has been obtained from sourcesbelieved to be reliable, Citigroup Inc. and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct orconsequential losses arising from its use. Throughout this publication where charts indicate that a third party (parties) is the source, please notethat the attributed may refer to the raw data received from such parties. No part of this document may be copied, photocopied or duplicated inany form or by any means, or distributed to any person that is not an employee, officer, director, or authorized agent of the recipient withoutCitigroup Inc.'s prior written consent.

Citigroup Inc. may act as principal for its own account or as agent for another person in connection with transactions placed by Citigroup Inc. forits clients involving securities that are the subject of this document or future editions of Quadrant.

Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interestrates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuers credit rating, or creditworthiness, causes abonds price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of thelower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrowmoney at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest paymentsfrom the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment wasmade.

Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or otherspeculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack ofdiversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation andhigher fees than mutual funds and advisor risk. Asset allocation does not assure a profit or protect against a loss in declining financial markets.

The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not representthe performance of any specific investment.Index returns do not include any expenses, fees or sales charges, which would lower performance.Past performance is no guarantee of future results.

International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political andeconomic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emergingmarkets, since these countries may have relatively unstable governments and less established markets and economics.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk,significant stock price fluctuations and illiquidity. Factors affecting commodities generally, index components composed of futures contracts onnickel or copper, which are industrial metals, may be subject to a number of additional factors specific to industrial metals that might cause pricevolatility. These include changes in the level of industrial activity using industrial metals (including the availability of substitutes such as man-made or synthetic substitutes); disruptions in the supply chain, from mining to storage to smelting or refining; adjustments to inventory; variationsin production costs, including storage, labor and energy costs; costs associated with regulatory compliance, including environmental regulations;and changes in industrial, government and consumer demand, both in individual consuming nations and internationally. Index componentsconcentrated in futures contracts on agricultural products, including grains, may be subject to a number of additional factors specific toagricultural products that might cause price volatility. These include weather conditions, including floods, drought and freezing conditions;changes in government policies; planting decisions; and changes in demand for agricultural products, both with end users and as inputs intovarious industries.

The information contained herein is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal

advice. Readers interested in the strategies or concepts should consult their tax, legal, or other advisors, as appropriate. Citi Private Bank is abusiness of Citigroup Inc. (Citigroup), which provides its clients access to a broad array of products and services available through bank andnon-bank affiliates of Citigroup. Not all products and services are provided by all affiliates or are available at all locations. In the U.S., brokerageproducts and services are provided by Citigroup Global Markets Inc. (CGMI), member SIPC. Accounts carried by Pershing LLC, memberFINRA, NYSE, SIPC. CGMI and Citibank, N.A are affiliated companies under the common control of Citigroup. Outside the U.S., brokerageproducts and services are provided by other Citigroup affiliates. Investment Management services (including portfolio management) areavailable through CGMI, Citibank, N.A. and other affiliated advisory businesses.

In the United Kingdom, Citibank N.A., London, and Citibank International plc, Citigroup Centre, Canada Square, Canary Wharf, London, E145LB are authorised and regulated by the Financial Services Authority. In Jersey, this document is communicated by Citibank N.A., JerseyBranch which has its registered address at PO Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A., Jersey Branch is regulated bythe Jersey Financial Services Commission to conduct deposit-taking business under the Banking Business (Jersey) Law 1991 and investmentbusiness under the Financial Services (Jersey) Law 1998. Citibank N.A., Jersey Branch is a member of the Depositors Compensation Schemeas set out in the Banking (Depositors Compensation) (Jersey) Regulations 2009. Further details of the scheme are available on request..

Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates. Copyright 2011, Citigroup Inc.


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Asia

Pacific

Europe &

Middle East

Latin

America

North

America

AUSTRALIA CHANNEL ISLANDS BRAZIL UNITED STATES

Melbourne St. Helier, Jersey Rio de Janeiro Atlanta, GA Orange County, CA

61-3-8643-9988 44-1534-608-010 55-21-2178-8905 877-248-4418 714-428-6580

Sydney GREECE Sao Paulo Beverly Hills, CA Palm Beach, FL

61-2-8225-4284 Athens 55-11-4009-3432 310-205-3000 800-494-1499

30-210-675-6850

HONG KONG LATAM OFFICES IN US Boca Raton, FL Palo Alto, CAHong Kong ISRAEL Houston, TX 561-368-6802 650-329-7060

852-2868-8688 Tel Aviv 713-966-5102

972-3-684-2522 Boston, MA Philadelphia, PA

INDIA Miami, FL 800-279-7158 267-597-3003

Bangalore KINGDOM OF BAHRAIN 305-347-1800

91-80-4144-6389 Kingdom of Bahrain Chicago, IL Phoenix, AZ

973-17-588-371 New York, NY 312-384-1450 602-667-8920

Mumbai 212-559-9155

91-22-4001-5282 KUWAIT Dallas, TX San Francisco, CA

Kuwait MEXICO 214-880-7200 415-627-6330

New Delhi 965-2594-033 Mexico City

91-124-418-6698 52-55-22-26-8310 Denver, CO Seattle, WA

MONACO 303-296-5800 888-409-6232

INDONESIA Monte Carlo Monterrey

Jakarta 377-9797-5010 52-81-1226-9401 Greenwich, CT Short Hills, NJ62-21-5290-8065 800-279-7158 973-921-2400

SPAIN

SINGAPORE Madrid Houston, TX Washington, DC

Singapore 34-91-538-4400 713-966-5150 202-776-1500

65-6227-9188

Valencia Los Angeles, CA CANADA

SOUTH KOREA 34-96-353-51-47 213-239-1927 Montreal

Seoul 514-393-7526

82-2-2124-3600 SWITZERLAND Miami, FL

Geneva 800-869-8464 Toronto

TAIWAN 41-58-750-5550 416-947-5300

Taipei New York, NY

886-2-7718-8608 Zurich High Net Worth Vancouver

41-58-750-5000 212-559-9470 604-739-6222

THAILAND

Bangkok UNITED ARAB EMIRATES International

66-2-232-3031 Abu Dhabi 212-559-9067

971-2-494-3200

Latin America

Dubai 212-559-9155

971-4-604-4644

Law Firm Group

UNITED KINGDOM 212-559-9470

London

44-207-508-8000 Securities Trading

800-269-8952

Published May 10, 2012 Citigroup Global Markets Inc.